An In-depth Analysis of The Finance Act, 2019

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The Finance Bill, 2019 is an Executive Bill presented alongside the Appropriation Bill, 2020 by President Muhammadu Buhari to a joint session of the National Assembly on 14th October 2019. It was passed into law by the National Assembly on 21st November 2019 and was signed into law on 13th of January, 2020 as the Finance Act, 2019.

The Finance Act, 2019 (“the Act”) is an omnibus draft legislation amending 7(seven) substantive Laws viz: Companies Income Tax Act, Value Added Tax Act, Customs and Excise Tariff Etc. (Consolidation) Act, Personal Income Tax Act, Capital Gains Tax Act, Stamp Duties Act; and Petroleum Profit Tax Act Cap P13, LFN 2004 to provide for review of tax provisions and make them more responsive to tax reform.[1]

Companies Income Tax Act (CIT Act)

• Exclusion/ exemption from Taxation

To avoid multiple taxation of a company’s profit, profits that are subject to tax under the Capital Gains Tax Act, Petroleum Profits Tax Act and Personal Income Tax Act are now excluded from taxation under CIT Act[2].

Section 9 of the Finance Act expands the categories of income exempted from Companies Income Tax to include the profit of a small company[3]; goods exported from Nigeria if the proceeds of such exports are used for the purchase of raw materials, plant equipment and spare parts; dividend and rental income/dividend of a Real Estate Investment Company (REICs); compensating payments amounting to dividends received by a Lender/borrower from its approved agent or a Borrower in a Regulated Securities Lending Transaction[4].

• Allowed cum disallowed deductions

Dividends and mandatory distributions made by a REIC on behalf of its shareholders and compensating payments which qualify as interest made by a Lender to its approved agent or a Borrower in a Regulated Securities Lending Transaction are now allowed deductions from tax[5]. On the flip side, any expense incurred involving related parties or expense incurred in deriving tax-exempt income; or compensating payment made by a Borrower/approved agent which qualifies as dividends; or penalty prescribed in any Act of the National Assembly for violation of any statute; as well as any taxes or penalties borne by a company on behalf of another person are some of the deductions that will no longer be allowed[6].

Also, the Act amended S 27(1)(g) of CIT Act such that the requirement for Ministerial approval, before expenses incurred in relation to management services between nonrelated parties becomes tax-deductible, has been abolished[7].

• Requirement as to TIN

Section 3 of the Act requires every company to have its own Tax Identification Number (TIN) which the company must display on all its business transactions and documentation; and forthwith, same will be required as a precondition for opening or maintaining a bank account[8].

• Taxable companies

Foreign companies (FCs) providing digital services to Nigeria[9] or carrying on technical, management, consultant or professional services outside of Nigeria to a person resident in Nigeria[10]; to the extent that such company has significant economic presence in Nigeria and profit can be attributable to such activity is now taxable. However, what amounts to ‘significant economic presence’ is to be determined by the Minister through an Executive Order[11].

• Provisions relating to insurance companies

To ensure that insurance companies are taxed in a fair and equitable manner relative to other companies operating in other sectors of the economy, section 5 of the Act amends section 16 of CIT Act by clearly stipulating that ‘Investment income’ for the purpose of taxation of a life insurance company means ‘income derived from investment of shareholders’ funds’[12]. Also, the limitation of an insurance company not being able to carry forward losses in one business against the profits from another business in the same class of insurance to 4 years has been removed[13]. However, tax payable by an insurance company will not be less than 0.5% of its gross premium/income[14].

• Exceptions to Excess Dividend Tax (EDT) provisions

Currently, the Excess Dividend Tax (EDT) rule is that where a company pays dividend in excess of its taxable profits, such dividend is subject to CIT at 30% irrespective of whether the income from which such dividend is paid had been taxed or even altogether exempted from tax. But with the coming into force of the Act, dividends paid out of the retained earnings of a Company, or out of profits that are exempted from income tax, or those regarded as franked investment income, or distributions made by a Real Estate Investment Company (REICs) to its shareholders from rental income and dividend income received on behalf of those shareholders; are exempted from EDT[15].

• Incentives

Any company engaged in agricultural production is now entitled to an initial tax-free period of five years renewable for an additional period not exceeding three years and subject to satisfactory performance[16].

Where a company pays its tax 90 days before the due date, it will be entitled to an incentive of 2%, if such company is a medium-sized company; and 1 % for any other company. Such bonus will only be available as a credit against future taxes[17].

• Computation of time

The profits of any company for each year of assessment will forthwith be the profits of the accounting period and not the calendar year[18].

• Tax rate[19]

Instead of the umbrella tax rate of 30 kobo per naira levied on every company by the CIT Act[20]; small companies[21]are now exempted while medium-sized companies[22] are levied 20 kobo per naira, and large companies have a tax rate of thirty kobo for every naira.

• Procedure for installmental payment of tax

Where a company desires to pay its assessed tax in installments, it must write, with evidence of payment of the first installment, and obtain the approval of the Service to pay in such number of installments as may be approved by the Service; provided that the final installment must be paid on or before the due date of filing.

• Exemptions on foreign loan

Tax exemptions available for interest on foreign loans have been modified, such that a 100% tax exemption no longer applies. With the coming into force of the Act, the highest tax exemption allowed is 70% which applies to loans of above 7years repayment period with not less than 2years moratorium[23].

• Thin capitalization rule

Section 25 introduced the thin capitalization rule to the effect that where a Nigerian company (excluding a banking or insurance company) incurs any expenditure by way of interest or of similar nature in respect of debt issued by a foreign connected person, the excess interest (an amount exceeding 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the Nigerian company) will not be allowable deduction. Failing which the company shall be liable to a penalty at 10% and interest at the central bank of Nigeria monetary policy rate plus a spread to be determined by the Minister.

Petroleum Profit Tax Act (PPT Act)

Personal Income Tax Act and other Acts can now be levied on the income or dividends paid out of any profits to which the PPT Act applies as section 60 of PPT Act which initially prohibited such has been repealed[24].

Personal Income Tax Act (PIT ACT)

In order to harmonize the provisions of the PITA and the FIRS Establishment Act, every reference to the words “the Federal Board of Inland Revenue” has been substituted with “the Federal Inland Revenue Service” in the PIT Act[25]; provisions of the Act relating to the approval of the board for contributory pension to be an allowable deduction under S. 20(1)(g) of the PIT Act has been deleted[26] and by the definition of “Board” and defining the term “Service” and Replacing all references to “the Board” in the PIT Act with ” Service”[27].

Value Added Tax (VAT)

• Increase in VAT rate

Section 34 of the Act increased the rate of tax from 5% to 7.5%.

• Requirement as to registration

Section 35 Every taxable person under the VAT Act is to register with the service for the purpose of tax otherwise, he will be liable to a fine of N50,000 for the first month in which the failure occurs as opposed to the initial N10,000; and from N25,000 for each subsequent month in which the failure continues instead of the initial N5,000.

Forthwith, all non-resident Companies (NRCs) are to include VAT on its invoice for the supply of taxable service and the person to whom the services are supplied in Nigeria shall withhold and remit the tax directly to the Service in the currency of payment[28].

• Who is required to pay VAT?

Persons whose business turnover falls below N25 million in a calendar year is exempted from paying VAT[29]. In determining whether a person meets the 25million naira threshold, the value of a taxable supply of a capital asset of the person; and a taxable supply made as a result of the person selling the whole or a part of its business or permanently ceasing to carry on business will be excluded[30].

However, where a taxable person fails to remit tax within the prescribed time, he will be liable to a sum equal to 10per cent of the tax not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum rediscount rate shall be added to the tax not remitted[31].  Similarly, a taxable person who fails to notify the service of its change of address or permanent cessation of trade or business within 30 days of such change/cessation will be liable to pay N50,000 for the first month in which the failure occurs; and N25,000 for each subsequent month in which the failure continues, instead of the N5,000 prescribed by S. 28 of the VAT Act previously[32]. The same penalty is prescribed in the event of failure to submit returns to the Service[33].

• Goods and services exempted from VAT

Section 47 of the Act amends the first schedule of the VAT to include “Locally manufactured sanitary towels, pads or tampon.” among goods that are exempted from VAT and ‘Tuition relating to nursery, primary, secondary and tertiary education’ as one of the services exempted from VAT.

Custom and Excise Tax (CET Act)

Forthwith, by virtue of section 48 of the Finance Act, Goods imported to Nigeria and specified in the Fifth Schedule will be subject to excise duties.

Capital Gains Tax Act (CGT Act)

A CGT exemption now applies where a trade or business carried on by a company is sold or transferred to a Nigerian company for the purpose of better organization, provided that there are no disposals of assets from such reorganization within a 365-day period[34].

Compensation for loss of employment below N10 million is exempted from CGT, as opposed to the initial N10,000[35].

Stamp Duties Act (SD Act)

Electronic stamp, electronic documents

The definition of stamp has been expanded to include an electronic stamp or electronic acknowledgement. And Instrument now includes ‘every written document including electronic documents’.

Payment of stamp duties on electronic transfer.

Electronic receipt or electronic transfer for money deposited in any bank or with any banker, on any type of account, from Ten Thousand Naira (N10,000.00) upwards shall attract a singular and one-off duty of the sum of Fifty Naira (N50.00) except it is between accounts of the same owner within the same bank.[36]

References

[1] Explanatory memorandum and Section 1 of the Finance Act, 2019

[2] Section 2(a) Finance Act, 2019

[3] Section 22 (c)Finance Act, 2019 defines a ‘small company’ to be ‘a company that earns gross turnover of N25,000,000 or less)

[4] Section 9(a) Finance Act, 2019

[5] Section 10(a) Finance Act, 2019; See also section 19 Finance Act,2020

[6] Section 11 Finance Act, 2019

[7] Section 11(a) Finance Act, 2019

[8] Same provision applies to individuals; see S. 28 of the Finance Act, 2019

[9] Section 4(a) Finance Act, 2019

[10] Section 4(b) Finance Act, 2019

[11] Section 4(c) Finance Act, 2019

[12] Section 5 Finance Act, 2019 generally

[13] Section 6(a) Finance Act, 2019; the same provision applies to other companies. See S. 13 of the Finance Act, 2019

[14] Section 6(d) Finance Act, 2019; the same provision applies to other companies with the exclusion of small companies. See S. 14 of the Finance Act, 2019

[15] Section 7(a)-(d) Finance Act, 2019

[16] Section 9(b) Finance Act, 2019

[17] Section 18 Finance Act, 2019

[18] Section 12 Finance Act, 2019

[19] Section 16 Finance Act, 2019

[20] Section 40 CIT Act, 2020

[21] defined by S. 22 of the Finance Act as a company that earns gross turnover of N25,000,000 or less

[22] defined by S. 23 as a company that earns gross turnover greater than N25,000,000 but less than N1 00,000,000

[23] Section 23 Finance Act, 2019

[24] Section 26 Finance Act, 2019

[25] Section 25 Finance Act, 2019

[26] Section 26 Finance Act, 2019

[27] Section 32 Finance Act, 2019

[28] Section 36 Finance Act, 2019

[29] Section 39 Finance Act, 2019

[30] Section 38 Finance Act, 2019

[31] Section 40 Finance Act, 2019

[32] Section 42 Finance Act, 2019

[33] Section 44 Finance Act, 2019

[34] Section 49 Finance Act, 2019; (see similar provision in Ss. 12(c) and 46  of the Finance Act, 2019)

[35] Section 50 Finance Act, 2019

[36] Section 54 Finance Act, 2019