Categories: REFLECTIONS

REFLECTIONS – 21 FEBRUARY

THIS IS REFLECTIONS, our weekly roundup of events in the legal and technology sector, covering various topics and interesting learning points for today’s professionals.

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TITLE-TAXATION OF FINANCIAL PRODUCTS & TRANSACTIONS 2022

DATE- 22ND FEBRURY 2022

TIME 1PM

The Financial Service Industry (FSI) is rapidly changing, and we have seen the emergence of different financial products being developed by players of the industry (banks, insurance companies, capital markets, commercial real estate etc This session gives insights into Tax implications of eNaira, issues with Debt-Equity (from the Lender’s perspective), Tax Planning for multinational corporations, current issues in taxation of Banks)

The speaker made the listeners understand that the Financial Technology industry has also widened the products and offerings in the Nigeria FSI, such products includes digital banking, investments and financial management, crowdfunding, electronic payment, digital credit, Block chain and digital currencies. With the inclusion of digital currencies, the Central Bank of Nigeria has recently introduced the eNaira as a financial product to grow with the changing market.

These financial products have tax implications, and tax authority as from time to time developed initiatives to ensure that taxpayers are compliant and are brought within the tax net in order to avoid tax evasion.

The eNaira is a digital currency introduced by the Central Bank of Nigeria. It is a digital form of the Naira that has same exchange value as the Naira. The eNaira differs from the Bitcoin and other cryptocurrency as its value is the same as the Naira and its value is not affected by market influence and it cannot be used for wealth growth or investment as its value is pegged to the Naira. The government believes that the eNaira will increase revenue and tax collection amongst other benefits.

TAX IMPLICATION OF E-NAIRA

Although there has been no statement from the tax authorities on the introduction of eNaira and the tax implication, the eNaira will have an effect on the administration of taxes in Nigeria, since eNaira is a legal tender and can be used to carry out transactions, it means taxes can be paid in eNaira. The tax law requires that taxes should be paid in the currency of transaction, therefore, where a transaction is executed using the eNaira, it is expected that the taxes due on that transaction will be paid in eNaira.

Since the eNaira has the same value as the Naira, there is no gain on the sale or purchase of eNaira and as such no tax implication.

However, looking at it from the perspective of encouraging the use of eNaira, the tax authorities an grant incentives in form of reduced taxes to companies and individuals who use the eNaira to pay taxes or execute transactions.

DEBT-EQUITY ISSUES

A growing concern for Entrepreneurs and businesses is the sourcing of financial capital and what type of capital to use when starting/running a business. There are basically two types of ways through which capital can be obtained- Debt Financing and Equity

Debt Financing is the process through which businesses get financial capital through debt instruments. These includes loans and corporate bonds. Below are tax implications.

LOANS: These are gotten from financial institutions such as banks. Essentially only WHT on the interest on the loan repayment would apply. The lender is to receive 90% of the interest loan with the 10% remitted to the RTA.

CORPORATE BONDS: These are loans gotten from multiple investors where the borrower issues them with a bond certificate in some cases. The interest and principal are repaid on the day of the maturity of the bond. The tax implication per the Finance Act 2021 is that the corporate bonds are now subject to company income tax and as a result WHT is applicable.

EQUITY: This is when shares of the business are sold to investors who become shareholders as a means of creating financial capital. The tax implication on these shares is on the dividend paid to the shareholder. Dividend is subject to WHT at 10% and remitted to the RTA and the WHT is the final tax on dividend income.

TAX PLANNNG FOR MULTINATIONAL CORPORATION

Multinational companies doing business in Nigeria need to take conscious efforts to consider the taxes payable in the jurisdiction it operates in some tax planning strategies include-

Thin Capitalization: This is when a company is made up of more debt than equity. However, there is a thin capitalization rule that interest paid foreign connected companies are limited to 30% of EBITDA and the unclaimed interest carried forward to a maximum of 5 years.

 Double taxation treaty- Nigeria has signed double taxation agreement with 14 countries and there are benefits or reliefs available to multinational corporation such as Relief from double taxation, in form of tax credits or deductions of foreign tax paid from tax payable in Nigeria by a Nigerian resident in order to eliminate double taxation

Treaty withholding tax rates for passive income or fees for technical service derived from Nigeria by residents of a treaty partner

Non-Discrimination in Taxation matters

Tax Havens- Tax Haven is a state or country where certain taxes are levied at lower rates or not at all. Tax havens can also be identified when there is protection of personal financial information and ack of transparency.

Electronic Money Transfer (EMT) Levy- Banks are required to pay N50 on all inter-bank deposit and transfers from N10,000, intra-banks deposits and transfers from N10,000 and other electronic receipts issued for deposits received by a financial institution.

Stamp Duties- all banks and other financial instruments are required to pay stamp duties on Guarantor’s Form, Loan Agreement/loan capital, Mortgages and Bonds and Rent Agreement.

What are the Tax implication of financial products and transactions?

Withholding Tax (WHT)- This is an advanced tax on income. WHT is applicable at 10% of the value of the dividend paid to shareholders as well as at 10% of the interest on fixed deposit. The consumer essentially is paid 90% of the income earned by the financial products with the 10% remitted to the relevant Tax authority. (RTA)

Stamp Duties: This is applicable where parties enter into share sale and purchase agreements, transfer of business asset at the prevailing rate.

Capital Gains Tax on disposal of asset. This applies on the disposal of shares with value above N100 million.

SPEAKERS

FOLAJIMI OLAMIDE AKINLA, SENIOR MANAGER, PWC NIGERIA

OYEYEMI OKE FCA, LLM PARTNER A2 LAW

KELECHI UGBEVA FOUNDING PARTNER, BLACKWOOD & STONE LP

Title: NIGERIA BUSINESS & ECONOMIC OUTLOOK 2022 | Actualizing Growth & Sustainability: The Business, Political & ESG Imperatives

Time-11am

Date-24th February 2022

In an opening session by one of the speakers, BiodunAdedipe he gave insights into the Nigerian Business Environment and the has challenges as well as many opportunities it has been faced with. According to him, “What we see and focus on is our choice.” “When we make our choices, those choices make of impacts COVID-19 caused in the economy.

In the Economic aspect, it affected oil prices, led to stock market crash, war, and economic recession. As regard countries, it has various impacts although few escaped recessions. Also, the Aviation industry was greatly affected negatively during the pandemic, and also the Hospitality sector.

Significant reductions in passenger numbers have resulted in flights cancellations thus a decline in revenue.

The Tourism sector also took a different direction.

Tourism is one of the world’s major economic sectors. It is the third-largest export category (after fuels and chemicals) and in 2019 accounted for 7% of global trade. Tourism is one of the sectors most affected by the Covid-19 pandemic, impacting economies, livelihoods, public services and opportunities on all continents. All parts of its vast value-chain have been affected. Export revenues from tourism greatly fell. Food, Entertainment, and luxury goods were not left out in the affected sectors from COVID-19 impacts.

The implications of the impacts on Governments, stimulus, interventions by COVID 19 was also not left out. Several Business failed, closed, different new business strategies sprung up. The livelihoods of some people were greatly affected negatively. People lost their means of income and livelihood and sustainability was hard. This affected the hospital and mental health status of humans globally.

On Global Economic Developments, going forward the global economy is projected to grow by 5.9% in 2021 and 4.9% in 2022. There is a expected increased global energy prices and pandemic stimuli trigger global inflationary pressures. There is also a shift in economic growth to energy-exporting countries from energy-importing ones and increasing adoption of monetary policy normalization in the USA and UK. The Sub-Saharan Africa GDP growth revised from 3.4% upwards to 3.7%

In discussing global economic developments, global debt has risen from $83 trillion in 2000(230% of global GDP) to $295trillion in 2021(320% of GDP in 2019 and 355% in 2021.

The growth rate has more than doubled the global GDP growth, reflecting in finances of nations, corporates and households.

Policy rates are being raised by major central banks around the world and the impact depends on where it is borrowed from.

Major trends to watch from 2022-

Democracy v Autocracy

Pandemic to Endemic

Inflation worries

The future of work

The new techlash

Cryptocurrency pace

Climate crunch

Space races

Nigeria: 2022 Expectations

Available projection 3.72%(BAA) 4.2%(FGN/NBS) 2.7% (IMF)

and 2.5%(world bank) are unanimous about GDP growth in 2022 improvements over2021.

Inflation rate is expected to be moderate but still be a double digit(January at 15:6% improved over 15.63% in December 2021)

Lending rate will remain double digit

Improvement in infrastructure that will positively impact the cost of doing business and improve government revenue in the near term

Intensified digitization and ascendancy of the digital economy.

SUMMARY

This session gave insights on sustainability strategies of the global economy, the impacts of COVID-19 and economic growth. The discussion also enlightened listeners on the relationship between sustainable development and economic growth. Although the global economy seems to be growing after a 4.3% contraction in 2020, the pandemic has caused a heavy toll on death, loss of livelihood, job loss, economic recession, decline in mental health, depressions several other impacts.

Speakers

KunleSoyibo, Partner and Co-sector Head Financial services sector at Jackson Etti& Edu

BiodunAdedipe(PHD) Economist and Former Economic Adviser to President Goodluck Jonathan

TolulopeAdeleru-Balogun Political and Business Analyst News, Central TV

Anne Marie Scot Global ESG &Sustanabilty, Partner Ashurst London

TOPIC: WOMEN, PEACE, SECURITY AND INTERNATIONAL LAW

SPEAKER: CHRISTINE CHINKIN

The speaker noted that there has been demands for accountability end of impunity for crimes against women.


The speaker noted that the UN resolution of 1820 demands protection for women and girls during war, the resolution also states that sexual violence must not occur during situations of war and also the resolution also states that rape and violence are deliberate tactics of war. The speaker used ISIS rampage in Iraq and Syria and alighted the way they use sexual violence as a means of terror.

The speaker noted that the myth of sexual violence against women should be debunked, relief and recovery for women who have experienced sexual violence prevention of sexual violence protecting of women during war are also essential.


The speaker noted that the new positions within the United Nations which includes women protection from sexual violence and she also noted that there is a women protection officer who is a representative of the UN secretary on sexual violence and conflict representation who reports sexual violence and acts to the UN and also gives the names of sexual violence offenders and also lists the provisions of sanctions against such offenders.

The speaker also noted that there is an agenda that is firmly rooted in gender binary distinction between women and men, she also noted that while all the proposed resolutions are forward-looking, there are also limiting as they failed to look at the roots of women sexual abuse such as the social-economic limiting and relegation of women.


The speaker noted that Russia and China have said that the security council of the UN was not the appropriate place to bring up issues of sexual abuse against women as it should be brought to the general council instead.


On way the issue of sexual violence against women stands in the international law, the speaker said it is more of a language of international relations development and empowerment that it is also the language of gender.She notd that there are already existing international laws that recognises human rights violence against women.


The speaker noted that even with the resolutions and laws, impunity is still the norm against women and that there is limited success of women participation in laws regarding sexual violence against women as there are still some extreme margin and generalization of women.

TOPIC: TOP CRITICAL RISK ISSUES FOR CONSTRUCTION AND DEVELOPMENT PROJECT

The webinar started at 1:00PM on the February 24, 2022 with the host Ms. Jennifer who explained the overview to the group that the contract negotiation and drafting is a difficult skill to master. Skillfully designed contracts might mean the difference between efficient, successful projects or significant reputational and financial impact to your client. Whether you are representing privately funded agreements or infrastructure projects, there is no such thing as a one-size -fits-all solution. In order to effectively preserve clients’ interests, practitioners must keep up to date on market trends, regulatory developments and changes in legal precedents.

The first speaker Mr. Julian Bailey who is a partner in White & Case LLP London shared his overview as follows:

  1. The problem of unforeseen site conditions
  2. Risk allocation
  3. Technical & contractual solutions

The problem starts in the contract agreement; whereby the contractor enters into an agreement and sign it without reading through its terms and conditions, and in reality the performance of work is not carried out as drafted or expected.

Always expect the unexpected. Surprises emerges during performance of work.

Archaeologists have uncovered the largest area of Roman mosaic found in London for more than half a century. It is thought it once decorated the floor of a Roman dining room. Also, a 2000-year-old Roman cemetery that includes at least 34 tombs has been uncovered in a northern Gaza city.

The Risk Allocation has two main types:

{i} The risk that the site conditions are worse than anticipated

{ii} The risk that the structure as (potentially known) site conditions e.g. Thorn v The Mayor and Commonalty of London (1876) LR 1 HL 120

The common law position on risk allocation states that unless the contract confers an entitlement on a contractor to claim additional time and money due to unforeseen site conditions; the contractor has no right to claim more time or money.

As illustrated by Re Nuttal and Lynton and Barnstaple Railway Co (1899) Hudson’s BC (4th edition, volume 2) 279 at 286, per Smith LJ that:

Contract to build a railway for a lump sum of £42,600 and much more rock was encountered than expected. So was the contractor entitled to additional payment? It is an absolute contract; whether the contractor found rock in a small degree or whether the contractor found rock in a large degree, the agreement was to do the work for £42,600.

However, in modifying this risk allocation e.g if the contractor encounters physical conditions which are unforeseeable, gives such a notice and suffers delay and/or incurs cost due to these conditions, the contractor shall be entitled to either of these claims:

{a} an extension of time for any such delay, if completion is or will be delayed

{b} payment of any such cost, which shall be included in the contract price

However, “unforeseeable” means not reasonably foreseeable by an experienced contractor by the date for submission.

Technical and Contractual Solutions

The following should be noted about technical and contractual solutions:

Technical solutions – constraints

Time: how much time is there to investigate the ground before the works start?

Money: who bears the cost? Taking borehole logs can be expensive

Access: is it actually possible to conduct a site investigation? Even if the site is investigated, there may be disagreement over what site conditions were “reasonably foreseeable” by an experienced contractor.

The second speaker Elizabeth Wilson presented on top critical risk issues for construction and development projects.

She defined joint ventures as an entity created by two or more parties which allows for pooling of resources to accomplish a specific task. It is usually created by incorporation or by contract. It generally involves shared risk and reward, as well as ownership and governance.  The use of joint ventures in a contract agreement which allows different companies with different skill sets to work together and helps satisfy local content requirements, share risks, capacity and coverage issues.

Types of Joint Ventures:

{i} liability of the joint venture partners: incorporated joint ventures usually benefit from limited liability

{ii} Position/ character of Joint venture partners: Joint venture partners themselves need to be mindful of who they are partnering with contractors with no access or a local company with substantial assets against which a decision could be enforced

{iii} Administration and day to day operations: Incorporated joint venture usually employs workers, opens bank accounts, obtains permits and retains IP in designs and drawings.

{iv} Tax liability: There are different tax position for incorporated and unincorporated joint ventures.

{v} Default and termination: it is easier to quickly exit a joint venture if contractual rather than incorporated though will depend upon termination process agreed. Continuing in the face of one joint venture partners’ exit generally easier with an incorporated joint ventures

In a hypothetical example where subcontractors with claims and outstanding certified payments is due. Employer with claims for delay. Also where lead joint venture member refuses to commit to funding payment of competition of the works and increasingly appears unable to do so.

Top issues to consider in negotiating construction and design/build contracts

  • Contractors agrees to both design and build a project, usually based on pretender designs and detailed owner criteria
  • Allows owner to engage single contractor but limits owner’s right of recourse to single contractor in the event of both design or construction issues

Commercial designers and lawyers have issues in the contract agreement. Responsibility for both design and construction for a single price means contractor is more financially exposed but also better able to control cost and price.

In dispute resolution, the following should be taken into consideration:

  • What types of claims might you be able to make based on contractual terms/governing law; breach of good faith, failure to fund the joint ventures
  • Will the system of deadlock resolution that applies to general operations also apply to resolve deadlocks during dispute with the owner e.g. which lawyers to appoint on the contracts?
  • Consider the type/forum which is usually arbitration for construction projects with international contractors.
  • Local partners need to consider risk of enforcement of court /arbitration rulings if the seat is also local.

The last speaker Mr. MomohKadiri summarized dispute resolution in Nigeria. Parties either go for arbitration, mediation, adjudication etc.  Arbitration is best option for construction projects because it offers more options than the other dispute resolution. The parties want quick resolutions and avoid court proceedings which is slow in responding to litigants.

However, in drafting the agreements, lawyers should be engaged from the early stage. It enables parties to specify the things to be stated in the agreement. Different sectors in oil & gas, transport agencies, foreign investors on road constructions usually have disputes if the joint ventures in the contracts is not stated clearly. In Nigeria, it takes an average of 20 – 30 years for a case to be decided.

What is the development from here?

Primarily arbitration in Nigeria is the preferred means of dispute resolution which was enacted in 1988 and the law is still behind compared to other countries. One of the solution is for the court to take more proactive action.

Mr. Momoh was asked on the implication of operating a construction company where none of the directors is an engineer, especially where they act as contractors in Nigeria? He answered that no law says a director must be an engineer.  A company that is certified would be considered for projects. Promoters need not be an engineer but in order to expand, there is need to employ an Engineer who is knowledgeable in the technical know-how of the contract.

In Nigeria, contractors also take the climatic period i.e., raining and dry season into consideration before signing a contract.

The agreement must be clearly stated about the issue of delay in job. Contractors must be on sight. A contractor/ consultant must ensure his people are ready for the designated work.

In conclusion, though unforeseen circumstances cannot be anticipated even if the weather is not predictable. Also should be a creation of consent from the early stage, roles are handling differently

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