Signed into law by President Muhammadu Buhari on 13th January 2020, the Finance Act (“the Act”) is the first of its kind in over two decades. Among other objectives, the Act seeks to promote fiscal equity, introduce incentives to encourage capital market and infrastructure investments, support small businesses and boost Government revenues.
The star of the Act is VAT, a 50% increase from 5% to 7.5%. Even at that, 7.5% is still the lowest in Africa despite our ‘Economic Giant’ status. South Africa doubles our VAT rate at 15%, Kenya: 16%, Egypt: 14% and Rwanda that we all yearn to be like these days is 18% like Senegal.
“In keeping with global best practice, the Act introduces a VAT compliance threshold of N25 million for taxable persons in Nigeria. By implication, Small enterprises with cumulative taxable supplies of less than N25 million in a calendar year will not be required to charge output VAT on their invoices or file VAT returns with the FIRS, thereby reducing the compliance burden on such companies” KPMG
Point by point, please find below our bits and insights on the new Act:
Agriculture:
Agriculture is the mascot of this administration, it must look good all the time, even if the Mascot needs to go on holiday to look good, so be it.
- Tax Holiday for Agric Businesses: The Finance Act grants tax exemption to companies engaged in agricultural production from tax for a period of five years, which can be extended for another three years subject to the determination of the satisfactory performance of such business.
With this largesse incentive from the Finance Act, abundant single-digit intervention funds available to the sector and the massive export potentials, the Agric sector appears to be the most viable business to run under this administration.
Capital Markets
2) Unit Trusts (Mutual Funds): Unit Trusts are now exempted from deducting WHT on dividends paid to their beneficiaries. That is, no WHT on distributions to Mutual Fund Investors.
We believe this will improve the patronage of mutual funds.
3) Securities Lending: in a Regulated Securities Lending Transactions (RSLT), WHT only arises in two cases – interest and dividend. According to the Act, WHT on interest is deducted only at the point of payment to the Borrower. WHT on dividends applies only at the point of payment to the Lender. This is a major departure from the current multiple tax regime plaguing securities lending.
We believe the new tax framework will increase the turnover on securities lending and further enrich the equities market.
Microfinance Banks
4) VAT Exempt Services: all services rendered by unit, state and national microfinance banks are exempted from VAT. This will reduce the cost of MFB services to grassroots taxpayers and facilitate the financial inclusion drive.
Stamp Duties
5) Transactions above N10,000.00: The Finance Act introduced a new section [Section 89(3)] to impose stamp duty of N50 on all electronic receipts/transfers above N10,000 for all types of accounts.
Insurance
The Finance Act is a game-changer in ensuring the fair taxation of insurance companies.
Before now, “the tax laws in Nigeria had provided disincentives to the sector by limiting their losses, placing an obligation to pay significant minimum tax when they make losses or earn little profits and restricting claims for unearned premium reserve”. PWC
This Finance Act addressed the disincentives as follows:
6) 4-year restriction on Losses: insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place.
7) Special Minimum Tax: this will no longer be applicable.
8) Restricted Deductible Claims and Other Outgoings: henceforth, all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
9) Taxable Investment Income for Life Insurance Business: The Act clarifies taxable income and limits it to income accruing to the insurance company as against income accruing to the insurance fund. It limits the investment income captured for tax purposes to income derived from the investment of shareholders’ fund, and provides a current year exemption from tax for investment income earned on funds obtained from policyholders.
The elimination of these inhibitive rules (peculiar to insurance companies) is expected to boost the profit potentials of the industry, reduce the unending retained losses plaguing the valuation of insurance companies and attract foreign direct investments to the sector.
Oil and Gas
10) WHT on Dividends to Investors: The Finance Act revokes the Withholding Tax (WHT) exemption on income or dividends paid out of after-tax petroleum profits. Before now, under Section 60 of the Petroleum Profits Tax Act, withholding tax was not charged on dividends from upstream operations. Henceforth, dividends from upstream companies are subject to withholding tax at the prevailing rate of 10% or 7.5% if payable to recipients of a treaty country.
Gas Utilisation (Downstream Operations) Incentive
11) Interest expense as a deductible expense: The requirement to obtain ministerial approval prior to claiming interest expense as tax-deductible has been removed.
12) Restriction on Number of Tax Incentives: The Finance Act clarifies that companies enjoying gas utilization incentives in respect of their qualifying capital expenditure shall not enjoy any other tax incentive including the Pioneer Status Incentive on the same project/assets.
Digital Economy
“The intention of this amendment is to broaden the tax base to capture profits arising from cross-border technology and digital activities that have previously escaped tax under the outdated CITA” PWC
All Nonresident Companies (NRCs) earning income from advertising, marketing, social media platforms etc will now be subject to tax on profits derived from such activities.
13) VAT: From the effective date of the Finance Act, services received by a person resident in Nigeria will be chargeable to VAT, regardless of the location of the supplier.
The Nigerian recipient of a VATable service provided by an NRC will also be required to self-account for the VAT where the Nonresident Company (NRC) has not included VAT in its invoice.
These obligations would arise if an NRC has a significant economic presence in Nigeria.
14) Contributions to Pension and Retirement Funds, Societies and Schemes are now unconditionally tax-deductible.
15) Expansion of the list of VATexempt goods and services: The Finance Act expands the list of VAT-exempt goods in the First Schedule to include locally manufactured sanitary towels, pads and tampons, as well as the following broad categories of “Basic Food Items”:
a) Brown and white bread;
b) Cereals including maize, rice, wheat, millet, barley and sorghum;
c) Fish of all kinds, other than ornamental;
d) Flour and starch meals;
e) Fruits, nuts, pulses and vegetables;
f) Roots such as yam, cocoyam, sweet and Irish potatoes;
g) Meat and poultry products including eggs;
h) Milk;
i) Salt and herbs of various kinds; and
j) Natural water and table water.
In addition, the Finance Act also expands the list of VATexempt services to include tuition relating to nursery, primary, secondary and tertiary education. The above measures are aimed at alleviating the impact of the increase in VAT rate on the populace.
We are optimistic the Act will stimulate economic activities, enhance GDP growth and facilitate increase in the revenue generated by Government. It’s a win-win for all.
