Deriving from its memorandum and long title, the Finance Act, 2020 is more or less a sweeping amendments of seven (7) different tax laws in Nigeria, that is to say: Companies Income Tax Act, Petroleum Profit Tax Act, Personal Income Tax Act, Value Added Tax Act, Customs and Excise Tariff, ETC (Consolidation) Act, Capital Gains Tax Act and Stamp Duties Act.
The objectives of the Act includes to promote fiscal equity, reform domestic tax laws to align with global best practices, introduce tax incentives for investments in infrastructure and capital markets, support MSMEs, and raise revenues for government.
Thus, the amendments of the various tax laws are primarily geared towards helping the government to raise revenue by increment of some tax rates, mitigate tax avoidance, clarify ambiguous tax provisions, thereby broadening the tax net. We shall now proceed to discuss the various innovations or changes in the Act.
SOME INNOVATIONS AND/OR CHANGES UNDER THE FINANCE ACT, 2020
There are various innovations or changes enshrined in the Finance Act, 2020. Some of these shall be discussed under the various tax laws which the Act amended.
Companies Income Tax Act (CITA)
Introduction of New Tax Rates For Different Categories of Companies for Purposes of Corporate Tax Liability
One of the changes in the Finance Act, 2020 is that companies are now categorized for the purpose of corporate tax liability using their annual gross turnover, and a corresponding new tax rate has been introduced. Hence, the Act categorises companies into small, medium-sized and large companies for purposes of companies income tax. A small company is defined as a company which has an annual gross turnover of N25, 000, 000.00 (Twenty Five Million Naira) and below. Such a company does not pay Company Income Tax.
A medium-sized company is defined as a company having an annual gross turnover of over N25, 000,000.00 (Twenty Five Million Naira) per annum but below N100, 000, 000.00 (One Hundred Million Naira). Such an entity pays Companies Income Tax at the rate of 20%, while a large company is defined as a company that is neither a small company nor a medium-sized company and it pays Companies Income Tax at the extant rate of 30%. This is the purport of section 22 of the Finance Act, 2020 which amended section 105(1) of CITA to the above effects. Also, section 16 of the Finance Act, 2020 is relevant in this regard.
It is most likely that for the purpose of tax avoidance, company promoters might elect to incorporate multiple small companies in the same or similar line of business with the aim of taking advantage of the zero percent tax rate for small companies by structuring the businesses of such companies to ensure that their gross turnovers per annum do not exceed the N25, 000, 000.00 (Twenty Five Million Naira) threshold so as to avoid payment of companies income tax, unless regulations are made by the supervising Minister to forestall this possibility.
Inclusion of Non-resident (Foreign) Companies With “Significant Economic Presence” in Nigeria Into The Tax Net
Before the Finance Act, 2020, to be taxable, a non-resident (foreign) company must have a fixed base in Nigeria. In determining what amounted to a “fixed base,” it was held in the case of Shell International Petroleum BV v FBIR (2004)3 NWLR (Pt.859)46 to the effect that the phrase should not be interpreted to mean “residence” or “ordinary residence” but that in the context of CITA, it connotes a place where a foreign company has carried on its business over a long period of time, notwithstanding that it is not the owner of the place or otherwise resident in that place.
However, it appears this issue is now somewhat statutorily settled by the provision of section 4 of the Finance Act, 2020, which amended section 13 CITA by inserting after paragraph (b) a new paragraph to the effect that non-resident companies “with significant economic presence” in Nigeria that profits can be attributable to are now within the tax net. The expansion of taxable activities of these non-resident companies would no doubt serve the end of the objective of increased tax revenue.
The implementation of this provision might raise unintended consequences. Firstly, the failure to define what constitutes “significant economic presence” in the Finance Act leaves room for ambiguity and vests so much latitude in the supervising Minister in her discretion of determining what constitutes significant economic presence, considering that such discretion might be open to abuse (section 4 Finance Act, 2020, which amended section 13 of the CITA by inserting a new subsection “(4)” to the above effect).
Secondly, this provision may be a disguised “digital tax” targeted at the global tech companies operating in Nigeria without necessarily having a fixed base therein. This might pitch Nigeria against some of her allies, e.g the USA, which is strongly opposed to the digital taxation of the big tech American companies.
Limitation of Tax on Dividend Distribution (Excess Dividend Tax) Only to Untaxed Profits And Abolition of Payment of Tax on Interim Dividend
Hitherto, companies were charged to tax at 30% on their dividend distributions where such dividends exceed the taxable profits for the year notwithstanding that profits being distributed may have been taxed in prior years, exempt from tax, or taxed under a different tax law. This particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location.
However, the situation has been changed under the Finance Act, 2020. The Finance Act, by virtue of section 7, which amended section 19 of the CITA by inserting a new subsection “(2)” now limits the tax chargeable on dividend distribution only to untaxed profits that are not exempt from tax, inter alia. Likewise, before now, companies that declare and pay interim dividends were required to remit income tax at 30% on such dividends to the FIRS. The Finance Act, 2020 has abolished this practice. Also, the Act stipulates that withholding tax (WHT) shall not be applied on dividends that are not paid in money (section 7 Finance Act, 2020).
Personal Income Tax Act (PITA)
Abolition of Children And Dependent Relative Allowances
Before the enactment of the Finance Act, 2020, every person subject to tax in Nigeria was entitled to certain allowances, including children and dependent relative allowances (section 33 of the PITA). This has now been abolished under the Finance Act, 2020. This was achieved by the deletion of the provisions granting children and dependent relative allowances.
This is the purport of section 27 of the Finance Act, 2020 which amended section 33 of the PITA by deleting subsections (4), (5) and (6). It appears this amendment is to resolve the controversies surrounding the entitlement of chargeable persons to children and dependent relative allowances in addition to the consolidated relief allowance granted under the PITA. It equally means that the base of a tax payer’s personal income tax has been expanded.
Tax Identification Number (TIN) as a Precondition For Opening And/or Continued Operation of Bank Accounts
By virtue of section 28 of the Finance Act, 2020 which amended section 49 of PITA by inserting before subsection (1) a new subsection “(1)” and renumbering the section appropriately, banks are now required to request for TIN before opening bank accounts for individuals, while existing account holders must provide their TIN to continue operating their accounts. This provision seems to apply with greater force in respect of business/corporate accounts and not necessarily private accounts. Section 3 of the Finance Act, 2020 which substitute for section 10 CITA, a new section “10” is also relevant in this respect.
Tax Exemption on Pensions, Gratuities And Other Retirement Benefits No Longer With Approval of the Federal Inland Revenue Service (FIRS)
Before now, pensions, gratuities and other retirement benefits were only exempt from tax under certain conditions, including that the beneficiary must obtain the approval of the FIRS before his/her claims would be successful. However, by the provision of section 26 of the Finance Act, 2020, which amended section 20(1) of the PITA by substituting for paragraph (g) a new paragraph “(g),” the requirement of the an approval a government authority, that is, the FIRS has now been removed as a precondition for claiming deductions on contributions made to a pension, provident and other retirement benefits fund as a tax-deductible expense. Therefore, pensions, gratuities and other retirement benefits are now unconditionally tax exempt.
Value Added Tax Act (VATA)
Increment in Value Added Tax (VAT)
Pursuant to section 34 of the Finance Act, 2020, which amended line 1 of section 4 of the VATA, the VAT rate is now raised from 5% to 7.5%. This represents an increment of 50%. Also, section 38 of the Act however substitutes and provides a new Section 15 of the Value Added Tax Act. Subsection 1 of the new section 15 now reads; “A taxable person who, in the course of business has made taxable supplies or expects to make taxable supplies, the value of which, either singularly or cumulatively in any calendar year is N25, 000, 00 or more shall render to the Service , on or before the 21st day of every month in which this threshold is achieved and on or before the same day in successive months thereafter, a return of the input tax paid and output tax collected by him in the preceding month in such a manner as the Service may prescribe”.
This implies that small businesses, individuals, entities and other taxable persons whose taxable supplies or projected taxable supplies fall without this threshold are not caught by this provision. Despite the widely held view that anyone who does not fall within the threshold above is exempted from registering, remitting, issuing tax invoice and collecting VAT, the correct position is that such individuals and entities are still to register and file their returns monthly. “Taxable supplies” is defined under the Finance Act as “any transaction for sale of goods or the performance of or for a consideration in money or money’s worth.”
Expansion of VAT-able (Taxable) Goods and Services
Before the enactment of the Finance Act, 2020, VAT was mostly chargeable on tangible “goods” and barely on intangible goods and services. This confusion was largely because the VATA did not even define the words “goods” and “services”. This meant that many goods and especially services were not VAT-able. Consequently, VAT-able goods were limited to tangible goods that were not exempted under the First Schedule to the VATA. Incorporeal property was generally accepted as non-VATable, by taxpayers, on the basis that such property neither constitute goods nor services. Hence, in the case of CNOOC Exploration & Production Nig. Ltd v AGF & 2 OTHERS [FHC/ABJ/CS/605/2007] the Federal High Court held to the effect that interest in rights in an oil concession is an incorporeal property; it is neither a good nor service, which are the two categories of taxable items under the VATA.
Thus, consolidating the argument that transactions in intangible property are not subject to VAT. However, by virtue of section 33 of the Finance Act, 2020 which substitute for section 2 of the VATA a new section “2,” VAT shall now be charged and payable on all goods and services in Nigeria, other than those listed in the First Schedule to the VATA. Also, by virtue of section 46 of the Finance Act, 2020 which amended section 46 of the VATA, “goods” means “(a) all forms of tangible properties that are movable at the point of supply, but does not include money or securities; and (b) any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, excluding interest in land”.
Furthermore, the section defines “services” as “anything, other than goods, money or securities which is supplied, excluding services provided under a contract of employment.” It is also in this light that section 47 of the Finance Act, 2020 amended the First Schedule to the VATA. The effects of this is that there has been an expansion of VAT-able products, so much so that the VATability of incorporeal property, such as rights (to intangible assets), patents, trademarks, royalty, copyright etc., that was hitherto at large has now been statutorily brought within the tax (VAT) net.
Upward Review of Monetary Penalties For Late VAT Filing And Failure to Register For VAT
Penalty for late VAT filing of returns is now increased to N50,000 for the first
month and N25,000 for subsequent months of failure (section 44 of the Finance Act, 2020, which substitute for section 35 of the VATA a new section “35”). Likewise, the penalty for failure to register for VAT is reviewed upwards to N50,000 for the first month of default and N25,000 for each subsequent month of default (section 35 of the Finance Act, 2020, which substitute for section 8 of the VATA a new section “8”).
Also, the penalty for failure to notify FIRS of change in company address is increased to N50,000 for the first month of default and N25,000 for each subsequent month of default. This penalty also covers failure to notify FIRS of permanent cessation of trade or business (section 42 of the Finance Act, 2020, which substitute for section 28 of the VATA a new section “28”).
Capital Gains Tax Act (CGTA)
Introduction of Business (Group) Reorganisation Tax Relief
Similar to the VAT amendment, the Finance Act, 2020 introduced CGT exemption on group reorganisations, provided that the following conditions are met, to wit: assets are sold to a Nigerian
company and is for the better organisation of the trade or business; the entities involved are within a recognised group 365 days before the transaction subject to tax; and the relevant assets are not disposed of earlier than 365 days after the transaction.
This is the purport of section 49 of the Finance Act, 2020, which substitute for section 32 of the CGTA a new section “32”. Hitherto, the practice was that companies send an approval request letter under Section 29(9) CITA to the FIRS, and include a CGT exemption request. The Act defines “recognised group of companies” as “…a group of companies as prescribed under accounting standards” (section 51 of the Finance Act, 2020, which amended section 46(1) of the CGTA).
The Finance Act, 2020 with its innovations or changes is not without its fallibilities. Still, it is indeed a timely piece of legislation capable of addressing the revenue shortfalls in Nigeria. What more, the idea of having fiscal regulation annually alongside the Appropriation Bill can only provide clarity to tax payers and people impacted by taxes. If this practice is sustained, it would surely make for easy tax planning by tax payers.
This notwithstanding, whether or not the Act will live up to its billing remains an anxious wait for all stakeholders. And perhaps, not until the end of the taxable period, we may never really know the degree of the impact this statute might have on the socio-cultural and economic landscape of Nigeria.
(Note: I acknowledge Wole Obayomi and Tunde Esan whose works “Finance Act 2020: Impact Analysis” and “The Tax Implications of the Finance Act, 2020” respectively, greatly influenced this write-up)