Consequent upon the commitment of the Federal Government to examine and enact a fiscal policy annually, the Finance Act 2020 “the Act” was signed into law by the President on 31 December 2020. The Act takes effect on 1 January 2021 and addresses the overall tax reforms, financial management and public revenue strategies by making numerous changes to legislations such as the Companies Income Tax Act, the Stamp Duties Tax Act, Petroleum Profits Tax Act, Industrial Development (Income Tax Relief) (“IDITRA”), Capital Gains Tax Act and Personal Income Tax amongst others. Some of the changes in the Act re-affirm the dedication of the federal Government to keep up with current economic realities and remain proactive. This paper outlines and examines some of the changes below.
Companies Income Tax
- Companies making contributions (in kind or cash) to complement the effort of the government during pandemics e.g. Covid-19, natural disasters or other exigencies; in addition to the usual allowable deductions are now eligible to claim deductions limited to 10% of their assessable profit.
- Companies (especially in the Financial Technology sector) can now claim capital allowance on capital expenditure for the acquisition or development of software. With the growing reliance on technology, this is a laudable policy to help grow local technological know-how and talents.
Note that there are no provisions for the capital allowances rate or the applicability of investment allowance.
- The income tax returns of non-resident companies include full audited financial statements of the companies and financial statements of Nigerian operations certified by auditors in Nigeria. This provision does not apply to non-resident companies with only a withholding tax obligation.
- The Minimum tax rate has now been reduced from 0.5% to 0.25% for companies with their assessment dates between 1 January 2020 and 31 December 2021.
- Companies in the Free Trade Zones (“FTZ”) are now required to file tax returns directly with the Federal Inland Revenue Service (“FIRS”).
- Businesses that are exempted from incorporation and corporate taxes are now mandated to keep a book of account in the manner prescribed by the FIRS. Failure to do this might attract a penalty of N100, 000.00 in the first month and N50, 000 in the following month.
- Services of notice of assessment can now explicitly be done by courier, email or any other electronic means. The Covid-19 Pandemic practically forced people to resort to electronic means of doing things and where there was some level of uncertainty as to what was allowed to be done electronically under the law; this new provision brings clarity on this front.
- There is now a trust fund for dividends that have been unclaimed for at least 3 years from date of declaration of such dividends– Unclaimed Funds Trust Fund (“UFTF”). Where such dividends remain unclaimed for a period of 12 years after being transferred to the trust fund, it will be transferred as revenue to the Federation Account.
Note that the company transferring the unclaimed dividends would have to derecognize the dividend payable upon such transfer.
- Small Companies are now exempted from paying Education Tax.
- The period of payment of any tax charged with no objection has now been increased from 30 days to 2 months. Essentially, the period of filing a Notice or Refusal is now 2 months.
- The moratorium for granting an exemption of tax for interests on foreign and agricultural loans has now been revised from “not less than 18 months” to “not less than 12 months”.
Personal Income Tax
- The rule on Significant Economic Presence now applies to include non-resident individuals, executors or trustees. The Minister of Finance will subsequently issue rules to define SEP as related to the Personal Income Tax Act (“PITA”).
- Annual premium paid during the year preceeding the year of assessment to an insurance company in respect of insurance on the individual’s life or the life of his spouse shall be allowed as a deduction.
- Incomes of NGN 30,000.00 (Thirty Thousand Naira Only) or less are now exempted from tax.
Capital Gains Tax
- Compensation paid to an employee for loss of an office in excess of N10, 000,000.00 shall be subject to capital gains tax.
Gas Utilization Incentive
- The incentives in the CITA for companies in the “downstream gas” utilisation sector will not apply where same is claimed under the PPTA, the IDITRA and any other law.
Stamp Duties
- The definition of “stamp” has been amended to admit the utilization of adhesive stamps produced by the Nigeria Postal Service (NPS).
Electronic Money Transfer
- All electronic transfer of funds in excess of N10, 000.00 attract a flat “levy” of N50, 00. This replaces stamp duty and gives the impression that the administration of this levy can be assigned to another body that is not the FIRS. It is expected that the Minister of Finance will make further clarifications on this.
Value Added Tax (VAT)
- VAT is no longer charged on services such as commercial airline tickets for airlines registered in Nigeria and hired/rented or leased agro-equipment for agricultural purposes.
- Any company that makes a supply of taxable goods and services in Nigeria has an obligation to register for VAT purposes. Note that tax representatives can be used. The Act confirms that the effective date for the 7.5% VAT rate commenced on 1 February 2020.
Pioneer Status
- Primary agricultural businesses involved in crop, livestock, forestry activities and fish production are now eligible for pioneer status incentive.
Customs and Excise Tariff
- Import duty on cars for transport has been reduced from 30% to 5%.
- Purchased or leased aircraft engines, spare parts and components by Nigerian registered airlines providing commercial air transport services are now exempt from import duty.
- Previous exemptions granted on imported goods that are not locally made and raw materials not locally sourced shall no longer apply.
- All telecommunication services in Nigeria shall now be liable to new rates to be specified at a later date by the President.
- Services are now subject to excise duties based on the rates provided in the 5th Schedule to Customs and Excise Act.
Filing Requirement for Entities in the FTZ
- All Companies operating in the FTZ are now mandated to file their returns with the FIRS. Failure to do this will attract sanctions.
Fiscal Responsibility Act There has been an expansion of the conditions where the President may exceed the aggregate ceiling of expenditures. The conditions now include war, safety, breakdown of law and order, natural disaster or other public dangers threatening the existence and unity of Nigeria.
Tax Administration
- The FIRS can now have virtual hearings, use technology to collect taxpayer information and ensure data protection measures of the information collected.
- For the purpose of tax refunds, the Accountant-General of the Federation shall create dedicated accounts for each tax-types and fund such refunds from the respective accounts of the government that the tax-type is remitted into.
- The FIRS can now get or provide assistance to foreign Government or other bodies on revenue or tax issues. This brings to fore the importance of international tax treaties, country-by-country reporting amongst other international collaborations and agreements on taxation.
Conclusion
The foregoing changes are hugely positive and would serve to ensure transparency in the public sector. However, businesses and individuals are urged to re-evaluate their tax advisory, planning and compliance strategies and modify where necessary by consulting professionals.
Credit: Ibrahim Moshood, Associate at The Centurion Law Group
