The Finance Act 2020 (the “Finance Act”), is split into 7 parts. This is a review of the changes in the under-listed tax legislations;
- Capital Gains Tax Act
- Companies Income Tax Act
- Customs and Excise Tariffs etc (Consolidation Act)
- Personal Income Tax Act
- Petroleum Income Tax Act
- Stamp Duties Act
- Value Added Tax Act
We have provided a brief overview of each of the Acts below;
Capital Gains Act
Capital Gains Tax is a type of tax applied to the profits earned on the sale of an asset. Unlike taxes on ordinary income, which occur each year as new income is earned, Capital Gains Tax are only levied once the assets in question are actually sold.
The two changes made by the Finance Act to take note of are:
- The N10,000 (Ten Thousand Naira) exemption on tax liability, which is compensation for loss of office has been increased to N1,000,000 (One Million Naira). This means that where one has lost their source of income, they get a tax exemption on their Capital Gains tax for up to N1,000,000; Also
- Any business that is transferred to a Nigerian company for the purpose of better organisation is exempt from the Capital Gains tax. However, it is important to note that this exemption is not applicable if the company that bought the business subsequently sells the assets of the business within one year of acquiring same.
Companies Income Tax Act
The Companies Income Tax is a form of tax levied against the annual profits of Companies operating in Nigeria. The Finance Act introduced an amendment to the Companies Income Tax Act (hereinafter referred to as CITA). The amendment imposes taxes on foreign entities of “Significant Economic Presence” who provide goods or services to Nigeria.
Significant Economic Presence” is therefore the factor for determining the profits of non-resident companies who provide services (digital, technical, management, consultancy or professional) in Nigeria.
in February 2020, the Minister of Finance, Budget and National Planning, issued the Companies Income Tax (Significant Economic Presence) Order, 2020 (‘the Order’).
The Order, which became effective from the date it was issued (3rd of February 2020) empowered the Minister to determine the definition of “Significant Economic Presence”, and what will fall under it to mean:
- A foreign company that derives an income of N25million or its equivalent in other currencies from Nigeria in a year by
- streaming or downloading services of digital contents (movies, videos, music, apps, games, e-books) to any person in Nigeria;
- transmission of data collected about Nigerian users generated from users’ digital activity;
- provision of goods or services other than technical, management, consultancy or professional services; or
- provision of intermediation services through digital platform that links suppliers and customers in Nigeria
- A foreign company that uses Nigerian domain name (.ng) or registers a website address in Nigeria
- A foreign company that has purposeful and sustained interactions with persons in Nigeria by customizing its digital platform to target persons in Nigeria e.g., by stating the prices of its products or services in Naira, or providing options for payment in Naira
For the purposes of determining that the N25million threshold was met, activities carried out by
- Associates as defined in the Companies and Allied Matters Act
- Business associates who directly or indirectly participate in the management, control or in the capital in that accounting year shall be aggregated.
However, any payment made:
- to an employee of the person making payment
- for teaching in relation to an educational institution
- by a foreign base of a Nigerian company
will not fall under the umbrella of Company Income Tax to be paid under Significant Economic Presence.
A few questions will naturally arise from this Order.
- How does Nigeria hope to go about implementing this Order?
- Would this not amount to double taxation, especially because these companies already pay taxes to the governments of their countries of origin?
- What is the likely outcome of this Order?
The mode of implementation of the Order is unclear as we anticipate clarifications from the Minister, however what is clear is that some of these companies to be taxed under this Order may be subjected to double taxation of the same income in multiple jurisdictions.
There is therefore the likelihood that the Companies either increase their monthly subscription fees, or the companies will be discouraged and leave the Nigerian economy to a more regulation-friendly one.
Customs and Excise Tariffs etc (CET Act)
Customs and Excise Tariffs are tariffs placed on the importation of certain goods and products into Nigeria. The Finance Act, amendment to the CET Act is the substitution of Part 3 section 21(1) with the New Section 21(1) which provides that both imported and manufactured goods that fall under CET Act’s 5th schedule will be charged with duties of excise so long those goods or raw materials are not locally produced or available in Nigeria.
It is clear that this is In a bid to incentivise local production in Nigeria.
Personal Income Tax Act (PITA)
Personal Income Tax refers to the taxes payable by individuals on income earned. The Finance Act has amended PITA’s section 49 to require a mandatory Tax Identification Number for people intending to either open a new bank account for their business, or to even continue using their business bank accounts.
This is a bid by the government to ensure people can easily be identified for tax purposes.
Petroleum Profit Tax Act (PPTA)
The Petroleum Profit Tax is an annual tax levied on the profits of petroleum companies in Nigeria. The Finance Act amendment to the PPTA is such that it deleted Section 60of the PPTA which exempts dividends or incomes paid out of the profits that are gained after tax deductions made under the Petroleum Profits Tax Act.
This means that such incomes or dividends will now be subjected to tax. Although the dividends paid out of profits that have been subjected to petroleum profits tax will now be subject to a withholding tax of 10%, shareholders that are resident in a country that has signed a double tax treaty with Nigeria will, however, enjoy the reduced rate of 7.5%.
Stamp Duties Act (SDA)
Stamp Duties is the tax governments place on legal documents, usually in the transfer of assets or property. The Finance Act tweaked some definitions like ‘stamp’, ‘stamped’, and ‘instrument’, the definition of ‘receipt’ liable to stamp duty has been expanded to cover electronic transactions.
Thus, stamp duty of N50 (Fifty Naira) is payable on every electronic transaction or receipt in excess of N10,000 with the exception of own-account transfers in the same bank.
Value Added Tax Act
Value Added Tax is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
By the Finance Act, the value added tax payable by consumers has been increased from 5% to 7.5%. There is also an increase (from 5% to 10%) on the penalty payable by a taxable person for non-remittance within the specified period from 5% to 10%.
The penalty for failure to give notice of change of address or permanent cessation of business has been increased from N5000 (Five Thousand Naira) to N 50,000 (Fifty Thousand Naira) in the first month and N25,000 (Twenty-five Thousand Naira) in the subsequent months of default.
As opposed to registering for VAT within 6 months from commencing business, by the Finance Act, there is now an obligation for taxable persons to register for VAT immediately upon commencement of business. Even though the time within which a taxable person is required to register with the service is not specified under the new law as the law simply hinged the time “upon commencement of business.” A business maybe be interpreted to have commenced in any of these instances:
- on the date that an entity carries on its first transaction;
- the earliest of the date it either begins to market or first advertises its products or services for sale;
- when it obtains an operating license from a regulatory authority in Nigeria
- when it makes its first sale or purchase;
- when it executes its first trading contract after incorporation;
- when it issues or receives its first invoice;
- when it delivers or receives its first consignment of goods;
- when it first renders services to its customers.
By the Finance Act, failure to register now attracts an increased fee of N50,000 (Fifty Thousand Naira) and N25,000 (Twenty-Five Thousand Naira) for the first and subsequent months of default respectively.
As a way of encouraging micro, small and medium scale enterprises, companies with less than N25,000,000 (Twenty-Five Million Naira) turnover are exempted from registering for VAT, otherwise, the companies must render their tax on or before the 21st day of every month.
A foreign company carrying on business in Nigeria is to register for VAT using the address of the person with whom the foreign company has a subsisting contract. Such non-resident companies are mandated to include VAT on their invoices for the supply of taxable services, regardless of physical presence in Nigeria.
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