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The President has signed the Finance Act 2020 (“the Act”) into law on 31 December 2020. The Act aims at addressing tax as well as non-tax related issues whilst improving on the success of the Finance Act 2019 and correcting its shortcomings.

The Act amends fourteen (14) existing statutes – Capital Gains Tax Act, Companies Income Tax Act, Value Added Tax Act, Personal Income Tax Act, Tertiary Education Trust Fund (Establishment) Act, Industrial Development (Income Tax Relief) Act, Stamp Duties Act, Customs and Excise Tariff etc. (Consolidated) Act, Federal Inland Revenue Service Establishment Act, Nigeria Export Processing Zone Act, Oil and Gas Export Free Zone Act, Companies and Allied Matters Act, Fiscal Responsibility Act and Public Procurement Act.

Key Focus Areas

Companies Income Tax Act

1. Reduction of Minimum Tax

Minimum tax rate reduced from 0.5% to 0.25%, but only for 2020 and 2021 years of assessment, the old rate is reactivated thereafter. Minimum tax is now clearly to be computed on the accounting gross income but excluding franked investment income.

Comments: We believe there is an error in this provision as 2020 returns have been filed by all companies and the minimum tax was computed based on the provisions of the Finance Act 2019 at 0.5%. Therefore, the reduction in rate to 0.25% for two years, should be applicable to tax returns filed during 2021 and 2022 tax years. A further amendment to this provision in the not distant future is not unlikely, to accurately reflect the obvious intention of the drafters of the law.

2. COVID-19 Incentive

Donations made in cash or in-kind to the Government (Federal or State), or any government-designated fund in respect of a pandemic or natural disaster is now an allowable deduction, subject to a maximum of 10% of assessable profits, after deduction of other allowable donations made by the company.

Comments: The extra burden of having to provide documentary proof for this claim and the fact that any unutilized claim cannot be carried forward plus the restriction to 10% of assessable profit could render this incentive cumbersome and insignificant.

3. Tax Returns of Small and Medium Companies

Instead of audited accounts, the FIRS may specify by notice, an alternative form of accounts to be included in the tax returns filed by small and medium-sized companies.

4. Adoption of Electronic Processes

The Act allows for the use of electronic means to exchange correspondence between FIRS and the taxpayers. Also, the Tax Appeal Tribunal may now conduct its proceedings virtually.

Value Added Tax Act

1. Non-Resident Companies to obtain TIN

NRCs making taxable supplies in Nigeria are now required to obtain a Tax Identification Number (TIN) upon registration with FIRS and an NRC may appoint a representative for the purposes of its tax obligations in Nigeria.

2. No VAT on Buildings

The Act has clarified that buildings and interest therein are exempted from VAT. This also means that VAT will not be charged on rental or leasing of buildings, whether for residential or for commercial purposes. However, rights in other tangible and immovable assets are subject to VAT at the applicable rate. Services relating to immovable properties (including the services of agents, experts, engineers, architects, valuers, etc.) are liable to VAT

3. Expansion of VAT-Exempt Goods and Services

Commercial aircrafts, aircraft engines and spare parts as well as commercial airline tickets and lease of agricultural equipment for agricultural purposes now exempted from VAT. Also, animal feed now deemed as basic food item, and as such not subject to VAT.

4. Re-definition of VATable Supplies

Supplies in respect of goods re-defined to mean all forms of movable or immovable tangible properties, excluding land, building, money or securities. Services include those consumed by a person in Nigeria, whether rendered within or outside Nigeria, excluding services provided under a contract of employment.

In respect of incorporeal, taxable supplies include the exploitation, acquisition or assignment of rights by a person in Nigeria or where the incorporeal is connected with a tangible or immovable asset located in Nigeria.

Personal Income Tax Act (PITA)

1. Significant Economic Presence Rule for Individuals

An individual, executor, or trustee outside Nigeria and providing technical, management, consultancy or professional services to a person resident in Nigeria may be subject to tax in Nigeria to the extent that such individual, executor or trustee has significant economic presence in Nigeria. The Minister is to determine what constitutes SEP of a non-resident individual.

2. Exclusion of Minimum Wage Earners from Tax

People with an annual gross income of N360,000 or less are now exempted from payment of PAYE. However, their employers will still be required to file annual tax returns.

3. Gross Income for Personal Relief

The gross income for the purpose of calculating consolidated relief allowance (CRA) for personal income tax purpose is now redefined as income from all sources less all non-taxable income, income on which no further tax is payable and tax-exempt items.

Other Notable Changes

1. Introduction of the Electronic Money Transfer Levy (EMT Levy)

The ₦50 stamp duty previously payable on money transfers of sums over ₦10,000 has been scrapped, and as a substitute, an EMT Levy of ₦50 is now to be paid on every electronic transfer of at least ₦10,000. The revenue generated from the collection of the Levy is to be distributed between the Federal and State Governments at 15% and 85% respectively and on derivation basis to the States.

2. Treatment of Unclaimed Dividends and Dormant Accounts Balances

Unclaimed dividends in a listed company and unutilized amounts in a dormant bank account outstanding for 6 years or more are to be transferred to the Unclaimed Funds Trust Fund (UFTF), to serve as a perpetual trust. The UFTF is to be managed by the Debt Management Office and transferred dividends and amounts constitute a special debt owed by the Federal Government to the shareholders and dormant bank account holders respectively and shall be available for claim at any time, together with the yield thereon.

Failure by any company or any deposit money bank to transfer unclaimed dividends or dormant accounts balance into the UFTF shall attract a fine of not less than five times the value of the unclaimed dividends and unutilized funds plus accumulated interest on the amount not transferred at the CBN Monetary Policy Rate.

Unclaimed dividends in a private limited company outstanding for 12 years shall be distributed to other shareholders of the company.

3. Excise Duties on Telecommunication Services

Telecommunication services provided in Nigeria are now included in the scope of goods liable to excise duties. The duty payable shall be at rates to be prescribed by the President via an Order.

4. Capital Gains Tax on Compensation for Loss of Office

The Finance Act has clarified that only the excess of ₦10,000,000 paid as compensation for loss of office is subject to CGT whilst employers are now appointed as agents of collection and thus obligated to deduct and remit tax due to the relevant tax authority within the time specified under the PAYE Regulations pursuant to PITA.

5. Companies in Free Zones (Export Processing Zones and Oil and Gas Export Free Zones

Approved enterprises within free trade zones are now expected to render returns to the FIRS and comply generally with the provisions of Section 55(1) of CITA, as a condition to be tax exempt.

6. Pioneer Status for Primary Agricultural Production Companies

Small or medium-sized companies engaged in primary agricultural production, may now qualify for an initial tax-free period of four (4) years, renewable for an additional maximum period of two (2) years, subject to satisfactory performance.

7. Amendment of Excise Duties and Levy

Type of Vehicle Old Rate New Rate
Tractors (HS Headings 8701) 35% Duty 5% Duty
Motor Vehicles for the transport of more than 10 persons (HS Headings 8702) 35% Duty10% Duty
Motor Vehicles for the transport of persons [cars] (HS Headings 8703) 30% Levy 5% Levy
Motor Vehicles for the Transport of Goods (HS Headings 8704) 35% Duty10% Duty

We commend the Federal Government for the demonstrated commitment to continually review the tax laws via the Finance Acts as this will ensure that the laws are in tune with the times and that taxation plays the expected role in any modern economy.