The President has signed the Finance Act 2021 (“the Act”) into law, the third of its kind since its re-introduction in 2019 to accompany the annual budgets. The Act, which is effective from 1 January 2022, introduces some changes to both tax and non-tax statutes.
The Act amends thirteen (13) existing statutes – Capital Gains Tax Act, Companies Income Tax Act, Value Added Tax Act, Personal Income Tax Act, Tertiary Education Trust Fund (Establishment) Act, Stamp Duties Act, Customs and Excise Tariff etc. (Consolidated) Act, Federal Inland Revenue Service Establishment Act, Fiscal Responsibility Act, Nigerian Police Trust Fund (Establishment) Act, National Agency for Science and Engineering Infrastructure Act, Insurance Act, and the Finance (Control and Management) Act.
Capital Gains Tax Act
Gains on Disposal of Shares now liable to CGT
Section 30 of the CGTA is amended to birth a new regime for disposal of stocks and shares in Nigeria. While disposal of government securities such as Nigerian treasury bonds, premium bonds and transfers between borrowers and lenders in regulated securities transaction, remain exempted from CGT, disposal of shares by (both resident and non-resident persons) in a Nigerian company will now attract CGT at 10%. For this to apply however, the proceeds of such disposal must not be less than ₦100m in any 12 consecutive months.
The amendment includes a ‘rollover relief’ clause which exempts the gains from tax if the proceeds of disposal are reinvested in the shares of a Nigerian company within the same year of assessment. However, where there is partial rollover, the gain related to the portion not reinvested, will be liable to CGT.
The major challenges would be how to ascertain and monitor when the threshold have been met by investors, including foreign investors who are not required to file tax returns in Nigeria. While the law may be silent as to who is responsible for filing the annual returns, the role of stockbrokers/other agents who represent the investors may need to be clearly defined. We expect that these outstanding issues will be given further clarifications in no distant time.
Companies Income Tax Act
- Companies engaged in Educational Activities
The profits of companies engaged in educational activities are no longer on the list of exempted profits under Section 23 irrespective of the activities being of public character, which is usually characterized by their registration as companies “Limited by Guarantee” or as public trust entities. This provision may lead to private educational institutions that are not for profit and which have no access to the tertiary education tax fund, to be liable to companies income tax and education tax, if registered as a company.
- Minimum Tax
Section 33 of CITA is further amended in view of the reduced rate of 0.25% introduced via Finance Act 2020. Taxpayers may now choose to apply the reduced rate in respect of tax returns filed for any two consecutive accounting periods ending on any date between 1 January 2019 to 31 December 2021. That is, either for 1 January 2019 to 31 December 2020 or for 1 January 2020 to 31 December 2021.
However, companies that fail to file tax returns within the time stipulated by law but opt for the reduced rate shall be liable to a penalty equal to the 0.25% minimum tax relief/reduction claimed by the company. But companies that file returns promptly can enjoy the two years’ relief.
- Gas Utilization Incentive
The Finance Act has amended Section 39 which now expressly prohibits a company from claiming this incentive more than once. More importantly, where a new company is formed following a restructuring out of a company which has already enjoyed this incentive, such new company would not be entitled to claim the incentive.
- Deemed Profit for Non-Resident Companies
Section 30 of CITA has been amended to include non-resident companies that have significant economic presence in Nigeria, which are involved in electronic commerce, online payment and network platforms etc in Nigeria. Such companies could be assessed to tax on turnover basis, if the conditions specified in the law are met. It must be stated that Nigeria has not adopted a digital service tax (DST) which involves assessing digital companies to income tax on a specified percentage of turnover.
The provision allows the FIRS to assess such company to tax on a fair and reasonable percentage on the turnover of the company as it considered appropriate in the circumstance. FIRS currently assumes a 20% profit on turnover taxed at 30%, thus giving 6% as the fair and reasonable percentage of tax on turnover.
- Capital Allowance on Assets Generating Non-Taxable Income
The Act has amended Section 31 such that qualifying capital expenditure (QCE) incurred in generating tax exempt income would no longer be considered for tax purposes. This provision can be applied by restricting the capital allowance claimable by a company to exclude the portion used in generating the exempt income. The restriction will only be applicable if the percentage of exempt income to total income is at least 20%.
Therefore, effective from 2022 year of assessment, where the exempt income restriction on capital allowance is triggered, the total capital allowance computed (excluding unutilized brought forward), will be reduced by the exempt income before absorbing the balance (subject to the 2/3 of assessable profit restriction where applicable) from the assessable profit for the year.
Small companies are also required to compute and claim their capital allowances based on the available assessable profit irrespective of the fact that no tax is payable on the total profit. This is to ensure qualifying capital expenditure used in generating the exempt income are not available for utilization when the company exits the small company threshold.
FIRS Establishment Act
- Supremacy of FIRS on Federal Government Revenue Tax Matters
The FIRS is now recognized as the only Federal Government agency responsible for the administration, assessment, collection, accounting, and enforcement of taxes and levies due to the Federal Government, under Section 68. It is now considered a punishable offence for any person or agency other than FIRS to carry out these duties. Therefore, all tax investigations or enforcements are to be carried out by FIRS.
- New Customer Returns
Banks are now required to file quarterly returns instead of the erstwhile requirement to file the same returns monthly. The returns will continue to show details of new customers of the bank within the relevant quarter. The penalty for contravention has also been reviewed upward to ₦1 million for each return not filed.
Value Added Tax Act
- Registration by Non-Resident Companies
FIRS may now recover VAT on imported supplies either directly from the non-resident suppliers or from the Nigerian resident to whom the taxable supplies are made where the NRC or its appointed agent fails to collect the VAT, following the amendment to Section 10.
- FIRS Circulars to Guide Non-Resident Companies
With the amendment of Section 10 of the VAT Act, circulars issued by FIRS would now serve as the operating documents in respect of charging, filing and remittance of VAT for non-resident companies in relation to taxable transactions in Nigeria.
Stamp Duties Act
Administration of Electronic Money Transfer (EMT) Levy
It would be recalled that the Finance Act of 2020 introduced the EMT Levy to be charged on electronic transfer of monies from ₦10,000 and above. This Act now amends Section 89A of the Stamp Duties Act and mandates the Minister of Finance to make regulations for the imposition, administration, collection, and remittance of the Levy.
Similarly, regulations relating to the auditing, accounting, allocation and distribution of arrears of the relevant stamp duties and EMT Levies collected between 2015 and 2019 fiscal years, is to be made by the Minister within 30 days of commencement of the Finance Act 2021.
Other Notable Changes introduced by the Finance Act 2021
- Increase in Education Tax Rate
Tertiary education tax chargeable on the assessable profit of a Nigerian company has been increased from 2% to 2.5%, following the amendment to Section 2 of the Tertiary Education Trust Fund (Establishment) Act.
- FIRS to Administer Police Trust Fund Levy
Some clarity has been provided in respect of the Police Trust Fund Levy which was introduced in 2019. FIRS now expressly declared as the responsible agency to assess, collect, account and enforce the payment of the Levy.
- NASENI Levy
The Finance Act has amended the National Agency for Science and Engineering Infrastructure (NASENI) Establishment Act, to make companies with a turnover of ₦100m and above liable to a levy of 0.25% of their profit before tax, payable to the NASENI Fund. This levy applies only to companies engaged in banking, telecommunications, ICT, aviation, maritime, and oil and gas activities. The amendment empowers FIRS to administer the assessment, collection and administration of the levy.
- Excise Duty on Non-Alcoholic Drinks
Section 21 of the Customs & Excise Tariffs Act has been amended by introducing an excise duty of ₦10 per litre on non-alcoholic, carbonated and sweetened beverages.
Unlike the last two Finance Acts, the 2021 Act has introduced some taxes and increased some tax rates. This requires careful consideration by taxpayers to avoid the penalty for non-compliance. However, clarifications are still expected from the appropriate authorities in respect of some grey areas of the Act.
These clarifications will help to boost compliance, even as we commend the Federal Government for continuously demonstrating its commitment to update the tax laws via the annual Finance Acts. It is expected that this will bring Nigerian tax laws at par with current realities which will in turn ensure that taxation plays its role in the economy.