It is no longer news that the Finance Act 2019 amended seven (7) tax legislations. In a bid to provide clarification to some ambiguous provisions of the Finance Act and the modalities for its application, the Federal Inland Revenue Service (“FIRS”) issued a series of circulars dated 29th of April 2020 to address and explicate tax treatments and hitherto ambiguous provisions. The circulars issued by the FIRS cover: Real Estate Investment Companies; Regulated Securities Lending Transactions; Insurance Companies; Value Added Tax (VAT); Business Reorganisation, Commencement and Cessation Rules; and Classification of Sundry provisions of the Finance Act as it relates to the Companies Income Tax Act.
The circulars and the corresponding clarifications would be discussed subsequently:
- Circular on Clarification of Provisions in the Value Added Tax Act (VAT Act)
Definition of Goods and Services
The Circular defined chargeable goods for VAT to include property (tangible or intangible) such as articles of trade, rights in goods or property (e.g. rights in mineral resources, copyrights, trademarks), assets, motor vehicles, oil wells, rigs, aircraft, ships, buildings, roads, jetties, or any other type of property.
Services will be chargeable to VAT in Nigeria where the services are performed in Nigeria to persons in Nigeria irrespective of the residence status of the service provider and regardless of the medium of delivery of the service. Services rendered remotely, online, or by other virtual means to Nigerian residents or persons in Nigeria are liable to VAT in Nigeria. Services rendered to and consumed by a Nigerian resident while physically outside Nigeria, is not liable to VAT in Nigeria.
Increase in the VAT Rate
The Circular provides clarification on transitional issues regarding the VAT tax point of transactions after the amendment to the VAT Act. The following guides were provided:
- The increase in the VAT rate from 5% to 7.5% contained in section 4 of the VAT Act is to take effect from 1st February 2020;
- Taxable supplies made before the 1st of February 2020 shall attract VAT at 5%;
- For all taxable supplies made from the 1st of February 2020, the VAT rate shall be at 7.5%;
- Applicable VAT rate for contract of taxable supplies signed before 1st February 2020 and supplies or performance occurred on or after the 1st of February 2020 shall be 7.5%;
- Continuing contracts for which performance is measured on the basis of the milestone achieved, the VAT rate for the milestone achieved on or after the 1st of February 2020 shall be 7.5%;
- A vatable service is said to be supplied when it is performed, or an agreed milestone reached; and
- Vatable goods are supplied upon delivery or transfer of risk, whichever comes first. However, where it is not practicable to determine the time of supply, the FIRS may rely on the dates indicated on the relevant invoices, bills, debit notes, goods-received notes, waybills, journal entries, etc. in determining the applicable VAT rate.
Determination of the VAT Threshold
Section 15 of the VAT Act was amended to create a threshold. Only taxable persons with taxable supplies of N25million and above are required to charge, collect, remit, and file monthly VAT returns to the FIRS. A taxable person shall be said to have reached the VAT threshold and shall charge, collect, remit the tax and file monthly returns to the FIRS when such taxable person:
- has made supplies of ₦25 million before the introduction of the VAT threshold, even where the taxpayer has not made ₦25 million taxable supplies in the current year.
- who did not attain the ₦25 million taxable supplies before 1 February 2020, but attains the threshold at any time within the year.
- who has not attained the ₦25million threshold but expects to attain the threshold at a future date within the calendar year.
- who makes taxable supplies amounting to ₦25million and above within a calendar year, regardless of whether or not part or the whole of such supplies are exempt under the VAT Act.
A calendar year shall be a period of 12 months beginning on a day marking the start of that year. A taxable person who attains the taxable supply threshold of N25million shall continue to collect VAT and file VAT returns monthly.
“Taxable supplies” is defined as “any transaction for the sale of goods or the performances of a service, for a consideration in money or money’s worth”. As such, the value of taxable supplies is the gross inflow of economic benefits arising from economic activities, including sales of goods, supply of services, rents, royalties, fees, rights, etc. However, it shall not include a taxable supply of the capital asset, and the sale of the whole or part of the business.
Voluntary VAT Registration
A taxable person may voluntarily register, charge, collect, remit the tax and file monthly returns to the FIRS at any time even without attaining the ₦25 million threshold. Such a person shall notify the FIRS prior to doing so and shall be subject to all the provisions of the VAT Act applicable to persons above the threshold.
2. Circular on Sundry Provisions of the Finance Act as it Relates to CITA
Dividend Tax- Section 19 of CITA
The Finance Act introduces a new sub-section which exempts certain incomes from the ambit of excess dividend tax. Taxpayers are required to maintain and include in their annual returns, a schedule to aid the tracking of the sources of dividend and show evidence of tax paid to enable the application of the amendment to this section. Dividend paid out of retained earnings will no longer be subjected to dividend tax. However, where profits reported for an accounting period are sufficient to cover the dividend declared, the dividend will not be treated to have been paid out of retained earnings.
Exemption of Small Companies from Tax – Section 23(1)(o)
Profits of small companies (companies with gross turnover of ₦25 million and below) are exempted from Income Tax and Tertiary Education Tax. This does not exempt such companies from registration for tax, filing of annual tax returns, and compliance with other provisions and obligations stipulated under CITA. A small company that does not comply with the Act is liable to penalty and shall also forfeit the exemption granted.
The Circular clarifies that the forfeiture of the exemption grants the tax authority powers to assess small companies to tax including, but not limited to, administrative or best of judgement assessment based on the information available to it.
Capital Allowance for Small Companies
Small companies who have incurred qualifying capital expenditure (“QCE”) in generating exempt income will have all capital allowance on such QCE deemed to have been utilised in the period in which the income of the company was exempted from tax. Capital allowances relating to those years of assessment shall not be allowed to be carried forward to the year of assessment in which the company becomes taxable under CITA.
Consequently, where a small company crosses the threshold to become a medium-sized or large company, all capital allowances relating to the assessment years it operated as a small company shall be deemed to have been utilised.
Interest Deductibility Rule – Seventh Schedule to CITA
Interest or deduction of a similar nature on loans from foreign connected parties is now limited to 30% of a company’s Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). In computing the 30% restriction of total interest paid or payable, interest payment to third parties shall be considered.
Excess interest can be carried forward for a period of not more than 5 years from the date for which it was first computed. The amount carried forward shall be considered for the purpose of computing restriction for succeeding years and shall first be utilised in determining the amount deductible in such years.
Interest and deductions of a similar nature mean the cost of borrowing money or other financial charges, including interest, discounts, fees, premium, share of profit, finance cost element of finance lease or exchange losses that are paid or payable in relation to a loan or a debt, or any other payment in relation to derivatives used in hedging a loan or debt. EBITDA shall be computed as the Assessable Profit before the interest restriction.
Section 33 – Minimum Tax
Minimum tax is now at a fixed rate of 0.5% of gross turnover less franked investment income.
Gross turnover includes turnover disclosed in the statement of profit and loss and other operating and non-operating income or revenue embedded in the financial statement of the company. The definition of gross turnover via the Circular means that all non-cash transactions such as exchange differences, valuation gains, provisions no longer required, etc. will constitute the tax base for minimum tax purposes.
Minimum tax rules apply to all companies except:
- Companies with less than ₦25 million gross turnover (small companies)
- Companies carrying on agricultural trade or business
- Any company in its first four years of business
Section 81 – Deduction of Tax at Source
The Circular introduced a new approach to the application of WHT on payments under section 81 of CITA. The Circular has imposed the obligation to deduct tax on anyone making any payment to withhold tax at the applicable rate and remit to FIRS irrespective of whether the income or the recipient of such payment is exempted from tax or not. Companies shall be eligible to claim refund of the withholding tax suffered on exempt income upon fulfilling the conditions for the exemption of its profit from tax under section 23(1)(o) of CITA.
The WHT rate for the construction activities of roads, bridges, buildings and power plants has been reduced to 2.5%. Where a contract combines construction and other activities that are preparatory, incidental, or ancillary to construction, the contract description and bill of quantity may be used to determine the applicable WHT rate for each aspect.
3. Circular on Commencement and Cessation Rules and Business Reorganization
Commencement and Cessation of Trade or Business- Section 29 of CITA
The application of the erstwhile commencement rule whereby the profit of a trade or business is subjected to tax more than once, due to the overlap of basis periods is now removed. The Finance Act amends Section 29(3) of CITA, eliminating the complexity surrounding the commencement rule while ensuring no profit is assessed to tax twice. Businesses are now to be assessed to tax on a preceding year basis (PYB).
In the same vein, the Finance Act has also limited the profits on which tax is payable by a company ceasing operation to the income in the actual year of cessation as against the old practice of subjecting the preceding year profits to multiple tax. Cessation returns must be filed with FIRS within six months from the date the company ceases operation.
Business Organisation and Restructuring
The Finance Act amends the relevant provisions of the Capital Gains Tax Act (CGTA), Value Added Tax Act (VAT Act) and CITA to grant concession from commencement and cessation rule, capital allowances on the assets transferred to related entities involved in business organisation and restructuring. To qualify for these concessions, the companies involved in such exercise must have been related for at least 365 days before and 365 days after the arrangement.
4. Circular on Tax Implications of Operation of Real Estate Investment Companies (“REICOs”) in Nigeria
The Circular clarifies the applications of Sections 9, 19, 23, 24 and 80 CITA.
A REICO is defined as a “company duly approved by the Securities and Exchange Commission (SEC) to operate as a Real Estate Investment Scheme (“REIS”) in Nigeria”. REIS refers to a company, trust or other such corporate structures approved and regulated by SEC, that is primarily engaged in and invests in income generating real estate assets or related assets. REICOs are expected to distribute not less than 75% of income within 12 months of receipt of the income to be able to enjoy the tax exemption provided in the CITA.
Dividends or mandatory distributions made by a REICO to its shareholders under REIS shall be an allowable deduction. Rental or dividend income received by a REICO shall also be exempted from tax under Section 23(1)(s) of CITA. Therefore, in compliance with Section 27(1)(h) of CITA any dividend or mandatory distribution made by a REICO to its shareholders, being an expense relating to an exempt income, and any other expense of the REICO incurred for the purposes of earning exempt income, shall not be allowed as deduction in computing its assessable profits.
However, where the conditions that will allow a REICO to enjoy the tax exemption provided in the CITA are not met, rental or dividend income received by the REICO will constitute a taxable income under Section 9 of CITA. Consequently, all expenses incurred for the purposes of earning the rental and dividend income, including dividends or mandatory distributions made by the REICO to its shareholders, under a REIS shall be allowed.
Regardless of whether a REICO meets the conditions for exemption of rental and dividend income from tax, any income not distributed to the shareholders will be subjected to tax.
Distribution or dividend payment to a REICO under a REIS shall not be subject to deduction of WHT. However, the REICO shall upon distribution to its shareholders deduct tax at 10% and remit to the relevant tax authority.
5. Circular on Tax Implications of the Operations of Securities Lending Transaction (‘SEC Lending’) in Nigeria
The Circular expounds the applications of Sections 9, 23, 24, 29, 78, 80, 81 and 105 of the CITA, Schedule to the Stamp Duties Act (SDA) and the provisions of the Personal Income Tax Act (PITA). The FIRS listed the income that could arise in a Regulated Securities Lending Transaction (“RSLT”) to include: Dividends; Rights; Bonus; Redemption benefits; Interests; Securities Lending Fees or any other right or benefit accruing on the securities lent. The clarifications are:
- Direct agreement between the lender and the borrower for lending and borrowing of securities shall not qualify as a Security Lending Transaction (SEC Lending) and as such, there must be an agent in the arrangement.
- Dividend received by a lender from a borrower or by an agent from a Borrower under SEC Lending is exempted from further tax in the hand of the lender as it is a franked investment income.
- Interest received by an agent from a lender under SEC Lending is exempted from tax in the hand of the agent. Also, interest paid by a lender to an agent or a borrower under a SEC Lending will qualify as an allowable deduction according to Section 24 of CITA. However, the interest shall not be allowed as deduction in computing the company’s (lender’s) assessable profits since the dividend received by the lender with respect to that transaction is exempt from tax.
- Payment of interest directly by the lender to the borrower will be liable to WHT deduction while payment to an agent will be not attract WHT deduction. However, the agent shall deduct WHT when making payment of interest to the borrower.
- In the case of dividend, payment by a borrower to an agent or lender, or from an agent to a lender shall not be subject to WHT deduction.
- The extant provisions of PITA shall continue to apply in the taxation of dividend, interest, rights, bonus, profits, fees, and any other benefit accruing to an individual under a SEC Lending.
- All documents issued by the SEC in relation to the exchange of SEC Lending instruments between a lender and borrower shall not attract Stamp Duties.
6. Clarification on the Amendment of Section 16 of CITA in Relation to Taxation of Insurance Companies
Provisions for unexpired risks are now determined on a time apportionment basis of the risk accepted in a year. This amendment is to align CITA with the provisions of Insurance Act 2003. Insurance companies are allowed under the new amendment to estimate the sum of outstanding claims and outgoings during a given year which should include an estimate of unpaid verified claims received for the period. This estimate must however be supported with a detailed schedule of specific expense before it can be allowed for tax purpose.
Non-life insurance businesses are now assessed to minimum tax at a fixed rate of 0.5% of their Gross Written Premium while life assurance businesses are assessed to minimum tax at a fixed rate of 0.5% of their gross income. Gross income for life businesses include investment income, fees, commission, and income from other assets
We commend the effort of FIRS in issuing these Circulars. The timing is also quite commendable as companies with December yearend are still in the process of finalising their financial reports for the year and the guidance provided will be quite helpful in making accurate provisions for tax liabilities.
We however wish to note that some of the “clarifications” by FIRS appear as an attempt to amend the Finance Act, given the importation of additional meanings beyond the provisions of the Act itself. Notable strange interpretations given by FIRS include the attempt to expand the meaning of Vatable goods to include “immovable” tangible assets such as Buildings and Jetties as against the unambiguous definition in the Finance Act that provides for “movable tangible goods” at the time of supply.
We do not also agree with the position of FIRS regarding the deduction of tax at source from incomes that are otherwise exempted from tax, or the deduction of tax from payments made to entities that are otherwise exempted from tax. There is no section of the Finance Act that supports this position; not even the amendment of Section 81 of the CITA reflects this position. Again, FIRS’ position that small companies will forfeit their exemption status upon failing to register and file tax returns, is also not in tandem with the provisions of the Finance Act.
We are of the view that misinterpretation of the provisions of the Finance Act by the tax authority will open a new area of controversies between the taxpayers and the regulator. We advise taxpayers that may be affected by this interpretation to be mindful of the ensuing disputes.