The Finance Act will help ease the burden on micro, small and medium-sized businesses, provide incentives for investment and help raise the country’s revenue, writes Obinna Chima
President Muhammadu Buhari on Monday signed into law, the Finance Bill 2019, as the government seeks to shore up its revenue and also strengthen the struggling micro, small and medium size enterprises (MSMEs) in the country.
Buhari’s assent to the bill was announced by his Media Adviser, Mr. Femi Adesina, in a statement.
He said the president had told the National Assembly last year that the 2020 budget, which comprised five objectives, was also made up of the draft Finance Bill.
The draft Finance Bill, according to the statement, consisted of 7.5 per cent increase in VAT rate from the hitherto five per cent rate.
He recalled the president’s remarks that: “This Finance Bill has five strategic objectives, in terms of achieving incremental, but necessary, changes to our fiscal laws.
“These objectives are; promoting fiscal equity by mitigating instances of regressive taxation; reforming domestic tax laws to align with global best practices; introducing tax incentives for investments in infrastructure and capital markets; supporting MSMEs in line with our Ease of Doing Business Reforms; and raising revenues for government.”
Adesina stated that with the president’s assent to the bill, there would be more revenue to finance key government projects, especially in the areas of health, education and critical infrastructure.
The sweeping changes to the tax laws, covering seven different tax laws, under the new regulation are expected to have positive impact on investments and ease of paying taxes especially for MSMEs.
It is envisaged that changes to the tax laws would be on an annual basis to ensure that Nigeria’s tax system continues to evolve in line with changes in business and economic conditions.
For instance, before the new law, companies were charged tax at 30 per cent on their dividend distributions where such dividends exceed the taxable profits for the year notwithstanding that profits being distributed may have been taxed in prior years, exempt from tax, or taxed under a different tax law.
This, according to a recent report by PwC Nigeria, particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location.
But, the new law limits the application of the tax only to untaxed profits that are not exempt from tax.
Also, prior to the signing of the law, companies that declare and pay interim dividends were required to remit income tax at 30 per cent on such dividends to the Federal Inland Revenue Service (FIRS).
But under the new legislation, the provision has been repealed. While the repeal addressed the intended exemption of advance tax on interim dividend, it also implies that withholding tax (WHT) applies on bonus shares or dividend-in-specie.
In addition, the law has amended the contentious commencement and cessation rules in Companies Income Tax Act (CITA). The effect of these rules is that companies suffer tax twice on profits of at least 12 months, when they commence business.
“Conversely, on cessation of business, a period of up to 12-month escapes tax. The removal of these rules is considered a welcome development.
“CITA empowers the FIRS to grant certain exemptions on group re-organisations, where certain criteria are fulfilled,” the Pwc report stated.
In terms of the Personal Income Tax Act, the law has removed the tax exemption on withdrawals from pension schemes except the prescribed conditions are met: banks will be required to request for Tax Identification Number (TIN) before opening bank accounts for individuals, while existing account holders must provide their Taxpayers Identification Number (TIN) to continue operating their accounts; e-mails are to be accepted by the tax authorities as a formal channel of correspondence with taxpayers, and penalty for failure to deduct tax will also apply to agents appointed for tax deduction.
This penalty is 10 per cent of the tax not deducted, plus interest at the prevailing monetary policy rate of the Central Bank of Nigeria.
However, under the legislation, the duties currently performed by the Joint Tax Board (JTB) as it relates to administering the Personal Income Tax Act, would now be performed by the FIRS.
In terms of VAT, the law introduced VAT exemption on Group re-organisations, provided that, the sale is to a Nigerian company; the entities involved are part of a recognised group of companies 365 days before the transaction, among others.
Similar to the VAT amendment, the law also introduced capital gain tax (CGT) exemption on Group re-organisations, provided that, among other things, the assets are sold to a Nigerian company and is for the better organisation of the trade or business.
The practice prior to the law was that companies send an approval request letter under CITA Section 29(9) to the FIRS, and include a CGT exemption request.
Effects on MSMEs
The Finance Law introduced across-the-board, changes to the various tax laws in Nigeria that would impact on MSMEs and their role in sustainable economic growth.
It provides certain incentives for businesses. Companies are generally expected to account for VAT based on invoices issued (i.e. accrual). This requires companies to render returns in the month following taxable supply or purchase. Failure to register for VAT attracts a penalty of N10,000 and N5,000 for each subsequent month where failure continues.
Exported services and basic food items are exempted from VAT. The VAT Act defines exported service as service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria which is ambiguous. It also prescribes that small businesses with turnover less than N25 million would be exempted from CIT while a lower CIT rate of 20 per cent now applies to medium-sized companies with turnover between N25 million and N100 million. Small businesses may have to prove to their customers that they do not meet the threshold to avoid withholding tax.
As stated previously, it has raised VAT rate from five per cent to 7.5 per cent, while penalties for failure to register has increased to N25,000 for the first month of default and N20,000 for each subsequent month.
It has introduced two additional categories of fixed base (FB) to capture e-commerce and technical/management/consultancy services provided remotely by non-resident companies (NRCs) to Nigerian consumers, to the extent that the providers have significant economic presence in Nigeria.
It also gives the Minister of Finance broad powers to determine, by order, the triggers and/or thresholds for significant economic presence in Nigeria. A bit more engagement would be required to avoid double taxation in the area of corporate income tax. The FIRS may need to provide some clarification on what mode of returns would be required for the permanent establishments.
“The FIRS may also need to invest in capacity to understand the businesses of taxpayers in this sector in order to determine what services are being provided to Nigerian residents and how to fairly determine the attributable profits,” the report stated.
Effects on Banks, Capital Market, Insurance
The law brings about several changes which will affect the banking, capital market and insurance sectors.
Significant among these, according to the PwC report are provisions to clarify the tax treatment of securities lending transactions in the capital market. Similarly, it provides clarity on the tax consequences of Regulated Securities Lending Transactions (RSLT).
Generally, an RSLT may involve the exchange of shares between a lender and borrower for short-selling. Furthermore, it has introduced a specific benchmark of 30 per cent of earnings before interest, taxes, depreciation and amortisation (EBITDA) as the limit for interest deduction on loans by a foreign ‘connected person’.
The benchmark is consistent with the recommendation of the Organisation for Economic Cooperation and Development (OECD) through its Article 4 on base erosion and profit shifting (BEPS) project, the PwC report stated.
It also legalises the charge of N50 on electronic receipts or electronic transfers made to any bank account on transactions of N10,000 and above with exemptions granted for bank transfers between own accounts.
Under the current CITA, a range of partial to total exemption from WHT is granted to interest on foreign loans, depending on specified criteria. It specified full exemption to foreign loans where the loan term is above seven years including a moratorium of two years.
For the insurance sector, among others, the claim for reserve for unexpired risks in a financial year, would now be calculated on a time apportionment basis of the risks accepted during the financial year.
This is to ensure that the tax deduction obtained is in line with the requirements of section 20(1)(a) of the National Insurance Act. Similarly, for the insurance sector, the new law has introduced an additional allowance of 10 per cent of estimated outstanding claims for claims incurred but not reported at year end.
It states that any portion of the allowance not utilised against claims and outgoings would be added to the total profits of the following year.
“The elimination of the restriction of claims and outgoings is positive for the industry as valid business expenses of insurance companies would no longer be disallowed from a tax perspective,” the PwC Nigeria report added.
Effects on Energy Sector
For of the energy and utilities sectors, among a range of other expected reforms, it has deleted the need for ministerial approval for tax deductible interest.
Section 41 of the CITA grants an incentive to companies that replaced obsolete plant and machinery, whereby a company that incurs an expenditure for the replacement of obsolete plant and machinery, are granted fifteen per cent investment tax credit. The law has repealed this Section and eliminated the incentive going forward.
Section 60 of the Petroleum Profit Tax Act (PPTA) exempts dividends paid out of petroleum profits from further tax in recognition of the relatively higher corporate income tax rate on petroleum operations. This meant that withholding tax was not charged on dividends from upstream operations. This is also supported by Section 43 of CITA.
The Finance Bill sought to repeal Section 60 of the PPTA and Section 43 of CITA. This meant that dividends from upstream companies would henceforth be subject to withholding tax. The current rate is 10 per cent (or 7.5% if payable to recipients of a treaty country).
The Finance law eliminated the requirement that tax deductions would be taken for interest payable on any loan for a gas project as long as the loan has been approved by the Minister.
According to the report, this proposal means that the general rules on tax deductibility of interest on loans would be applicable to gas companies and if they obtain related party loans, they would be subject to Transfer Pricing rules as well as the new thin capitalisation rules.
The amendments affecting the industry are focused on increasing revenue for government through introduction of WHT on upstream dividends, the deletion of investment tax credit on replacement of obsolete plant and machinery, deemed utilisation of capital allowances for gas companies in pioneer and the elimination of 15 per cent investment allowance. These changes are all focused on increasing government revenue.
“If the Finance Bill is passed into law, the energy and utilities sector (in particular, oil and gas) would witness an increase in their tax costs including royalties.
“Contrary to the outlook of the 2020 budget proposal that envisages that the non-oil sector would contribute more to revenue generation, we expect that the oil and gas industry may in fact contribute more than it did in 2019, based on the current proposals,” the report stated further.
To a former Director General, Abuja Chamber of Commerce and Industry, Dr. Chijioke Ekechukwu, said the new legislation would help ease tax burden on MSMEs.
“Businesses with income less than N25 million in a year, would actually pay nothing in CIT and of course, above that to N100 million would be expected to pay graduated rate of about 20 per cent and above N100 million, they are paying 30 per cent.
“The issue of fiscal equity, which was one of the objectives of the law has been addressed in this case. So, people pay different things at different income levels. Yes, the prices of goods and services are going to increase, but I do not think the impact is,” he explained.
According to him, the country would also benefit in terms of increased revenue.
To the Tax Leader/Head of Tax and Corporate Advisory Services at PwC, Mr. Taiwo Oyedele, the Finance Act, “is a good development because in 20 years, it is the first time since 1999 we are having something of this scale and size, which is focused on how to fund the budget and issues around tax and reforms and its effect on MSMEs.
“It also has issues to do with stamp duties where the threshold has been raised to N10,000 meaning you don’t have to pay stamp duties if you are buying less than N10,000.
“And of course, the most talked about VAT increase from five per cent to 7.5 per cent and there has been an expansion of items exempted from VAT to include what the poorest and most vulnerable people would consume in terms of food items, education, healthcare etc.”
According to him, the law would encourage MSMEs to grow, reduce their tax burden and enable the government to raise revenue.
The Head of Consulting, Agusto Consulting Limited, Mr. Jimi Ogbobine, described the new Finance Act as, “undoubtedly the biggest fiscal reform of the Buhari administration, dwarfing the Voluntary Asset Income Declaration Scheme (VAIDS).
He said by stratifying corporations by size via revenue, the Finance Act could potentially pare back the incidents of tax evasion amongst small businesses.
Ogbobine noted that the Act also addresses fiscal disadvantages in the tax polity, especially those that affect the insurance industry and the treatment of withholding taxes on dividends.
“The big debate should now shift to the management of the VAT windfall by the state governments. The sub-nationals (states and local governments) receive 85% of the VAT proceeds. For now, the VAT increase is supposed to help the states meet the increase in payroll owing to the increase in the minimum wage. We expect greater fiscal vision from the states. We expect the bulk of the VAT windfall to go into infrastructure to create greater impact for the tax payers,” he explained.
But, the Director General of the Lagos Chamber of Commerce and Industry, Dr. Muda Yusuf, argued that the increase in VAT would place additional burden on businesses, consumers and investors.
He noted that already businesses had been grappling with multiple taxation, high import duty, high regulatory charges, among other challenges.
Also, his counterpart in the Nigeria Employers’ Consultative Association, Dr Timothy Olawale, said the new legislation places additional tax burden on the private sector and was capable of further impoverishing the citizens.
Speaking in a recent interview on Arise Television, a Partner and the Head of Family Wealth at Andersen Tax LP, Mr. Emeka Onwuka, welcomed the legislation, saying it did not come as a surprise to most tax advisers in the country.
He said it showed the dynamism the federal government was attaching to the tax regime in the country, adding that it would help improve tax compliance.
“And of course, the big one being the VAT that has been raised to 7.5 per cent. But I will say it is a win-win for the tax payers and the government. For the taxpayers, there are clarifications that have been provided by the Finance Act.
“It seeks to improve compliance and the ease at which businesses are being done. Some of changes as well would increase the sources of funding for the budget,” Onwuka added.
Furthermore, he said the legislation would help clarify some of the areas that most taxpayers usually have issues with revenue agency.
“For instance, the tax rate, for the first time, the government has taken the small businesses out of the tax bracket. If your revenue is less than N25 million, you don’t expect to pay taxes today. That is a welcome development, in terms of having to pay 30 per cent, which is the tax rate for corporates.
“Also, if your revenue is between N25 million and N100 million, you only pay 20 per cent instead of 30 per cent. So, that would encourage compliance and encourage people to come forward and file compliance.
“On the issue about compliance, it is a general issue with developing countries. Which is why indirect taxes, such as VAT, have been more effective, in terms of sourcing for government funding.
“But, over time, we believe that as government become more transparent in terms of utilisation of these sources, the taxpayers would be more comfortable to meet their payment.
“But, we have to bear in mind that even though taxation is a social contract between the taxpayers and government, whereby when you make the payment, you expect the government to also provide, public goods and services, however, taxation is often described as a compulsory and unrequited payment to government.
“Unrequited in the sense that the service you get from government is not usually commensurate with the payment you make, because government gets the money and takes care of the general public.
“However, we expect that government will be transparent and be responsive to the needs of the people to drive compliance,” the former bank chief executive officer said.
For MSMEs, he said it would be a win-win for the business operators and the government.
According to him, the biggest beneficiaries would be the insurance sector.
“Over the years, the way the tax law applies to the insurance companies, are meant that they have a minimum tax level of at least 30 per cent of their gross premium as taxable income, but that has been taken off by this regulation.
“So, there is no limit in terms of how much the tax law would assume their profit to be. Over the years, there have also been limit as to the amount of expenses they can charge to their profit and loss.
“Now, these two provisions have always made investment in insurance sector unattractive and so you don’t have a lot of money flowing into the insurance sector. So, this regulation coming at this time that the industry is recapitalising is encouraging in terms of attracting investors.
“What it means is that the tax liabilities of insurance companies are going to go down to a large extent. The VAT, there is full clarification today as to what VAT is applicable to and what it is not applicable to. So, the VAT now is applicable to certain kind of goods,” he explained.
For the capital market, Onwuka, pointed out that it would eliminates double transactions and also enhance real estate investment.
“For banking transactions, it has also left out small customers in terms of stamp duties. Those kind of regulation improves the ease with which customers do business with the bank and ultimately would be beneficial to the banks,” he added.
In his contribution, the Partner and Head, Deal Advisory and Tax Services, KPMG Nigeria, Mr. Ajibola Olomola, who also featured on Arise Television, stressed that the legislation would help align the micro-economy with the macroeconomic direction of the federal government.
“What is does is to my mind, to begin to show signals of the direction towards which Nigeria would go in seeking to raise revenues with which it intends to finance the budget,” he said.
The legislation, according to him, has lessened and almost mitigated the tax burden on a very vital sector of the Nigerian economy – the MSMEs -and try to mitigate the challenges they currently face in complying with the tax legislation, reduce the tax burden on that very important sector of the economy and by so doing, attract many of them for the first time into the tax net.
He added: “The most important change that most Nigerians have picked up is the increase in the VAT rate from five per cent to 7.5 per cent. That is the most material change that most people have picked up. However, this is in recognition of the fact that very large section of the economy are vulnerable and sensitive to tax rate change.
“What it has done is to moderate the effect of the rate increase, shift it to the higher producing elements of the economy and exempt SMEs who are businesses with a turnover of N25 million and below, from paying VAT.
Responding to a question on how the proposed legislation seeks to address the issue of compliance, he said, by lowering the burden on companies, they would be encouraged to comply with their tax obligations.
Shedding light on the aspect of the legislation that requires TIN for operating a bank account, he said: “Already, the bank opening forms requires businesses that seek to open account in Nigeria, to provide information as to their corporate status, the identity of their directors, the bank account numbers, BVN, number of their directors, and the TIN.
“What it has done is merely to formalise what is already included by banks under the auspices of the central bank’s Know –Your-Customer directive, to make it formal and codified in the tax law, that banks should not open accounts for businesses that do not have TIN.
“It is hoped that by closing this loophole, it must be better possible for regulatory authorities to match the operationalisation of bank accounts with contributions to the economy by way of tax redistribution.”