You must have heard of the new tax laws but you probably cannot fathom it well enough. The new tax laws in Nigeria are called The Finance Act of 2020 (the Act). This act reviews and amends several tax legislations. By reviewing it all in one act, it merges all tax laws and provisions into one statute. The main aim of the Finance Act of 2020 is to increase the revenue generated by the Federal government and to check the many ways in which many businesses and individuals had been avoiding or evading tax over the years. The Finance Act, 2020 introduces changes to various tax laws in Nigeria to include the following:
- Companies income tax: measures concerning the taxation of companies not residing in Nigeria
- Value-added tax (VAT): increase in the VAT rate from 5% to 7.5%
- Petroleum profits tax: repeal of the former tax exemption for dividends paid from after-tax profits
- Individual (personal) income tax
- Capital gains tax: a limited deduction for loss of office
- Customs and excise tax
- Stamp duty (tax)
The amendment of tax laws, under the Finance Act are intended to raise revenue to help reduce budget deficits and consolidate the macroeconomic effects on the economy.
Other objectives of the finance bill include:
- Promoting fiscal equity
- Reforming domestic tax laws to align with global best practices
- Introducing tax incentives to boost investments in Nigeria infrastructure and capital markets
- Supporting Medium and Small scale enterprises
- Raising revenues for the Nigerian government
Below are the reasons for the amendments of tax laws:
- The low level of internally generated revenue across the country
- Constraints on financial distributions to the tiers of government due to unbudgeted fuel subsidy and other tax expenditures
- Huge fiscal gap at the state level which was about to be compounded by the implementation of new minimum wage.
New Tax Laws in Nigeria: All You Need to Know
The Nigerian Tax and Fiscal Law (Amendment) Bill 2019 otherwise known as the Finance Bill was signed into law by President Muhammadu Buhari. The new law contained over 90 changes to 7 different tax laws. Below are major changes that were made:
- Increase in the rate of Value Added Tax from 5% to 7.5%
- 0% Company Income Tax rate for small businesses and a lower rate of 20% CIT for medium-sized companies
- Tax Identification Number becoming a compulsory requirement to open and operate a business bank account
- Increase in the threshold of online transfers liable to stamp duty of N50 (from N1,000 to N10,000)
- Taxation of foreign companies (who have significant economic presence) and are involved in digital transactions.
Prior to the enactment of the Finance Act, 2020, a company that is not resident in Nigeria was only subject to pay tax in Nigeria if it had a fixed base in Nigeria. In fact, the taxable profit was only the profit attributable to that fixed base. In simpler terms, the reason for taxing profits derived by a foreign company in Nigeria before now was based on its physical presence in Nigeria. With the Finance Act 2020, non-resident companies (even with no fixed base in Nigeria) but who are involved in services such as e-commerce, filming, computing, ride-sharing services, media will now have to pay the Nigerian income tax. Although this is subject to the company satisfying the “significant economic presence” threshold. The Finance Act does not properly define what the term “significant economic presence,” means but it gives authority to the Minister of Finance to define the term. It is expected that there will be guidance when such is being determined. These companies may also be required to register for taxes and file income tax returns in Nigeria.
Effective date of the 2020 Finance Act
The bill was supposed to be signed into law in December 2019 and be effective from 1 January 2020. However, there was a delay due to the need for further vetting by the Executive and to harmonize the changes introduced by the Legislature. The Finance Act took effect in 2020.
Below are major changes of the new tax laws in Nigeria
- Excess dividend tax applies only to untaxed distributions rather than from profits specifically exempted from tax and franked investment income
- Small businesses with gross turnover less than N25m are now exempted from Companies Income Tax
- A lower Company Income Tax rate of 20% for medium-sized companies with gross turnover between N25m and N100m
- Modification of commencement and cessation rules to eliminate overlaps and gaps to avoid double taxation and complication during commencement
- Minimum tax was amended to 0.5% of gross turnover. Exemption to minimum tax now applies to small companies (with less than N25 million gross turnover)
- Non-resident companies will now pay minimum tax
- Insurance companies can now carry forward tax losses indefinitely
- Abolishment of Special minimum tax for insurance companies
- Bonus of 2% of tax payable ( for medium-sized companies) and 1% (for large companies) when Company Income Tax is paid early
- Non-residents with significant economic presence and who provide imported technical and management services are now taxable at a Withholding tax rate of 10%
- Any expense intentionally incurred by a company so as to be able to earn exempt income is now disallowed as a deduction against other taxable income
- Any dividend distributed from petroleum profits now attracts a 10% withholding tax
- Banks are now required to request for Tax Identification Number (TIN) before opening business bank accounts for individuals
- Existing account holders must provide their Tax Identification Number to continue operating their business accounts
- Email correspondences will now be recognized for communicating with tax authorities
- The definition of goods and services has been expanded to cover intangible items beyond land.
- There are now specific requirement for Value Added Tax deregistration
- Introduction of VAT reverse charge on imported services
- Introduction of VAT registration threshold of N25 million turnover in a calendar year
- Remittance of VAT now to be on cash basis
- Compensation for loss of employment that is below N10m to be exempted from CGT
- Stamp duty on bank transfer now applies only on amount from N10, 000 and above.