> PwC Nigeria:
Nigeria’s Finance Act Gets a Facelift to Attract Business and Investment By Folajimi Akinla
Earlier this year, Nigerian president Muhammadu Buhari signed the Finance Bill 2019 into law as the Finance Act of 2019 — the first amendment to the country’s tax laws since 1999.
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he Act, which comprises 57 sections, seeks to amend seven major federal tax laws: the Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Value Added Tax Act (VATA), Customs and Excise Tariff (Consolidation) Act (CETA) and Stamp Duties Act (SDA).
The Act brings substantial changes to the tax landscape in Nigeria. Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination. One of the core objectives of the Act is to bring the laws into line with the federal government’s policies and to generate short-term revenue to fund the 2020 Budget. It is expected that, as pre-1999, a finance bill will be passed annually. FAVOURABLE TAX REGIME FOR SMEs The Act gives SMEs more favourable tax regimes. Under the old law all companies were subject to income tax at a single rate of 30 percent. The Act creates exemptions for SMEs with a gross turnover is less than NGN25m (£52,000), even though they are expected to file annual returns. A medium-sized company is defined as one whose gross turnover exceeds NGN25m but is less than NGN100m (£210,000). Such companies are subject to income tax at the rate of 20 percent. The Act also introduces special regimes under the Value Added Tax (VAT) Act. Companies with a turnover of less than NGN25m do not have to register or charge VAT on their supplies. However, they are expected to pay VAT on their purchases. HOLDING-COMPANY JURISDICTION Prior to the Act, there was a provision — section 19 — in the Companies Income Tax Act (CITA) that, in effect, penalised groups with Nigerian holding companies by subjecting them, in certain circumstances, to tax at the rate of at least 62 percent, instead of the standard rate of 30 percent. 108
"Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination." Section 19 deems as profit any dividends paid by holding companies in excess of their total profits. The law then imposes an additional tax of 30 percent on such excess dividends as though they were profits. The provision is informally referred to as Excess Dividend Tax. Given the nature of holding companies — which ordinarily do not carry out any business activities and by extension do not have taxable profits — such companies are often susceptible to the Excess Dividend Tax. Besides holding companies, section 19 also had an adverse effect on companies which earned exempt income, and therefore had no taxable profits or taxable profits that were lower than the dividends they paid. It also affected companies that paid dividends from retained earnings where such dividends exceeded the companies’ taxable profits in the year the dividends were paid. Such companies were, in addition to income tax of 30 percent, also subject to Excess Dividend Tax at 30 percent on the excess of dividends over their taxable profits — even though the retained earnings from which the dividends were paid had been subject to tax in previous years. Section 19 was seen as a disincentive to many multinationals considering holding companies in Nigeria. The loss of foreign investment caused by section 19 cannot be quantified. The section also prevented Nigerian companies from investing in their own country. The effect of Section 19 becomes even more onerous when one considers that dividends paid by multinationals and Nigerian companies were also subject to a withholding tax (WHT) of 10 percent CFI.co | Capital Finance International
or 7.5 percent (where the recipient is resident in a country that has a Double Tax Agreement with Nigeria) in the hands of the shareholders / investors. The Act now provides that no additional tax is imposed on dividends that exceed total profits in any of these circumstances. That is, companies distributing excess dividends from retained earnings which had been taxed in prior years, exempt income and franked investment income would no longer suffer Excess Dividend Tax. The result of the amendment is that, from a tax perspective, Nigeria becomes a more attractive destination for holding company structures. INCENTIVES FOR THE REAL ESTATE SECTOR Nigeria has a relatively youthful population of about 200 million people — and a housing deficit estimated at 20 million units. Only 100,000 housing units are developed each year. The major challenges to the real estate sector are difficulties in registering properties and obtaining construction permits, which in turn create obstacles to securitisation of property. It also increased the cost of investing in the sector. These challenges are responsible for the significant amount of “dead” capital in the sector which — estimated to be in the region of $900bn. The luxury real estate market is estimated to hold between $230bn to $750bn in value, while the middle market carries between $60bn and $170bn in value. Real estate investment companies (REICs), are arguably liable to corporate income tax at 30 percent of their profits and a further two percent Tertiary Education Tax (TET). In addition, distributions to shareholders could be liable to WHT at 10 percent. This is a deviation from the treatment of real estate investment trusts (REITs) globally as tax-neutral vehicles. The reason for the difference in practice is lack of specific provisions in the current tax laws. Under the old law, the tax treatment of an REIC made it unattractive to investors (although in practice, the FIRS sometimes did not strictly apply the law).