Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) recognise and regulate transactions involving securities lending. Typically, in a securities lending transaction, one party (“lender”), in exchange for collateral (cash or other security) transfers securities (stocks, shares) to another (“borrower”) through an agent (“lending agent”). It is expected that Lender and Borrower earn income (“compensating payments”) on the collateral and securities transferred. The Act now expands the definition of “interests” and “dividends” to include compensating payments made by a lender to a borrower, and by a borrower to a lender, respectively. Prior to the amendment, there was little or no clarity on the taxation of such income. Now, profits arising from such transactions, other than the compensating payments, are now subject to tax. CHANGES IN VAT REGIME One of the biggest and most discussed changes by the Act is the increase of the VAT rate from five percent to 7.5 percent. Since the introduction of VAT in Nigeria in 1993, the rate had remained at five percent until the recent amendment, making Nigeria one of the countries with the lowest VAT rates in the world. In Africa, the average rate ranges between 15 percent and 17.5 percent. While there is some concern that the increase in the rate will result in a corresponding increase in the cost of living, the rate remains one of the lowest globally. On the flip side, it is expected that states’ income would increase given that they get the bulk of VAT revenue under a revenue-sharing formula. One of the arguments for an increase in VAT was to enable states meet their obligations under the recent increase in the national minimum wage. The Act provides clarity to ambiguous provisions in the VAT Act, which now allow FIRS impose VAT on supply by non-residents of goods and services to Nigerian consumers even when the non-residents do not include VAT on their invoices. This procedure is usually referred to, in international VAT context, as reverse-charge mechanism. Other amendments include introducing a list of basic food items which are VAT-exempt. To alleviate the increase in the VAT rate, a list of basic food items comprising 16 categories of over 150 basic food items was introduced. Under the old VAT Act, “basic food item” was not defined. DIVIDENDS FROM PETROLEUM TAX PROFITS Before the advent of the Act, dividends arising from petroleum profits were exempt from any further tax, including withholding tax. The intention was to grant investors in the petroleum companies palliatives given the high tax rates (85 percent for Joint Venture arrangements, 110
Author: Folajimi Akinla
reduced to 65.75 percent for companies in their first five years of production, and 50 percent for Production Sharing Contract arrangements) under the Petroleum Profits Tax regime.
from advertising, marketing and social media platforms would be subject to tax on profits derived from such activities provided they have significant presence in Nigeria.
This exemption has now been deleted, with the effect that all dividends arising from petroleum profits would now be subject to WHT at the applicable rate: 10 percent or 7.5 percent if the recipient of dividend is resident in a country which has a Double Tax Agreement with Nigeria.
REMOTE PROVISION OF SERVICES A non-resident company would be deemed to be taxable in Nigeria where it provides technical, management, consultancy or professional services to persons resident in Nigeria, provided it has a significant economic presence in the country and profits can be attributed to such activities. The amendment seeks to expand the tax base to capture activities where non-resident companies provide services to persons in Nigeria without being physically present in Nigeria.
Digital economy significant economic presence Generally, a non-resident company is only subject to tax in Nigeria if it has a fixed base (FB) in Nigeria and only the profits attributable to the fixed base would be taxable in Nigeria. Prior to the Act, a non-resident company would create a FB in Nigeria if it had a physical presence in Nigeria. Non-resident companies providing services remotely to Nigerian consumers were not subject to Nigerian tax. However, they were subject to WHT of 10 percent or 7.5 percent (where the non-resident is resident of a country that has a Double Tax Agreement with Nigeria) on passive income (dividends, interest, rents and royalties) earned from Nigeria. To address modern business realities, the Act proposes certain amendments. TAXATION OF E-COMMERCE ACTIVITIES Under the Act, a non-resident company would be deemed to be taxable in Nigeria where it transmits, emits signals, sounds, or images by electronic or wireless means in respect of any e-commerce activity, provided it has a significant economic presence in Nigeria and profits are attributable to such activities. The intention is to broaden the tax base by capturing profits arising from e-commerce that have previously escaped tax. It is expected that all non-resident companies earning income CFI.co | Capital Finance International
NEW MINISTERIAL POWERS The Act now gives the Finance Minister new powers to determine, by order, what constitutes “significant economic presence” in Nigeria for the purpose of subjecting non-residents to tax. This gives the minister the discretion and flexibility to define (and redefine) the term to reflect changing business and economic circumstances. CONCLUSION The Act is a step in the right direction. It is expected that there will be annual Finance Acts to address outdated provisions and create revenue streams to implement annual budgets. To achieve the ultimate ends — making Nigeria a more attractive place for business and investment — the Act must be complemented by other actions. Citizens demand more accountability and transparency from public officers on how the Budget is implemented, and how tax revenue and resources are allocated. Government officials must earn the people’s trust as stewards of Nigeria’s resources. There is also room for improvement in areas of tax administration, the judicial system, security, respect for freedom of expression, and other fundamental rights. i