The Finance Bill if passed into law will enhance Ease of Doing Business in Nigeria, strengthen micro, small and medium scale enterprises, as well as address the revenue challenge facing the country.
Today, the major headache facing the federal government is the country's low revenue generation profile.
And with the volatile nature of crude oil prices and the rising debt obligation, there is every need for policymakers in the country to be worried about the low revenue level.
A comparison of the country's ability to convert its Gross Domestic Product (GDP) to revenue for capital and social investment- key drivers of sustainable economic growth -with that of its peers, clearly shows that Nigeria has to do a lot to catch up.
To achieve that, the federal government has to urgently mobilise significant resources to invest in human capital development and critical infrastructure.
This has seen the government introduce various measures to pursue optimal revenue generation.
For instance, the federal government had launched its Strategic Revenue Growth Initiatives (SRGI), which aims to boost revenue generation.
In addition, President Muhammadu Buhari, on October 8, 2019, presented The Finance Bill, 2019 (the Bill), alongside the 2020 Appropriation Bill, to a joint session of the National Assembly. The Bill has since been passed by both arms of the National Assembly.
The bill aims to raise government revenue, reform the tax laws to align with best practices, create incentives for investment, support micro, small and medium scale enterprises (MSMEs), as well as raise government revenue.
It is expected to shore up Nigeria's low tax to GDP ratio, which presently at about 16 per cent, is one of the lowest in the world.
While the focus since the president presented the bill to the lawmakers has been on the proposed hike in Value Added Tax (VAT), which some interest groups in the country have continued to kick against, considering the present weak purchasing power, analysts have stressed that the proposed legislation if passed into law and effectively implement could help in addressing some of the fiscal challenges facing the country.
Submission of a Finance Bill legislation with the budget/Appropriation Bill is not new in Nigeria as past military regimes had, during budget pronouncements, amended various tax laws.
Proposed Changes and Implications
The sweeping changes to the tax laws, covering seven different tax laws, under the proposed Bill are expected to have positive impacts 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.
Companies Income Tax (CIT)
Currently, companies are 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 report by PwC Nigeria, titled: 'Nigeria's Finance Bill Insights Series,' particularly affects holding companies on dividends received from their subsidiaries thereby making Nigeria unattractive as a headquarters or group holding company location.
But, The Finance Bill proposes changes to limit the application of the tax only to untaxed profits that are not exempt from tax.
Also, currently, companies that declare and pay interim dividends are required to remit income tax at 30 per cent on such dividends to the Federal Inland Revenue Service (FIRS). But under the proposed legislation, there is a proposal to repeal the provision (which also specifies that withholding tax (WHT) should not be applied on dividends that are not paid in money) in the Finance Bill.
While the repeal will address the intended exemption of advance tax on interim dividend, it may also imply that WHT should be applied on bonus shares or dividend-in-specie, the PwC report stated.
In addition, Bill seeks to amend 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," it stated.
In terms of the Personal Income Tax Act, the Bill seeks to remove 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 proposed 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 Bill seek to introduce 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 Bill is also introducing 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 current practice is that companies send an approval request letter under CITA Section 29(9) to the FIRS, and include a CGT exemption request.
Implications for Banking, Capital Market, Insurance
The proposed 2019 Finance Bill seeks to bring about several changes which will affect the banking, capital market and insurance sectors. Significant among these, according to the report are provisions to clarify the tax treatment of securities lending transactions in the capital market. Similarly, it seeks to provide 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, the Bill introduces 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 proposed 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.
The Bill 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.
The CBN recently issued a directive for banks to charge a stamp duty of N50 on point of sale (PoS) transactions of N1,000 and above. This directive has been viewed by many as retrogressive and contrary to the government's plan to reduce the proportion of financially excluded adults to 20 per cent by the year 2020.
But, the proposed Bill, however, provides some succour by raising the minimum threshold of N1,000 to N10,000.
For the insurance sector, among others, it recommended that the claim for reserve for unexpired risks in a financial year, should be calculated on a time apportionment basis of the risks accepted during the financial year. This seeks 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 Bill 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.
For of the energy and utilities sectors, among a range of other expected reforms, it proposes to delete 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 Bill proposes to repeal this Section and eliminate 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 seeks to repeal Section 60 of the PPTA and Section 43 of CITA. This means that dividends from upstream companies will 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 Bill proposes to eliminate 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," it stated further.
Consumers, Industrial Products' Sectors
The Bill aims to amend the Custom, Excise Tariff etc. (Consolidation) Act (CETA), to subject importation of excisable products to excise duties at the same rates applicable to locally manufactured items. This aims to create a level playing field for local manufacturers and raise revenue for the government.
Replacement of obsolete plant and machinery Section 41 of the Companies Income Tax Act (CITA) grants a 15% tax credit to a company that incurs capital expenditure to replace "obsolete" plant and machinery. This is in addition to the capital and investment allowances ordinarily available on such capital expenditure.
The Bill deleted this provision in order to rationalise incentives and due to the ambiguity on what constitutes an "obsolete" plant or machinery, making the incentive redundant in practice.
Implications for MSMEs
The Finance Bill seeks to introduce across-the-board changes to the various tax laws in Nigeria that would impact on MSMEs and their role in sustainable economic growth. The bill 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 is also to prescribe that small businesses with turnover less than N25 million would be exempted from CIT while a lower CIT rate of 20 per cent would apply 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 seeks to raise VAT rate from five per cent to 7.5 per cent, while penalties for failure to register will increase to N25,000 for the first month of default and N20,000 for each subsequent month.
Implication for Digital Economy
The new Finance Bill introduces 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.
Speaking in an interview on the 'Morning Show,' on Arise Television yesterday, a Partner and the Head of Family Wealth at Andersen Tax LP, Mr. Emeka Onwuka, welcomed the proposed legislation, saying it did not come as a surprise to most tax advisers in the country.
He said the Finance Bill showed the dynamism the federal government was attaching to the tax regime in the country, adding that it would help improve tax compliance.
"I will say this didn't come as a surprise to some of us that are tax advisers. This is because some of the issues covered by the new Finance Bill, have been contentious over the years, but this Bill provides clarification.
"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 proposed legislation, when passed into law, 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 featured on the 'Global Business Report,' on Arise Television, yesterday, stressed that the Finance Bill would be epochal if passed into law.
According to Olomola, it would help align the micro-economy with the macroeconomic direction of the federal government.
"In terms of the directionality of the bill, 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.
"And the very first significant thing that this Bill does is to lessen and almost mitigate 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.
"So what this bill does in a nutshell is to begin to reposition the fiscal environment in Nigeria towards attracting investment, encourage Nigerians to invest in Nigeria, grow capital and also grow the labour market, grow our economy and in a sense begin to change the narrative of the economy," he explained.
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, which has been approved by both the Senate and the House of Representatives, after public hearings. 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 the Finance Bill has done is an attempt by the government 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.
"The Bill is proposing a change to the CITA, such that if that same business were registered as a company, they would face zero taxation up to revenues of N25 million and below. And above N25 million, up to N100 million, there is a reduction in tax rate below 30 per cent.
"That, then, is the clear motivation for businesses that are currently not registered as companies to come into the formal net, register under the CAMA with the CAC in order to seek protection that the Finance Bill provides.
"That means that more companies would come into the tax net, and once they are in the tax net the ability of the tax authority to monitor compliance then becomes a little bit more enhanced," he added.
Shedding light on the aspect of the proposed 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 the Bill 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."
From the foregoing, considering the fiscal challenges facing the country, there is need for stakeholders to embrace the proposed legislation as it has the capability stimulate economic growth in the country, enhance the operations of MSMEs, attract the much-needed foreign direct investment and address the severe revenue challenge facing the country, if passed into law and effectively implemented by the government.