Government’s efforts to raise additional revenue, optimally fund the 2020 Budget, bridge the increase in the minimum wage payroll, introduce some much-needed tax amendments and reforms to encourage businesses, and other fiscal strategic objectives, have led to the passing into Law of the Finance Act, 2019.
The passage of the Finance Act continues to generate a lot of commentary and some uncertainty as to what its practical implications are to day-to-day businesses, individuals and interested investors, whether foreign or domestic. Some simplified highlights are now shared for your enlightenment and necessary action.
Companies Income Tax Act (as amended)
Tax Identification Number (“TIN”) – Banks are now required to request from all Limited Liability Companies, as a pre-condition to opening new bank accounts, or to allow for the continued operation of existing Bank accounts, a Tax Identification Number (“TIN”). As you will find in a paragraph following this one, this requirement also applies to individual bank account holders.
Digital Electronic Transactions – Digital Electronic Transactions by offshore companies who have significant economic domestic presence are now liable to bear Companies Income Tax (“CIT”) liabilities on the profits attributable to such online electronic transactions. Where any tax is withheld on electronic transactions, such withheld tax shall be deemed as the final tax on such transactions.
Excess Dividend Income – Excess Dividends paid out of the retained taxed earnings of any company, Franked Investment Income, Dividends paid out of profits exempted from any form or kind of taxation and Real Estate Investments Companies who distribute at least seventy-five per cent (75%) of their rental income, are now some of the income exempted from further CIT. Prior to this new amendment, the latter practice had in the past resulted in double taxation, which had in turn discouraged serious investments in the larger economy.
Exempted Companies and Withholding Tax – Companies exempted from paying CIT are now required to withhold tax on any dividend, interest, rent or royalty that they pay out or receive. The income and dividends of Unit Trusts, interest earned on foreign currency domiciliary accounts and other foreign exchange transfers through formal government approved channels, income of wholly export oriented businesses who use such exempted income to purchase raw materials, plant, equipment and spare parts, small businesses who comply with tax registration and tax filings, are now among some of the income that will continue to enjoin CIT exemption.
Minimum Tax – The minimum CIT rate is now 0.5% of the turnover of any company that is not exempted from CIT, that has made a loss or has no ascertainable profit to declare.
Small Companies – Companies with an annual turnover of Twenty-Five Million Naira (N25,000,000) or less are no longer liable to pay any tax including the 0.5% minimum tax. They must however register for CIT and file annual tax returns.
Medium Size Companies – Companies with annual turnovers of more than N25Million but less than N100Million in any year of tax assessment will now enjoy a CIT rate of twenty per cent (20%) on all their assessable profits.
Large Companies – Companies with an annual turnover of more than N100Million will continue to be liable to pay thirty per cent (30%) CIT on their total annual profits.
CIT Timeline – Companies liable for any CIT are now required to, along with their self-assessment tax filings, immediately pay the computed CIT in one lump sum or in a Federal Inland Revenue Service (“FIRS”) pre-approved instalment(s) on or before the last day for the filing of the self-assessment tax returns.
Tax Credits – Taxes paid ninety (90) days in advance of their due date are to enjoy a two per cent (2%) (for medium sized companies) and one per cent (1%) (for large companies) tax credit against their future CIT obligations.
Petroleum Profit Tax Act (as amended)
Petroleum Profits Withholding Tax – Section 60 of the Petroleum Profits Tax Act (“PPT”) is repealed/expunged to ensure that any form of dividends paid out of petroleum profits are now subject to withholding tax obligations.
Personal Income Tax (as amended)
Pension, Retirement, Provident Fund – Any contribution to a Pension, Provident or other kinds of retirement benefit schemes or funds are now an allowable tax-deductible expense. The prior approval of FIRS is no longer required.
TIN – Like with incorporated limited liability companies, every Individual who intends to, or is already operating a Bank Account or Accounts must provide a Tax Identification Number (“TIN”) as a pre-condition to enable him or her to continue to operate such Bank Account or Accounts.
Personal Relief – Spouses are now able to singularly claim tax reliefs for their children and other dependants provided the total combined sum claimed does not exceed the relief allowed for each dependant.
Electronic Communications – In line with modern day technological realities, electronic communication in tax administration are now allowed and admissible in tax proceedings.
Value Added Tax Act (as amended)
Goods and Services Defined – The Value Added Tax Act (as amended) (“VAT Act”) has now defined what constitutes goods and services under the VAT Act. Exempted from this VAT definition are money or securities, interest in land, and services provided under a contract of employment.
VAT Rate – The VAT Act has increased the VAT Rate on non-exempted goods and services from five per cent (5%) to seven and a half per cent (7.5%).
VAT Registration Penalties – All taxable persons are now required to register for VAT immediately they commence business. Failure to register for VAT and file VAT compliance Returns now carry much higher penalties.
Non-Resident Companies – Companies that are non-resident are now required to, in addition to registering for VAT compliance, include in all their invoices their VAT registration number and the VAT charged. Where the person to whom the goods or services are delivered or rendered is resident, the resident person must withhold the new VAT rate from the invoice, in the currency of the transaction, and subsequently remit the VAT withheld to FIRS.
Where no VAT compliant invoice is issued, and or no VAT is withheld and remitted, the person paying for the goods or services shall be individually liable for the VAT that is not withheld and remitted.
Oil and Gas Industry – The Federal Tax Authority, FIRS, also has the authority to direct companies in the Oil and Gas Industry to deduct VAT at source and remit the VAT withheld to FIRS in the currency of the transaction.
VAT Exemption Compliance Thresholds – Companies that in any calendar year, singularly or cumulatively, have a VAT non-exempt turnover of N25,000,000 (Twenty-Five Million Naira) or less are exempted from VAT Collection and Remittances.
VAT Remission and Credit – Where the VAT invoiced or charged, and collected (“Output VAT”) exceeds the VAT paid out (“Input VAT”), any excess credit VAT is required to be remitted to the Federal Tax Authority, FIRS. Where the reverse occurs, the deficit in the VAT collection is treated as a Tax Credit against subsequent monthly VAT Returns provided that the transaction documents are available for audit whenever requested for.
Effect of Non-Remittance – The penalty for the non-remittance of any VAT due is now increased from 5% to 10% of the VAT that was not remitted; plus, a further interest charge computed using the prevailing Central Bank minimum rediscount rate.
Penalty, No VAT Returns Filed – The penalty for failure to file VAT monthly Returns is also increased from N5,000 (Five Thousand Naira) to N50,000 (Fifty Thousand Naira) for the month in which the default occurred; and N25,000 (Twenty-Five Thousand Naira) for every subsequent month in which the default continuous persist.
VAT Exempted Goods and Services – The definition of Basic Food Items have been enumerated in the Finance Act; Services provided by Microfinance Banks, Peoples Bank, Mortgage Institutions; Tuition charged by Nursery, Primary, Secondary and Tertiary Educational Institutions; are now among the items added to the VAT Exemption First Schedule.
Capital Gains Tax Act (as amended)
Takeovers Tax Exemptions – The Capital Gains Tax Act (“CGT”) is amended to enable a trade or business that is sold or transferred to an indigenous company to enjoy capital gains tax exemption from such a sale or transfer transaction. The latter is however provided that the assets of such a transferred business or trade does not undergo a further transfer or sale within 365 (three hundred and sixty-five) days of the initial transfer or sale.
Loss of Office Compensation – The amount exempted from CGT, for loss of office, is increased from N10,000 (Ten Thousand Naira) to N10,000,000 (Ten Million Naira).
Stamp Duties Act (as amended)
Electronic Money Transactions – The Stamp Duties Act is amended to enable all electronic transfers or receipts of money, N10,000 (Ten Thousand Naira) and above to suffer a one-off stamp duty charge of N50 (Fifty Naira). This stamp duty will however not apply where the electronic transfers are done between bank accounts domiciled in the same Bank and operated by the same owner.
Regulated Securities Exempted – Securities that are regulated by the Securities and Exchange Commission (“SEC”) now enjoy exemption from any stamp duties charge.
Conclusions
There are many commendable, modern, innovative tax reliefs, exemptions and credits in the 2019 Finance Act. The principal challenge will be in the transparent enforcement of this legislation. A good example is claiming and utilising the various tax credits which in the past was usually an uphill task.
Also challenging will be how the VAT collected and the VAT paid out on the same product, among multiple supply chains, in a vastly informal and undocumented economy, will be reconciled with any credit deferential recovered by the VAT taxable person who is usually in the formal part of the market.
