Introduction

The Financial Technology (Fintech) sector in Nigeria has experienced remarkable growth, even as other sectors have faced stagnation. This growth has drawn significant attention from tax and regulatory agencies due to the substantial investments pouring into the Fintech ecosystem. According to the Nigeria Inter-Bank Settlement System (NIBSS), the volume of financial transactions processed via mobile devices surged by 155.8 percent, from ₦719.4 billion in August 2021 to ₦1.8 trillion in August 2022. Additionally, the total value of transactions conducted electronically through NIBSS from January to August 2022 reached ₦238.7 trillion. This boom extends beyond mobile transfers to Point of Sales (POS) transactions, which also saw a 30.2 percent increase in volume during the same period.

National Information Technology Development Levy: Liability for Fintech Companies

One key tax issue facing Fintech companies in Nigeria is the National Information Technology Development (NITD) Levy. This levy, charged at 1% on profit before tax, applies to companies with annual turnovers of ₦100 million and above, including GSM service providers, telecommunications companies, cyber companies, internet providers, pension managers, banks, and other financial institutions. Initially, it was unclear if Fintech companies fell under this category, as they were not explicitly mentioned in the repealed Banks and Other Financial Institutions Act (BOFIA) 2004. However, the updated BOFIA 2020 now includes entities conducting financial businesses electronically, thus encompassing Fintech companies.

Recently, Fintech companies have received NITD Levy assessments for prior years, raising issues of compliance and potential business disruptions if they fail to comply. It’s arguable that Fintech companies were not liable for the NITD Levy before 2020 since they were not classified as financial institutions under the older BOFIA.

VAT and CIT Implications for Payment Service Providers

Fintech companies providing payment services often act as intermediaries between merchants/customers and traditional banks. This intermediary role can lead to unintended VAT and Companies Income Tax (CIT) issues. During audits, tax authorities may misinterpret the nature of pass-through transactions, leading to allegations of misrepresented turnover or income. Proper bookkeeping and detailed transaction records are crucial to mitigate these risks. Without accurate records, Fintech companies may face additional tax assessments.

Withholding Tax on POS Commissions

State Tax Authorities (STAs) have recently begun demanding that Payment Terminal Service Providers (PTSPs) and Payment Solution Service Providers (PSSPs) account for Withholding Tax (WHT) on commissions earned by POS agents. However, these Fintech companies typically have no direct relationship with the agents, who operate independently and charge commissions directly to customers. Such transactions should be taxed appropriately by the STAs without shifting the responsibility to Fintech companies.

Regulatory Challenges for Fintech Companies

The rapid growth of Fintech in Nigeria has led to increased regulatory scrutiny. However, several challenges remain:

• Absence of a Unified Regulatory Framework: Currently, multiple regulations govern the Fintech sector, leading to complexity and the risk of non-compliance. Different regulatory bodies, including the Central Bank of Nigeria (CBN), National Communication Commission (NCC), and others, oversee various aspects of Fintech operations.
• Conflicting Regulations: Overlapping regulations can create uncertainty. For example, the Federal Competition and Consumer Protection Commission (FCCPC) introduced a regulatory framework for digital lending that conflicts with the CBN’s oversight, causing potential regulatory conflicts.
• Fragmented Regulation: The regulation of Fintech is divided among various state agencies, increasing the risk of regulatory arbitrage. The introduction of new regulations adds to the administrative burden on Fintech companies.

Recommendations for a Unified Approach

To address these challenges, several measures are recommended:

• Unified Regulatory Framework: Implementing a comprehensive regulatory framework for Fintech companies would streamline compliance and enhance industry growth.
• One-Stop Shop Scheme: Establishing a single regulatory body to provide all necessary licenses and approvals could simplify the business entry process and reduce administrative bottlenecks.
• Continuous Implementation of Sandbox Frameworks: The sandbox framework by the CBN and other relevant bodies allows Fintech companies to test new products in a controlled environment, promoting innovation while ensuring compliance.
• Professional Tax Advice: Fintech companies should seek guidance from tax professionals to navigate complex tax issues and avoid unnecessary tax exposure.

Conclusion

Fintech companies have revolutionized financial services in Nigeria, bringing about significant changes and disruptions. However, this success has also attracted increased scrutiny from tax and regulatory bodies. A solid, flexible legal framework for Fintechs in Nigeria is essential to boost investor confidence and improve the ease of doing business. By adopting a unified regulatory approach and utilizing professional tax advice, Fintech companies can effectively manage their tax obligations and regulatory compliance, fostering sustainable growth in the sector.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.