Introduction

On December 31, 2020, the President signed the Finance Bill, 2020 (now Finance Act, 2020) into law alongside the 2021 Appropriation Act. The introduction of the Finance Act, 2020 demonstrated the Nigerian government’s efforts to align local laws with global best practices, promote fiscal equity, improve ease of doing business, support small businesses, and create a conducive environment for infrastructure investment. The government’s dedication to finalizing the Finance Act in tandem with the Appropriation Act annually is commendable. This forward-thinking initiative, if continued, could lead to the elimination of redundant and ambiguous sections of the tax laws.

The FA 2020 brought substantial changes to several tax and regulatory laws in Nigeria, amending key provisions of approximately fourteen Acts, including the Companies Income Tax Act, Personal Income Tax Act, Petroleum Profits Tax Act, Tertiary Education Trust Fund Act, Value Added Tax Act, Capital Gains Tax Act, Industrial Development (Income Tax Relief) Act, Customs and Excise Tariff Act, and Stamp Duties Act. This article reviews the key amendments made by the FA 2020, with a particular focus on their impact on the manufacturing sector.

Key Changes in Direct Taxes

• Reduction of Minimum Tax Rate

To alleviate the burden on companies affected by the COVID-19 pandemic, FA 2020 amended Section 33 of the Companies Income Tax Act (CITA) to reduce the minimum tax rate from 0.5% to 0.25%. This 50% reduction applies to tax returns for any assessment year between January 1, 2020, and December 31, 2021. This commendable move acknowledges the pandemic’s toll on businesses. Companies that filed their taxes before the FA 2020 was signed should consider refiling to adjust their tax payable. The Act also facilitates tax refunds, making it easier for companies to claim excess minimum tax refunds for returns filed within this period. However, companies with less than ₦25 million turnover, those within the first four years of operation, and those in agricultural trade or business remain exempt from minimum tax.

• Exemption of Small Companies from Tertiary Education Tax (TET)

FA 2020 clarified the uncertainty in FA 2019 by amending Section 1 of the Tertiary Education Trust Fund Act to exempt small companies from TET. This means companies with a turnover of less than ₦25 million, already exempt from CIT, are also not liable for TET. While some qualifying taxpayers had already adopted this practice, FA 2020 provides the necessary legal basis to support it.

• Inclusion of COVID-19 Donations as Allowable Deduction

Recognizing the contributions made by companies during the pandemic, FA 2020 amended Section 25 to include donations made to the COVID-19 crisis intervention fund or similar funds as allowable tax-deductible donations. The allowable deduction is limited to 10% of assessable profits after other allowable donations, and companies must provide documentation to support their claims. Manufacturing companies that donated items in kind should ensure their records meet the requirements for tax deductibility.

• Claim of Capital Allowance on Software

The FA 2020 expanded the definition of Qualifying Capital Expenditure (QCE) to include capital expenditure on software development and acquisition. This allows companies to claim capital allowances on software, aligning with the government’s aim to encourage investment in technology. However, FA 2020 does not specify the applicable capital allowance rates for software or clarify whether investment allowance is claimable on software-related expenses, necessitating further clarifications.

• Capital Gains Tax (CGT)

The amended Section 2 of the CGT Act requires taxpayers to pay and file CGT returns by June 30 and December 31 each year. The rationale behind having two due dates is unclear and may cause ambiguity, requiring additional guidance.

• Accountability and Record Keeping Compliance

FA 2020 aims to improve record-keeping practices among small and medium businesses by amending Section 63 of CITA. Companies, including those exempt from incorporation in Nigeria, must maintain proper records of accounts. Non-compliance could result in penalties, including ₦100,000 for the first month and ₦50,000 for each subsequent month of non-compliance.

• Electronic Means of Objection to Assessment Notices

Amendments to Sections 68 and 69 of CITA now recognize courier services, emails, and other electronic media as valid for issuing notices of assessment and submitting objections. This development reduces the compliance burden and could positively impact Nigeria’s ease of doing business ranking.

• Timeline for Payment of Tax

The FA 2020 reduced the time limit for paying taxes from final assessments from two months to thirty days.

• Penalties for Deliberate Misstatement

The Act introduces penalties for companies that deliberately misstate their profits or taxes, with interest accruing from the date of filing incorrect returns. However, it does not clarify how tax authorities will determine deliberate misstatements.

Key Changes in Indirect Taxes

• Commencement Period of the New 7.5% VAT Rate

FA 2020 clarified the ambiguity regarding the commencement date of the VAT rate, confirming that the 7.5% rate became effective on February 1, 2020.

• Timing of Supply of Goods and Services

A new section, 2A, clarifies that supply is deemed to occur when an invoice or receipt is issued, or when payment is due or received, whichever is first. This resolves issues related to advance billing and invoice dates.

• Modification of VATable Goods and Services

FA 2020 amends the VAT Act to exclude land, buildings, money, and securities from the definition of goods and services, resolving previous controversies.

• WHT as Final Tax for Non-Resident Companies

The Act specifies that WHT is the final tax on income earned by non-resident companies providing technical, professional, management, and consultancy services in Nigeria, provided they have Significant Economic Presence.

• New VAT Exemptions

The VAT exemption list now includes commercial aircraft, engines, and spare parts, as well as agricultural equipment rentals. This development ensures VAT is not applied to these items.

• Reduction in Excise Duty Rates

To boost investment in agriculture, excise duties on tractors and public transport vehicles have been significantly reduced. This reduction lowers importation costs and makes these vehicles more affordable.

Conclusion

The Nigerian government’s proactive approach to amending tax laws and addressing gaps is commendable. The enactment of FA 2020, alongside the annual Appropriation Act, is a positive tradition that supports revenue generation and economic targets. Its effective implementation will enable companies to benefit from the changes and improvements introduced, fostering a more favorable business environment.

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.