Prior to
The introduction of the Finance Act to improve the ease of doing business and align the tax laws to global best practices has been largely positive. To date, about 167 amendments have been introduced and the full impact of these amendments will only be seen in the next couple of years as the business environments improves with the imminent change in Government by
As the country awaits the President's assent on the latest Finance Act 2022, this article seeks to evaluate some of the amendments to the tax laws introduced by the Finance Act that impact NRCs operations in
Companies Income Tax - The Quest to Include More NRCs in the
On
The above approach did not yield much results as many NRCs reported losses. Some NRCs were also not liable to tax based on the extant laws at the time. Consequently, the basis of taxing NRCs as provided in Section 13 of the Companies Income Tax (CIT) Act was reviewed and amended by the Finance Acts. Currently, NRCs are subjected to tax where;
- the NRC has a fixed base (i.e., a place of business) in
Nigeria to the extent that the profit is attributable to the fixed base; -
the non-resident company habitually operates a trade or business through a person in
Nigeria or maintains a stock of goods or merchandise inNigeria from which deliveries are regularly made by a person on behalf of the company; - the trade or business or activities of the non-resident involves a single contract for surveys, deliveries, installations or construction;
-
the non-resident company does not have physical presence in
Nigeria but derives income fromNigeria through digital activities to the extent that it has a Significant Economic Presence (SEP) inNigeria ; - the trade or business of the non-resident involves the remote provision of technical, management, consultancy or professional services to a Nigerian resident; and
- the trade or business or activities is between the company and a related party, which is considered not to be at arm's length.
The amendments introduced in paragraph (iii) to (v) above brought more NRCs into the tax net even where they did not have a fixed base or permanent establishment in
Are Double Tax Treaties Sufficient to Shield NRCs from Tax?
Consequently, where there is no PE, there is no CIT applicable to the NRC. Given most DTT between
The above notwithstanding, the FIRS issued a circular dated
In addition, the reduced tax rate of 7.5% applicable on dividends, interests and royalties earned by taxable persons resident in a DTT state has been terminated by the FIRS with effect from
Capital Gains Tax and Withdrawal of Incentive Associated with Investment in Nigerian Companies
Prior to the Finance Acts, where a Nigerian company has 25% imported equity, such a company is exempted from minimum tax. Based on the amendment introduced by Finance Act 2019, this incentive has been removed. The introduction was intended to create a level playing ground for Nigerian companies without imported capital. However, this may impact the attractiveness of investing in Nigerian companies given that minimum tax is 2.5% of turnover and investors may have to take loans to pay the minimum tax due to the government where the company is making losses.
In addition, Finance Act 2021 removed the Capital Gains Tax (CGT) exemption on the disposal of shares in a Nigerian company by amending relevant provisions of the Capital Gains Tax. Thus, where a company sells its equity investment in a Nigerian company worth at least ₦100m in any twelve consecutive calendar months, the gains associated with the sale are to be taxed at 10% subject to certain exemptions including where the proceeds from the disposal of the shares are reinvested within the same tax assessment in the acquisition of shares in either the same or another Nigerian company.
Section 32 of the CGT Act was also amended to introduce CGT on restructuring arrangements between related entities. To qualify for exemption from CGT, companies involved in a restructuring exercise must be related for 365 days before the restructuring, either by way of one entity having control over the other entity, both entities having same parent or both entities being members of the same group. In addition, the assets involved in the restructuring exercise must not be disposed within 365 days after the restructuring exercise.
Furthermore, Finance Act 2019 provides that the amount of interest deductible for tax purposes by a
Key Amendments Relating to Transaction Taxes
For several years prior to the Finance Acts, the Value Added Tax (VAT) implication of services provided by an NRC to persons in
The latest court case on this issue was the 2019
The above notwithstanding, services provided by an NRC to persons in
The above exposes cross-border transactions to double tax and additional cost as the Nigerian company may be required to pay the local transaction tax where the foreign company is resident. Conversely, where the services are provided by a
Similarly, where an NRC provides technical, consultancy, management, or professional services outside
Furthermore, prior to the Finance Act amendments, foreign companies could enjoy full (100%) or partial (10%, 40% or 70%) WHT exemptions on interest relating to loans advanced to Nigerian companies provided the terms of the loan meet certain moratorium / grace period in the CIT Act. The Finance Act modified the exemption to 70%, 40% and 10% thus reducing the incentive available to NRCs on such loans.
Other proposed Amendments to consider in the 2022 Finance Bill
- To avoid double taxation, importation of taxable goods purchased through an online electronic or digital platform operated by a Non-Resident Supplier (appointed as a VAT collecting agent of FIRS) into
Nigeria are not subject to VAT at the point of clearance with the Nigerian Customs Service where the importer furnishes evidence of registration or appointment of such collecting agent with the FIRS andVAT charged on the sales invoices of the goods. -
Imposition of a levy of 0.5% on all eligible goods imported into
Nigeria from outsideAfrica to finance capital contributions, subscriptions and other financial obligations to theAfrica Union ,African Development Bank ,Africa Export-Import Bank and other multilateral institution. - The scope of services liable to excise duty under the Customs, Excise Tariff, etc. (Consolidation) Act is to be expanded to include all services.
- Introduction of 50% investment tax credit on qualifying expenditure incurred by medium and large companies involved in the commercial winning, capture, production and utilization of associated and non-associated gas.
- Introduction of a new corporate tax rate of 50% to be levied on Companies engaged in gas flaring.
- Removal of Investment Allowance of 10% applicable on capital expenditure incurred on plant and equipment. In addition, the Rural Investment Allowance ranging from 15% to 100% applicable on capital expenditure incurred for the provision of certain facilities for the purpose of trade or business which is located at least 20 kilometers away from such facilities provided by the government has also been removed.
Tax as a Fiscal Tool to Provide Stable Source of Government Revenue
Amidst crude oil price volatility and reduced crude oil production which fell by 23% (1.14 million barrels per day1) in 2022, the amendments to the tax laws introduced by the Financial Acts have helped the government increase its tax revenues. Few days ago, the FIRS reported that it collected ₦10.1trillion2 as tax revenue in 2022 which is about 63% higher than the tax collected in 2021. Although some analysts opine that there has not been much improvement in dollar terms, this is an indication that the Government can place more reliance on taxes as a stable source of revenue.
The FIRS has made tremendous efforts in digitalizing tax compliance process with the introduction of TaxPro Max; an online digital platform that allows taxpayers submit tax returns online. While there are views that the online tool impacts on the right of the taxpayer to self-assessment since approvals have to be obtained from the FIRS for the treatment of certain tax items, the TaxPro Max has reduced the cost of compliance for both taxpayers and the tax authority. With the introduction of online instant issuance of Tax Clearance Certificate which typically takes two weeks or more before approval is granted, it is expected that the FIRS will make more improvements that will positively impact the tax administration and compliance.
The above notwithstanding, it is not clear whether there is a direct relationship between the declining FDI and the amendments to the tax laws as there are other factors that may be contributory to the decline in foreign investment inflows like the challenging foreign exchange regime and insecurity in some parts of the country. Given the
According to the
Conclusion
As the Nation prepares for elections in few days, the next Government will have to evaluate the existing tax regime in order to simplify it further, expand the tax base and explore new initiatives that will attract the much-needed investment to stimulate the economy. NRCs should continue to monitor developments in the tax space so they can take full advantage of the investment opportunities that exist in
Footnotes
1. https://businessday.ng/energy/article/nigerias-oil-production-drops-by-23-in-three-years/#:~:text=Data%2from%20the%20upstream%20regulatory,barrels%20per%20day%20in%202022.
2. https://businessday.ng/news/article/firs-received-n10-1trn-record-highest-remittance-in-2022/
3. https://africa.businessinsider.com/local/markets/the-world-bank-projects-that-nigerias-economy-could-take-a-significant-hit-in-2023/mg3j858
4. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Tax-Capacity-and-Growth-Is-there-a-Tipping-Point-44436
5. https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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