Preface

On 28 May 2023, His Excellency, former President Muhammadu Buhari, GCFR, signed the Finance Bill,2023 into law as Finance Act, 2023.

The Finance Bill, 2023 was an Executive Bill prepared by the then Honourable Minister for Finance, Budget and National Planning, and presented by His Excellency, President Muhammadu Buhari, together with the 2023 Budget proposals to the National Assembly. Following several reviews and updates by both the Executive and National Assembly, the Finance Bill, 2023 was signed by the former President as Finance Act, 2023 (hereinafter referred to as "Finance Act", "FA 2023" or "the Act").

The Act introduces changes to the Capital Gains Tax (CGT) Act, Companies Income Tax (CIT) Act, Personal Income Tax (PIT) Act, Customs and Excise Tariff Etc. (Consolidation) Act (CETA), Value Added Tax (VAT) Act, Petroleum Profits Tax (PPT) Act, Stamp Duties Act (SDA), Corrupt Practices and other Related Offences (CPORO) Act, Tertiary Education Trust Fund (Establishment) Act, Public Procurement Act (PPA) and the Ministry of Finance (Incorporated) {MoFI} Act. The commencement date of these amendments is now 1 September 2023, in line with the Finance Act (Effective Date Variation) Order, 2023 which was signed by His Excellency, President Bola Ahmed Tinubu, GCFR on 6 July 2023. The Act also made slight modifications to its predecessors, Finance Acts 2019, 2020 and 2021, to clarify some of the changes introduced by these Acts and align them more with the government's fiscal plans and current economic realities.

Finance Act, 2023 is the fourth in the series of legislative amendments to be enacted by the Federal Government (FG) on an annual timeframe. The passage of the Act reinforces FG's commitment to making incremental changes to Nigeria's fiscal framework that continues to be pivotal in achieving Nigeria's economic growth and sustainable development imperatives. The changes introduced by the Act are intended to improve tax revenue, align changes in the prior Acts to ensure tax equity and consistency, reform Nigeria' tax incentives regime for companies, and improve tax administration.

This publication contains the analysis of the amendments introduced by the Act and the potential impact of these changes on tax administration, government agencies and taxpayers operating in the various sectors of the economy.

1. General Implications of Finance Act, 2023 on the Nigerian economy

1.1. 2022 Economic Performance

Despite the many challenges faced in 2022, Nigeria maintained a steady economic recovery during the year with an overall real Gross Domestic Product (GDP) growth of 3.1%. This is following the country's recovery from a pandemic-induced recession in 2020 with a GDP growth of 3.4% in 2021. However, based on the economic indices, the growth recorded in 2022 was not broad-based. The country's economic expansion was mainly driven by the non-oil sector, which contributed 94.33% to the nation's real GDP and grew by roughly 5%.

The oil sector continued to underperform in 2022, as it contributed only 5.67% to real GDP during the period and contracted by almost 20%. The sector's dismal performance, despite the surge in crude oil prices in 2022, was largely due to the high incidence of crude oil theft and pipeline vandalism in the country during the year. These issues resulted in the country recording an average crude oil production of 1.2 million barrels per day (mbpd), 25% lower than the budgeted crude oil production target of 1.6 mbpd.

At the same time, Nigeria's headline inflation rate hit 21.47%1 in November 2022. This was 6.07% points higher compared to the rate recorded in November 2021. Inflation is projected to remain elevated throughout 2023, fuelled mainly by rising cost of food, diesel, and gas prices and persistent supply disruptions amplified by the new policies implemented by the new administration.

Notwithstanding, the Nigerian non-oil sector is expected to continue to drive economic growth in 2023 and beyond following its contribution to the country's GDP in 2022 financial year.

1.2. How Finance Act, 2023 seeks to achieve economic stability and sufficiency

Since the beginning of 2022, there has been a deliberate effort by the (FG) to enact legislation that will help to improve the contributions of the non-oil sector to Nigeria's economic development and growth. For example, the Nigeria Start-up Act, Excise Duty (Non-Alcoholic, Carbonated and Sweetened Beverages) Regulations, and the Non-Interest Finance (Taxation) Regulations were all enacted in 2022 with the aim of maintaining economic growth and stability in Nigeria.

Similarly, Finance Act, 2023 has been enacted to stimulate inclusive, diversified and sustained economic growth while ensuring macroeconomic stability. The Act introduces amendments to eleven (11) laws in Nigeria. These amendments are focused mainly on revenue generation, economic growth, promotion of tax equity and ensuring clarity in the tax laws and administration.

Revenue generation continues to be critical for Nigeria's growth as the country struggles with huge debt, increase in fuel price, rising cost of living and poor infrastructure. The Appropriation Act, 2023 budgets expenditure of ?21.83 trillion against an expected revenue of ?10.49 trillion, resulting in a budgeted fiscal deficit of ?11.34 trillion, which would likely be exceeded. It is, therefore, imperative for the FG to diversify and increase its revenue sources to fund critical development expenditure in the country.

Consequently, the Act has amended and/ or introduced new provisions to the CGT Act, CIT Act, VAT Act, and other relevant pieces of legislation to increase tax revenue. The Act also contains provisions which clarify existing laws to ensure tax equity.

In general, it is expected that the changes introduced by Finance Act, 2023 will improve the country's fortunes, boost investors' confidence, and continue to lead the country on the path of consolidation and sustainable growth.

1.3. Applicable taxable period

The effective date of Finance Act, 2023 is 1 September 2023. One issue that will agitate the minds of taxpayers is which transactions will the provisions of the Act apply to. The revised National Tax Policy (NTP), 2017 states that tax policies and laws shall not be retroactive. In other words, the application should be for the future only and should not change the law from what it was before the effective date. The Federal High Court has reinforced this position in its decision in the case between Accugas Limited and Federal Inland Revenue Service (FIRS) to the extent that transactions that had occurred between the effective date of the Finance Act, 2019 would not be subject to the new law. The implication of this ruling is that all transactions that occur prior to 1 September 2023 would not be affected by Finance Act 2023. However, events happening thereafter would be subject to its provisions. This will result in apportionment of profits between pre and post 1 September for income tax purposes.

One of the guiding principles enunciated in the NTP is that tax laws and administrative processes should be simple, clear and easy to understand. Consequently, we suggest that future Finance Acts should clearly state that the provisions would affect accounting period starting from the effective date to ensure clarity.

It is also important that government ensure a reasonable transition period before implementation of a new tax law. The NTP specifies a period of between three (3) to six (6) months as reasonable.

2. Direct Taxes

Finance Act, 2023 amends various provisions of the Nigerian tax legislation relating to direct taxes. These changes are discussed under the relevant tax laws as follows:

2.1. Capital Gains Tax Act (CGTA), Cap C1, Laws of the Federation of Nigeria (LFN), 2004 (as amended)

The amendments to the CGTA, Cap C1, Laws of the Federation of Nigeria (LFN), 2004 (as amended) are as follows:

2.1.1. Imposition of Capital Gains Tax on digital assets

Finance Act, 2023 amended Section 3(a) of the CGTA to include digital assets as part of chargeable assets for CGT purposes. The implication is that effective from the date of commencement of the FA 2023, proceeds derived from disposal of digital assets such as cryptocurrency will now be liable to 10% CGT. While it is laudable that Nigeria is aligning with emerging markets on taxation of digital assets, it is interesting to note that the Central Bank of Nigeria (CBN) had previously issued restrictions on trading of cryptocurrencies in February 2021, which resulted in the closure of accounts of persons or entities involved in cryptocurrency transactions by all deposit money banks, non-bank financial institutions and other financial institutions in Nigeria.

Notwithstanding the restriction, Nigeria has continued to issue legislation to regulate the trading in digital assets. For example, in May 2022, Nigeria's capital market regulator, the Securities and Exchange Commission (SEC), issued an updated regulatory guideline for digital currencies and crypto-based businesses for start-ups. The guidelines provided procedures for the licensing of companies interested in commencing business along this sector, thus providing some comfort for investors in this arena.

While the amendment in the Act shows the FG's interest in the emerging digital currency market; however, there is a conflict in policy direction given that the directive from the CBN on digital currency market is yet to be reversed. It is, therefore, important that regulatory bodies be well aligned in policy formation to ensure consistent strategic output.

Furthermore, there is an urgent need to define and clarify what digital assets would entail. The SEC guideline defines digital assets as "a digital token that represents assets such as a debt or equity claim on the issuer". However, this definition is in the context of issuance of securities, which would not sufficiently address the tax objectives of the provision introduced. This is because for the purpose of taxation, tax treatment is derived from the accounting classification or recognition of an item.

For example, digital assets may be held not only as a security but also as inventory or intangible assets. Given the complex and broad nature of digital assets, it is necessary to understand their form and substance, and the rights and obligations of the holders to determine the appropriate tax treatment in each case.

Therefore, it is important to have a robust tax framework for taxation of digital assets in line with the relevant accounting treatment or general accepted accounting principles (GAAP).

2.1.2. Exclusion of capital losses

Prior to the enactment of the FA 2023, losses on disposal of any chargeable asset were not tax deductible in computing the chargeable gains. The Act introduces an amendment to Section 5 of the CGTA to allow capital losses to be set-off against capital gains.

In computing chargeable gains, losses on disposal of any chargeable asset are now tax deductible. However, certain criteria have been included to the tax deductibility of such losses. For losses on disposal of a chargeable asset to be tax-deductible against capital gains, such losses shall be attributable to the same asset or assets within the same class in a taxable year. Further, unabsorbed losses may also be carried forward, to be set-off from gains realised from the same class of asset for a maximum of 5 years immediately following the year the loss was incurred.

This is a welcome development in ensuring equity and fairness in taxation of chargeable gains. Finance Act, 2021 had introduced the taxation of gains from disposal of shares, which caused a stir amongst investors in the equity market. This is especially as shares were exempt from tax for over 20 years prior to the amendment. However, the new amendment will provide relief to investors, demonstrating government's commitment to promoting the principles of equity and fairness in taxation, despite the drive for revenue generation.

Other technical issues include clarification on the relevant cost methodology (such as Last in-First out (LIFO), First in-First out (FIFO) or weighted average) to be adopted in determining the historical cost for the purpose of computing capital gains on disposal of shares.

2.1.3. Inclusion on shares and stocks for rollover reliefi

The FA 2023 now includes shares as a class of asset that qualifies for roll-over relief. Finance Act, 2021 had introduced an amendment on taxation of gains arising from share disposals where the aggregate proceeds from such disposal exceed ?100million in any 12 consecutive months. The amendment also provided a proportionate waiver from CGT where the whole or part of the disposal proceeds are reinvested within the same year of assessment (YOA) in acquiring shares in the same or other Nigerian companies.

While the above exemption in Section 30 of the CGT Act was like a roll-over relief on shares, the FA 2023 has now clarified and appropriately included shares as one of the classes of assets qualified for roll-over relief.

Prior to this amendment, there were four classes of chargeable assets that qualified for the roll over relief. These are building and plant or machinery, ship, aircraft, and goodwill. Shares and stocks have now been included as the fifth class of asset to qualify for the exemption by the FA 2023.

We note that the specific condition of the period for reinvesting proceeds from share disposal (i.e., reinvestment being within the same YOA as the share disposal) was retained in the amendment. Therefore, it may be safe to assume that shares are excluded from the general precondition of sub-section 3 (i.e., acquisition or unconditional contract of the new asset should be entered into, twelve months before or after the disposal of the old asset), to qualify for the roll-over relief. The condition will, however, continue to apply to other classes of assets.

In view of the above, the new amendment does not materially impact the existing provision on taxation of share disposal introduced by the Finance Act, 2021. However, the amendment would appear to provide clarity to the status of shares and stock as a class of asset under the roll over relief provisions.

2.2. Companies Income Tax Act (CITA), Cap C21, LFN, 2004 (as amended)

The most notable general amendment to the CITA is the cancellation of the ten percent (i.e., 10%) investment allowance on plant and equipment purchased by any company, and claimable in the year that such qualifying asset was first used for the business of the company. This allowance was taken as capital cost uplift.

Thus, any plant and equipment that is acquired and first used by a company for its trade or business after the effective date of the FA 2023 (i.e., 1 September 2023) can no longer enjoy the 10% investment allowance stipulated in Section 32 of the CITA. Section 32 of the CITA was originally introduced to incentivise companies that lost assets during the Nigerian civil war and replaced them subsequently, and companies engaged in agricultural production. This incentive was subsequently expanded to all companies. It appears that the FG considers the incentive as redundant, hence its deletion. In other words, it has no impact on the decision of taxpayers to invest in items of plant and machinery.

Also, the Finance Act cancels the rural investment allowance provided in Section 34 of CITA. The rural investment allowance is a graduated capital cost uplift (from 15% to 100% uplift) granted to any company that builds specific facilities such as tarred roads, electricity or water for the purpose of its trade or business. The key qualifier is that the trade/business should be located at least 20km from any such facilities provided by Government.

Only few companies typically qualify for the rural investment allowance annually, for example, companies engaged in manufacturing or mining of solid minerals in remote locations requiring the provision of captive electricity and construction of industrial water plants. Therefore, the impact of the removal of this incentive on the affected companies would need to be evaluated individually. The decision to withdraw this investment may also be due to the intervention program with respect to Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme launched in 2019.

The other amendments to the CITA are analysed on an industry basis as follows:

2.2.1. Shipping and air transport companies

Finance Act, 2020 had amended the requirements for filing CIT by non-resident companies (NRCs) to include fully audited financial statements of the NRCs' operations in Nigeria duly attested by an independent and qualified/ certified accountant in Nigeria. In consideration for the peculiarities of the shipping and air transport industries, FA 2023 has introduced an alternative requirement for international shipping and air transport companies that fail to provide audited financial statements when filing their CIT. These companies will be required to submit a comprehensive gross revenue statement of their Nigerian operations for the specified period, endorsed by a director of the company and an external auditor and supported with all invoices issued to relevant customers.

FA 2023 also introduced a new Section 14(6) to the CIT Act. This section mandates regulatory agencies to request evidence of income tax filing and tax clearance certificates from shipping and air transport companies before processing and granting business approvals and permits or allowing them to continue to carry on business in Nigeria. The objective of the amendment is to ensure that shipping and air transport companies fulfil their tax obligations by filing income tax returns and obtaining tax clearance certificates. These requirements will help to promote tax compliance within these sectors.

2.2.2. Taxation of tourist income received by Hotellersi

Foreign currency income earned by hotels from tourists would no longer be exempted from income tax. Previously, twenty-five percent (25%) of such foreign currency income was exempted from tax if the amount was set aside in a dedicated/ reserve fund and used for expansion of the physical infrastructure of the business within five (5) years.

The implication of the above is that any balance in such dedicated/ reserve fund currently held by any hotel must be fully utilised within the next 5 years. Otherwise, such balance would be subject to income tax at the appropriate rate.

2.2.3. Unrestricted capital allowance claim by companies in the Oil and Gas sector

Previously, the CITA only permitted agricultural and manufacturing companies to claim all available capital allowances against their assessable profits. However, the Finance Act, 2023 has introduced an amendment to this provision. The amendment now allows companies involved in upstream and midstream gas operations to fully offset their capital allowances against their assessable profits in view of the provisions of the Petroleum Industry Act (PIA) 2021. This change aims to provide parity and equal treatment for companies engaged in any process by which a commodity is produced, recognizing the importance of the sector and its contribution to the Nigerian economy.

2.3. Personal Income Tax Act (PITA), Cap P8 Laws of the Federation (LFN), 2004 (as amended)

Finance Act, 2021 sought to prevent abuse of life insurance premiums by amending Section 33(3) of the PITA to disallow tax deduction of premiums paid or payable on contract for deferred annuity taken up by an individual. However, following this amendment, the contract for deferred annuity became unattractive and negatively impacted interest in such contracts.

Consequently, FA 2023 has reintroduced the previously repealed provision, thereby allowing as deduction for tax, the premiums paid or payable on contract for deferred annuities. However, the tax-deductible premiums are restricted to premiums with a minimum of five (5) year holding period. This implies that any portion of the deferred annuity that is withdrawn before the end of the five (5) year holding period shall be subject to tax at the point of withdrawal. This provision is similar to the provisions applicable to voluntary contributions under the Pension Reform Act (PRA).

2.4. Petroleum Profits Tax Act (PPTA) Cap C4. LFN, 2004 (as mended)

The Finance Act provides the following modifications to the PPT Act:

  1. Treatment of decommissioning and abandonment contribution by an upstream company to a fund, scheme or arrangement approved by the Nigerian Upstream Petroleum Regulatory Commission as allowable deduction for PPT purposes subject to the provision of a Statement of Account of the fund.

  2. Revision of the basis for determination of the chargeable crude oil price under the PPT Act to the fiscal oil price per barrel. Where there is no fiscal price for a crude stream, Nigerian Upstream Petroleum Regulatory Commission (NUPRC) shall establish a fiscal price based on a fair and reasonable relationship to the established fiscal oil price of Nigerian crude oil streams of comparable quality and specific gravity; or where there is no Nigerian crude oil streams of comparable quality and specific gravity, a fair and reasonable relationship to the official selling prices at main international trading centres for crude oil of comparable quality and gravity.

  3. Requirement for companies that are in pre-production phase to submit tax returns within 18 months from the date of incorporation for a new company, and 5 months after the year-end in other cases. This is to ensure uniform application of the tax laws with respect to submission of income tax returns to all sectors of the economy.

  4. Revision of the late filing penalty to ?10 million for the first day of default and ?2 million for each day that the default continues.

  5. Introduction of administrative penalty of ?10 million in the first month of default for non-compliance with the provisions of the PPT Act where no specific penalty is provided and a further ?2 million, or such sum as may be approved by the Minister of Finance, for each day the continues.

2.5. Tertiary Education Trust Fund (Establishment, etc.) Act

2.5.1. Increase in the rate of Tertiary Education Tax (TET)

Finance Act, 2021 increased the TET rate for companies, excluding small companies, from 2% to 2.5%. Finance Act, 2023 has further increased the rate to 3%. The increased TET rate will be applicable to the assessable profits of any company registered in Nigeria, except for small companies as defined in the CITA.

The hope is the additional tax from the increment will be used to provide the necessary funding required by Nigerian tertiary institutions to compete with their global counterparts.

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