The Bill seeks to promote fiscal equity, align domestic laws with global best practices and support Micro, Small and Medium-sized businesses. Other objectives include increasing government revenues and stakeholder investments in investment/capital market through the introduction of incentives.
The Finance Bill, 2019 (the Bill), presented alongside the 2020 Appropriation Bill to a joint session of the National Assembly on 8 October, 2019 by President Muhammadu Buhari, has been passed by the Senate. Submission of a "finance bill" or fiscal legislation with the budget/Appropriation Bill is not new in Nigeria as past military regimes had, during budget pronouncements, amended various tax laws.
The Bill is an omnibus draft legislation, aimed at curing the deficiencies of major primary tax legislation by amending obsolete and contentious provisions. This is a major aspect of the initiatives suggested by the President Enabling Business Environment Council (PEBEC)1 and the National Tax Policy Implementation Committee.
This newsletter gives an overview of the Bill, analyses the key provisions vis-à-vis the changes to the primary taxing legislation, and highlights the potential tax implications for stakeholders. Other areas covered by this newsletter include implementation challenges, transitional arrangements and required actions by stakeholders.
1. Objectives of the Bill
In addition to setting the tone for Nigeria's fiscal policy for 2020, the Bill seeks to promote fiscal equity, align domestic laws with global best practices, and support Micro, Small and Medium-sized businesses.
Other major objectives of the Bill include increasing government revenues and stakeholder investments in investment/capital market through the introduction of incentives.
2. Analysis of proposed key changes and implications
- Companies Income Tax (CIT) Act:
- Wider base for taxing non-resident
The Bill introduces provisions that create a taxable presence for NRCs carrying on digital activities, consultancy, technical, management or professional services in Nigeria, provided that they have "significant economic presence" (SEP) in Nigeria; and profit can be attributable to such activity.
This provision is a welcome development as it seeks to ensure taxation of activities with an economic base in Nigeria; however, it raises issues for further consideration as described below:
- The Bill did not define what
constitutes SEP but gives the Minister of Finance (the Minister)
autonomous power to determine this by an Executive Order.
Without such Order, the ambiguity surrounding this provision remains. Nonetheless, the Minister may adapt the interpretation and factors for SEP stated in the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) reports to suit the peculiarities of the Nigerian tax landscape.
- The Bill did not define what constitutes SEP but gives the Minister of Finance (the Minister) autonomous power to determine this by an Executive Order.
- Deletion of certain inhibitive rules
for insurance companies
Under the proposed amendment, insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place.
Life and non-life businesses would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
Furthermore, "taxable investment income" would be limited to "income derived from the investment of shareholders' funds". This seeks to clarify taxable income and limits it to income accruing to the insurance company as against income accruing to the insurance fund.
Nonetheless, the Bill, when passed into law, would be a game-changer in ensuring the fair taxation of insurance companies.
- Exceptions to Excess Dividend Tax
Currently, where a company pays dividend in excess of its taxable profits, such dividend is subject to CIT at 30% – whether or not the income from which such dividend is paid had been taxed hitherto or whether the underlying income is altogether exempt from tax.
- Wider base for taxing non-resident companies (NRCs)
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