July 8, 2021
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July 2, 2021
The Tax Appeal Tribunal (TAT) sitting in Lagos, recently delivered a judgment in a matter between Kenya Airways (“the Company”) v Federal Inland Revenue Service (“the Revenue”). The crux of the matter was the tax assessment of companies engaged in air transport, based on the provisions of Section 14 of the Companies Income Tax Act, Cap C21, LFN, 2004 (CITA) and the Public Notice issued by the Revenue in 2015.
Highlights of the Case
The Company, engaged in air transport, was incorporated in Nigeria in 1998, and prior to 2015, has been subject to income tax at the minimum rate of 2% of the full sum recoverable in respect of carriage of passengers, livestock and goods loaded into an aircraft in Nigeria. The Company has also obtained tax clearance certificates for these years. In 2015, the Revenue issued a Public Notice mandating all non-resident companies to file their annual income tax returns pursuant to Section 55 of CITA. Premised on this, the Revenue audited the Company for 2009-2014 tax years, and issued additional income tax assessments, based on 6% of the Company’s turnover.
The Company objected to the assessments issued by the Revenue, stating amongst other things that, it had paid its taxes and obtained tax clearance certificates for the years, based on the provisions of section 14(4) of CITA. This was followed by a Notice of Refusal to Amend (NORA) from the Revenue, which resulted in the Company filing an appeal at the TAT on the grounds that:
In its response, the Revenue maintained that it reserved the right to not amend an assessment despite receiving objection(s) from taxpayers. Thus, the Revenue did not fail nor neglect to consider the Company’s objection but only responded with a NORA. Furthermore, the Revenue stated that it is empowered to assess the Company to tax under section 14(2) of CITA like any other company in Nigeria, and section 14(3) of CITA where applying section 14(2) of CITA is impracticable. With regards to VAT, the Revenue argued that by virtue of the provisions of Section 10(1) & (2) of the VAT Act, the Company has been brought into the VAT net, and all commissions paid by the Company to its agents for sales of tickets are liable to VAT.
TAT’s Decision
Upon hearing the arguments of both parties, the TAT held that:
An appeal operates as a temporary stay of payment of an assessment and does not extinguish the right to pay the assessment. Where an appeal succeeds, the tax liability alongside interest and penalty would be extinguished. However, should the appeal fail, the tax liabilities, interest and penalty become payable from the due date.
Our Comments
The bone of contention in the instant appeal is the application of Section 14 of CITA which relates to the taxation of companies engaged in air and shipping transport. This section provides for three (3) different approaches to which an air transport company may be assessed to tax viz:
The Revenue had adopted the third approach by using a fair and reasonable percentage. In practice, 20% of the total sum receivable in Nigeria is often deemed as the profit upon which the relevant tax rate is applied, resulting in an effective tax rate of 6%.
Irrespective of this, in line with the position of the TAT, since the previous years have been assessed at 2%, the Company can legitimately expect that the period under review will also be assessed at the same rate. This is further supported by Section 14 which provides that the tax payable is not to be less than 2% of total sum receivable from the carriage of passengers, mails, livestock or goods in Nigeria, regardless of the method used.
In addition, VAT is expected to be deducted and remitted on all transactions which have not been expressly exempted under the First Schedule to the VAT Act. Non-resident companies are also required to issue VAT-inclusive invoices, and where this is not the case, the Nigerian entity who is the recipient of the service, is expected to self-account and remit the VAT due to the FIRS, in line with section 10 of the VAT Act.
We however observed a discrepancy in the ruling on VAT on agency commission, as the obligation to issue a tax invoice according to section 13(A) of the VAT Act, is that of the supplier of taxable goods and services, which in this case are the agents who rendered service to the Company for a commission. The obligation of the Company under this transaction would be to pay the invoice amount plus VAT to the agents, while the agents have the obligation to remit same to the tax authority and account for the VAT on the commission income.
For ease of doing business, the law permits the appointment of an agent in Nigeria to assist with VAT obligations of a non-resident company, where applicable. Similarly, WHT is expected to be deducted at 5% in the case of unincorporated entities, such as the agents of the Company, to which commissions are paid.
Finally, taxpayers must bear in mind that an ongoing appeal only puts penalty and interest in abeyance, the fate of which will be determined by the success or failure of the appeal. Where the latter is the case, penalty and interest will be calculated from the date the tax liability became due and payable.
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June 12, 2021
On 28 May 2021, the Tax Appeal Tribunal (TAT) South-South Zone, sitting in Benin, delivered a judgment in a matter between Ecobank Nig. Ltd (“the Bank”) v Delta State Board of Internal Revenue (“the Revenue”). The matter bordered on the legality or otherwise of the Revenue carrying out tax audit or investigation on tax payers beyond six (6) years, without establishing a case of fraud, wilful default or neglect, on the part of the taxpayer.
Highlights of the Case
The Revenue via a demand notice dated 28 October 2019, issued a Best of Judgment (BOJ) assessment on the Bank, as additional PAYE tax liability for an 11-year period, spanning 2000 to 2010. The Bank objected on the ground that no case of fraud, wilful default nor neglect has been established against it by the Revenue, and as such, cannot carry out an audit or investigation beyond the statutorily recognised six-year period. The Bank further buttressed that since equity aids the vigilant and not the indolent, waiting twenty (20) years to raise an additional assessment was a clear case of acquiescence on the part of the Revenue.
In its response, the Revenue maintained that it reserved the right to conduct a tax investigation beyond the six-year period, further to the provisions of Section 55(1) of PITA, if it is discovered that a taxpayer is fraudulent, or has neglected or wilfully defaulted on his tax obligations. The Revenue argued that a discovery has been made through her Intelligence and Enforcement Unit, that the Bank had wilfully defaulted and neglected to disclose the income of its employees according to the law, hence the need to carry out the tax investigation.
TAT’s Decision
Upon hearing the arguments of both parties, the TAT held that:
Our Comments
There have been diverse judgments on the interpretation and application of Section 55(2) of PITA. Worthy of note is the recent case of Polaris Bank v. Abia State Board of Internal Revenue where the decision of the Tribunal which was initially granted in favour of Polaris Bank, was upturned by the Federal High Court.
The TAT in this case has reiterated that there has to be an end to raising additional tax assessments on tax payers in respect of the same tax years. This is not intended to go on in perpetuity. To trigger a tax investigation, the tax authority must have established that there was fraud, willful default or neglect committed by the taxpayer. This has to be established with proof and not based on speculations or assumptions.
Finally, since equity will not aide the indolent, the tax authority should ensure that tax audit exercises are carried out within the prescribed period. Only when there is evidence of fraud, willful default or neglect on the part of the taxpayers, can there be a tax investigation. We do align with the reasoning of the TAT in this case and until this judgment is appealed, it remains binding on both taxpayers and tax authorities.
May 28, 2021
Since the introduction of Transfer Pricing (TP) Regulation 2012 in Nigeria and its amendment via the Income Tax (Transfer Pricing) Regulation in 2018, Nigeria has only conducted a few TP audits. However, starting from the last quarter of 2020 till date, FIRS has issued quite a few TP letters to not just multinational entities (MNEs) but also, local entities with connected persons. This increases the number of potential TP audits in the coming months.
Nigeria does not currently have a threshold for TP reviews/audits, as all entities with connected persons regardless of size and jurisdiction of the entities, are subjected to the same level of compliance obligation.
The tax authority has been aggressive in its attempt to enforce the provisions of the 2018 TP Regulations and imposing the stiff penalties enshrined in the TP Regulations on defaulters. The recent increase in the request for the TP documentations and proof of transactions can be seen as a means to further drive compliance with the documentation requirement of the TP Regulations and to ensure that entities pay fair taxes on the profits generated from Nigeria. This initial request along with the TP returns filed by the company is usually reviewed and used as a basis of the TP risk assessment. This review might eventually lead to a full-blown TP audit, depending on the conclusions drawn by FIRS from the review.
It is therefore important for taxpayers to ensure they re-assess and review their controlled transactions in readiness for a possible TP audit. In this article, we have discussed some considerations and critical steps to be adopted by affected entities in this regard.
Need to Maintain a Contemporaneous TP Documentation
It is important to mention that a letter from the tax authority does not necessary equate to a TP audit. However, this is usually the first step taken by the tax authority to perform a risk assessment on the taxpayer. The TP documentation requested by FIRS, along with the previously submitted TP returns serve as one of the major bases for the tax authority to ascertain whether a taxpayer has complied with the TP Regulations or not.
The Regulation in summary, requires that all transactions with any connected person be done at arm’s length (i.e., as the transaction would have been if it were with an independent person) and any such method used in arriving at such pricing be properly documented to justify the pricing of the transactions that had occurred.
The first step in readiness for a TP audit is to ensure that all transactions have been properly priced. This step cannot be overemphasized, as it is one of the major bases for determining the risk level of a taxpayer. The TP Regulations require taxpayers to keep contemporaneous documentation that confirms that its transactions with related entities align with the arm’s length principle.
Given the above, MNEs or local entities with connected parties should ensure that a TP Policy establishing methods for pricing of transactions has been developed in setting the prices of all transactions within the Group. Where the pricing had been established by the parent company of a multinational outside Nigeria, it is important that this pricing regime is strictly followed and adopted by the local entity, provided that it aligns with the guidelines issued by the Organisation for Economic Cooperation and Development (OECD) and Nigerian TP Regulations.
Upon developing a TP Policy and setting the pricing, it is also critical to ensure proper implementation of the policy in conducting the transaction, as this cascades downwards into the annual TP documentation prepared to justify the transactions that had occurred in each year. Having a transfer pricing documentation that is prepared in line with the TP Regulations is the first step to proving that the connected transactions are consistent with the arm’s length principle. Please note that the onus of proof of compliance with the arm’s length principles is the sole responsibility of the taxpayer.
Regulation 16(4) of the TP Regulations expects this document to be in place prior to the due date for filing the income tax return for the year in which the documented transactions occurred. Therefore, taxpayers should ensure all documentation and support documents are available and ready for submission upon request from the tax authority. This will prevent the taxpayer from incurring the stiff penalties provided in the 2018 TP Regulations.
Other Important Documents to Maintain
Taxpayers should ensure that annual transfer pricing returns have been filed and that they are up to date. Regulations 13 and 14 of the Nigerian TP Regulations 2018, requires all connected persons to file their annual TP returns (disclosure forms and the declaration form) in an appropriate form. This annual TP return is one of the major requirements for any taxpayer in this category and non-compliance to this requirement attracts stringent administrative penalties.
A major issue that arises in a typical TP audit is the inability of a taxpayer to provide the adequate support documents needed to validate transactions that had occurred in the year. Therefore, the effort put into the development of a Policy and its implementation would have been wasted, if proper documentation of all necessary support and compliance documents to justify the transactions with related parties are not kept in a manner that they can be retrieved. Some of these important documents include contract / agreements, invoices, internal memos, financial statements, details of a third-party cost/pass-through cost, etc. Taxpayers should therefore ensure there is a proper system in place to document all necessary information that can support their claim in case of any TP audit exercise and these documents are readily available for submission upon request.
Transfer Pricing Risk Assessment – Health Check
This is an important step that should be considered by the taxpayer. It serves as an internal pre-audit evaluation to identify potential risk areas where there are gaps in the compliance requirements and in the pricing of transactions with connected persons.
The evaluation allows the taxpayer to consider its options and possible steps to mitigate any risk that might have been discovered during the risk assessment, including insight into the availability of necessary support documents or otherwise. This will also allow the taxpayer to evaluate the strength of the TP methods that have been adopted for specific transactions and proffer adjustments where necessary.
It is important to carry out TP risk assessment regularly, either internally or outsourced to a seasoned professional. It gives the taxpayer ample time to make necessary amends in the way it conducts its transactions or make necessary financial adjustments if required. Also, carrying out TP risk assessment can help a group entity neutralize the effect of TP adjustments.
In conclusion, given the recent drive of the tax authority to ensure compliance with the provisions of the TP Regulation, the continuous request for TP documentation is inexorable. However, the receipt of such letters does not necessary equate to a TP audit. It is just the first step taken by the tax authority to perform a risk assessment on the taxpayer.
Taxpayers should therefore take necessary actions to ensure their books are in order to avoid pitfalls, penalties and TP adjustments that may result from a TP audit.
May 25, 2021
Further to the provisions of the Finance Act 2020 and in line with the Federal Inland Revenue Service (FIRS) mandate to automate the tax administration system, the FIRS has recently launched a one-stop online platform – TaxPro Max.
On the platform, taxpayers will be able to file returns electronically, pay taxes online, get instant credit for withholding taxes deducted from their income, ascertain capital allowance carried forward, loss carried forward to be utilised for subsequent income tax returns, generate tax clearance certificates, respond to tax assessments raised, keep track of outstanding debt and communicate with the FIRS local tax offices on other tax matters.
What should Taxpayers do?
Identified Shortcomings of TaxPro Max
Our Comments
The introduction of the TaxPro Max is a laudable effort by the FIRS to ensure that taxpayers enjoy a seamless tax filing process and also ease compliance. Taxpayers in return are expected to get acquainted with the platform, to fully maximise the benefits.
In view of the imminent migration from the current manual tax returns filing to the full implementation of automated filing on the platform, there is need to allow for a transition phase, to ensure that the usual glitches associated with system integration is prevented. Implementation can also be done in batches according to the current local tax office groupings i.e Large Tax Offices (Non-oil), Medium Tax Offices, Micro & Small Tax Offices e.t.c.
To fully achieve the objective of introducing this platform, the FIRS must ensure that sufficient measures are put in place to ensure that concerns raised by users of the platform are promptly attended to and resolved. Some of the identified inadequacies like the exclusion of the insurance and upstream oil & gas companies from using the platform as well as the restriction of currency of filing to Naira, should be urgently addressed.
Overall, it is expected that this initiative, if properly managed, will improve tax compliance in Nigeria by reducing the related costs, time and inconvenience associated with manual returns filing.
May 10, 2021
The Federal Inland Revenue Service (FIRS) had on 31 March 2021 published a circular titled “Guidelines on the Tax Treatment of Non-Governmental Organisations” and another one titled “Requirements for Funds, Bodies or Institutions for Listing under the Fifth Schedule to CITA’”. These Circulars aim to clarify issues relating to the taxation of Non-Governmental Organisations (NGOs) in Nigeria and qualification as approved bodies for donation under the Fifth Schedule of CITA.
Highlights of the Circular on Taxation of NGOs
The circular also clarifies that while VAT on goods purchased by NGOs for use in humanitarian donor-funded projects is chargeable at zero rate, the NGO itself is not exempted from VAT. Also, that an NGO is liable to VAT where it consumes services, other than those exempted under the VAT Act.
Finally, the circular reminded that even though the NGOs are exempted from tax on their incomes, they are not exempted from the obligation to deduct WHT on payments to suppliers and contractors, as well as other qualifying payments, for remittance to the relevant tax authorities in the currency of transaction.
In a similar circular, The Federal Inland Revenue Service (FIRS) provided clarification on the procedure for listing under the 5th Schedule of Companies Income Tax Act Cap C21, LFN 2020 (CITA) by relevant entities.
Highlights of the Circular on Listing under Fifth Schedule of CITA
1. Section 25 of CITA provides the legal framework for Companies to make charitable donations, (which are tax deductible by the donor), to funds, bodies or institutions listed in the Fifth Schedule of CITA. Furthermore, Section 25(6) of CITA empowers the Minister to make amendments to the Fifth Schedule by an Order to be published in the Federal Gazette.
2. The general criterion for listing under the Fifth Schedule is for the fund, body or institution to be of public character, and the advantage of such listing is the tax deductibility of donations made by persons to these entities as enshrined under Section 25(2) and (3) of CITA. Also, listing under the fifth schedule will confer tax exemption status on such Funds, Bodies or Institutions.
3. The Circular further provides that an application in compliance with the checklist set out in Schedule 1 to the Regulations is to be made with a non-refundable payment of the sum of Two Hundred and Fifty Thousand Naira (₦250,000) to the FIRS.
4. A Tax-Deductible Certificate is to be issued, which shall be valid for 3 years in the first instance and renewable after every 3 years upon satisfactory performance at a fee of One Hundred and Fifty Thousand Naira (₦150,000).
5. The Circular also lists out the documents required for the issuance and renewal of the Certificate.
Our Comments
The Circular focusing on NGOs has elucidated the tax obligations of such organisations. It is expected that the clarifications would put to rest all misconceptions as to the requirements of these entities particularly, with the definition of public character contained in CITA and further reiterated in the Circular. Also, it is now clear that goods and services consumed by NGOs and not for use in humanitarian donor-funded projects are liable to VAT.
In the same vein, providing a guideline on issuance of Tax-Deductible Certificate will afford the donor entity the opportunity to deduct such expenses without any hassle, as well as confirm the tax exemption status of the donee entity.
April 27, 2021
Introduction
The Nigerian economy has for some years been burdened with the menace of deficit budgeting, which the government has often supplemented, using external and internal borrowings besides other measures. The internal borrowings have been largely via the issuance of government securities through the Central Bank of Nigeria. These include the Nigerian Treasury Bills, Treasury Certificates, Stocks and Bonds. This source of funding the budget is not peculiar to the Federal Government alone, but also applicable to State Governments as well as corporate entities that raise funds by issuing bonds to the public.
In order to encourage investment in these securities, the President in exercise of the powers conferred on him under Section 23 of CITA issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011. In the same year, the Personal Income Tax Act (PITA), 2011 was also amended, introducing similar tax exemptions for non-corporate entities. The Personal Income Tax amendment Act which has a commencement date of July 2011, exempts from income tax, incomes earned by individuals, partnerships, trusts and other non-corporate entities, on Bonds issued by the Federal, State and Local Governments, as well as those issued by corporate organisations and Supra-nationals.
The Companies Income Tax Exemption Order, 2011 which became effective in January 2012, provides the legal backing for the exemption from Companies Income Tax (CIT), the income earned from the following securities:
Matters Arising
While the tax exemption provided by the PITA does not have a time frame, the Companies Income Tax Exemption Order specifies a 10-year time limit, except on income earned by companies from Bonds issued by the Federal Government, which shall enjoy the tax exemption without limit.
By implication, effective January 2022, incomes accruing to companies on Bonds issued by corporate and supra-national bodies, State governments, Local government and their agencies shall be liable to Companies Income Tax at the prevailing rates as specified in CITA as well as Tertiary Education Tax at 2% for medium and large companies. Similarly, profits or gains arising from trading on short-term Federal Government securities such as treasury bills and promissory notes, e.t.c., will be liable to income tax. On the other hand, individual taxpayers and non-corporate entities shall continue to enjoy the tax exemption on incomes earned from these securities.
The disparity in tax treatment for corporate and non-corporate investors begs the question; will the expiry date of the Companies Income Tax Exemption Order 2011 be extended or a law enacted, to put both corporate and non-corporate investors on the same pedestal for tax purposes.
This uncertainty on the possibility of extension or otherwise creates the following challenges:
Conclusion
The tax incentives created by both the Exemption Order and the PITA 2011 amendment, have over the years boosted capital market activities, made investments in the securities more attractive and provided the issuers (including Federal Government) access to long and short-term funding. It is therefore pertinent for all corporate stakeholders, investors and issuers alike to consider the future business implications of investment in these securities, evaluate viability should the tax exemption not be extended and take timely action, as necessary.
Also, the Government needs to embark on some tax expenditure reporting, to assess the impact of the Tax Exemption Order on the Nigerian economy over the past 10 years, and issue a timely public statement on the likelihood of extending the Tax Exemption Order or otherwise.
February 15, 2021
Introduction
Small and medium scale enterprises (SMEs) are largely viewed as the engine wire of any nation’s economic growth and are regarded as justifiable means that propel development globally. SMEs are the key drivers to economic growth and poverty reduction which strengthen and enhances the development of Nigeria, as in several other economies.
Although SMEs have been regarded as the gold for employment and technological development in Nigeria, challenges encountered on an intra-regional trading scale hinders the sector with unsavory impacts on the economy. They include constrained access to financing, poor infrastructural facilities, multiplicity of regulatory agencies and overbearing operating environment, integrity and transparency problems, restricted market access, lack of skills in international trade, and bureaucracy.
With the implementation of the African Continental Free Trade Agreement (AfCFTA), the challenges posed by the Nigerian economy becomes conspicuous as SMEs will be unable to partake in benefits that this agreement bears if they are not resolved timely.
AfCFTA’s Facilitation
On January 1, 2021, the biggest trade area with a market of 1.2 billion people and a projected cumulative GDP of US$3.4 trillion since the creation of the World Trade Organisation (WTO) in 1995 after years of ambitious planning commenced with 54 countries aimed at providing great opportunities to enhance industrialization in Africa by removing tariffs on and other barriers to trade on goods and services as well as increasing intra-African investment.
While the establishment of the African Continental Free Trade Agreement is not the utmost goal but rather a means to an end towards actualizing Africa’s Agenda 2063 – The Africa We Want, it aims to; create a single and liberalized market for goods and services; contribute to the movement of capital and natural persons; promote sustainable and inclusive socio-economic development; expand intra-African trade and enhance competitiveness within the continent and the global market.
However, the current Nigerian market poses greater challenges in ensuring a successful intra-regional trade for businesses in her sphere. The key question that comes to mind is – “How Nigeria can resolve these challenges to ensure SMEs’ growth in the regional economies of Africa?”.
Current Limitations of AfCFTA to SMEs Growth in Nigeria
Inadequate infrastructure
One of the objectives of AfCFTA is to increase intra-African investments; the global competitiveness of firms and products will depend on having access to the most cost-effective services and products. This will create a need for significant volumes of investment in Nigeria as the intra-African investment will not be enough.
A massive and strategic investment in infrastructure is essential together with the harmonisation of regulations related to different sectors needed to foster trade. The latter can be achieved through mobilization of the country’s financial resources without increasing the risk of debt distress as well as designing relevant sectoral economic development strategies and industrial policies through learning from other successful regional economic systems.
Poor trade logistics
Reliable transport infrastructure is vital for businesses to be able to scale up production for regional export or to develop manufacturing bases. Poor logistics has been a major constraint in production which has led to local supply chain disruptions and overreliance on imports.
Investments in utility infrastructure will be an incentive for foreign companies to set up production facilities as investors need countries with a business enabling environment to easily transport goods to other African markets.
Volatile financial markets
Nigeria’s economy is plagued by volatile macroeconomic conditions as a result of poor infrastructure, access to capital, and increased contraction in GDP growth post-COVID era resulting in competitive devaluation and tariff barriers posing great danger to AfCFTA. As Africa emerges as a viable investment opportunity, there is a demand for timely, reliable, and competitively priced sourcing of currency. Unfortunately, for those investing in Nigeria, this demand has not yet driven supply as the currency is illiquid creating exchange rate volatility thereby increasing risks and reducing opportunities for investments in SMEs.
Cross-border payment settlements
Payment providers currently have difficulty providing services cross-border for several reasons. They include trade barriers manifested in form of discriminatory regulations, treatment of foreign providers, requirements for local incorporation, licensing, prohibitions on cross-border services or limitations on the movement of capital, as well as infrastructure barriers – difficulty in transmitting money from one country to another due to cross-border connection or the payments system in either country.
A more developed regional financial infrastructure can help facilitate further intraregional trade. This could include harmonizing regional payment systems to further facilitate cross-border payments; creating swap arrangements across central banks and a multicurrency clearing center to reduce risks from trading in different national currencies.
Onerous regulatory agreements
Nigeria, though haven come a long way still lacks effective regulations, as well as regulation stability, which could work against the benefits of AfCFTA. For the agreement to work, there should be flexible regulations that would aid trade such as reducing bottlenecks to ease of doing business. There should be an increased focus on the digitization of the Nigeria economy to enable the development and harmonization of a regulatory framework needed for integration. A legal and regulatory framework that enables quick digital transactions is vital for full participation in global digital trade.
Government needs to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows, at least, across the region, to allow for the efficient implementation of AfCFTA.
Freedom of movement of people
One of the numerous benefits of AfCFTA includes the essential protocol on the Free Movement of people as this is important for trade in services. Despite the effort of East Africa and West Africa sub-regions that introduced regional passports to aid the movement of people across each region, traveling between African countries can be very challenging for Africans.
Security threat poses one of the greatest obstacles to free movement as a result of limited or non-existent capabilities of the Countries to effectively differentiate ‘good’ from ‘bad’ mobility. A free movement regime requires better-resourced airports, border posts, significant work, and investment in border
Complex dispute settlement within Africa
While AfCTFA is a rule-based system, Nigeria has weak laws with the inability to protect small businesses against property rights, intellectual property theft, strong monopolies, and labour rights. The agreement is yet to determine how to settle disputes between private parties, the jurisdiction of legal proceedings, and the implementation of judgments. With diversity between the various regional economies communities (REC); the interplay between regional integration and national industrial policies is not always harmonious. Most African countries are part of more than one REC with them bound to their WTO commitments and treaties with external regions or countries (EU, USA, China, Canada) – this has probable potential of impeding the development of the AfCFTA (when national policy objectives conflict with regional integration goals, national objectives will be prioritized).
Inadequate arbitration measures and corruption tackling mechanisms will therefore deter the envisioned integration.
Conclusion
There have been recent interventions to reduce the impact of these challenges on the implementation of AfCFTA to SMEs. They include:
1. Afro-Champions initiative of a trillion-dollar investment framework towards AfCFTA, enabling projects between 2020 and 2030;
2. facilitation of a trade portal with Zenith Bank;
3. partnership with Standard Bank to provide US$1 billion Trade Finance Facility, aimed primarily at SMEs;
4. creation of an online trade barrier platform to enable African businesses play an active role in removing obstacles to continental trade, and;
5. development of a Pan-African payment and settlement platform by Africa Export-Import Bank to eliminate the need for transactions in a third currency.
The impact of the AfCFTA cannot be determined by government policies alone but also by how much the private sector leverages the abundant opportunities available in the free trade area in Africa. Policies implemented must minimize short-term adjustment costs in order to break entry barriers of small markets and establish a truly integrated continental market that maximizes gains from economies of scale. There is a therefore a need for the private sector to ensure the policy is not inimical to participating small businesses.
February 2, 2021
It is no longer news that the Companies and Allied Matters Act (CAMA) 2020 was signed into law in August 2020 by the President, further to significant changes in the economic and business world compared to when the law was enacted in 1990. The new CAMA is to ensure economic and business realities with the legislation governing the conduct of such businesses.
The CAMA 2020 has become effective from 1 January 2021 and it is expected that business owners, investors and other stakeholders adhere to its provisions which are primarily aimed at ensuring the ease of doing business and enhanced corporate governance structures in companies. Similarly, the Companies Regulations 2021 has been issued to give effect to the implementation of the CAMA 2020.
Although not a tax statute, some provisions of the CAMA 2020 have bearings on tax obligations and compliance processes and have consequently altered certain tax requirements.
This article highlights the possible interactions of CAMA 2020 with existing tax provisions.
1. Definition of Small Companies
CAMA 2020 classifies companies to small and others using a combination of different parameters, whereas CITA classifies companies on the basis of their turnover. Below are the classifications of companies under CAMA and CITA:
| CAMA Classification | CITA Classification |
| Section 394(3) of CAMA 2020 classifies a company as small if it satisfies ALL the following conditions: a. must be a private company; b. maximum turnover of ₦120million; c. maximum net assets value of ₦60million; d. has no foreign member; e. has no government membership; and directors must hold at least 51% of its share capital. | a. Small Company: Gross turnover of less than ₦25million b. Medium-sized Company: Gross turnover of more than ₦25million but less than ₦100million c. Large Company: Gross turnover of ₦100million and above |
These features of a small company under CAMA 2020 differ significantly from the tax classification of companies. The Finance Act 2019 (amending the Companies income Tax Act) introduced the classification of companies into small, medium and large for tax purposes. The variances in the basis of determining small companies under the CAMA and CITA have created ambiguities. For instance, while a company with a turnover of ₦110million qualifies as a large company under CITA for tax purposes, the same company may qualify as a small company under CAMA provided all other conditions are satisfied.
This contradiction transcends mere classification as it borders on the taxability of affected companies. Section 40 of CITA (as amended by the Finance Act 2019) prescribes varying tax rates for each class of companies. While profits of small companies are exempt from tax, medium-sized and large companies are taxed at 20% and 30% respectively. Again, companies which qualify as ‘small’ under CAMA may still be subject to tax at 20% or 30% since such companies are considered ‘medium’ or ‘large’ under CITA. Consequently, a company deemed ‘small’ by virtue of CAMA may not enjoy the tax incentives provided for small companies under CITA.
Therefore, a harmonization of what constitutes a small company in Nigeria under CAMA, CITA as well as other relevant laws and regulations is necessary to ensure uniformity and confidence of taxpayers and stakeholders and eliminate resultant conflicts.
2. Exemption of Small Companies from Appointment of Auditors
The effect of conflicting definitions of small companies under CITA and CAMA also impacts the required documents for the purpose of filing the company’s annual income tax returns.
Section 402 of CAMA 2020 exempts companies which are yet to commence business and small companies (by its definition) from appointing auditors to audit its account for the period. Conversely, in line with Section 55 of CITA, all companies (including small companies despite exemption from tax) are required to file annual self- assessment returns with the Federal Inland Revenue Service (FIRS) along with their audited financial statements amongst other documents.
Auspiciously, the Finance Act 2020, which became operational on 1 January 2021, has amended Section 55 of CITA, such that instead of audited accounts, FIRS may specify an alternative form of accounts to be included in the tax returns to be filed by small and medium -sized companies (by its definition). This amendment was precipitated by the exemption granted to small companies from appointing auditors.
Considering the provisions of CITA, all large companies are expected to file audited accounts with FIRS regardless of whether such company falls within the category of small company under CAMA. Also, in view of the amendment introduced by FA 2020, which grants FIRS the power to specify the form of accounts to be included in a tax return, small and medium sized companies can still be compelled by FIRS to prepare audited accounts for filing.
Notwithstanding the provisions of these laws, the credibility of a company is often enhanced by the existence of an independent auditor’s opinion as to whether the financial statements of a company represent a true and fair view of the financial position of such company. It is therefore pertinent that companies, regardless of size, consider the financial audit of accounts as this allows for transparency and ultimately boosts the confidence of users of the financial statements.
3. Taxation of Single-Shareholder Companies
CAMA 2020 now allows for the incorporation of single-shareholder private companies, thus modifying the erstwhile requirement for a minimum of two (2) persons to set up a company. This type of company enjoys the full benefits of a duly incorporated limited liability company including but not limited to having a separate legal personality, perpetual succession, and so on.
Section 108 of the Personal Income Tax Act (PITA) which deals with the taxation of persons other than companies defines ‘individual’ to include ‘a corporation sole’. What then constitutes a corporation sole? This is a legal entity consisting of a single incorporated office and occupied by a sole natural person.
In the light of Section 18(2) of CAMA 2020, which now permits single-shareholder companies, there is a tendency for a mix-up with corporation soles particularly in the determination of the appropriate taxing authority. While States’ Internal Revenue Services are responsible for taxing individuals, the FIRS is responsible for the collection of taxes from incorporated companies.
It is clear that a single-shareholder company has a separate legal personality and as such, is to be taxed according to the provisions of CITA. However, it is necessary that Section 108 of PITA is amended to expunge ‘corporation sole’ from the definition of individuals to avoid potential conflicts between taxing authorities and ensure clarity. This is however not to be confused with registered business names as these do not have the same legal status as single-shareholder companies and as such the proprietors of business names are to be taxed in line with the provisions of PITA.
4. Distributable Profits – Source of Dividends
Sections 426 & 427 of CAMA 2020 provide that dividends payable to shareholders are payable only out of the distributable profits of the company. Distributable profits have in turn been defined as the company’s accumulated realised profits which have not been previously utilised by distribution or capitalisation, less any accumulated realised losses which have not been previously written off in a reduction or reorganisation of capital.
On the other hand, Section 19 of CITA which deals with excess dividend tax makes provision for the payment of dividend from retained earnings, which could be either realised or unrealised profits. Following the provisions of CAMA 2020, it is expected that dividends are only paid out of the accumulated realised profits of the company.
5. Redeemable Preference Shares
Prior to now, it was permissible for a company to issue preference shares which could either be redeemable or irredeemable. However, pursuant to Section 147 of CAMA 2020, companies are now prohibited from issuing irredeemable preference shares to shareholders. That is, all issued preference shares must be redeemable.
This is expected to clarify the previously contentious treatment of returns on such irredeemable preference shares – either as interest which is a deductible expense for tax purposes, or as dividend which is non-deductible. Therefore, this contention is eliminated as all preference shares are to be deemed redeemable by the company. Hence, the returns on such preference share will be treated as interest and therefore allowable as a deductible expense.
6. Fixed Charge Holders to take Priority over Preferential Payments including Tax
A fixed charge is a debt secured against specific identifiable assets, which can subsequently be sold to repay the debt in an event of default. Section 207(4) of CAMA 2020 provides that the holder of a fixed charge is to have priority over other debts of the company including preferential debt. This is irrespective of provisions contained in the law or in any other law currently in force.
Preferential debts, one of which is all assessed taxes of the company, are to be paid in priority to all other debts. However, in line with Section 657(6), where it relates to settlement of claims in the winding up of a company, claims of secured creditors are to rank in priority to all other claims including any preferential payment and debts relating to the expenses of winding up.
Thus, where a company’s assets are insufficient for the purpose of settling all debts, statutory payments including tax and other employee deductions under relevant Acts may be abated, since the interest of secured creditors is to be considered first before preferential payments are made. This may cause a potential loss of revenue to the tax authorities where a company in liquidation is yet to fully settle its tax obligations prior to the commencement of an insolvency process.
7. Non-deductibility of Penalties under CAMA
A major feature of CAMA 2020 is the updated amounts of penalties to reflect current economic realities. While some are expressly contained in the law, the Corporate Affairs Commission (CAC) is to prescribe most of the penalties for any contravention of the provisions therein.
Following the provisions of Section 27 of CITA (as amended by Finance Acts 2019 & 2020), penalties prescribed by an Act of the National Assembly or by any Law of a State’s House of Assembly are treated as disallowable expenses for the purpose of ascertaining the profits of a company.
Consequently, any penalty or fine stipulated in CAMA 2020 or prescribed by the CAC for non-compliance with the law will not be allowed for deduction by a company for income tax purposes.
Conclusion
Again, the enactment of the CAMA 2020 is a step in the right direction considering the developments in the business environment particularly in the last decade, which is largely aimed at ensuring ease of doing business.
This article has highlighted areas in which the CAMA 2020 has interacted with extant tax provisions and obligations. It is expected that clarification guidelines are issued to ensure that administrators, investors, taxpayers and other stakeholders are conscious of their respective responsibilities, in order to avoid ambiguities which may act as a snag in the wheel of seamless implementation of the Act.