FIRS LAUNCHES ‘TAXPRO MAX’ FOR ONLINE RETURNS’ FILING AND PAYMENT OF TAXES
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?
Visit FIRS office to complete tax update form
Visit the TaxPro Max platform via https://taxpromax.firs.gov.ng and login with your user details, after which a dashboard will be displayed
Carry out a reconciliation of the outstanding withholding tax credit notes to be uploaded on the TaxPro Max
Carry out a reconciliation of losses and capital allowance carried forward to be uploaded on the TaxPro Max, so that these can be automatically available for utilisation.
Be mindful that downtime or technical glitches may occur towards the due date of filing. It is therefore imperative that payment of taxes in respect of the tax returns to be filed, should be done as early as possible and filing process initiated before the due date.
Regularly visit the TaxPro Max website to check for any correspondence or assessment that may have been raised and the due date for a valid response or payment already counting against the company.
Identified Shortcomings of TaxPro Max
The “TaxPro Max” is not yet configured for the filing of companies income tax returns for Insurance Companies and Upstream Oil & Gas Companies.
Some of the returns filing processes are repetitive and can be further compressed
The TaxPro Max platform recognises only Naira (NGN) as the reporting currency
There is no provision for correction or amending tax returns
The platform did not make provision for instalment payment.
Payment is expected to be completed within 24 hours after initiation of payment / generation of Remita Retrieval Reference (RRR) Number.
The platform does not generate any report for the user after completion of the filing process.
Adequate consideration not made for confidentiality and security of taxpayers’ information on the 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.
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FIRS PROVIDES CLARIFICATION ON TAXATION OF NON-GOVERNMENTAL ORGANISATIONS AND ISSUANCE OF TAX-DEDUCTIBLE CERTIFICATE FOR THE PURPOSE OF FIFTH SCHEDULE
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 defines an NGO as a not-for-profit association of persons incorporated as a company or incorporated trustees under CAMA, or under any other law in force in Nigeria, or registered under the laws of a foreign jurisdiction and approved as such in Nigeria. These NGOs include organisations engaged in ecclesiastical, charitable, benevolent, literary, scientific, social, cultural, sporting or educational activities of a public character.
The Circular reiterates that an NGO must be of public character as defined under Section 105 of CITA. Public character with respect to any organisation infers that such organisation is registered in accordance with the relevant laws in Nigeria, and does not distribute or share its profit in any manner to its members or promoters. Rather, their income is to be wholly applied for the objects of the organization or institution in the interest of the public. Furthermore, where there is a distribution of assets whether in cash or in kind for the personal use of its promoters or members, such distribution shall be construed as distribution of profit.
The Circular mandates all NGOs to register for tax purposes and obtain their Taxpayer Identification Number (TIN) at designated FIRS offices in their respective geo-political regions. The tax obligations of these entities as contained in the Circular include:
Filing of Income Tax Returns.
Liability to Companies Income Tax on profits from trade or business, or income from investment in revenue generating assets or businesses.
Obtain Tax Deductible Certificates so that donations made to the NGO will be allowed for deduction in the hand of donors, in line with Section 25 of CITA (as amended by Finance Act 2020). The procedure for obtaining this certificate has also been discussed in another circular released on the same date, and discussed in the next section.
Account for PAYE on income of individual promoters and employees (from all sources, including the NGO), fees, other remuneration or benefits-in-kinds paid to trustees and guarantors; and salaries or other remuneration of employees.
Capital Gains Tax on gains derived from the disposal of assets acquired in connection with any trade or business carried on by the institution.
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.
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Companies Income Tax (Exemption of Bonds and Short-Term Government Securities Order) 2011 – What Next after Ten Years?
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:
Short term Federal Government of Nigeria Securities, such as treasury bills and promissory notes.
Bonds issued by the Federal, State and Local governments and their agencies.
Bonds issued by corporate bodies and supra-nationals.
Interest earned by the holders of the Bonds and short term securities listed in 1-3 above.
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:
Corporate investors will be faced with varied investment decisions on whether to hold or dispose existing investments in these securities, for more viable alternatives, considering the impact on returns on investment. These investors include mostly banks and other financial institutions.
The ability to source financing via bond issuance by state & local governments, corporate entities, and supra-national entities will be affected.
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.
News
AfCFTA: Challenges to SME Scalability in Intra-Regional Trade in Nigeria
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.
News
Companies and Allied Matters Act 2020: Interactions with Extant Tax Provisions
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.
News
Finance Act 2020: What’s New?
January 27, 2021
The President has signed the Finance Act 2020 (“the Act”) into law on 31 December 2020. The Act aims at addressing tax as well as non-tax related issues whilst improving on the success of the Finance Act 2019 and correcting its shortcomings.
The Act amends fourteen (14) existing statutes – Capital Gains Tax Act, Companies Income Tax Act, Value Added Tax Act, Personal Income Tax Act, Tertiary Education Trust Fund (Establishment) Act, Industrial Development (Income Tax Relief) Act, Stamp Duties Act, Customs and Excise Tariff etc. (Consolidated) Act, Federal Inland Revenue Service Establishment Act, Nigeria Export Processing Zone Act, Oil and Gas Export Free Zone Act, Companies and Allied Matters Act, Fiscal Responsibility Act and Public Procurement Act.
Key Focus Areas
Companies Income Tax Act
1. Reduction of Minimum Tax
Minimum tax rate reduced from 0.5% to 0.25%, but only for 2020 and 2021 years of assessment, the old rate is reactivated thereafter. Minimum tax is now clearly to be computed on the accounting gross income but excluding franked investment income.
Comments: We believe there is an error in this provision as 2020 returns have been filed by all companies and the minimum tax was computed based on the provisions of the Finance Act 2019 at 0.5%. Therefore, the reduction in rate to 0.25% for two years, should be applicable to tax returns filed during 2021 and 2022 tax years. A further amendment to this provision in the not distant future is not unlikely, to accurately reflect the obvious intention of the drafters of the law.
2. COVID-19 Incentive
Donations made in cash or in-kind to the Government (Federal or State), or any government-designated fund in respect of a pandemic or natural disaster is now an allowable deduction, subject to a maximum of 10% of assessable profits, after deduction of other allowable donations made by the company.
Comments: The extra burden of having to provide documentary proof for this claim and the fact that any unutilized claim cannot be carried forward plus the restriction to 10% of assessable profit could render this incentive cumbersome and insignificant.
3. Tax Returns of Small and Medium Companies
Instead of audited accounts, the FIRS may specify by notice, an alternative form of accounts to be included in the tax returns filed by small and medium-sized companies.
4. Adoption of Electronic Processes
The Act allows for the use of electronic means to exchange correspondence between FIRS and the taxpayers. Also, the Tax Appeal Tribunal may now conduct its proceedings virtually.
Value Added Tax Act
1. Non-Resident Companies to obtain TIN
NRCs making taxable supplies in Nigeria are now required to obtain a Tax Identification Number (TIN) upon registration with FIRS and an NRC may appoint a representative for the purposes of its tax obligations in Nigeria.
2. No VAT on Buildings
The Act has clarified that buildings and interest therein are exempted from VAT. This also means that VAT will not be charged on rental or leasing of buildings, whether for residential or for commercial purposes. However, rights in other tangible and immovable assets are subject to VAT at the applicable rate. Services relating to immovable properties (including the services of agents, experts, engineers, architects, valuers, etc.) are liable to VAT
3. Expansion of VAT-Exempt Goods and Services
Commercial aircrafts, aircraft engines and spare parts as well as commercial airline tickets and lease of agricultural equipment for agricultural purposes now exempted from VAT. Also, animal feed now deemed as basic food item, and as such not subject to VAT.
4. Re-definition of VATable Supplies
Supplies in respect of goods re-defined to mean all forms of movable or immovable tangible properties, excluding land, building, money or securities. Services include those consumed by a person in Nigeria, whether rendered within or outside Nigeria, excluding services provided under a contract of employment.
In respect of incorporeal, taxable supplies include the exploitation, acquisition or assignment of rights by a person in Nigeria or where the incorporeal is connected with a tangible or immovable asset located in Nigeria.
Personal Income Tax Act (PITA)
1. Significant Economic Presence Rule for Individuals
An individual, executor, or trustee outside Nigeria and providing technical, management, consultancy or professional services to a person resident in Nigeria may be subject to tax in Nigeria to the extent that such individual, executor or trustee has significant economic presence in Nigeria. The Minister is to determine what constitutes SEP of a non-resident individual.
2. Exclusion of Minimum Wage Earners from Tax
People with an annual gross income of N360,000 or less are now exempted from payment of PAYE. However, their employers will still be required to file annual tax returns.
3. Gross Income for Personal Relief
The gross income for the purpose of calculating consolidated relief allowance (CRA) for personal income tax purpose is now redefined as income from all sources less all non-taxable income, income on which no further tax is payable and tax-exempt items.
Other Notable Changes
1. Introduction of the Electronic Money Transfer Levy (EMT Levy)
The ₦50 stamp duty previously payable on money transfers of sums over ₦10,000 has been scrapped, and as a substitute, an EMT Levy of ₦50 is now to be paid on every electronic transfer of at least ₦10,000. The revenue generated from the collection of the Levy is to be distributed between the Federal and State Governments at 15% and 85% respectively and on derivation basis to the States.
2. Treatment of Unclaimed Dividends and Dormant Accounts Balances
Unclaimed dividends in a listed company and unutilized amounts in a dormant bank account outstanding for 6 years or more are to be transferred to the Unclaimed Funds Trust Fund (UFTF), to serve as a perpetual trust. The UFTF is to be managed by the Debt Management Office and transferred dividends and amounts constitute a special debt owed by the Federal Government to the shareholders and dormant bank account holders respectively and shall be available for claim at any time, together with the yield thereon.
Failure by any company or any deposit money bank to transfer unclaimed dividends or dormant accounts balance into the UFTF shall attract a fine of not less than five times the value of the unclaimed dividends and unutilized funds plus accumulated interest on the amount not transferred at the CBN Monetary Policy Rate.
Unclaimed dividends in a private limited company outstanding for 12 years shall be distributed to other shareholders of the company.
3. Excise Duties on Telecommunication Services
Telecommunication services provided in Nigeria are now included in the scope of goods liable to excise duties. The duty payable shall be at rates to be prescribed by the President via an Order.
4. Capital Gains Tax on Compensation for Loss of Office
The Finance Act has clarified that only the excess of ₦10,000,000 paid as compensation for loss of office is subject to CGT whilst employers are now appointed as agents of collection and thus obligated to deduct and remit tax due to the relevant tax authority within the time specified under the PAYE Regulations pursuant to PITA.
5. Companies in Free Zones (Export Processing Zones and Oil and Gas Export Free Zones
Approved enterprises within free trade zones are now expected to render returns to the FIRS and comply generally with the provisions of Section 55(1) of CITA, as a condition to be tax exempt.
6. Pioneer Status for Primary Agricultural Production Companies
Small or medium-sized companies engaged in primary agricultural production, may now qualify for an initial tax-free period of four (4) years, renewable for an additional maximum period of two (2) years, subject to satisfactory performance.
7. Amendment of Excise Duties and Levy
Type of Vehicle
Old Rate
New Rate
Tractors (HS Headings 8701)
35% Duty
5% Duty
Motor Vehicles for the transport of more than 10 persons (HS Headings 8702)
35% Duty
10% Duty
Motor Vehicles for the transport of persons [cars] (HS Headings 8703)
30% Levy
5% Levy
Motor Vehicles for the Transport of Goods (HS Headings 8704)
35% Duty
10% Duty
We commend the Federal Government for the demonstrated commitment to continually review the tax laws via the Finance Acts as this will ensure that the laws are in tune with the times and that taxation plays the expected role in any modern economy.
News
FIRS GRANTS FURTHER TAX PALLIATIVES TO TAXPAYERS
November 12, 2020
The Federal Inland Revenue Service (FIRS) via a publication dated 4 November 2020 has granted further tax palliatives to taxpayers. This, as per the publication, is in a bid to ease the losses incurred from business disruptions that recently occurred following ENDSARS protests in different parts of the country.
This palliative involves extending the waiver window of penalty and interest for businesses which pay up the principal portion of their liabilities in full between now and 31 December 2020. These outstanding tax liabilities include those which have arisen from audits and investigations as well as self-assessments. Now, companies need not worry about the payment of penalties and interests so long as the tax liabilities are settled on or before 31 December 2020.
The earlier granted palliatives including the extension of monthly filing due date of VAT and WHT to month-end and allowing the payment of Naira where taxpayers are unable to source for Forex, are still available to taxpayers and may be enjoyed in addition to the extended waiver period.
It will be recalled that in order to cushion the effect of the Covid-19 pandemic, FIRS had earlier in the year, announced a similar waiver of penalties and interests for taxpayers which settled outstanding liabilities latest by 31 May 2020.
It is laudable that FIRS has further granted this concession in view of the current economic situation in the country further aggravated by the recent unrest and the resultant disruptions to businesses across the country. We encourage taxpayers to take advantage of this along with other palliative measures that have been put forward by FIRS.
News
TAX APPEAL TRIBUNAL (TAT) RULES THAT RENTAL INCOME DERIVED FROM COMMERCIAL AND RESIDENTIAL REAL PROPERTIES ARE VAT EXEMPT
September 21, 2020
On Thursday, 10 September 2020, the Tax Appeal Tribunal (“TAT”), Lagos Division delivered a judgment in a matter between Ess-ay Holdings Limited (“the Appellant”) and the Federal Inland Revenue Service (“FIRS” or “the Respondent”).
The matter bordered on the applicability of Value Added Tax (VAT) on rental income and whether the lease of a real property constitute a supply of goods or service, regardless of whether they are for commercial or residential purpose. The case also evaluated the validity of FIRS information circular subjecting lease of Commercial Property to VAT.
Highlights of the Case
The Appellant invests and engages in the development of real properties which are rented or leased to tenants for both commercial and residential purposes, in return for rental income. Following a tax audit carried out by FIRS, the rental income earned by the Appellant from its commercial tenants for 2014 to 2016 was subjected to VAT. The Appellant objected and filed an appeal against the FIRS’ decision refusing to amend the assessments in respect of the alleged tax liability for the 2014 – 2016 accounting years.
The Appellant alleged as follows:
i. FIRS subjecting its rental income to VAT is unlawful as it contradicts the provisions of the VAT Act Cap V1, LFN 2004 (VAT ACT).
ii. VAT is not a tax on returns on investments, such as rent, dividend and interest. Likewise, rental income is not derived from supply of goods and services.
iii. The VAT Act did not differentiate between commercial rental income and residential rental income, therefore, such distinction is illegal, null and void.
iv. An information circular cannot override or alter the provisions of the VAT Act.
On the other hand, FIRS argued that its information circular No. 9701 dated 1st January 1997 remains valid and rentals on commercial and residential real properties is vatable by the combined reading of sections 2 and 46 of the VAT Act, as it amounts to supply of goods. However, residential lease or tenancy is exempted under the VAT Act (Modification) Order of 2018.
The TAT held that:
i. VAT is charged and payable on transactions and not on the consideration paid on the transaction. Consideration is only relevant to determine the amount to be paid as VAT.
ii. Due to the nature of real properties, they are not moveable and therefore cannot be classified as goods.
iii. Transfer of interest in real properties does not amount to rendering of service. A lessor or a landlord in a lease or tenancy arrangement is not rendering any service to the lessee/tenant, he only transfers his right to the exclusive possession of the property, for a defined period of time.
iv. Lease of real properties whether for commercial or residential purpose, does not amount to supply of goods or services. This is simply a transfer of incorporeal property right to the tenant and therefore not liable to VAT. This decision was supported with the earlier judgement on CNOOC vs FIRS on a similar matter.
v. Information Circular does not constitute a regulation within the meaning of the VAT Act. Amendment to the Schedule of the VAT Act cannot be done through an information circular, it must be by way of Regulations made by the appropriate authority, in this case, the Minister for Finance.
vi. However, the decision of the Federal High Court in Registered Trustees of Hotel Owners and Managers Association of Lagos (HOMAL) Vs AG Federation is valid. The Tribunal reiterated that the National Assembly cannot donate its power of legislation to anybody, not even its own Committee, and section 1(2) of the Taxes and Levies (Approved List for Collection) Act (similar to section 38 of the VAT Act) which gave the Minister of Finance the power to amend the Act is in breach of the doctrine of separation of powers and therefore null and void.
Our Thoughts
Value Added Tax is chargeable on supply of goods and services other than those listed in the first schedule to the VAT Act. The Act defines supply of goods or service but is silent on what constitutes goods or services. This has resulted in the evident ambiguity in this case.
While there may be divergent opinions regarding this judgement, we agree with the reasoning of the TAT that rental of real properties whether for commercial or residential purpose does not amount to supply of goods or services (but can be deemed to be incorporeal property right), especially as there was no clear definition in the VAT Act on what constitute goods and services, prior to the 2019 Finance Act. Tax laws should be unambiguous and clear to all parties.
This gap has however been made good by the Finance Act, which amended the VAT Act. The definition of goods has now included any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land. Going by this definition, transfer of rights or interest in incorporeal properties now fall within the definition of goods and therefore liable to VAT at the appropriate rate.
Notwithstanding the outcome of this judgement, tax payers, especially those involved in the business of renting or leasing of real properties, should note that, even though this decision seems favorable, it will however not hold water going forward, given the new definition of “goods” in the VAT Act as amended by the Finance Act 2019, which became effective in February 2020.
Also noteworthy is the contradicting decision of the Tribunal sitting in Benin in the case of Chief JW Ellah, Sons & Company Ltd. V FIRS (Chief JW Ellah case). The Tribunal in JW Ellah case made a distinction between commercial and residential buildings, and held that a charge, fee, rent or any other consideration payable on commercial buildings are subject to VAT, whereas charge, fee, rent or any other consideration payable on domestic or residential building are not VATable. Given that the TAT in Chief Ellah case and the case under review are of concurrent jurisdiction, the two decisions remain valid until a decision from a court of higher jurisdiction and the controversial issue of VAT on rental income from real property may subsist.
We do expect that FIRS will appeal this judgement and whatever is the outcome of such appeal will only have effect on periods before February 2020. In the event that subsequent appeals end in the taxpayer’s favour, it may also be impracticable to seek refund for VAT already paid to FIRS on rental income for previous years.
News
COMPANIES AND ALLIED MATTERS ACT 2019: A NEW DAWN FOR ADMINISTRATION OF COMPANIES IN NIGERIA
August 10, 2020
The President of the Federal Republic of Nigeria has on Friday 7 August 2020 signed into law, the Companies and Allied Matters Act 2019 (CAMA 2019). The CAMA 2019 has now repealed and replaced the erstwhile CAMA CAP C20 LFN 2004 which has been in operation since 1990, as some of its provisions have become obsolete and no longer in tune with current realities.
The new law, which has been undergoing legislative work since 2018, has finally been brought to the fore and it is expected that relevant stakeholders are up to speed on its implementation. Although its commencement date is excluded, it is envisaged that the CAMA 2019 is effective from the date it was assented to by the President, except where a new date is provided in the gazette.
Some of the highlights of CAMA 2019 include:
1. Approval of Single-Member/Shareholder Companies – Section 18(2)
One person may now form and incorporate a private company by complying with requirements applicable to private companies. This amendment enhances the ease of doing business in Nigeria particularly with regards to start-ups and small companies, as the inherent entrepreneurial spirit of Nigerians is being further encouraged.
2. Introduction of Limited Liability Partnerships and Limited Partnerships – Parts C and D
New business vehicles – limited liability partnerships and limited partnerships – have now been introduced as valid corporate entities for carrying on business in Nigeria. The dynamics of these vehicles including but not limited to the formation, liability of the partners, limitation of liability, contributions, financial disclosures, transfer of partnership rights, and so on have been elucidated in the new law.
3. Restriction on Multiple Directorship – Section 307(1)
A person is now prohibited from being a director of more than five (5) public companies at a time. This prohibition applies solely to the directorship of a public company, the contravention of which is considered an offence under the law.
4. Replacement of ‘Authorized Share Capital’ with ‘Minimum Share Capital’ and Increase in Value – Section 27(2)
The CAMA 2019 has expunged the concept of authorized share capital and replaced same with minimum share capital so as to alleviate the incidental burden of payment for shares which are not needed at a specific period. However, the minimum share capital has been increased to N100,000 and N2,000,000 for private and public companies respectively in order to align with present realities.
5. Provision for Electronic Share Transfers, E-Filings, and Notice of Meetings – Sections 176, 860 and 244
The new law has confirmed the veracity of electronic documents to be at par with original copies. Thus, companies may now validly transfer shares via electronic instruments. Also, any document required to be filed with the Corporate Affairs Commission (CAC) for registration may be filed electronically.
6. Definition of a Small Company – Section 394(3)
A small company is now defined as a private company which in any year satisfies the following qualifying requirements:
i. a maximum turnover of N120,000,000, or such other amount as may be fixed by the CAC;
ii. a net assets value of not more than N60,000,000, or such other amount as CAC may determine;
iii. has no alien as member;
iv. none of its members is a government, government corporation or agency or its nominee; and
v. where it has a share capital, the directors hold at least 51% of its equity share capital.
A company qualifies as small in relation to its first financial year if the requirements are met in that year, and in relation to a subsequent financial year if the requirements are met and/or qualifies as small in that year and in the preceding financial year.
7. Exemption from the Appointment of an Auditor – Section 402
Small companies and single-shareholder companies no longer have an obligation to appoint auditors at their Annual General Meetings to audit the financial records of the company.
8. Exemption from the Appointment of Company Secretary – Section 330
Appointing a company secretary has become optional for private companies, as a small company may choose not to appoint a secretary. Nonetheless, every public company is required to appoint a secretary not later than 6 months after the commencement of the new law.
9. Introduction of Statement of Compliance – Section 40
The CAMA 2019 has introduced the Statement of Compliance to be signed by an applicant or his agent certifying that the requirements of the law with regards to registration have been complied with, and such Statement shall be sufficient evidence of compliance.
10. Merger of Incorporated Trustees – Section 849
The new law allows for two or more associations with similar aims and objects to merge under conditions as the CAC may prescribe from time to time.
Our Comments
The enactment of the CAMA 2019 is a welcome development, the implementation of which will impact positively on companies and stakeholders alike. The timing is most commendable as the new-normal around the globe has necessitated the review of previous practices cutting across different spheres including administration of companies. As developed jurisdictions have attempted to cushion the effect of the current pandemic on companies by relaxing previously stringent rules, it is laudable that Nigeria is towing this path by the introduction of virtual and electronic processes.
By and large, the CAMA 2019 is a long-awaited legislation, and it is expected that the CAC issues clarification guidelines where it is observed that there are any ambiguities which may impede its smooth application.
We shall provide a more detailed review of the new law in our upcoming series, especially how the various changes in CAMA 2019 will alter some provisions of the tax laws and other regulatory requirements.
News
THE COURT DECIDES: LUMP SUM PAYMENT OF 25% TO RETIREES ABOVE 50 YEARS BY PENSION FUND ADMINISTRATORS UNLAWFUL
August 3, 2020
Background
The National Industrial Court, sitting in the Abuja Judicial Division has ruled in Maroof Giwa (“the Claimant”) v. ARM Pension Managers (“ARM”) & National Pensions Commission that the 25% lump sum payment to retirees over 50 years of age by Pension Fund Administrators is unlawful based on the provision of Section 7 of the Pension Reform Act 2014 (PRA).
The Claimant had requested for 50% of the total sum of his retirement savings from ARM, the request of which the latter rejected and insisted on a maximum withdrawal of 25% of total savings and relied on Section 7(2) of the PRA. In its defense, ARM averred that allowing a 50% withdrawal will open the floodgates thereby permitting other holders of Retirement Savings Accounts (RSAs) to demand varying percentages of their savings outside the provisions of the law.
The Court in its ruling disagreed with both ARM and National Pensions Commission and ruled that the restriction imposed under Section 7(2) does not apply to a retiree who is above 50 years of age.
Our Comments
The provision of the law is clear with regards to withdrawal from an RSA. Section 7(2) which provides for the 25% threshold applies only to employees who voluntarily retire, disengage, or are disengaged from employment. On the other hand, retirees who do not fall under the aforementioned categories, or persons who have attained 50 years of age (which is latter), are allowed by the provisions of Section 7(1) to withdraw a lump sum from the total amount credited to their RSAs. The only condition attached is that the amount left after such withdrawal must be sufficient to cover further programmed fund withdrawals or payments for life.
Similarly, Section 7(1)(b) provides that withdrawals may be programmed to be made periodically and calculated on the basis of an expected life span. The report of the WHO which puts the life expectancy of the Nigerian male person at 54.7 years buttresses the provisions of the PRA which allows a person over 50 years old access to withdrawal without restriction.
Thus, we align with the decision of the Honourable Court in the instant case as the claimant does not fall under the scope purposed by Section 7(2) of the PRA. It is expected that the practice of capping withdrawals from RSAs at 25% will now be challenged on the strength of this decision. Save for voluntary retirement and disengagement from employment, retirees may withdraw sums in excess of 25% of the total sum, subject to the laid down conditions.
