Non-Resident Foreign Companies doing Business in Nigeria must now Register for VAT in Nigeria

A Review of the Nigerian Finance Act 2021:

On 31 December 2021, the Nigerian President signed the Finance Act 2021 (the Act) into law. The Act came into effect on 1 January 2022. The Act amends various tax laws in Nigeria such as the Capital Gains Tax Act, the Companies Income Tax Act, the Customs, Excise Tariffs, Etc. (Consolidation) Act, the Federal Inland Revenue Service (Establishment) Act, Personal Income Tax, Insurance Act, etc.

In this article, we consider the recent changes which were brought in by the Act, aimed mostly at bringing relevant laws in conformity with the Nigerian Government reforms and policies.

Capital Gains Tax Act

Disposal of Shares in Nigerian Companies: The Act has now introduced chargeable Capital Gains for any disposal by any person of Shares in any Nigerian registered Company. The following exceptions however apply:

1. where the proceeds from the disposal are reinvested within the same year of assessment in the acquisition of shares in the same or in another Nigerian company. Note however that any portion not reinvested shall be taxable;
2. where the disposal is less than N100 million in any 12 consecutive months. Where this happens, the person disposing the Shares will be required to render appropriate returns to the Federal Inland Revenue Service (FIRS); or
3. where the shares are transferred between an approved borrower and lender in a regulated Securities Lending Transaction as defined under the Companies Income Tax Act (CITA).

The rate of tax on disposal of shares is 10% payable in the case of individuals, in accordance with the provisions of Personal Income Tax Act while for a company, it is to be paid to the FIRS.

Companies Income Tax Act

• The determination of adjusted profit of related Companies: The Federal Inland Revenue Service Board is now responsible for determining the adjusted profit of related companies where it is of the opinion that the commercial/financial relations are fictitious or artificial for the purpose of taxation. This was previously the responsibility of the Federal Inland Revenue Service (FIRS) only and did not involve the Board.
• Exemption from taxation: All dividends received from investments in wholly export-oriented businesses are now exempted from taxation.
• The exemption on profits of exported goods whose proceeds are used to purchase raw materials, plant, equipment and spare parts have now been streamlined to Nigerian companies operating in any of the Nigerian Petroleum Sector. Prior to this Act, it related to any Nigerian company.
• FIRS power to charge tax on the turnover of non-Nigerian Information Technology (IT) Companies:  The Act now empowers the FIRS to assess and charge non-Nigerian IT companies to the extent of their economic significant presence in Nigeria for that year of assessment on such fair and reasonable percentage of that part of the turnover attributable to that presence. This includes e-commerce stores, online payment platforms, application stores, such as companies owned by Facebook, Twitter, Ali Express, YouTube, etc.
• Allowable deductions from profits of a company in a year of assessment: Qualifying capital expenditure incurred in generating the assessable profit are now to be allowed as deductions for the purpose of ascertaining taxable profits of a company. However, a company that enjoys pioneer status under the Industrial Development (Income Tax Relief) Act cannot benefit from this deduction. An asset partially utilized to generate assessable profit will qualify for a pro-rated capital allowance where the proportion of non-taxable income is above 20% of the company’s total income.
• Extension of the accounting period to which the reduction of minimum tax payable applies: The accounting period to which the reduction of minimum tax payable (0.25%) applies has now been extended to include any two accounting period as may be determined by the tax payer that falls between 1^st January 2019 – 31^st December 2021. This extension, however, seems to apply where a company has filed its relevant tax returns for any year of assessment falling on any date between 1^st January 2020 – 31^st December 2021 (inclusive of both dates).
• Exemption from Incentives for companies engaged in Downstream Gas Utilization. These companies are now exempt from benefitting from the 3-year tax-free period which is renewable for an additional two-year period for companies engaged in Downstream Gas Utilization:

1. Companies that have claimed the incentive previously;
2. A company that has claimed any other incentive for trade or business in gas utilization under any Nigerian law including the Petroleum Profit Tax Act or the Industrial Development (Income Tax Relief) Act; and
3. A new company formed from a company restructured through buy-back, reorganization etc. that had previously benefitted from the incentive.

• Penalty for late filing: Henceforth any company that claims the minimum tax payment relief and fails to file its returns with the FIRS as appropriate shall be liable to pay as penalty for late filing, an amount equal to the relief sought. The implication of this is that such a company will be deemed to forfeit the said relief.

• Payment of undisputed tax: Where tax assessed by the FIRS is in dispute, the taxpayer is required to pay only the disputed tax.
• Payment of tax in installments: Taxpayers making payment in installment are no longer mandated to obtain an approval from the FIRS to make such payments.

• Taxation of the recipient of a Unit Trust Payment: The tax due from the recipient of a Unit Trust payment is now subject to withholding tax. The implication is that the withholding tax would be final tax in respect of such payment.

• Refund of tax payment made in excess: Excess payment arising from compliance with deduction of tax from interest, rent, dividend and at source over the assessment made by the FIRS is now to be refunded within 90 days of the assessment if duly filed with the option to set off against future taxes.

• Taxable dividends in a Regulated Securities Lending Transaction (RSLT): The taxable dividends in a RSLT has been generalized to include compensating payments received by a lender from its approved agent or borrower. Previously, it only applied where the underlying transaction giving rise to the compensating payment is a receipt of dividends by a borrower on any shares or securities received from its approved agent or a lender.

Customs, Excise Tariffs, Etc. (Consolidation) Act

Excise duty on non-alcoholic, carbonated and sweetened beverages: The Act empowers the Nigerian Customs Service to impose and collect an excise of N10 per liter on non-alcoholic, carbonated and sweetened beverages.

Federal Inland Revenue Service (Establishment) Act

• Administrative penalty for failure: Failure by any taxpayer to give access to the FIRS after the 30 days’ notice or any extended time is liable to an administrative penalty of N25,000 for each day that it fails to grant access.

Personal Income Tax Act

• Deduction of premium: The Finance Act makes provision for the allowance of the deduction of the annual amount of premium paid by an individual for life insurance for his own life or that of his spouse. The premium allowed to be deducted is the amount of premium paid in the preceding year before the year of assessment of the individual.
• Increment and removal of distinction of penalty charges: Section 47 of the Personal Income Tax Act states the duty of a person engaging in banking to make disclosure upon a 7 days’ notice from a relevant tax authority not below the rank of a Senior Manager or Grade Level 14 or equivalent. The penalty charges for the contravention of section 47 of the Act has been increased to N1,000,000. This was previously N500,000 penalty in the case of a corporate body and N50,000 in the case of an individual. This distinction of penalty charges has now been removed.

Tertiary Education Trust Fund (Establishment, etc.) Act

Increment of tax rate: Except for small companies, the profits of companies registered in Nigeria is now subject to a 2.5% tax deduction which is an increment from the previous 2% payable.

Value Added Tax Act

• Tax registration by non-resident persons: A non-resident person who make taxable supplies to Nigeria is required to register for tax with FIRS and obtain a Tax Identification Number (TIN).
• Inclusion of VAT on invoices: A non-resident person is obligated to include value added tax (VAT) on its invoice for all taxable supplies.
• Withholding tax by taxable persons: Taxable persons to whom taxable supplies are made are required to withhold or collect the tax and remit it to the FIRS. Ordinarily, taxable persons to whom taxable supplies have been made are not required to withhold VAT unless the appointed representative of the FIRS has failed to collect the VAT.
• Appointment of representative by a non-resident person: A non-resident person that makes taxable supply to Nigeria may also appoint a representative for the purpose of complying with its tax obligations.

Conclusion

The Finance Act 2021 has made some significant changes to the Nigerian tax laws. It has introduced a tax on non-alcohol carbonated drinks, it has also introduced taxes on non-resident IT companies with significant presence in Nigeria. In addition, it has introduced the charging of VAT by non-resident foreign companies doing business in Nigeria. This is a key piece of legislation that would drive the Nigerian government’s fiscal policies in 2022 and it will be interesting to see how the collection of taxes on non-resident IT companies in Nigeria is to be policed.

Please note that the contents of this article are for general guidance on the Subject Matter. It is NOT legal advice.

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