PwC Nigeria: Nigeria’s Finance Act Gets a Facelift to Attract Business and Investment

Author: Folajimi Akinla

Author: Folajimi Akinla

Earlier this year, Nigerian president Muhammadu Buhari signed the Finance Bill 2019 into law as the Finance Act of 2019 — the first amendment to the country’s tax laws since 1999.

The Act, which comprises 57 sections, seeks to amend seven major federal tax laws: the Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Value Added Tax Act (VATA), Customs and Excise Tariff (Consolidation) Act (CETA) and Stamp Duties Act (SDA).

The Act brings substantial changes to the tax landscape in Nigeria. Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination.

One of the core objectives of the Act is to bring the laws into line with the federal government’s policies and to generate short-term revenue to fund the 2020 Budget. It is expected that, as pre-1999, a finance bill will be passed annually.

Favourable tax regime for SMEs

The Act gives SMEs more favourable tax regimes. Under the old law all companies were subject to income tax at a single rate of 30 percent. The Act creates exemptions for SMEs with a gross turnover is less than NGN25m (£52,000), even though they are expected to file annual returns.

A medium-sized company is defined as one whose gross turnover exceeds NGN25m but is less than NGN100m (£210,000). Such companies are subject to income tax at the rate of 20 percent.

“Among other things, it seeks to protect the most vulnerable sectors of society, create favourable tax regimes for SMEs, and make Nigeria a more attractive business destination.”

The Act also introduces special regimes under the Value Added Tax (VAT) Act. Companies with a turnover of less than NGN25m do not have to register or charge VAT on their supplies. However, they are expected to pay VAT on their purchases.

Holding-company jurisdiction

Prior to the Act, there was a provision — section 19 — in the Companies Income Tax Act (CITA) that, in effect, penalised groups with Nigerian holding companies by subjecting them, in certain circumstances, to tax at the rate of at least 62 percent, instead of the standard rate of 30 percent.

Section 19 deems as profit any dividends paid by holding companies in excess of their total profits. The law then imposes an additional tax of 30 percent on such excess dividends as though they were profits. The provision is informally referred to as Excess Dividend Tax.

Given the nature of holding companies — which ordinarily do not carry out any business activities and by extension do not have taxable profits — such companies are often susceptible to the Excess Dividend Tax.

Besides holding companies, section 19 also had an adverse effect on companies which earned exempt income, and therefore had no taxable profits or taxable profits that were lower than the dividends they paid. It also affected companies that paid dividends from retained earnings where such dividends exceeded the companies’ taxable profits in the year the dividends were paid. Such companies were, in addition to income tax of 30 percent, also subject to Excess Dividend Tax at 30 percent on the excess of dividends over their taxable profits — even though the retained earnings from which the dividends were paid had been subject to tax in previous years.

Section 19 was seen as a disincentive to many multinationals considering holding companies in Nigeria. The loss of foreign investment caused by section 19 cannot be quantified. The section also prevented Nigerian companies from investing in their own country. The effect of Section 19 becomes even more onerous when one considers that dividends paid by multinationals and Nigerian companies were also subject to a withholding tax (WHT) of 10 percent or 7.5 percent (where the recipient is resident in a country that has a Double Tax Agreement with Nigeria) in the hands of the shareholders / investors.

The Act now provides that no additional tax is imposed on dividends that exceed total profits in any of these circumstances. That is, companies distributing excess dividends from retained earnings which had been taxed in prior years, exempt income and franked investment income would no longer suffer Excess Dividend Tax.

The result of the amendment is that, from a tax perspective, Nigeria becomes a more attractive destination for holding company structures.

Incentives for the real estate sector

Nigeria has a relatively youthful population of about 200 million people — and a housing deficit estimated at 20 million units. Only 100,000 housing units are developed each year. The major challenges to the real estate sector are difficulties in registering properties and obtaining construction permits, which in turn create obstacles to securitisation of property. It also increased the cost of investing in the sector.

These challenges are responsible for the significant amount of “dead” capital in the sector which — estimated to be in the region of $900bn. The luxury real estate market is estimated to hold between $230bn to $750bn in value, while the middle market carries between $60bn and $170bn in value.

Real estate investment companies (REICs), are arguably liable to corporate income tax at 30 percent of their profits and a further two percent Tertiary Education Tax (TET). In addition, distributions to shareholders could be liable to WHT at 10 percent. This is a deviation from the treatment of real estate investment trusts (REITs) globally as tax-neutral vehicles. The reason for the difference in practice is lack of specific provisions in the current tax laws. Under the old law, the tax treatment of an REIC made it unattractive to investors (although in practice, the FIRS sometimes did not strictly apply the law).

The difference in law, and in practise, creates inequity in the taxation of different REICs and uncertainty around using such a vehicle to attract investments in the real estate sector. The proposed changes to the taxation of REICs seek to align the tax treatments with global best practices.

Definition of an REIC

The Act defines an REIC as a company approved by the SEC to operate as a Real Estate Investment Scheme in Nigeria. The SEC rules have a clear definition of the scope and regulatory requirements for an REIC.

Dividends and income now exempt

The Act exempts dividend and rental income received by REICs on behalf of unit-holders from income tax, provided that a minimum of 75 percent of the dividend or rent earned is distributed within 12 months of the end of the financial year in which the income was earned. Should the REIC fail to distribute the dividend or rental income within the stipulated 12-month period, the income would be subject to income tax and TET. However, the Act does not exempt the income (such management fees, profits or any other income) of the REIC from income tax and TET.

As an additional safeguard, the Act treats dividends and mandatory distributions by REICs as tax-deductible expenses. This would not create a double dip since the Act also has a general rule that expenses would be tax deductible only to the extent that they relate to the production of taxable profit. Also, as mentioned earlier, dividends paid by REICs are excluded from the ambit of Excess Dividend tax.

Distributions to REICS to be exempt

Under the Act, dividends or distributions to a REIC would not be subject to WHT. Therefore, where a REIC is a shareholder in a company, the company must pay gross dividends to the REIC without deducting WHT. However, the Act assumes that the REIC would then be responsible for deducting WHT when distributions are made to its unit-holders. This ensures that there is only one layer of WHT on investments made through REICs and such taxes are remitted to the appropriate authorities especially for individual unitholders liable to State’s Internal Revenue Services.

The proposed tax changes are geared towards making REICs tax-transparent investment vehicles in respect of dividends and rental income, placing the obligation for tax on the respective shareholders subject to meeting the minimum distribution threshold and timing. This would make REICs even more attractive than REITs.

Taxation of profits

Before now, Nigerian tax laws did not recognise or impose any tax on income earned from regulated securities lending transactions, even though the Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) recognise and regulate transactions involving securities lending.

Typically, in a securities lending transaction, one party (“lender”), in exchange for collateral (cash or other security) transfers securities (stocks, shares) to another (“borrower”) through an agent (“lending agent”). It is expected that Lender and Borrower earn income (“compensating payments”) on the collateral and securities transferred.

The Act now expands the definition of “interests” and “dividends” to include compensating payments made by a lender to a borrower, and by a borrower to a lender, respectively. Prior to the amendment, there was little or no clarity on the taxation of such income. Now, profits arising from such transactions, other than the compensating payments, are now subject to tax.

Changes in VAT regime

One of the biggest and most discussed changes by the Act is the increase of the VAT rate from five percent to 7.5 percent. Since the introduction of VAT in Nigeria in 1993, the rate had remained at five percent until the recent amendment, making Nigeria one of the countries with the lowest VAT rates in the world. In Africa, the average rate ranges between 15 percent and 17.5 percent.

While there is some concern that the increase in the rate will result in a corresponding increase in the cost of living, the rate remains one of the lowest globally. On the flip side, it is expected that states’ income would increase given that they get the bulk of VAT revenue under a revenue-sharing formula. One of the arguments for an increase in VAT was to enable states meet their obligations under the recent increase in the national minimum wage.

The Act provides clarity to ambiguous provisions in the VAT Act, which now allow FIRS impose VAT on supply by non-residents of goods and services to Nigerian consumers even when the non-residents do not include VAT on their invoices. This procedure is usually referred to, in international VAT context, as reverse-charge mechanism.

Other amendments include introducing a list of basic food items which are VAT-exempt. To alleviate the increase in the VAT rate, a list of basic food items comprising 16 categories of over 150 basic food items was introduced. Under the old VAT Act, “basic food item” was not defined.

Dividends from Petroleum Tax profits

Before the advent of the Act, dividends arising from petroleum profits were exempt from any further tax, including withholding tax. The intention was to grant investors in the petroleum companies palliatives given the high tax rates (85 percent for Joint Venture arrangements, reduced to 65.75 percent for companies in their first five years of production, and 50 percent for Production Sharing Contract arrangements) under the Petroleum Profits Tax regime.

This exemption has now been deleted, with the effect that all dividends arising from petroleum profits would now be subject to WHT at the applicable rate: 10 percent or 7.5 percent if the recipient of dividend is resident in a country which has a Double Tax Agreement with Nigeria.

Digital economy significant economic presence

Generally, a non-resident company is only subject to tax in Nigeria if it has a fixed base (FB) in Nigeria and only the profits attributable to the fixed base would be taxable in Nigeria. Prior to the Act, a non-resident company would create a FB in Nigeria if it had a physical presence in Nigeria.

Non-resident companies providing services remotely to Nigerian consumers were not subject to Nigerian tax. However, they were subject to WHT of 10 percent or 7.5 percent (where the non-resident is resident of a country that has a Double Tax Agreement with Nigeria) on passive income (dividends, interest, rents and royalties) earned from Nigeria.

To address modern business realities, the Act proposes certain amendments.

Taxation of e-commerce activities

Under the Act, a non-resident company would be deemed to be taxable in Nigeria where it transmits, emits signals, sounds, or images by electronic or wireless means in respect of any e-commerce activity, provided it has a significant economic presence in Nigeria and profits are attributable to such activities.

The intention is to broaden the tax base by capturing profits arising from e-commerce that have previously escaped tax. It is expected that all non-resident companies earning income from advertising, marketing and social media platforms would be subject to tax on profits derived from such activities provided they have significant presence in Nigeria.

Remote provision of services

A non-resident company would be deemed to be taxable in Nigeria where it provides technical, management, consultancy or professional services to persons resident in Nigeria, provided it has a significant economic presence in the country and profits can be attributed to such activities. The amendment seeks to expand the tax base to capture activities where non-resident companies provide services to persons in Nigeria without being physically present in Nigeria.

New ministerial powers

The Act now gives the Finance Minister new powers to determine, by order, what constitutes “significant economic presence” in Nigeria for the purpose of subjecting non-residents to tax. This gives the minister the discretion and flexibility to define (and redefine) the term to reflect changing business and economic circumstances.


The Act is a step in the right direction. It is expected that there will be annual Finance Acts to address outdated provisions and create revenue streams to implement annual budgets. To achieve the ultimate ends — making Nigeria a more attractive place for business and investment — the Act must be complemented by other actions.

Citizens demand more accountability and transparency from public officers on how the Budget is implemented, and how tax revenue and resources are allocated. Government officials must earn the people’s trust as stewards of Nigeria’s resources. There is also room for improvement in areas of tax administration, the judicial system, security, respect for freedom of expression, and other fundamental rights.

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