INTRODUCTION

The Finance Act 2020 introduces changes to the Companies Income Tax Act, Value Added Tax Act, Petroleum Profits Tax Act, Personal Income Tax Act, Capital Gains Tax Act, Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act. Having now been passed by both arms of the National Assembly, and thereafter assented to by the President, its provisions have come into force in 2020 calendar year together with the Budget and the Appropriation Act that was signed by the President in December 2019.[1]

The amendments are intended to raise necessary revenue required to provide for public expenditure, support sustainable increase in public revenue, ensure that tax law provisions are consistent with the national tax policy objectives of the Federal Government of Nigeria, promote fiscal equity, reform domestic tax laws in order for those laws to align with global best practice, support small and medium-sized businesses and introduce tax incentives for investment in infrastructure and capital markets.[2]  

This paper contains a detailed analysis of some of the amendments as contained in the Finance Act and the expected effect of these changes on tax administration, revenue generation and businesses operating in various sectors of the economy.  The analysis focuses more on the effect of the changes made by the Finance Act on the following various sectors: Financial Services sector; Oil and Gas sector; Consumer Markets and Infrastructure sector; Business Re-organization and Digital Economy sector.

1.      Amendments under Company Income Tax Act (CITA) 
Section 13 of Company Income Tax Act provides under the Nigeria companies that[3]:

    (1) �The profits of a Nigerian company shall be deemed to accrue in Nigeria wherever they have arisen and whether or not they have been brought into or received in Nigeria. 

    (2) The profits of a company other than a Nigeria company from any trade or business shall be deemed to be derived from Nigeria; 

        (a) if that company has a fixed base in Nigeria to the extent that the profit is attributable to the fixed base.
        (b)    if it does not have a fixed base in Nigeria but habitually operate a trade or business through a person in Nigeria authorized to conclude                 contracts on its behalf or on behalf of some other companies controlled by it or which have controlling interest in it or habitually maintains a                 stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company to the extent that the                 profit is attributable to business or trade or activities carried on through that person.
        (c) if that trade or business or activities involve a single contract for surveys, deliveries, installations or construction; the profit from that contract.
        (d)   where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it                 and conditions are made or imposed between that company and such persons in their commercial or financial relations which in the opinion of                 the board is deemed to be artificial or fictitious, so much of the profits adjusted by the board to reflect arm s length transaction.

    (3) for the purposes of subsection 2 of this section a fixed base shall not include facilities used solely for the

        (a)  storage or display of goods or merchandise.  
        (b)    facilities used solely for the collection of information. 

However, the new Finance Act 2020, made the following amendments under the section 13 of the CITA: 

(a)  In subsection (2), the Act inserted after the word �from� in line 2, the words, �or taxable in�.  It inserted after paragraph (b), a new paragraph �(c)� which reads as follows �(If it transmits, emits or receives signals, sounds, messages, or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity)��, and renumbered the subsection appropriately- 

(b) The Act inserted after paragraph �(d)�, a new paragraph �(e) � (f)� which reads as follows �(If the or business comprises the furnishing of technical, management, consultancy or professional services outside Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria:

Provided that the withholding tax applicable to income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection (2) (a)-(e))�.   

(c)  The Act also inserted a new subsection �(4)� �(For the purpose of subsection (2) (c) and (e), the Minister may by order, determine what constitutes the significant economic presence of a company other than a Nigerian company)�.[4]

Section 19 of Company Income Tax Act[5] provides that:

�Where a dividend is paid out as profit on which no tax payable due to �

(a) no total profits or

(b)    total profits which are less than the amount of dividend which is paid whether or not the recipient of the dividend is a Nigerian company is paid by a Nigerian company paying the dividend shall be charged to tax at the rate prescribed in subsection 1 of section 40 of this Act as if the dividend is the total profits of the company for the year of assessment to which the accounts out of which the dividend is declared relates.�

The Finance Act has however made the following amendments under the S. 19 of the CITA:

(a)  It inserted a new subsection �(2)� � �(The provisions of subsection (1) shall not apply to-

(a)  dividends paid out of the retained earnings of a company, provided that the dividends are paid out of that profits that have been subjected to tax under this Act, the Petroleum Profits Tax Act, or the Capital Gains Act;

(b) dividends paid out of profit that are exempted from income tax by any provision of this Act, the Industrial Development (Income Tax Relief) Act, the Petroleum Profits Tax Act, or the Capital Gains Act or any other Legislation;

(c)  profits or income of a company that are regarded as franked investment income under this Act; and

(d) distributions made by a real estate investment company to its shareholders, from rental income and dividend income received on behalf of those shareholders,

whether such dividends are paid out of profits of previous reporting periods)�

(b) It also renumbered the sections appropriately.[6]

Section 23 of the CITA[7] provides under the Profits Exempted that:

(1)  �There shall exempt from the tax �

(a) the profits of any company being a statutory or registered friendly society, in so far as such profits are not derived from a trade or business carried on by such society;

(b)     the profits of any company being a co-operative society registered under any enactment or law relating to co-operative societies, not being profits from any trade or business carried on by that company other than co-operative activities solely carried out with its members or from any share or other interest possessed by that company in a trade or business in Nigeria carried on by some other persons or authority;

(c) the profits of any company engaged in ecclesiastical, charitable or education activities of a public character in so far such profits are not derived from a trade or business carried on by such company;

(d)     the profits of any company formed for the purpose of promoting sporting activities where such profits are wholly expendable for such purpose, subject to such conditions the Board may prescribe;

(e) the profits of any company being a trade union registered under the Trade Unions Act in so far as such profits are not derived from a trade or business carried on by such trade union;

(f)  dividend distributed by Unit Trust.

(g)the profits of any company being a body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;

(h)     the profits of anybody corporate being a purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria from the purchase and sale (whether for the purposes of export or otherwise) of that commodity;

(i)   the profits of any company or any corporation established by the law of a State for the purpose of fostering the economic development of that State, not being profits derived from any trade or business carried on by that corporation or from any share or other interest possessed by that corporation in a trade or business in Nigeria carried on by some other person or authority;

(j)   any profits of a company other than a Nigerian company which, but for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria;

(k) dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels. For the purpose of this subsection, "Government approved channels", means the Central Bank of Nigeria, any bank or other corporate body appointed by the Minister as authorized dealer under the Foreign Exchange (Monitoring and Miscellaneous) Act or any enactment replacing that Act;

(l)   The interest on deposit accounts of a foreign non-resident company: provided that the deposits into the account are transfers wholly of foreign currencies to Nigeria on or after 1st January 1990 through Government approved channels;

(m)  The interest on foreign currency domiciliary account in Nigeria accruing on or after 1st January 1990.

(n)      nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78,79 or 80 of this Act, such that the provisions of sections 78,79 or 80 of this Act, shall apply to a dividend, interest, rent or royalty which is a part of the profits or income referred to in subsections (1) (a) to (f) and (1) (h) to (l) of this section.

(o) dividend received from small companies in the manufacturing sector in the first five years of their operation;

(p)      dividend received from investments in wholly export oriented businesses;

(q)      the profits of any Nigerian company in respect of goods exported from Nigeria provided that the proceeds from such export are repatriated to Nigeria and are used exclusively for the purchase of raw materials, plant, equipment and spare parts;

(r)  the profits of a company whose supplies are exclusively inputs to the manufacturing of products for export provided that the exporter shall give a certificate of purchase of the inputs of the exportable goods to the seller of the supplies power to exempt.�

The Finance Act made the following amendments under this S. 23(1) of CITA:

(a)  In subsection (1) � it deleted paragraph (n), and substituted it for paragraphs (o) and (q). The new paragraphs �(o) and (q)� read as follows:

�(o) the profits of a small company in a relevant year of assessment, provided that - (i) such company shall without prejudice to this exemption, comply with the tax registration and tax return filing stipulations of this Act and be subject to the provisions as regards time of filing, penalties for breach of statutory duties and all other provisions of this Act in all aspect during the periods which its profits are below the tax paying threshold, or

(ii) they are dividends received from small companies in the manufacturing sector in the first five years of their operations;

(q) the profit of any Nigerian company in respect of goods exported from Nigeria, if the proceeds of such export are used for the purchase of raw materials, plant equipment and spare parts:

Provided that tax shall accrue proportionately on the portion of such proceeds which are not utilized in the manner prescribed)�.

The Act inserted after paragraph (r) new paragraphs �(s) � (u)� which also read as follows:

(s) �the dividend and the rental income received a the real estate investment company on behalf of its shareholders provided that � (i)   a minimum of 75% of dividend and rental income is distributed, and (ii) such distribution is made within 12 months of the end of financial year in which the dividend or rental income was earned�

(t)  the compensating payments, which qualify as dividends under section 9 (1) (c) of this Act, received by a lender from its approved agents or borrower I a regulated securities Lending Transactions, such payment are deemed to be franked investment income and shall not be subjected to further tax in the hands of the lender.

(u)    the compensating payments, which qualify as dividends or interest under section 9 (1) (c) of this Act, received by an approved agent from a borrower or lender on behalf of a lender or borrower in a Regulated Securities Lending Transaction�);

The Act also inserted after subsection (1) new subsections �(1A)� � �(1C)� which reads as follow: 

�(1A) Nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78, 79 or 80 of this Act shall apply to dividend, interest, rent or royalty paid by a company exempted from tax under subsection (1) (a) to (c), (h) to (l), (o), (q), (r) and (t).

(1B) Nothing in this section shall be construed to exempt- (a) shareholders from tax on dividend or rental income received from a real estate investment company, (b) a real estate investment from tax on management fee, profit or any other income earned for and its own account, and (c) a real estate investment from tax on dividend and rental income that is not distributed after 12 months from the end of financial year in which the dividend or the rental income was earned.

(1C) Any company engaged in agricultural production shall be granted the following incentives in addition to other incentives in this Act - (a) an initial tax period of five years which may be subject to satisfactory performance of agricultural production, be renewed for an additional maximum period of three years, and (b) such company cannot be granted similar incentive under any other Act in Nigeria.�[8]

Section 81 (2) & (7) of the CITA[9] provides under the Deduction of tax at source that:

�(2) Any such direction may apply to any person or class of persons specified in such direction, either with respect to all companies or a company or class of companies, liable to payment of income tax.

(7) The Minister of Finance on the advice of the Board may make Regulations for the carrying out of the provisions of this section.�

Here the new Finance Act made changes only in sections 2 and 7 of CITA:

(a)  In subsection (2), it inserted a �proviso� after the word, �tax� in line 3: �(Provided that in case of road, bridges, building and power plant construction contract, the rate shall not exceed two and a half percent)� and

(b) It inserted after subsection (7), a new subsection �(8)� which reads as follow:

�(The provisions of this section shall not apply to compensating payments made under a Registered Securities Lending Transaction)�.[10]

Amendment under Stamp Duty Act

Section 2 of the Stamp Duty Act[11] provides under the Interpretation of the following words; �Stamp�, �Stamped� and �Instrument�, that:

"Instrument� includes every written document;

�Stamp� means as well a stamp impressed by means of a die as an adhesive stamp for denoting any duty or fee;

�Stamped� with reference to instruments and material, applies as well to instruments and material impressed with stamps by means of a die as to instrument and material having adhesive stamps affixed thereto;�

However, in the new Finance Act, the section 2 is amended by substituting for the definition of the words, �Stamp�, �Stamped� and �Instrument� with the following new definitions �

�Stamp� means an impressed pattern or mark by means of an engraved or inked block die as an adhesive stamp or an electronic stamp or an electronic acknowledgment for denoting any duty or fee;

�Stamped� with reference to instruments and materials applies to instruments and material impressed with stamps by means of an engraved or inked block die, adhesive stamps affixed thereto as well as to instruments and material digitally tagged with electronic stamp or notional stamp on an electronic receipt; and

�Instrument� includes every written document and electronic documents.�

Section 89 of the Stamp Duties Act[12] provides under the receipt that:

�89. (1) For the purposes of this Act, the expression "receipt" includes any note, memorandum, or writing whereby any money amounting to four naira or upwards, or any bill of exchange or promissory note for money amounting to four naira or upwards, is acknowledged or expressed to have been received or deposited or paid, or whereby any debt or demand, or any part of a debt or demand, of the amount of four naira or upwards, is acknowledged to have been settled, satisfied, or discharged, or which signifies or imports any such acknowledgement, and whether the same is or is not signed with the name of any person.

(2) The duty upon a receipt may be denoted by an adhesive stamp which is to be cancelled by the person by whom the receipt is given before he delivers it out of his hands.�

The Finance Act has however substituted the section 89 with a new section 89, adding some subsections in it which includes:

�89 (1) For the purpose of this Act, the expression �receipt� includes any note, memorandum, writing or electronic inscription whereby any money or any bill of exchange or promissory note for money is acknowledged or expressed to have been received or deposited or paid, or whereby any debt or demand, or any part of a debt or demand is acknowledged to have been settled, satisfied, or discharged, or which signifies or imports any such acknowledgement, and whether the same is or is not signed with the name of any person.

(2)    The duty upon a receipt may be denoted by an adhesive stamp which is to be cancelled by the person by whom the receipt is given before he delivers it out of his hands or by a digital tag with electronic stamp or any acknowledgment of duty charged on an electronic transaction.

(3)   Notwithstanding the provisions of the Stamp Duties Act, electronic receipt or electronic transfer for money deposited in any bank or with any banker, on any type of account, to be accounted for and expressed to be received of the person to whom the same is to be accounted for of amounts from N10, 000.00 upwards shall attract a singular and one off duty of the sum of N50.00.  Provided that money paid into one�s own account or transferred electronically between accounts of the same owner by the owner within the same bank shall not be chargeable for duty.

(4)   Any duty paid under subsections (1) to (3) shall be applied as credit against any duty applicable on an instrument denoted with an adhesive stamp.�[13]

3.     Amendment Under Petroleum Profit Tax Act

Section 60 Petroleum Profit Tax Act[14] provides under the �Restrictions on effect of the Personal Income Tax Act and other Acts� that:

�No tax shall be charged under the provisions of the Personal Income Tax Act or any other Act in respect of any income or dividends paid out of any profits which are taken into account, under the provisions of this Act, in the calculation of the amount of any chargeable profits upon which tax is charged, assessed and paid under the provisions of this Act.�

This section 60 has however been deleted by the new Finance Act 2020.

4.    Amendments Under Value Added Tax Act

The amended Section 4 of the Value Added Tax Act increases the rate of VAT from 5% to 7.5%.  The intent of Nigeria�s National Tax Policy was to rely on both direct and indirect tax for economic growth, which amounted to an increase in the rate of VAT. The rate increase is expected to increase significantly, the revenue realized from Value Added Tax[15].

The new Section 8 of the Value Added Tax Act provides punitive penalties for non-compliance with the need to register with FIRS for the purpose of the tax. Such defaulter will be liable to pay the sum of N50, 000 in the first month and N25, 000 in the subsequent months. The increase in the penalties for non-compliance will bring about prompt payment of tax by taxable persons.

Section 8(3) of the Value Added Tax Act introduces the need of a taxable person to notify the FIRS of his intention to deregister for tax, where such person ceases to carry on business in Nigeria.

The newly inserted Sections 14 (3) and (4) of the Value Added Tax Act excludes a non-resident company from registering for VAT in Nigeria and mandates a Nigerian customer to self-account for tax payable where the NRC fails to issue an invoice on which no tax is charged. This is a form of incentive for foreign investors to invest in the Nigerian economy.

The new Section 15 of the Value Added Tax Act introduces a threshold of N25, 000,000 for micro and small enterprises, exempting companies with an annual turnover of N25, 000,000 or less from registering for tax, charging the tax, rendering a monthly return of its sales and purchases and from penalties for non-compliance by the virtue of Section 8(2), 13, 29, 34 and 35 of the Value Added Tax Act.

This provision is to water down the economic impact, the increase in the VAT rate might have on small companies and to bring about economic development through small enterprises. The amendment results in the reduction in the cost of tax administration by the Federal Inland Revenue Service, as it can now focus its compliance monitoring efforts on large companies[16].

The new Section 10 of the Value Added Tax Act imposes on Non-resident companies that carry on business in Nigeria, the obligation to register for tax with FIRS. This provision will generate more revenue for the Nigerian economy.

The First Schedule of the Value Added Tax inserts a new paragraph 10 for the purpose of widening the scope of items exempted from Value Added Tax. These items include; locally manufactured sanitary towels, pads or tampons, services rendered by microfinance bands and mortgage institutions and nursery, primary, secondary and tertiary education.

Section 28 of the Value Added Tax Act was completely substituted for a new one to include the definition of �goods and services.� Goods[17] means,

�all forms of moveable tangible properties, 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 excluding interest in land.�

Initially, the Value Added Tax Act did not define �goods�. As a result, the term �goods� was limited to tangible goods not exempted under the First Schedule to the Act. In addition, incorporeal property was declared not to be subject to VAT by tax payers on the grounds that such properties did not constitute �goods & services� as provided by the erstwhile provisions of the VAT Act.

The new provisions of the Value Added Tax Act has been amended in favour of the Federal Inland Revenue Service which suffices to mean that, incorporeal properties such as rights, patents, trademarks, royalty, etc. are now subject to Value Added Tax.[18]

5.    Amendment under Personal Income Tax Act (PITA)

Section 28 of the Finance Act 2020 amended section 49(1) of the Personal Income Tax Act.  It provides that,

�a person engaged in banking shall require that a person intending to open a bank account for the purposes of the person�s business operations shall provide a tax identification number as a precondition for opening or continue operating of such bank account.�

In other words, every person is expected to provide a Tax Identification Number as a condition precedent to open a bank account or to have access to a continued operation of his bank account in relation to its business operations[19]. The Tax Identification Number is a number issued to individuals and organizations to track tax obligations and payments they make to the Government[20]. Providing a Tax Identification Number will enable the Federal Inland Revenue Service track taxable persons in the habit of evading tax. This will also bring about a level of organization and efficiency in the administration of their statutory duties.

Section 25 of the Finance Act 2020, amends section 2(2), 49(1), 86(2), 102(1) and 108 (f) of the Personal Income Tax Act by substituting, �Federal Board of Inland Revenue� for �Federal Inland Revenue Service.� This amendment provides one acknowledged nomenclature for the body in charge of tax regulation in Nigeria.

Section 29 of the Finance Act 2020 amends section 58 of the Personal Income Tax Act. The erstwhile Section 58 of PITA stated that a taxable person could only object to a notice of assessment in writing. The Finance Act now includes other means by which a taxable person may object to include courier service or via electronic mail.

This is a welcome development, as the new method provided by the Act brings about convenience and ease in going about some procedures in Nigeria.

The provisions of Sections 34(4) (5) and (6) of the Personal Income Tax Act, granting children and dependent relatives allowance have been deleted by section 27 of the Finance Act 2020. The amendment seeks to resolve the controversies surrounding the entitlement of chargeable persons to children and dependent relative allowances in addition to the consolidated relief allowance granted under the PITA.

Section 26 of the Finance Act amends section 20(1) of PITA by providing a new paragraph (g). This amendment strips the Federal Inland Revenue Service off the powers to grant an approval to taxable persons to claim contributions made to a pension and other retirement benefits fund as a tax-deductible expense[21].

6.     Amendments under Capital Gains Tax (CGT) Act Cap C1, Laws of the Federation of Nigeria (LFN), 2004 (CGTA)

The Finance Act substitutes for section 32 of the Capital Gains Tax Act (CGT) Act, a new section 32, providing that assets transferred during business reorganisation within a group of companies are exempted from Capital Gain Tax. However, the Law also adds that;

�No tax shall apply under this act to the sale or transfer of the assets to the extent that one company has control over the other or both are controlled by some other person or members of a recognised group of companies and have been so for a consecutive period of at least 365 days, prior to the date of reorganisation.�

Thus, the new provisions of the Capital Gains Tax Act only recognizes companies as being a part of a group, only if such company has been a member of that group for a period not less than 365 days prior to the date or reorganisation. In addition to this, where the acquiring company makes a subsequent disposal of the assets acquired within the 365 days after the date of transaction, the tax exemption enjoyed will be rescinded[22].

The impact of the above is the inability of companies to form a short term group relationship, claiming �business reorganisation� for the sole purpose of benefitting from the tax exemptions[23].

The Capital Gains Tax Act imposes tax at the rate of 10% on any capital sum received as compensation for loss of employment. But by the virtue of the Finance Act which amends section 36(2) of the CGT Act, any capital sum of N10 million or less, received as compensation for loss of employment is exempted from the Capital Gains Tax. This amendment serves as a form of termination benefit[24].

From the foregoing analysis, it is apparent that there have been increases here and there, but most of them are not without incentives to encourage citizens to pay taxes. The goal of the Finance Act is to increase the revenue of the Government and to promote fiscal equity. One cannot deny the necessity of the above as there is a need to take care of the pressing needs of the nation. The level of insecurity in the country calls for financial investments in the security sector, to acquire mercenaries in combating the perpetrators of this crime. Following this need, is the 84billion dollars debt the country is currently in, the change in the tax laws are part of the plans to offset this debt.

In addition to the above, it is apparent that by exempting small enterprises from some taxes; an incentive not available to big companies, the Finance Act 2020 attempts to balance the level of fiscal inequalities existing between these enterprises.

THE EFFECT OF THE FINANCE ACT ON THE FINANCIAL SERVICE SECTOR

The financial services industry (FSI) covers a broad range of operations, such as banking, insurance, asset and capital market, etc. The industry typically plays a pivotal role in the development of any economy and Nigeria is not an exception in this regard. Notwithstanding this, despite the strategic nature of the industry, some of its key performance indicators are yet to be met in Nigeria.

The Federal Government has set up several commendable regulatory measures to revamp the Nigerian FSI.  The Finance Act has now set out the key provisions which will help to address the potentially hostile nature of our existing tax law provisions in different sectors.[25]

Under the Banking sector, the Finance Act imposes a requirement on banks and other financial institutions to request the TIN of a prospective business customers (companies and individuals), prior to opening any account for their business operations. For continued operation of an account, banks and other financial institutions are required, within three months from passage of the Finance Act, to obtain the TIN of business customers who had not provided this information at the time of opening the account. This requirement is not expected to influence the activation or maintenance of retail bank accounts set up for personal, non-business-related uses.  The amendment will also extend the practice of the banks to other financial institutions, such as depository, custodial investment and insurance institutions/companies.

However, the Act does not stipulate a penalty for failure to comply with this requirement.  The effect is that it would be difficult to regularize and manage the banking activities and those exiting accounts without TIN.

The Finance Act amends Section 2 of the Stamp Duties Act to accommodate electronic and digital transactions in the definition of �stamp�, �stamped� and �instrument�. Based on the provisions of the Finance Act, instrument would now include electronic documents. The Finance Act also introduces a new section [Section 89(3)][26] to impose stamp duty of N50 on all electronic receipts / transfers above N10, 000.00 for all types of account. This has validated and extended the current practice of banks in this regard and has put an end to the ongoing debate on the legality of the stamp duty charged by banks on electronic transfers.

Under the Insurance sector, the sector has long demanded for amendments to the taxation framework for insurance businesses under the CITA to bring them at par with other businesses. This is because the former framework introduced by amendments to CITA in 2007 contained rather detrimental provisions for taxation of insurance business, when compared to the tax regime for other businesses.

The Finance Act, therefore, repeals the detrimental insurance taxation provisions and replaces them with similar tax provisions applicable to other companies taxable under CITA. The amendments is expected to improve the fortunes of the insurance industry and make it more viable.

The Finance Act also introduces a new minimum tax regime for general and life insurance companies which will be computed as 0.5% of gross premium for general insurance companies and 0.5% of gross income for life insurance business, respectively. However, the Act does not include a specific definition for �gross premium� for the purpose of computing minimum tax for general insurance companies to take into account the peculiar accounting requirements for insurance businesses. Therefore, there may be a need to review the Act in the future to re-introduce a definition that should be reflective of the actual turnover earned by the company, i.e. Gross premium written, to ensure insurance companies are not faced with detrimental minimum tax compliance requirements.[27]

Under the Capital Market, the introduction of securities lending to the stock market in 2012 was an initiative of the capital market regulators to improve market liquidity and boost activities in the stock market. Securities lending involves a temporary transfer of securities (shares or bonds from a lender to a borrower. Based on the former provisions of the law, transactions carried out under this arrangement were taxable based on their legal form, rather than their economic substance. This created the risk of multiple taxation of the same income streams and thereby made securities lending transactions unviable.

The Finance Act has however introduced a tax framework that will eliminate the multiple taxation risk and will ensure that securities lending transactions are taxed based on their economic substance rather than legal form[28].

In conclusion, the amendments contained in the Finance Act will significantly improve and boost the growth of the banking, insurance as well as the market sector, given that the various difficult provisions in the extant CITA have been addressed by the Finance Act.

THE EFFECT OF THE FINANCE ACT ON THE OIL AND GAS SECTOR

Since the discovery of oil in Nigeria in 1956, the key issues that have plagued the industry are the seeming capacity of the operations of certain key regulators in the sector, and the alleged unfairness to the country by the international oil companies (IOCs) in their operations. Unfortunately, these concerns were not addressed before more worrying issues surfaced: crude oil theft (which could average as much as 30% of some operators� output), pipeline vandalism/insecurity and uncertainty of fiscal terms (particularly for offshore oil field development). It is against this backdrop that operators and key stakeholders in the industry have clamored for a complete overhaul of both the regulatory landscape and fiscal framework governing the industry.[29]

The Finance Act has revoked the Withholding Tax (WHT) exemption on income or dividends paid out of after-tax petroleum profits, provided for under section 60 of the Petroleum Profits Tax Act (PPTA)[30]. It is important to note that the exemption under section 60 of the PPTA was introduced as a palliative to upstream oil and gas investors whose profits have suffered tax at a higher rate of 85% for Joint Venture operations, and 50% for PSCs, compared to the 30% corporate income tax rate applicable to non-oil and gas businesses. Therefore, revoking the exemption will further aggravate the tax burden of the upstream oil and gas companies.

Under the Gas Utilisation (Downstream Operations) Incentives contained in the CITA, the Finance Act has removed the requirement to obtain approval from the Minister of Finance prior to claiming interest expense as a deductible expense. The requirement then was seen as a disincentive to the oil sector, because companies operating in other sectors of the economy do not have similar obligations.

The Finance Act has also placed a restriction on the number of tax incentives that can be claimed on the qualifying capital expenditure, including the Pioneer Status Incentive on the same assets.[31]

In conclusion, since the main objective of the Finance Act amendments is to raise revenue for the government, the consequent effect on doing business in Nigeria will result in reduction in investors� return.  In the long term it may lead to diversion of the much-needed foreign direct investments to more competitive jurisdictions in Africa.

THE EFFECT OF THE FINANCE ACT ON THE CONSUMER MARKETS AND INFRASTRUCTURE SECTOR

The Consumer and Industrial Markets (CIM) industry comprises the manufacturing and trade sectors of the Nigerian economy, and accounts for about 23.97% of the country�s real GDP3. Unfortunately, the sector�s growth has been stifled over the years by the huge infrastructural gap in the country, particularly in relation to power and transportation. These factors, combined with the tough macroeconomic environment, low access to credit, uncertainty in government policies, dependence on foreign inputs, etc., have limited the CIM industry�s ability to enable the realization of the Federal Government�s economic diversification agenda.[32]

In attempt to address these challenges, the Federal Government introduced Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme in January 2019. Also, the recent directive of the Central Bank of Nigeria to Deposit Money Banks to increase their Loan-Deposit Ratio to 65%, with special consideration for operators in retail and consumer markets, will increase lending to players in the CIM industry and reduce lending rates.[33]

The Federal government has through the Finance Act made some changes to stimulate the CIM industry. In practice, the requirement for repatriation imposes an unnecessary administrative burden on exporters, under the CITA.  However, the Finance Act will address this by simply requiring affected companies to demonstrate that the proceeds of such exports were used to procure raw materials, plant, spare parts and equipment, thereby eliminating the need to first repatriate the proceeds and the requirement to use the proceeds only for inventory and plant, equipment and spare parts.[34]

Also, prior to enactment of the Finance Act, excise duty (ED) was applicable on excisable goods, such as cigarettes, wines, spirit, beer, stout etc., manufactured in Nigeria. However, such goods when imported into Nigeria do not currently attract ED. The Finance Act seeks to address this disparity by subjecting imported excisable products to ED.  Therefore, the importers of these products will be required to account for the duty to the Nigeria Customs Service, with few exempts of categories of imported goods, going forward as required under the Finance Act 2020.

In keeping with global best practice, the Act introduces a VAT compliance threshold of N25 million for taxable persons in Nigeria. By implication, Small enterprises with cumulative taxable supplies of less than N25 million in a calendar year will not be required to charge output VAT on their invoices or file VAT returns to the FIRS, thereby reducing the compliance burden on such companies. While this is a welcome initiative, it will potentially affect the cash flow of small manufacturing or trading companies.[35]

The Finance Act amends Section 23(1) of the CITA[36] to grant tax exemption to companies engaged in agricultural production from tax for a period of five year(s), which can be extended for another three years subject to the determination of satisfactory performance of such business. However, the Act does not stipulate a framework for granting this incentive, which is probably better placed in the Industrial Development (Income Tax Relief) Act (IDITRA) as an incentive that can be granted by the President on the recommendation of the Nigerian Investment Promotion Council through the Minister for Industry, Trade and Investment.

Under construction industry, the Finance Act introduces a cap on the withholding tax rate applicable to road, bridges, building and power construction contracts up to a maximum 2.5%. This amendment returns the WHT rate applicable to all aspects of building, construction and related activities (excluding survey, design and deliveries) from 5% to 2.5% following a reversal of the 2.5% rate in November 2016 by a Ministerial Order in the Federal Republic of Nigeria Official Gazette No. 168 issued pursuant to Section 81 of the CITA[37]. The amendment under the section 81(2)[38] addresses the challenges of the recover-ability of WHT deducted on payments to construction companies due to the thin margins (typically between 2% and 3%) earned by companies operating in this space.

Nigeria is one of the Africa�s largest economies and the prospects for Real Estate Investment Scheme (REIS) in Nigeria is perceived to be strong due to the high demand for, and undersupply of, real estate assets, and limited institutional investment. However, the absence of an enabling tax framework had hindered investment in REITs and failed to unlock the potential benefits attributable to Real Estate Investment Tax (REIT) activities.  It is expected that with supporting tax legislation, a REIS can serve as a tax-efficient �pass through� vehicle for investment in real estate and stimulate growth of the capital markets, the real estate sector and the economy at large.[39]

In conclusion, the clarity provided by the Finance Act on the non-applicability of Excess Dividend Tax (EDT) to dividends declared from tax-exempt incomes will help companies whose dividend decisions have been adversely impacted by the literal interpretation of Section 19 of CITA[40].  Also, the EDT exemption of dividend paid from retained earnings that have suffered tax may encourage some companies to increase the proportion of their current year earnings that is reinvested in the business, thereby reducing their borrowing cost and promoting economic growth and development.

THE EFFECT OF THE FINANCE ACT ON THE BUSINESS RE-ORGANISATIONS SECTOR

A business reorganization, such as a merger, acquisition, take-over, asset-deal, etc., which involves a change in ownership or transfer of operating assets, will typically trigger tax consequences under the CITA, CGTA and VATA.  These may include taxing the proceeds on asset disposal and any transaction profits.

What the Finance Act seeks to address here is to harmonize the tax concessions available to related parties undertaking a business reorganization by introducing similar provisions in the CGTA, CITA and VATA as the basis for enjoying the concessions.  The effect is that short term group relationships created for the purpose of enjoying the tax concessions would no longer be an effective business reorganization strategy. Investors will now be forced to consider the cost and benefits of reorganizing immediately after an acquisition and forfeiting the tax benefits as well as fulfilling the holding period conditions and taking the benefits accorded under the tax laws.[41]

The Finance Act also modifies the tax exemption on business re-organisations which exempts assets transferred in a related-party business re-organisation, subject to passing the minimum holding requirement test.  Operating assets transferred in the course of a related party business re-organisation will typically not give rise to the realization of economic value for group of companies, as the benefits derived from utilizing those assets will eventually devolve to the same persons who had hitherto benefited from those assets. Taxing the asset transfer would, therefore, result in a double taxation within the group on the same asset as opposed to taxing the synergies and other economic benefits derived from exploiting those assets. The implication of the amendment contained in the Finance Act is that, related-party business re-organisations can now be successfully completed in a tax-neutral manner � subject to passing the minimum holding requirement test.[42]

In conclusion, the changes made by these Act will enable the investors to pay more attention to the impact of these changes on their acquisition strategy.

THE EFFECT OF THE FINANCE ACT ON THE DIGITAL ECONOMY SECTOR

Technological changes are constantly shaping business relationships and organizations have continued to refine their business models to keep up with digital innovations. However, tax has not kept pace with the digital revolution and collective attempts are just being made globally to catch up with the fast changing pace of the digital economy. In other to address the tax challenges of the digital economy, the Organisation for Economic Cooperation and Development (OECD), through its BEPS Inclusive Framework, has proposed the approaches for allocation of taxing rights and nexus rules, for consideration by its members including Nigeria.  However, the approaches are still debated.  Besides, OECD legal framework is not binding and may not be enforced in the courts except where it has been domesticated through legislative Act.[43]

For instance, regarding the applicability of VAT to digital/electronic transactions, Nigerian courts have before now been tasked to fill the gap in extant Nigerian tax legislation by ruling (such as in Vodacom Business Nigeria Limited vs FIRS; Appeal no. CA/L/556/2018) that such transactions are liable to VAT. Therefore, the legislative intervention by the Finance Act to address the uncertainties around taxation of digital economy in Nigeria is a welcome development that brings clarity to this area of Nigerian tax laws.[44]

Prior to the Finance Act, Section 13 of the CITA[45] subjected a Non-resident Company (NRC) to tax in Nigeria only if such company had a fixed base in Nigeria and the taxable profit was the profit attributable to that fixed base. The Finance Act now introduced new provisions under the CITA aimed at capturing the digital economy by adopting �significant economic presence� (SEP), among other things to affix the affected companies with a fixed base in Nigeria.

In conclusion, the Finance Act 2020 is a welcome initiative and a laudable move by the Federal Republic of Nigeria. The Laws have been amended to cover loopholes and controversies that ensued between the Federal/State Inland Revenue Service and taxable persons over the years, as a result, the ambiguity of the tax laws have been dealt with.

One of the more interesting expectations from the Finance Act is its positive impact on SMEs in Nigeria. In our view, the incentives provided to the SME sector are appropriate considering that the National Bureau of Statistics data shows SMEs as employing about 84% of Nigeria�s labour force, whilst contributing about 50% of the number of industrial jobs. The sector has been variously described as the engine room for Nigeria�s development and industrialization and accounts for about 48% of GDP. Granting tax concessions provides them with a significant reduction in reporting complexities and frees them up to deploy additional capital into their business. These palliatives will result in greater employment opportunities across board whilst allowing the tax administration focus its additional resources towards harnessing tax revenue from the sectors of the economy that have the largest revenue footprints.[46]

Written By: Augustine Ezeanochie Esq and Adeiye F. Adenekan Esq.

[1] Wole Obayomi, Partner & Head, Tax, Regulatory and People services: KPMG �Finance Act, 2020 � Impact Analysis� (Published in January, 2020). Accessed on the 12th of February, 2020.
[2] Nigeria�s Finance Bill 2019; Key changes and implications (Published in November 2019). Accessed 10th February, 2020.
[3] Section 13 of Company Income Tax Act
[4] https://www.proshareng.com/admin/upload/report/13050-Finance%20Act_2020-proshare.pdf> accessed on the 13th February 2020.
[5] Section 19 of Company Income Tax Act, LFN 2004
[6] https://www.proshareng.com/admin/upload/report/13050-Finance%20Act_2020-proshare.pdf> accessed on the 13th February 2020.
[7] Section 23 of Company Income Tax Act, Cap C21, LFN 2004.
[8] https://www.proshareng.com/admin/upload/report/13050-Finance%20Act_2020-proshare.pdf > accessed on the 13th February 2020.
[9] Section 81(2) & (7) Company Income Tax Act, Cap C21 LFN 2004.
[10] https://www.proshareng.com/admin/upload/report/13050-Finance%20Act_2020-proshare.pdf > accessed on the 13th February 2020.
[11] Section 2 of the Stamp Duty Act, Cap S8, LFN 2004.
[12] Section 89 of the Stamp Duties Act, Cap S8, LFN 2004.
[13] https://www.proshareng.com/admin/upload/report/13050-Finance%20Act_2020-proshare.pdf> accessed on the 13 February 2020.
[14] Section 60 Petroleum Profit Tax Act, Cap P13, LFN.
[15]  Wole Obayomi, Partner & Head, Tax, Regulatory and People services (KPMG): �Finance Act, 2020 � Impact Analysis� (Published in January, 2020). Accessed on the 12th of February, 2020.
[16] Wole Abayomi, Partner & Head, Tax, Regulatory & People Services (KPMG): �Finance Act, 2020 Impact Analysis.� (Published in January, 2020) Accessed 11th February, 2020.
[17] Section 42 of the Finance Act, 2020    
[18]Wole Abayomi, Partner & Head, Tax, Regulatory & People Services (KPMG): �Finance Act, 2020 Impact Analysis.� (Published in January, 2020) Accessed 11th February, 2020.   
[19] Wole Abayomi, Partner & Head, Tax, Regulatory & People Services (KPMG):� Finance Act, 2020 Impact Analysis.� (Published in January 2020) Accessed 10th February, 2020.     
[20] Business Encyclopedia: Tax Identification Number. Cited in < https://www.shopify.com/encyclopedia/tax-identification-number-tin> Accessed 12th February, 2020.
[21] Ibid. Accessed 11th February, 2020.
[22] Ibid. Accessed 12th February, 2020.
[23] Ibid.
[24] Yomi Olugbenro, Patrick Nzeh, Olukunle Ogunbamawo, Oluseye Arowolo, Taiwo Okunade: Nigeria�s Finance Bill 2019; Key changes and implications (Published in November 2019) accessed 12th February, 2020.
[25] A. Oloma and N. James; �Financial Services Industry Impact Analysis on Finance Act (2020). Accessed on 11th of February, 2020.
[26] Section 89 (3) of the Stamp Duty Act, Cap S8, LFN 2004.
[27] A. Oloma and N. James; �Financial Services Industry Impact Analysis on Finance Act (2020).� Accessed on the 11th of February, 2020.
[28] A. Oloma and N. James; �Financial Services Industry Impact Analysis on Finance Act (2020).� Accessed on the 11th of February, 2020.  
[29] A. Ajayi and A. Salami; �Oil and Gas Industry Impact Analysis on Finance Act (2020)� Accessed on 12th of February, 2020. 
[30]  Section 60 of the Petroleum Profits Tax Act, Cap 13, LFN 2004.
[31] Ibid,
[32] Nigerian Gross Domestic Product Report Q3 2019.
[33] T. Ogungbenro and A. E. Aibangbee �Consumer Markets and Infrastructure Industry Impact Analysis on Finance Act (2020)� accessed on the 12/02/2020.
[34] Ibid,
[35] Ibid.
[36] Section 23 (1) Company Income Tax Act, Cap C21, LFN 2004.
[37] Section 81 of Company Income Tax Act, Cap C21, LFN 2004.
[38] Finance Act (2020)�(Provided that in case of road, bridges, building and power plant construction contract, the rate shall not exceed two and a half percent)�   
[39] T. Ogungbenro and A. E. Aibangbee: �Consumer Markets and Infrastructure Industry Impact Analysis on Finance Act (2020).� Accessed on the 12th of February, 2020.  
[40] Section 19 Company Income Tax Act, Cap C21, LFN 2004.
[41]  A. Oloma and N. James; �Financial Services Industry Impact Analysis on Finance Act (2020)� Accessed on the 11th of February, 2020.
[42]  Ibid,
[43] W. Obayomi,  https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/finance-act-2019.pdf> accessed on the 13th February 2020.
[44] Ibid,
[45] Section 13 of Company Income Tax Act, Cap C21, LFN 2004. 
[46] https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/finance-act-2019.pdf accessed on the February 2020.