The Finance Act 2019: Impact on Startups and SMEs

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On the 13th of January, President Muhammadu Buhari assented to the Finance Bill 2019, which is now known as the Finance Act 2019 (the “Act”). Following this, the Minister of Finance announced February 1 as the commencement date of the Act. In our previous post, we detailed some of the key changes made to the various tax laws. This week, however, we identity the effects the Act will have on startups and Small and Medium Scale Enterprises (SMES) in Nigeria.

New Basis for Charging Companies Income Tax (CIT)

Startups and SMES may pay 0% CIT due to the new basis of computing CIT. Though, this depends on their annual turnover. The Act exempts small companies (defined as companies with turnovers of less than ₦25,000,000) from paying minimum tax. In addition, medium sized companies (with turnovers between ₦25,000,000 – ₦100,000,000) are now required to pay a lesser rate of 20% as CIT; however, the former CIT rate of 30% is still applicable to large companies (with turnovers above ₦100,000,000).

  Digital Tax Introduced

An interesting amendment to the CIT Act is that its provisions will now apply to companies providing online/digital services or goods and who have significant economic presence in Nigeria. This deviates from the previous provisions of the CIT Act which requires foreign companies to have a physical presence or a fixed base in Nigeria. This expands tax revenue sources by including digital services such as e-commerce businesses, online payment platforms, cloud storage platforms, and online consultancy and management services, provided such companies have a significant economic presence. Although, the Act does not define what “significant economic presence” means, this may see tech companies such as Google and Alibaba who operate some of the digital services mentioned above pay tax on the services they provide to Nigerians.

  Non-Resident Tech Companies Affected

Foreign companies (or Non-Resident Companies) supplying goods or services are also required to include the VAT of 7.5% on their invoices. However, a foreign company is not required to withhold and remit VAT as that burden rests on the Nigerian company receiving the services provided. For example, where a foreign tech company (not incorporated in Nigeria but derives income or profits from Nigeria) provides tech services to a Nigerian startup, the Nigerian startup is required to withhold and remit VAT on behalf of the foreign tech company to the FIRS.

 

  Conclusion

The Act introduces laudable changes to Nigeria’s tax laws and brings it on par with global best standards. It encourages the growth of early stage startups and SMES through the various tax palliatives targeted at them. These companies will be able to redirect revenue saved from these palliatives back to their businesses. Considering that SMES account for 96% of all businesses and 84% of employment, it is likely to impact positively on economic growth.

Pavestones’ Regulatory Update: CBN Revised Guide to Bank Charges

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The Central Bank of Nigeria (“CBN”) recently introduced changes to the fees charged by banks and other financial institutions for electronic banking transactions; account usage and maintenance; and ATM withdrawals.

The fees were reviewed downwards and contained in the revised “Guide to Charges by Banks, Other Financial and Non-Bank Financial Institutions” (the “Guide”) issued in December, 2019.

The Effect of the Charges

The CBN believes the reduced fees will incentivize stakeholders, especially those making micropayments, to further embrace electronic banking channels which will in turn improve financial inclusion.

The revision of these charges is a welcome development to encourage financial inclusion of the under-banked in Nigeria. It is however useful to note that fintech companies in the payments space such as PalmPay and Kuda Bank are already playing an important role in improving access to finance by offering lower fees on electronic transfers and online payments.

With this reduction, it might appear on the face of things that banks are in even more competition with Fintech companies. The reality however, is that there has been a long-standing issue in Nigeria with access to finance and this competition is likely to solve this issue in good time.

We have set out the key changes in the Guide below.

Key Changes Made in the Guide

  • Electronic Transfers: Transfers between bank customers was reduced to ₦10 for transfers below ₦5,000 and ₦25 for transfers between ₦5,000 and ₦50,000 while the previous charge of ₦50 was retained for transfers above ₦50,000.
  • ATM withdrawals: The ₦65 charged after the third withdrawal within a month on other banks ATM was reduced to ₦35 after the third withdrawal within a month.
  • Current Account Charges: The card maintenance fee previously charged on current accounts was removed while the annual card maintenance fee of foreign currency denominated cards was reduced to $10 from $20.
  • Savings Account Charges: The card maintenance fee charged on savings accounts is now to be charged quarterly as opposed to monthly. The ₦50 charge was however retained.
  • Hardware Tokens: The fees charged for hardware token was reduced to a maximum of ₦2,500 from the previous maximum of ₦3,000

Pavestones’ Legislative Update: The Finance Bill 2019

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On November 21, 2019, the Senate passed the Finance Bill (2019). The bill makes extensive changes to the tax laws in Nigeria with the objective of introducing tax incentives for investments in infrastructure and capital markets; supporting Small and Medium Scale Enterprises (SMSEs); and raising revenue for government, amongst others.

Some Key Changes To Existing Tax Laws

  1. Companies Income Tax (CIT) Act

The Amendment:

    • introduces a basis for computation of minimum tax for companies and exempts companies with turnovers of less than ₦25,000,000 from paying minimum tax, while companies with turnovers between ₦25,000,000 – ₦100,000,000 will pay a reduced CIT of 20%;
    • exempts the dividends and rental income received by real estate companies on behalf of their shareholders from tax provided that a minimum of 75% of such dividends or rental incomes are distributed within 12 months of the end of the financial year in which they were earned; and
    • allows insurance companies to carry forward losses indefinitely as opposed to the 4-year restriction previously in place.

  2. Personal Income Tax Act

The Amendment:

  • removes provisions granting personal income tax reliefs but maintains child benefit deduction set at ₦2500 per child with a maximum of 4 children;
  • mandates banks to require Tax Identification Numbers from corporate customers who intend to open or maintain a bank account; and
  • introduces forwarding objections against tax assessments to tax authorities via electronic mail and courier services.

3. Value Added Tax (VAT) Act

The Amendment:

  • increases the VAT rate to 7.5%;
  • exempts companies with annual turnovers of less than ₦25,000,000 from filing VAT returns; and
  • no longer requires foreign entities carrying on business in Nigeria to register for VAT in Nigeria and include VAT charges in their invoices.

4. Stamp Duties Act

The Amendment increases the stamp duty on receipts to N50 on every transaction from N10,000 and above; and expands the definition of receipt to cover electronic transactions.

Some of the key reforms introduced in the Finance Bill are a welcome development and have the capacity to stimulate the growth of SMSEs operating in various sectors of the economy due to the tax reliefs available to them whilst increasing government revenue and encouraging foreign direct investment in Nigeria.