KEY PROVISIONS OF THE FINANCE BILL 2021

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By Aderonke Alex-Adedipe and Eustace Aroh 

Introduction

In line with the tradition of the current administration, the Finance Bill 2021 (the “Bill”) was recently presented before the legislature for passage into law. Similar to its predecessors, the Bill proposes to amend twelve federal statutes in furtherance of the government’s objectives to foster the growth of the economy, stimulate investment into Nigeria, and boost revenue generation. In this article, we highlighted some key provisions of the Bill.

Proposed Amendment to Companies Income Tax (CIT)

i. The Bill specifically introduces taxation for lotteries and betting companies. These companies will be under obligation to pay income tax on the profit earned from the business of lottery and gaming. To determine their profits, prizes of customers, contribution to the lottery trust fund, agent commissions, and regulatory levies among others will be considered as allowable deductions.

ii. The Bill also confers powers on the Federal Inland Revenue Service (FIRS) to assess foreign digital and technology-driven companies with significant economic presence in Nigeria and charge income tax based on their turnover attributable to their presence in Nigeria.

iii. Income accrued from exports of companies engaging in the upstream, midstream or downstream petroleum operations are no longer exempt from CIT. Therefore, such income is now classified as taxable under the CITA.

iv. Unit trusts are no longer required to pay the usual CIT. Rather, the withholding tax deducted from income generated by the unit trust shall be full and final tax liability due to the unit trust.

v.The minimum CIT of 0.25% (as opposed to 0.5%) for companies that have recorded a loss or no profit has been extended to the period between 1st January 2019 to 31st December 2021. However, the application is only available for two accounting periods (2019-2020 or 2020-2021).

Proposed Amendment to Companies Income Tax (CIT)

vi. The Bill proposes a 5% Capital Gains Tax (CGT) on the proceeds from the disposal of shares in a Nigerian company exceeding 500 million Naira. Nevertheless, where the proceeds (or a portion of the proceeds) are reinvested into any Nigerian company within the same year, the proceeds (or the portion of the proceeds) will be exempted from taxation.

Other Taxation

vii. The Bill proposes the removal of the 0.25% National Agency for Science and Engineering Infrastructure Levy paid annually by commercial companies with over 4 million naira turnover.

viii. The FIRS has also been charged with the task of implementing the provisions of the Nigeria Police Trust Fund (Establishment) Act, 2019. Consequently, the FIRS will be required to assess and collect 0.005% of the net profit of companies operating in Nigeria to be paid into the Nigeria Police Trust Fund.

Conclusion

In addition, the provisions of the Bill attempts to remedy some loopholes in the tax laws (such as appointing the FIRS as the collecting agency of the Nigeria Police Trust Fund) as well as providing obtainable advantages to doing business in Nigeria.

Nevertheless, the annual amendment to the tax laws has made the tax regulations complex by creating a labyrinth of provisions. This will create a herculean task for the FIRS as the agency required to implement these changes. These annual amendments also create confusion among taxpayers on what applies every financial year.

THE NIGERIAN VENTURE CAPITAL (INCENTIVES) ACT

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INTRODUCTION

Funding of Startups globally hit an all-time high in 2021 with a total investment of approximately $454 billion recorded in just the 1st to 3rd quarter; as compared to investments recorded by Startups in 2020.1

In view of the crucial role VCs are playing in funding Startups, it is useful to know the available incentives for such VCs in Nigeria. In this article, we highlight these incentives that are available to VCs under the Venture Capital (Incentives) Act of 1993.

  1. Why is the Venture Capital Incentives Act relevant today?

The Venture Capital (Incentives) Act (the “Act”) grants tax reliefs and other incentives to VCs  that invest an amount not less than 25 per cent  of the total funding required for the venture project. This is relevant today because most Startup projects fall within the definition  of a Venture Capital Project set out in 2 below; and therefore, VCs that invest in such Startups  (“Qualifying Startups”)  would be entitled to  take advantage of the incentives contained in the Act.

  1. What is a Venture Project under the Act?

The Act lists the following as Venture Projects:

  1. projects that are capable of accelerating industrialisation by nurturing innovative ideas, projects and techniques to fruition;
  2. projects which commercialise research findings with high potential for far-reaching forward or backward linkages;
  3. projects which promote self-reliance through the establishment of resource-based and strategic industries, through the provision of risk guarantee and insurance;
  4. projects which encourage indigenous processes and technologies; and
  5. projects which promote the growth of small and medium scale enterprises with emphasis on local raw materials development and utilisation.
  1. What are the Incentives that accrue to Venture Investments?

 

Incentive Details of Incentives available to VCs
Capital Allowances  Up to 30 per cent Capital Allowance on equity investments, shall be available to VCs that invest in qualifying Startups.

 
Exemption from Capital Gains Tax Exemption from capital gains tax of up to 100% upon disposal of equity interest by the VC.
Reduction of Withholding Tax A 50% reduction of withholding tax payable on dividends received from Qualifying Startups within the first five years of the investment.
Application of the Industrial Development (Income Tax Relief) Act

 

 Incentives contained in the Industrial Development (Income Tax Relief) Act will apply to a Qualifying Startup.

 
Application of the Export (Incentives and Miscellaneous Provisions) Act

 

 The provisions of the Export (Incentives and Miscellaneous Provisions) Act will apply to a Qualifying Startup to the extent of the involvement of the Qualifying Startup in the exportation of products (e.g. Startups in the Agricultural sector exporting products).

 

  1. Which Regulator is Empowered to Grant these Incentives?

The Federal Inland Revenue Service (FIRS) is empowered to certify that a proposed venture project fulfils one or more of the above criteria to qualify for the incentives under the Act.

Conclusion

At a glance, the Act aims to encourage VCs to invest in Startups and this is applaudable.  It however, needs to be reviewed in light of more recent development in the Startup/Investor ecosystem and updated to provide more practicable and easily accessible incentives.

 

1. Gene Teare, ‘The Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong’ Crunchbase News’ (6 October 2021) https://news.crunchbase.com/news/q3-2021-global-venture-capital-report-record-funding-monthly-recap/ accessed 9 December 2021.

 

 

THE ROLE OF ADVISORY BOARDS IN STARTUP COMPANIES IN NIGERIA

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

Startups are young technology driven companies with innovative ideas and solutions capable of changing the status quo in their respective industries. Majority of Startups do not survive beyond their first five years of inception for a number of reasons; some of which include the lack of business acumen, managerial experience and technical expertise necessary to scale the company to the next level. A startup can, however, make up for these deficiencies by establishing an Advisory Board.

This article highlights the importance of Advisory Boards to Startups and the factors distinguishing them from the Board of Directors.

What is an Advisory Board?

An Advisory Board is an informal body of individuals set up by the management or board of directors of a company to provide business and strategic advice to the company. Advisory Boards usually consist of industry experts who can provide relevant assistance and advice to the Startup in areas where the company is lacking such as marketing and sales of products, investment options, technical experience and regulatory support, amongst others.

What is the difference between an Advisory Board and the Board of Directors of a Company?

Advisory boards are not a substitute for a company’s board of directors. The table below highlights the differences between an Advisory Board and the Board of Directors of a company.

  Advisory Board Board of Directors
Establishment There is no statutory requirement to have an advisory board. The number of members is at the sole discretion of the management and the Board of Directors of the company. The Companies and Allied Matters Act, 2020 (CAMA) mandates all companies to have a Board and to appoint at least 1 director.
Functions The board provides business and strategic advice to the management or the board of directors. The board directs the affairs of the Company.
Decision making It has no decision-making powers. The board is empowered by CAMA (and other relevant legislations) to make decisions on behalf of and for the company.
Qualification There is no statutory provision on the qualification of members of an advisory board. It is, however, recommended that they should be experts in the field in which the company requires guidance. Section 283 of CAMA, provides for persons who are disqualified from being appointed as directors eg persons who are less than 18 years old.
Statutory filings upon removal or appointment This is not required. Statutory filings are required to be made to the Corporate Affairs Commission and other relevant regulatory bodies.
Formal Meetings Formal meetings are not required. Members of the board may give advice to the management of the company through informal means such as telephone conversations, emails e.t.c. The Nigerian Code of Corporate Governance, 2018 requires companies to hold formal board meetings every quarter.
Fiduciary duty The members of the Advisory board do not have a fiduciary duty towards the company. The directors of the board members have a fiduciary duty towards the company.

What are the Benefits of Advisory Boards to Startups?

Members of the Advisory Board can assist Startups by bridging experience/ knowledge gaps in the management of Startups. They also provide fresh opinions and perspectives regarding the business of the company.

The appointment of well-known professionals and experts on the Advisory Board can increase the credibility of the company as clients, vendors, investors and other companies in the industry are more willing to partner with Startups who have experienced oversight.

Advisory Boards provide an informal and inexpensive avenue for Startups to gain insights from professional and experts without conferring control or decision-making powers on them.

Conclusion

While the establishment of an Advisory Board for a Startup is an important step towards ensuring its survival, Startups are advised to discuss with the members of the Advisory Board and agree on the workings of the advisory relationship. Such discussions should be documented and must contain provisions for remuneration (where necessary), the mode of providing advisory services as well as the protection of the company’s confidential information and intellectual property.

REGULATION OF FINTECH IN NIGERIA: DIFFERENCE BETWEEN MMOs, PSBs AND MFBs (version 2.0)

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By Seun Timi-Koleolu and Eustace Aroh 

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In our February 3, 2020 article, we had written on the differences between a Mobile Money Operator (MMO) license, a Payment Service Bank (PSB) license and a Microfinance Bank (MFB) license. The article was aimed at supporting Fintechs in determining which of the existing Central Bank of Nigeria (CBN) licenses is compatible with their services or proposed products.

Since our article, the CBN has issued various regulations and policies affecting MMOs, MFBs and PSBs. In view of this, we have updated our table on the different licenses to reflect the regulatory update.

MMO PSB MFB
Minimum share capital

 

 NGN 2 billion NGN 5 billion Unit (Tier 1) – NGN 200 million

Unit (Tier 2) – NGN 50 million

State MFB – NGN 1 billion

National MFB – NGN 5 billion
Service Area No restriction 25% of its operations in Rural Areas Unit (Tier 1) – operating in urban areas with 5 offices in 5 Local Government Areas (LGAs).

Unit (Tier 2) – operating in rural areas with two branches in 1 LGA.

State – operating in one state.

National – operating in all the states.
Loan Not permitted Not permitted Permitted provided that:
• No single loan will exceed 1% of the
sharecapital of the MFB; and
• subject to 80% Micro loan of the total loan portfolio.*Micro loans are credit facilities not more than NGN 500,000 for Unit
(Tier 1) and NGN 1 million for other categories.
Bank accounts and Wallets Bank Account-Based

Card Account-Based (Credit, Debit and Pre-paid)

e-Wallet

 Account and e-Wallets Bank accounts
Cards Limited to card processing Debit and Pre-paid cards Debit and Credit cards
Transaction limit Depending on KYC level

level 1 – NGN 50,000 (balance of NGN 300,000)

level 2 – NGN 200,000 (balance of NGN 500,000)

level 3 – NGN 5,000,000 (unlimited balance)

 Depending on KYC level

level 1 –  NGN 50,000 (balance of NGN 300,000)

level 2 – NGN 200,000 (balance of NGN 500,000)

level 3 – NGN 5,000,000 (unlimited balance)

 No Limit
Foreign Currency transaction Can receive and sell foreign exchange from inbound transfer.

Prohibited from remittance.

 Can receive and sell foreign exchange from inbound transfer.

Prohibited from remittance.

 Prohibited from foreign exchange transactions
Airtime and USSD service  Permitted (subject to NCC approval) Permitted (subject to NCC approval) Permitted (subject to NCC approval)
QR Code Payments Permitted Permitted Permitted
Connection with the Nigeria Inter-bank Settlement System

(NIBSS)

 Required Required Required
Connection with the
CBN Real Time Gross
Settlement (RTGS)		 Required Not required Not required
Agent Banking Permitted Permitted Permitted
Who can Operate Existing Banks and any
company can apply for an MMO license.		 Limited to the types of companies
listed below:Banking AgentsTelecommunication companiesRetail chainsPostal Service and Courier CompaniesMMO (converting to PSB)Switching Companies

Financial Technology companies

Financial Holding companies

 Any company can apply for an MFB license.

If you require clarity or further information on the licenses above, contact Pavestones at info@pavestoneslegal.com.

A FOREIGNER’S GUIDE TO ESTABLISHING A BUSINESS IN NIGERIA

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Aderonke Alex-Adedipe and Oghenekaro Faith Isiorho

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INTRODUCTION

As the most populous African nation, Nigeria continues to attract an increasing number of foreign investments annually. In 2020, the United Nations reported that Nigeria’s inflow of Foreign Direct investments (FDI) increased by 4.3% despite the outbreak of COVID-19. As the market expands, the government continually issues policies aimed at creating a conducive business environment. As a result of the existence of multiple regulations, however, a potential foreign investor may require some guidance in relation to establishing a business and navigating the Nigerian business environment.

 

In this article, we highlight some crucial considerations for foreigners seeking to do business in Nigeria.

 

  1. Company Registration

Generally, any individual or company registered outside Nigeria and having the intention of carrying on business in Nigeria must be registered at the Corporate Affairs Commission(“CAC”), except such company is exempt by law.[1]  The company is permitted to have 100% foreign shareholders except it operates in specific sectors such as oil and gas, aviation, domestic coastal carriage, etc, which require local ownership and control. A foreign entity must also have a minimum of two shareholders and two directors. Other requirements for registration may vary from one sector to another.

  1. Nigerian Investment Promotion Commission (NIPC) Registration:

The NIPC is empowered by the Federal Government to promote foreign investments in Nigeria. Every business with foreign participation is mandated to register with the commission and obtain a certificate of registration. To obtain a NIPC certificate the evidence of registration at the CAC is required.

  1. Business Permit

A business permit is issued by the Ministry of Interior in Nigeria. Every company with foreign participation in Nigeria is required to apply and secure the permit before commencing business activities. The process for the application has now been fully automated, thus registration can be made online.

  1. Tax Registration

It is important that after incorporation a registered company registers with the Federal Inland Revenue Service (FIRS) and obtains a Tax Identification Number (TIN). The TIN is often required to secure other licenses and operate a bank account. It is also necessary to register with the State Inland Revenue Service located in the state in Nigeria where it wishes to carry on business.

  1. Trademark Protection/Registration

 Companies that already have an existing trademark in their home countries are encouraged to register such trademarks in Nigeria to secure their usage by the company. A search must be conducted at the trademark registry to determine if the trademark is already in existence before registration will be approved or rejected.

Note that approval for trademark registration will not be granted where the trademark is already registered by another company unless permission or assignment of that trademark has been granted by that company.

  1. Operating a Bank Account

 A company will generally require capital to set up its business in Nigeria. Commercial banks in Nigeria are appointed by the Central Bank of Nigeria as authorized dealers for the purpose of importing foreign exchange and guaranteeing repatriation of foreign capital which may have been imported through a Commercial Bank. Commercial banks also play a crucial role in facilitating the importation of goods into the country.

Generally, the requirements for operating a bank account vary from one bank to another. Evidence of company registration, identities of a company’s directors, TIN of the company, proof of registered address, are however standard requirements.

  1. Sector-Specific Licensing

 A foreign company must enquire about the licenses required to do business in its proposed sector of operation.  Some sectors may have special licensing requirements which must be fulfilled by operators. For instance, a foreign company interested in the sale of cosmetics in Nigeria must first obtain a permit from the National Agency for Food and Drug Administration and Control; a company seeking to import and distribute electronics must obtain a certificate from the Standard Organisation of Nigeria (SON); also, a company that wishes to provide logistics services must be licensed by the Nigerian Postal Service (NIPOST).

  1. Advertising

 It is worthy of note that a license to operate may not always confer permission to advertise. A foreign company must ensure it obtains the requisite advertising permit before advertising to its consumers.[2]

CONCLUSION

It is advisable that a foreigner interested in doing business in Nigeria engages the services of a business lawyer who will offer transactional guidance specifically tailored to the sector which it seeks to operate.

 

 

[1] S. 80 of the Companies and Allied Matters Act 2020, exempts foreign companies engaged in specific individual loan projects on behalf of the donor country or international organization, export promotion activities or engineering consultants or technical experts engaged in individual-specific projects with the government or any of its agencies, from registration at the CAC.

[2] In Lagos state, the agency empowered to issue advertising licenses is the Lagos State Signage and Advertisement Agency (LASAA).

 

THE NIGERIAN STARTUP BILL

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Introduction

The recently introduced Nigerian Startup Bill (“Bill”) is one development that is expected to improve the business environment for Startups in Nigeria when passed into law. It is aimed at creating a favourable environment for Startups by: providing incentives; removing regulatory constraints; and developing an ecosystem for Startups to thrive. We have outlined below some of the salient provisions proposed by the Bill.

How are Startups defined in the Bill?

The Bill defines Startups as innovative companies that fall into the categories listed in the table below.

Areas Criteria
Nationality of the company The company should be incorporated in Nigeria and have been in existence for not more than 10 years. The headquarters of the company should also be in Nigeria.
Objects of the company Innovation, development, production, improvement or commercialization of an innovative product or process.
Shareholding of the company At least 51% of its shares should be held by Nigerians. Companies whose foreign participation exceed 49% will still qualify where the ultimate beneficial owners of its foreign corporate shareholders are Nigerian citizens.
Goods/ services provided by the company Involves a new technology or is technology-enabled.
Labour Less than 100 direct employees excluding causal workers, consultants and outsourced staff.
Expenses of the company At least 15% of its expenses should be attributed to research and development activities

The Bill requires companies that meet the above eligibility criteria to apply for registration with the One Stop Shop Centre (OSSC) to be eligible for the incentives contained in the Bill. The OSSC is made up of representatives of regulatory agencies relevant to Startups in Nigeria such as the: Corporate Affairs Commission (CAC); Central Bank of Nigeria (CBN); Securities and Exchange Commission (SEC); National Office for Technology Acquisition and Promotion (NOTAP); Trademark, Patents and Design Registry e.t.c. Eligible companies will be required to register with OSSC through the OSSC Portal, which will serve as a platform for interaction and information exchange between Startups and regulatory bodies.

What are the incentives and protections available to registered Startups under the Bill?
The Bill proposes the establishment of the National Council for Digital Innovation and Entrepreneurship (“Council”) which is responsible for collaborating with various regulatory bodies to ensure the provision of support services and incentives to the Startups. Some of the proposed incentives and support services are as stated below.

1. Provision of regulatory support by the OSSC– To reduce regulatory hurdles currently faced by Startups, relevant regulators including the CAC, Trademarks, Patent and Design Registry, CBN, NOTAP (“Regulators”) are to set up help desks at the OSSC with appropriate personnel; and to provide support to Startups through the OSSC Portal.

2. Provision of discounts to Startups- Regulators will be required to grant discounts on their licensing /registration fees to Startups. We expect that more details on the discounts will be included upon further review of the Bill.

3. Expedition of licence applications for Fintech Startups- The Bill requires the CBN and SEC to ensure that the license application process for Startups is expedited and seamless. The Bill, however, does not provide clarity as to how this will be achieved or how to measure the effectiveness of the regulators in this area.

4. Provision of tax incentives to Startups- The Bill proposes tax incentives such as:

a. tax exemption on the profits of Startups for 7 years;

b. taxation of goods and services supplied by Startups at a reduced Value Added Tax   rate of 3%;

c. provision of tax credit to Startups that create a minimum number of jobs (the   minimum number is to be determined by the Council);

5. Provision of tax incentives to employees of Startups and investors in Startups

6.Provision of funding to Startups- The Bill proposes the establishment of a   Startup Investment Seed Fund to provide funding to early-stage Startups who meet the criteria set by the Council.

7.Procurement of Technology-related goods and services by government parastatals- The Bill proposes that Ministries, Departments and Agencies of the Government set a 15% margin of preference in favour of Startups when procuring technology related products.

Conclusion

The introduction of the Bill is truly a step in the right direction in creating an enabling environment for Startups to thrive in Nigeria. It is, however, worthy of note that the test of the effectiveness of any law such as this majorly depends on the ability of the stakeholders to enforce it. We expect that as the Bill undergoes legislative review, it would be updated to include practical provisions and guidelines that would ensure the  implementation of the proposed incentives and support to Startups.

PLEASE NOTE THAT THE BILL IS YET TO BE PASSED INTO LAW AND MAY BE REVISED IN THE PROCESS.

REGULATORY UPDATE: GOODS AND SERVICES EXEMPT FROM VAT IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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Introduction

The current regulatory regime for Value Added Tax (VAT) in Nigeria is made up of a number of laws and regulations including the VAT Act of 1993 (as amended in 1996, 1999 and 2007); the Finance Act, 2019 and 2020; and the VAT Modification Order of 2020 (“MO 20”). The Minister of Finance, Budget and National Planning, on September 21, 2021, issued the VAT Modification Order of 2021 (“MO 21”) which amends the list of goods and services exempted from VAT and eligible as zero-rated goods and services.

In this article, we evaluate the key provisions of the MO 21 and highlight the updated list of exempted goods and services.

Notable Amendment by MO 21

  1. Microfinance Banks. Previously, all services rendered by Microfinance Banks (MFB) were exempt from VAT. The MO 21, however, narrows the exemption to Unit MFBs. Consequently, only the services of MFBs with tier 1 unit or tier 2 unit licenses qualify for VAT exemption.
  2. Books and educational materials. Under the MO 20, books and educational materials were listed as exempt. This reference has, however, been restricted to educational books and materials in MO 21. In essence, books which are not meant for educational purposes shall no longer be exempt from VAT.
  3. Raw materials for production. Under the MO 21, raw materials for the production of baby diapers, sanitary towels and pharmaceutical products are specifically exempt from VAT.
  4. Agricultural Products. The MO 21 makes adequate efforts to include products and services to support the agricultural sector of Nigeria. Products such as agricultural seedlings and locally produced animal feeds have been included under the exemption list.
  5. Electricity. To reduce the overall cost of electricity, the following products are exempt from VAT: (i) gas supplied to electricity generating companies by gas producers; (ii) electricity supplied by generating companies to the national grid or the Bulk Electricity Company; (iii) electricity supplied by transmission companies to distribution companies; and (iv) renewable energy equipment.
  6. Petroleum products. Petroleum products such as aviation turbine kerosene, premium motor spirit, household kerosene, locally produced liquefied petroleum gas and crude petroleum oils have been included under the VAT exemption list.
  7. Residential Leases. In a 1995 circular issued by the Federal Inland Revenue Service titled “Detailed List of Items Exempt from Value Added Tax (VAT)”, lease on residential property was listed as exempt from VAT. This has been subject to two conflicting decisions of the Tax Appeal Tribunal, on whether the FIRS possesses the power to include a service under the VAT exemption list.[i]
  8.   In MO 20, lease on residential property was also exempt from VAT. However, this has now been omitted under the MO 21.

Goods and Services Exempt from VAT

The table below identifies all Goods and Services now exempt from VAT under the MO 2021.

Goods Services
  1. All medical and pharmaceutical products
  2. Basic food items.
  3. Educational books and materials
  4. Baby products
  5. Fertilizers and locally produced agricultural chemicals and veterinary medicine
  6. All exports
  7. Machinery and goods imported for use in the export processing zone or free trade zone provided that 100 per cent of the production are for export.
  8. Machinery and equipment purchased for utilisation of gas in downstream petroleum operations.
  9. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
  10. Locally manufactured sanitary towels, pads or tampons
  11. Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts
  12. Petroleum products
  13. Renewable energy equipment
  14. Raw materials for producing baby diapers and sanitary towels
  15. Raw materials for manufacturing pharmaceutical products
  16. Locally produced animal feeds.
  17. Military hardware, arms and ammunition and locally manufactured uniforms used by the armed forces, paramilitary and other security agencies.
  18. Gas supplied by gas producing companies to Electricity Generating Companies (GENCOs). Electricity generated by GENCOs and supplied to National Grid or Nigeria Bulk Electricity Company and Electricity transmitted by Transmission Company of Nigeria to Electricity Distribution Companies.
  19. Agricultural seeds and seedlings
  1. Medical services.
  2. Services rendered by unit microfinance banks and mortgage institutions.
  3. Plays and performances conducted by educational institutions as part of learning.
  4. All exported services.
  5. Tuition relating to nursery, primary, secondary and tertiary education
  6. Airline transportation tickets issued and sold by commercial airlines registered in Nigeria
  7. Rental or lease of tractors and other agricultural equipment for agricultural purposes.
  8. Shared passenger road-transport service

 
Zero-rated Goods
  1. Goods and services purchased by diplomats.
  2. Goods purchased for use in humanitarian donor funded projects.

Conclusion

The issuance of the MO 21 is a step to encourage specifically those in the manufacturing and agricultural sector and generally reduce the cost of some consumables in Nigeria. Nevertheless, taxpayers are advised to consult professionals on their obligations under the new VAT regime.

[i] Chief J.W. Ellah, Sons & Company Ltd v. Federal Inland Revenue Service (Unreported Judgment) in Appeal No: TAT/SSZ/001/2019; and Ess-ay Holdings Limited v. Federal Inland Revenue Service (Unreported judgment) in Appeal No: TAT/LZ/VAT/029/2019

5 INCENTIVES AVAILABLE TO STARTUPS IN NIGERIA

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By Seun Timi-Koleolu and Oghenekaro Faith Isiorho

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Startups have the potential to play a major role in the growth of developing countries particularly because of their ability to: (i) improve the standard of living in countries through innovation; (ii) create wealth by attracting local and foreign investments; and (iii) reduce the rate of unemployment by creating new jobs.

Despite the potential to bring good to countries, the prevalent view amongst Startups in Nigeria is that the regulatory and business terrain provides many hurdles to their ability to the achievement of their fullest potential. These include high costs of doing business; multiple taxes and unpredictable regulatory oversight.

Notwithstanding the foregoing, there are incentives in existing regulations in Nigeria, which Startups can benefit from but might not utilize due to a lack of awareness of such incentives. We have tried to solve this problem by putting together in this article a list of incentives which can be enjoyed by Startups from various legislations.

The 5 Incentives are as follows:

  1. Exemption from Company Income Tax: Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million Startups may find this useful in their early stages. Click here to read on other impacts of the Finance Act 2019 on Startups and SMEs.
  2. Tax Holiday of Up to 5 Years: Startups who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period as established under the Nigerian Industrial Development (Income Tax Relief) Act. Startups in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives. Click here to read more on industries eligible for Pioneer status in Nigeria.
  3. Reduced Tax Rate for Investors: There are various incentives provided in the Nigerian Venture Capital Incentives Act for investors and Startups engaged in venture projects. These include: (i) up to 30% capital allowances for eligible Startups on equity investments made by Venture Capitalist firms; and (ii) up to 100% exemption on capital gains tax on capital gains accruing to Venture Capital investors upon disposal of their equity interest.
  4. Opportunity for Startups in Government Projects: One way the Nigerian government has tried to encourage the growth of Startups is by requiring companies to engage Startups in projects involving the Federal Government or any of its agencies where the gross value of the project contract is 500 million naira or above. This requirement is provided in the Guidelines for Nigerian Content Development in Information and Technology 2019.
  5. Tax Exemption for Start-ups in the Agricultural Sector: Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020 which amended the former provision under the Industrial Development (Income Tax Relief) Act. Click here to read more on the key highlights of the Finance Act, 2020.

Please note that this list is not exhaustive.

Conclusion  

As stated earlier, many Startups and investors are unaware of incentives available to them in Nigeria because of the absence of a comprehensive platform or document that highlights all applicable incentives and regulations. A search by Startups for such incentives (without the assistance of professionals) can be as tedious as searching for a needle in a haystack. It is, therefore, our recommendation that the Nigerian government collates relevant incentives and applicable regulations on a single platform for ease of reference by Startups.

 

 

 

REGULATORY UPDATE: THE REVISED REGULATORY FRAMEWORK FOR BANK VERIFICATION NUMBER (BVN) OPERATIONS IN NIGERIA

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By Aderonke Alex- Adedipe and Feyijuwa Akinyanmi

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Introduction

On February 14, 2014, the Central Bank of Nigeria (CBN) deployed a centralised BVN system.  The rationale for the creation of BVNs (an 11-digit code which uniquely identifies every customer across the Nigerian Banking industry through their biometric details) is to enhance the Know Your Customer (KYC) process in the banking industry to curb illegal and fraudulent transactions within the industry.

To channel the BVN system towards the prevention of fraudulent banking activities and prevent abuse of use, the CBN on October 18, 2017 issued the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2017 (“Previous Framework”).

On October 12, 2021, the CBN published the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2021 (“Framework”) which revises the Previous Framework. The Framework defines the operations of BVN as well as the establishment and operation of a watch-list for the Nigerian Banking Industry.

Today’s newsletter briefly highlights salient provisions on use, access and prohibited activities in relation to BVN of customers.

Who Can Access the BVN Database?

Similar to the Standard Operating Guidelines for BVN Matching System, 2021 (SOG), the Framework categorises persons who can access BVN information of customers into two- Tier 1 users and Tier 2 users.

Tier 1 users include banks (e.g. deposit money banks, payment service banks), Mobile Money Operators and Other Financial Institutions (“OFIs”) (e.g. Microfinance Banks and Finance Companies), while Tier 2 users include Payment Service Providers, Credit Bureaus and other entities approved by the CBN. While Tier 1 users do not require the approval of the CBN to gain access to the BVN of customers, Tier 2 users can only access the BVN of customers through the Nigeria Inter-Bank Settlement System (NIBSS). In addition, all institutions except banks require the consent of customers to gain access to their BVN.

Law enforcement agencies, The National Pension Commission, Pension Fund Administrators and other entities as may be approved by the CBN can only access BVN information upon the presentation of a valid Federal High Court order.

It is pertinent to note that foreign entities are not eligible to access the BVN database, while individuals are not eligible to access the BVN of other persons.

Are there any restrictions on use of BVN?

Although the Framework restricts the use of BVN to purposes specified by the CBN, the Framework does not explicitly mention any specific purpose. It, however, prohibits the use of BVN for the purpose of (i) sanctioning individuals for non-financial offences, (ii) identification of individuals outside the banking system and (iii)any other misuse, as may be designated by the CBN. The Framework prescribes several penalties for failure of participants to comply with the provisions of the Framework[1].

What is a Watch-List in the Nigerian Banking Industry?

The Framework also establishes a Watch-list for the banking industry to address the increasing incidence of fraud. The Watch-list is a record of the BVN of individuals who are involved in confirmed cases of breaches as listed in the Framework.

While some breaches such as the use of forged documents, forgery, duplicate enrolment, infractions on AML/CFT laws and the Cybercrimes (Prohibition, Prevention, etc) Act, 2015 are self-explanatory, breaches such as compromise, non-cooperation with efforts to reverse wrong credit, erroneous multiple or duplicate payments or credits, concealment of relevant information, dishonest acts, receipt of proceeds of deception, deception, complicity and connivance are rather ambiguous and vague.

In determining whether an individual is guilty of a breach, the institution is required to investigate the alleged breach within 1 month of the report of the breach and the individual will also be entitled to a fair hearing. During the process of the investigation, the customer’s account will be placed on “post-no-debit” and the customer is to be given 3 business days to present evidence in his favour.

 

Which Sanctions apply to Individuals whose BVN are on the Watch-List?

The Framework provides for a number of sanctions for persons whose BVNs are on the Watch-list by reason of the commission of a breach (Watch-listed Individuals). Some of the penalties include:

  1. The Watch-listed Individual is prohibited from entering into any new relationship with any Bank or OFI;
  2. Any bank or OFI can choose to discontinue a business relationship with the Watch-listed Individual;
  3. Banks or OFIs that do not discontinue their relationship with the Watch-listed Individual are required to prohibit the Watch-listed Individual from using all electronic banking channels such as ATMs, POS, internet banking, mobile banking, USSDs and from issuing third party cheques. Cash inflows will, however, be allowed into the account or wallet of the Watch-listed Individual; and
  4. The Watch-Listed Individual is prohibited from referencing accounts and from accessing or guaranteeing credit facilities.

It is also interesting to note that the Framework, unlike the Previous Framework now applies the sanctions to the bank and OFI accounts and wallets (except for Tier 1 accounts) of Watch-listed individuals as opposed to only banks under the Previous Framework.

Conclusion

The publication of the Framework is a step in the right direction in protecting the BVN information of individuals. In addition, while the Watch-List is a commendable effort by the CBN to penalize individuals perpetrating fraud in the banking industry, the offences and the mode of investigating and confirming that a breach has truly occurred leaves room for abuse of the Watch-List process.

We recommend that provisions be made for the establishment of an independent tribunal to investigate the occurrence of a breach and penalize erring individuals. Guidelines should also be set up to ensure that the investigation and penalization process are in accordance with the principles of fair hearing and natural justice.

[1] Paragraph 3.1.2. of the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2021

REGULATORY UPDATE – REVISED RULES ON MERGERS, ACQUISITIONS AND TAKE-OVERS IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Prior to 2019, the Securities and Exchange Commission (“SEC”) was the primary body responsible for mergers, acquisitions and take-overs of public and private companies in Nigeria. With the enactment of the Federal Competition and Consumer Protection Commission (“FCCPC”) Act 2019, the provisions within the Investment and Securities Act 2007 on mergers were repealed and the FCCPC became the primary body responsible for regulating mergers. Notwithstanding, SEC maintained its rights to regulate mergers and acquisitions affecting public companies on the basis that it is the primary regulator of the capital market in Nigeria.

Consequently, SEC released an Amendment to the SEC Rules on Mergers, Take-Overs, and Acquisitions (“Amendment”) on August 30, 2021. In this article, we have highlighted some salient provisions of the Amendment.

 

What Transactions require the approval of SEC?

Although all companies are required to obtain an approval for mergers and acquisitions from the FCCPC, the Amendment mandates public companies to apply to SEC for approval in respect of the following transactions.

  1. Any amalgamation or merger involving a public company.
  2. The conversion of a public company to any other form of company or the reconstruction of the shares of a public company.
  3. Restructuring of a public company which includes “carve-outs”, “spin-offs” and “split-offs” as defined in the Amendment.
  4. Acquisition or disposal of assets that result in a significant change in the business direction or policy of the public company.
  5. Any of the foregoing transactions carried out by a subsidiary of a public company.

The power to prevent monopoly and restraint of competition, however, remains with  FCCPC.

 

Whose obligation is it to apply for the approval?

It is the obligation of the public company involved in the transaction to apply to SEC for approval notwithstanding the involvement of other types of companies in the transaction.

 

What are SEC criteria for granting approval?

In obtaining the approval of SEC, the applicant must prove that all the shareholders of the public company are treated fairly, equitably and are given sufficient information in connection with the transaction.

 

What transactions are exempt from the requirement to obtain SEC approval?

The following are exempt.

  1. Any acquisition by a public company of a business or asset which does not involve the issuance of shares of the public company as consideration for the acquisition. The company will, however, be required to provide pre and post-acquisition financial statements to its shareholder; and disclose any conflicting interest with respect to the transaction.
  2. Any divestment of the asset of a public company that is less than 15% of the total asset of the company or any divestment of assets that do not form a core part of the business. The company may, however, voluntarily notify SEC of any such divestment.

 

What is the process of obtaining the approval of SEC?

In addition to complying with the requirements under the Companies and Allied Matters Act 2020 and the provisions of the FCCPC Merger Review Guidelines, a public company is also required to make an application to SEC. Prior to the merger, the public company is required to make a preliminary application to SEC and obtain an approval in principle before arranging court-ordered meetings for the shareholders of the respective companies. The public company is expected to invite SEC to this meeting. Upon approval of the shareholders of the respective companies, a formal application is to be made to SEC.

 

Conclusion

The Amendment helps to provide a level of clarity on SEC requirements pertaining to mergers, acquisitions and take-overs involving public companies. Please note, however, that not all changes introduced by the Amendment were highlighted by SEC in the document as new introductions. Companies are, therefore, advised to seek professional support when engaging in such transactions.