DOING BUSINESS IN NIGERIA: EXEMPTIONS TO THE EXCESS DIVIDEND TAX RULE UNDER THE FINANCE ACT, 2019

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By Aderonke Alex- Adedipe and Feyijuwa Akinyanmi

 

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Introduction

Companies Income Tax (“CIT”) is a major source of revenue for the Nigerian government. To ensure continued inflow of revenue, the Companies Income Tax Act (“CITA“) provides for a number of measures to curb tax evasion and tax avoidance, one of which includes the provision for excess dividend tax.

Excess dividend tax in practice, has resulted in the double taxation of some companies caught under the provision.  To curb this menace, the Finance Act, 2019 has amended the provisions of the CITA by providing for exemptions to the excess dividend tax rule in Nigeria.

This newsletter considers the previous provision for excess dividend tax under the CITA and the exemptions provided for under the Finance Act 2019.

 

Excess Dividend Tax under the CITA

Under the CITA[1], where a company pays dividends to its shareholders while declaring that: (i) it made no profit for the year; or (ii) its profit for that year is less than the dividend paid out to its shareholders, the company paying the dividend will be taxed as if the dividend paid out is the total profit of the company for that year.

The rationale for the provision is to prevent tax avoidance/ evasion by companies on the basis that only profit generating companies in a financial year are capable of declaring and paying dividends to its shareholders. While this provision indeed curbed tax evasion and other unethical practices of companies, the provision had negative effects on companies that did not actually generate profit or whose declared dividends exceeded their profit for legitimate reasons.

By virtue of Section 19(1) of the CITA, the dividends of holding companies not carrying on any business were subjected to both withholding tax and companies income tax despite the fact that the withholding tax paid on the dividend was franked investment income and as such, not subject to further taxation.

In addition, companies declaring dividends based on their retained earnings or who had postponed the payment of dividends to the present year were made to pay income tax on the dividends declared previously been subjected to  income tax in the year the profit was actually made.

This in effect, discouraged many companies (local and foreign) from setting up holding company structures in Nigeria for fear of double taxation.

 

Exemptions to Excess Dividends Tax under the Finance Act 2019

Favouring the clamours for the review of this harsh provision, the National Assembly passed the Finance Act which created exemptions to excess dividend tax in Nigeria. Section 7(a) of the Finance Act amended Section 19 of CITA by providing for instances where the dividend of a company will not be subjected to income tax where the company does not declare profit for the year or where the profit of the company is less than the dividend declared. The exemptions are listed below.

 

1. Dividends paid out of the retained earnings of the Company– where the dividends of a company is paid out of its retained earnings which have been previously subjected to companies income tax, capital gains tax or petroleum profit tax, the company will not be required to pay CIT on it.

 

2. Dividends paid out of profits exempted from income tax– where a company pays dividends from its profit which has been exempted from tax by any law in Nigeria, the dividend paid will not be subject to excess dividend tax.

 

3. Franked investment income of the company– CITA[2] defines franked investment income as the dividend received by a corporate shareholder after deduction of withholding tax. The implication of this is that companies (e.g. holding companies) are no longer required to pay excess dividend tax on declared dividends which originate from franked investment income.

 

4.Distributions made by a real estate investment company to its shareholders– where a Real Estate Investment Company distributes dividends to its shareholders from its profit made from rental income or dividend income, such dividend declared will be exempt from excess dividend tax. This based on the provision of the Finance Act[3] which exempts the rental and dividend income of real estate investment companies from tax, provided that 75% of the dividend and rental income is distributed within 12 months after the end of the financial year in which it was earned.

 

Conclusion

The provision for exemption to excess dividend tax in Nigeria is and continues to be a welcome development in the Nigerian tax regime. It serves as an incentive for businesses intending to set up holding company structures in Nigeria and encourages corporate savings.

[1] Section 19(1) of CITA

[2] Section 80(3) of CITA

[3] Section 9 of the Finance Act, 2019

THE REGULATION OF DATA IN NIGERIA: CROSS-BORDER TRANSFER OF DATA

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By Seun Timi-Koleolu and Eustace Aroh

 

INTRODUCTION

In today’s world, the commonly used phrase “the world is your oyster” can now be taken literally by businesses. With the use of technology and data analytics, companies can now reach customers across borders with products/ services tailored to meet the peculiar needs of customers in various countries.

As data analytics has become a pivotal part of most businesses, understanding the regulatory framework for proper data usage is imperative. More specifically for local and multinational companies playing in the Nigerian market, understanding the requirements of Nigerian data protection laws for cross border transactions is key.

In this article we have set out in a simplified manner the requirements of the Nigerian data protection laws for cross border transactions.

 

1. WHAT ARE THE APPLICABLE REGULATIONS?

The primary regulations are the Nigeria Data Protection Regulation (NDPR) and the NDPR Implementation Framework.

 

2. WHAT TYPE OF DATA IS SUBJECT TO REGULATIONS ON CROSS-BORDER TRANSFER?

Any personal information that can be used to identify a Nigerian citizen (Personal Data) is regulated under the NDPR and subject to the restrictions on cross-border transfer. Please note that anonymised data is excluded from the restrictions on data transfer in Nigeria.

 

3. WHEN IS A CROSS-BORDER TRANSFER CONSIDERED TO HAVE OCCURRED?

A company will be considered to have transferred data outside Nigeria where the company:

i.   hosts or transfers data to a database maintained by a company located outside Nigeria (Foreign Company);

ii.  grants staff and/or other third parties of a Foreign Company access to Personal Data; or

iii. relies on a Foreign Company for technical support and in the process grants that company access to the personal data of Nigerians.

 

4. ARE THERE COUNTRIES DEEMED AS HAVING ADEQUATE DATA PROTECTION LAWS UNDER NIGERIAN LAW?

Yes,  countries deemed to have adequate data protection laws are included on a white list contained in the NDPR framework. These include, all African countries who are signatories to the Malabo Convention 2014; all EU and European Economic Area Countries; United States of America; Japan and many more.

 

5. ARE COMPANIES IN NIGERIA FREE TO TRANSFER DATA TO COUNTRIES ON THE WHITE LIST?

Yes, but prior to such a transfer, the companies are expected to enter into data transfer agreements with the Foreign Company detailing the terms of the transfer and the measures to be adopted by the Foreign Company to protect the Personal Data received.

 

6. CAN A COMPANY IN NIGERIA TRANSFER TO COUNTRIES NOT LISTED ON THE WHITE LIST?

Yes, they will however be required to: (i) notify the individual whose data is being transferred of the risk involved in transferring data to a country without adequate level of protection; (ii) obtain the individual’s consent; and (iii) enter into a data transfer agreement with the Foreign Company prior to any such transfer.

 

7. DOES THE REQUIREMENT FOR CROSS-BORDER TRANSFER OF DATA DIFFER WHEN THE TRANSFER IS BETWEEN COMPANIES WITHIN THE SAME GROUP/SUBSIDIARIES?

Yes, to share personal data with companies within the same group, the transferring company is required to execute a Binding Corporate Rule (BCR) or  include Standard Contracting Clauses (SCC) in data transfer agreements. These documents can be provided by licensed Data Protection Compliance Organisations in Nigeria.

 

CONCLUSION

A company that complies with the foregoing requirements of Nigerian law when transferring data out of Nigeria would avoid incurring substantial financial penalties from the National Information Technology Development Agency (NITDA).

It is pertinent to note that companies (both local and foreign) handling data of over 1000 Nigerian citizens are required to engage the services of a licensed Data Protection Compliance Organisation to review their activities and make recommendations geared towards ensuring compliance.

For clarity on the foregoing article,  you may contact Pavestones Legal via info@pavestoneslegal.com. Pavestones Legal is one of the few licensed Data Protection Compliance Organisations in Nigeria and is also a full-service law practice providing support to both local and foreign clients.

NIGERIA’S VALUE ADDED TAX (“VAT”) REGIME; REGULATORY UPDATE

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

The Federal Inland Revenue Service (FIRS) as an agency of the Federal Government, has been solely responsible for the administration and management of VAT assessment and collection in Nigeria. The judgment delivered by the Federal High Court, Port- Harcourt Division on 9th August, 2021, in AG Rivers State v. FIRS & AG Federation[1]  has effectively barred the FIRS from administering, Nigeria’s VAT regime.

This newsletter discusses the implications of the decision of the Federal High Court as well as subsequent events which have occurred after the court’s decision.

What is VAT?
VAT is a consumption tax paid on all goods and services provided in or imported into Nigeria. VAT, which is currently charged at the rate of 7.5% is payable by individuals, companies, and government agencies. Certain goods and services including medical and pharmaceutical products, medical services basic food items, books and educational materials, exports e.t.c. are exempt from VAT. The VAT Act, 1993 (as amended) vests the FIRS with the power to administer the collection VAT from taxable persons in Nigeria.

Implications of the Judgement of the Federal High Court
In the case of AG Rivers State v. FIRS & AG Federation, the Federal High Court provided a literal interpretation of the Constitution of the Federal Republic of Nigeria, 1999 as amended (the “Constitution”), holding that the National Assembly is only empowered to enact laws in relation to stamp duties and the taxation of income/profit and capital gains. The court also held that pursuant to the Constitution, the Federal Government or any of its agencies, lacks the powers to impose and collect VAT, or any other tax not specifically provided for in the Constitution.

The decision of the Federal High Court, until upturned by a superior court, essentially renders the VAT Act and its amendments, void.

By implication therefore, individual states are entitled to enact laws for the administration of VAT and can appoint their respective tax agencies to supervise the collection of taxes within the state. The VAT Act will, however, still be applicable in the Federal Capital Territory and the FIRS will continue to be responsible for the administration of its VAT.

In addition, every state will be entitled to the revenue accruing from the VAT collected by it and VAT from each state will no longer be pooled into the Federation Account.

Lagos State VAT Bill
By virtue of the Federal High Court’s decision on VAT, states like Lagos State and Rivers State have raced to the drawing board to develop their own VAT laws which will govern the administration of VAT in the state.

Lagos State for example, has passed a bill to impose and charge VAT on certain goods and services and to provide for the administration of VAT in Lagos state. The Value Added Tax Bill (“Bill”) has been passed by the Lagos State House of Assembly and awaits the assent of the Lagos State Governor. Some key provisions of the Bill are highlighted below.

1.Rate of Tax: 6% of the value of goods and services as opposed to the current rate of 7.5% imposed by the Finance Act, 2019.

2.Administration of VAT: The Lagos State Internal Revenue Service (LIRS) has been vested with the power to administer VAT in Lagos State. All taxable persons are required to register with the LIRS within 6 months of the commencement of the VAT Law. Failure to comply is considered an offence and is punishable by a fine of N50,000 (Fifty thousand naira) for the first month of default and N100,000 for each subsequent month of default.

3.Returns to the LIRS: Taxable persons are required to render returns to the LIRS on or before the 21st day of the subsequent month after provision of goods and services. Failure to comply will make such person liable to a fine of N500,000. (Five Hundred Thousand Naira) for every month of default.

4.Treatment of non-resident companies: Companies that carry on business within Lagos State but are not resident in the state are required to register with the LIRS using the address of the person with whom it has a subsisting contract for the provision of goods and services. The non-resident company is to make provision for VAT in its invoice and the person to whom the services were rendered or the goods were provided is required to remit the tax to the LIRS.

5.Establishment of the Value Added Tax Tribunal: The Bill also establishes a Value Added Tax Appeal Tribunal which shall assist the LIRS in resolving disputes arising from tax assessments.

6.Sharing formular for revenue accruing from VAT: The Bill provides that the revenue obtained by the Lagos State Government from VAT will be distributed between the state and local governments in the ratio of 75% to 25%.

Conclusion

Many have raised concerns as to the practicability of the administration of VAT at the state level with respect to the taxation of non- residents of the states, the treatment of output and input tax, as well as the taxation of goods imported into the country. The FIRS has also appealed the judgment of the Federal High court on grounds that it is the appropriate agency to administer VAT in the country given the above listed complications. In the event that the appellate court decides against FIRS, it is recommended that the states take up the mantle that has been handed to them and effect necessary measures to ensure that the VAT is administered efficiently.

[1] FHC/PH/CS/149/2020

eNAIRA – THE FUTURE OF DIGITAL CURRENCY IN NIGERIA?

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By Seun Timi-Koleolu and Eustace Aroh

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On the 5th day of February 2021, the Central Bank of Nigeria (“CBN”) instructed banks and other financial institutions to refrain from dealing with cryptocurrency (a digital currency) and facilitating payment for cryptocurrency exchanges. With this, various crypto-based companies were frustrated out of the Nigerian market and the growth of other digital and virtual currencies in Nigeria decelerated.

Interestingly, the CBN has recently launched a project titled “Project Giant” on June 24, 2021; a project to produce and issue a government-controlled digital currency in Nigeria known as “eNaira”. On August 27, 2021, the CBN circulated a presentation to licensed Financial Institutions (“FI”) which provides guidelines on the issuance and operation of eNaira in Nigeria (“Presentation”). In this article, we have highlighted the pertinent features of eNaira and its prospective operations in Nigeria.

  1. What is eNaira?

eNaira is a digital currency to be issued by the Nigerian government with the same value as fiat naira (i.e. physical naira notes). It is to be purchased by the general public through FI and transferred into e-wallets maintained by customers. It is similar to the Chinese digital renminbi and the Swedish e-krona.

  1. How is eNaira different from cryptocurrency?

Cryptocurrency is a decentralised form of encrypted digital currency based on blockchain technology whilst eNaira is a government-controlled digital currency envisaged to be more stable than cryptocurrency as its value is to be at parity with the country’s official currency.

  1. What is the benefit of eNaira over regular digital banking?

Unlike digital banking which involves customers transacting with money maintained by them in a bank, eNaira is actual money earned and maintained by customers in their e-wallets. Consequently, customers will be able to transact with it like fiat currency without the involvement of intermediaries as is the case with digital banking. The elimination of the intermediaries is expected to reduce the cost and time of transactions. Furthermore, cross-border transactions are expected to become easier. It also provides an opportunity for unbanked Nigerians to transact with eNaira without a private bank account.

  1. How will eNaira operate in practice?

eNaira will be supplied by the CBN (from their Stock Wallet) to intermediaries (licensed FIs) for onward supply to individuals. Consequently, FIs will maintain a treasury wallet to receive eNaira from the CBN. eNaira transactions will operate on new and existing systems including the Nigerian central switch i.e. the Nigeria Inter-Bank Settlement System Plc (NIBSS).

There are to be four major parties in the operating model of eNaira. (i) The CBN; (ii) the licensed FIs (responsible for issuing eNaira to Customers, monitoring digital transactions under their institution; (iii) Businesses and Merchants (responsible for complying with the CBN regulation on KYC and AML/CFT); and (iv) Customers (responsible for maintaining an eNaira Wallet).

  1. How will the eNaira Wallet operate?

Upon launch of the eNaira, the CBN will provide an interim e-wallet (the Spead Wallet) for customers until FIs can develop and launch their individual wallets. There will be three tiers of wallet as highlighted below.

Types of wallet Cumulative balance Limit Transfer Limit KYC Requirement
Tier 1 300,000 50,000 No existing bank account, phone number validated by NIN
Tier 2 500,000 200,000 Existing Bank account and Bank Verification Number (BVN)
Tier 3 5,000,000 1,000,000 Existing Bank account and BVN
Merchant No limit 1,000,000 Full KYC requirement and Anti-money laundering and counterfeit terrorism regulation of the CBN

 

Conclusion

For eNaira project to be successful, a good number of Nigerians (including companies and government agencies) will have to maintain e-wallets. Nevertheless, eNaira will be troubled by some of the current issues of the country including illiteracy, lack of power, lack of internet coverage, and the volatility of the Nigerian currency.

Though the provisions of the Presentation are tentative as the CBN is yet to issue a draft guideline or framework on the operation of eNaira, this project appears to be a step in the right direction to achieving a cashless economy.

There are also hopes (though there is no indication of the strength of this) that the guidelines of the CBN will create an avenue for the operation of cryptocurrency and virtual currencies in Nigeria.