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.