TAXATION OF CRYTPOCURRENCY UNDER THE 2022 FINANCE BILL

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By Aderonke Alex-Adedipe and Sharon Okpo

 

Introduction

In our previous article, we highlighted some of the proposed amendments/reforms to the various tax laws in operation in Nigeria under the 2022 Finance Bill (the “Bill”). Some of the highlights of the Bill include taxation of digital assets, taxation of gaming and gambling companies, tax increase for flaring companies, and rollover relief on shares and stocks, amongst others.

In this article, we will be examining the provisions of the Bill on the taxation of digital assets and its implications on businesses and individuals should the provision be maintained upon enactment of the Act.

Provision of the Bill

Section 3 of the Bill provides as follows:

Section 3(a) of the Capital Gains Tax Act (“CGTA”) is amended by inserting the phrase “digital assets” after the word “debt” as follows-

“subject to any exceptions provided by this Act, all forms of property shall be assets for the purposes of this Act, whether situated in Nigeria or not, including- options, debts, digital assets, and incorporeal property generally”

By the above provisions, digital assets which include cryptocurrency are considered property or asset and are made subject to the provisions of the CGTA.

The justification for this provision according to the Bill is to provide clarifications on the basis of taxing cryptocurrency and other digital assets in line with the government’s efforts at enhancing cross-border and international taxation of growing e-commerce with the emerging markets. Upon enactment and implementation of this provision, Nigeria will become one of 3 African countries to impose tax on cryptocurrency.

Implications of the Provision of the Bill

  1. Capital gains tax at a flat rate of 10% shall apply to all gains (after making such deductions as are allowed in the computation of the gains) made following a disposal (i.e sale, transfer, assignment, compulsory acquisition, etc.) of all or any part of cryptocurrency held by any individual to whom the Personal Income Tax Act (“PITA”) or legal entity in any year of assessment. This shall be in addition to the tax obligations that may be imposed under PITA;
  2. The owner or dealer in cryptocurrency shall have the obligation to report every cryptocurrency transaction and disposal made by him in the particular year of assessment.

Conclusion
An attempt by the government at bringing cryptocurrency transactions under its tax net has been long anticipated, especially following the Securities and Exchange Commission’s (SEC) moves to regulate cryptocurrency and other digital assets. However, it is expected that the government and relevant tax authorities may experience some challenges in enforcing this provision, especially with the anonymous nature of cryptocurrency transactions. We expect that upon enactment of the Bill into law, further directives and guidelines on compliance by individuals and companies will be issued by the relevant authorities.

KEY PROVISIONS IN THE NIGERIAN FINANCE BILL TO TAKE EFFECT IN 2023

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By Seun Timi-Koleolu and Adedolapo Arisoyin

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Introduction

The Nigerian Finance Bill (the “Bill”) which is to take effect in January 2023 is currently undergoing the legislative review and approval process at the house of representatives. It was shared by President Buhari and presented by the Minister of Finance, Budget, and Economic Planning to the House of Representatives on Thursday, December 22, 2022.

The Bill is proposing key reforms to tax laws and other relevant laws in Nigeria.

We have highlighted in this article, some of the proposed amendments in the Bill.

Key amendments in the Bill

1. Taxation of digital assets: The Bill proposes that gains on digital assets are to be subject to tax under the Capital Gains Tax Act at the rate of 10% (ten percent).

2.  Taxation of gaming and gambling companies: The Bill proposes that income derived by a company from gaming, gambling, betting, or lottery business is to be subject to tax under the Companies Income Tax Act.

3. Tax increase for gas flaring companies: In line with Nigeria’s climate change commitments to reducing greenhouse gas emissions, the Bill proposes that gas-flaring medium and large companies are to be liable to corporate taxation at a 50% rate. It is anticipated that this rate will help to deter gas-flaring, as it is more than the typical 30% nominal income tax rate.

4. Exclusion of losses: The Bill proposes the set-off of capital losses against capital gains on two identical capital assets (i.e. two assets that are of the same kind) in a taxable year.

5. Remittance of Value Added Tax (“VAT”) by specific entities: Entities like MTN, and oil and gas companies, appointed to deduct VAT at source on invoices received from their vendors will be expected to remit such VAT to the Federal Inland Revenue Service on or before the 14th day of the following month (currently 21st day of the following month).

6. Import Levy: In addition to existing customs duties and other charges, a levy of 0.5% is to be imposed on goods imported into Nigeria from outside Africa. It is stated that this duty will be used to make payments for subscriptions, and other financial obligations to multilateral institutions like the African Union, African Development Bank e.t.c

7. Investment allowance: The existing investment allowance of 10% (ten percent) applicable on qualifying expenditure incurred on plant and equipment will no longer apply as from December 31, 2022, where the Bill is passed as an Act.

8. Rollover relief on shares and stocks: Investors need to note that they will be required to   pay a tax of 10% on the gains they make from the sale of their shares in startups and other companies. The Bill, however, proposes that investors that purchase shares from startups will be eligible to roll over reliefs in the event that they reinvest the proceeds of the sale of such shares. Rollover relief provides a mechanism for deferring payment of tax from the sale of an asset, where the proceeds from such sale are reinvested to buy new assets.

9. Goods liable to excise duty: All services including but not limited to telecommunication services, provided in Nigeria will be subject to excise duties.

10. Supervisory role: The Minister of Finance, Budget, and Economic Planning is to be charged with the responsibility for the supervision of the Tariff Review Board.

Conclusion                                                           

As mentioned earlier, the Bill is currently undergoing review at the house of representatives, and we await the final Act. It will, however, be interesting to see how the provisions on the taxation of digital currency will be implemented particularly in the cryptocurrency space.

 

 

REGULATORY UPDATE: APPLICATION PROCEDURE FOR ADMISSION TO THE CENTRAL BANK OF NIGERIA’S REGULATORY SANDBOX

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

In January 2021, the Central Bank of Nigeria (“CBN”) issued the Framework for Regulatory Sandbox Operations  (the “Framework”), which provides for the establishment of a regulatory sandbox in Nigeria and the rules guiding its operations. In our previous newsletter on the establishment of the Framework, we highlighted the application process for admission into the sandbox.

In view of the foregoing, the CBN has issued a notice to participants in the financial sector to submit expressions of interest to participate in the sandbox (“Invitation”).

Today’s newsletter briefly highlights the application procedure as well as the eligibility criteria for admission to the Sandbox  in view of the CBN’s Invitation.

1. What is the CBN’s Regulatory Sandbox?

The CBN’s regulatory sandbox is a process established by the CBN for companies involved in the provision of financial technology to conduct live tests of new, innovative products, services, delivery channels, or business models in a controlled environment, with appropriate regulatory oversight. It enables the CBN to remain well-informed about innovations in the financial services sector and ensure consumer protection while promoting innovation.

2. Who is Eligible for admission into the Sandbox?

According to the Invitation, all entities with innovative financial solutions are eligible to apply for admission into the Sandbox, including existing CBN-licensed institutions. The CBN will, however, consider the following criteria when selecting candidates for the sandbox:

  1. the product, service or solution (“Product”) must be innovative with a clear potential to improve the accessibility, security and quality of financial services. It should also address gaps in, or provide new opportunities for financial benefits or investment in, the Nigerian economy;
  2. the applicant should be able to test the Product within the transaction value and volume limit approved by the CBN;
  3. the applicant should have conducted an adequate assessment of the functionality, usefulness and inherent risks of the product. In addition, the risks of the product should not affect existing financial structures and consumer experience;
  4. the applicant is required to possess the requisite resources and expertise to support the testing of the Product in the Sandbox and mitigate potential risks; and
  5. the applicant must present a business plan showing that the Product can be successfully deployed after exiting the Sandbox.

3. What is the Application Process?

a. Submission of the Required Documents: The Invitation requires applicants to complete an online form and provide the following documents to the CBN:

    1. a board resolution approving the application;
    2. the incorporation documents of the Company:
    3. the Company’s profile;
    4. the resumes of the members of the board of directors and management team of the Company;
    5. the business plan of the Company;
    6. the Company’s AML/CFT Policy; and
    7. patent certificates or evidence of patent registration (where applicable) and other documents.
  3. b. Acknowledgement and Evaluation of Applications: Successfully submitted applications will be acknowledged by the CBN following which an applicant is to be informed of the approval or rejection of its application within 60 working days after the deadline for the submission of applications.

c. Approval of Application: Upon approval of an application, a Letter of Approval will be issued to the entity by the CBN, authorizing the applicant to test its Product within the Sandbox. It is important to note that approval to participate in the Sandbox does not guarantee a license from the CBN. Upon a successful exit from the regulatory sandbox however, the CBN will provide regulatory support on a case-by-case basis.

4. What is the Deadline for the Submission of an Application to the CBN?

Applicants are required to submit an application to be admitted to the Sandbox on or before 1st February 2023.

 

Conclusion

As the principal regulator of the Nigerian financial sector, it is vital that the CBN remains at the forefront of financial innovation and by extension, financial regulation. Therefore, the CBN’s Sandbox is a welcome development as it will help the CBN remain informed about new products within the sector. It is hoped that the CBN’s invitation to the public will encourage players within the Nigerian financial space to participate in the CBN’s Sandbox programme.

REGULATORY UPDATE: EXTENSION OF TIME FOR THE REGISTRATION OF DIGITAL MONEY LENDING COMPANIES WITH THE FEDERAL COMPETITION AND CONSUMER PROTECTION COMMISSION

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By Seun Timi-Koleolu and Sharon Okpo

As stated in our previous article, the Federal Competition and Consumer Protection Commission (the FCCPC”) on August 18, 2022, issued the “Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022” (the “Framework”) directing all existing digital money lending companies (“Digital Lenders” or “Company”) in Nigeria to register with the FCCPC within ninety (90) days from the date of issuing the Framework; and all new Digital Lenders to register as they commence operations.
In furtherance of this directive, the FCCPC has commenced registration of existing Digital Lenders and published names of Digital Lenders that have been granted full or conditional approvals. The FCCPC recently released an official notice on December 6, 2022, extending the deadline for registration from November 14, 2022 to January 31, 2023, to enable digital lending companies who were unable to meet the deadline, to comply with the directives issued under the Framework.
It is important to note that the provisions of the Framework should be adhered to by Digital Lending Companies in addition to any other regulatory requirements set out by the Central Bank of Nigeria (CBN) in regulations and licenses; the Nigerian Data Protection Bureau (NDPB); and all other laws and regulations that previously applied to the Company, depending on the license held by it (see our article on FinTech licenses).
In this article, we have set out the requirements for registering with the FCCPC in line with the provisions of the Framework, and other documents that may be required of companies wishing to be registered.

Requirements for Registration

  1. In complying with the provisions of the Framework, Digital Lenders are required to-

1. Submit a duly completed FORM DLG 001 highlighting the following information:

  1. registered name, physical address, and contact details of the Company;
  2. website of the Company;
  3. identity and nationality of its promoters, directors, and initial key role players;
  4. source(s) of funding including equity, debt, or otherwise. This should include details on the nature of the instrument, capital injection, the identity of sources, and the nature of business of sources;
  5. details of affiliations with other companies, institutions, or similar businesses, whether local, regional, or global;
  6. consultants, agents, or any other person assisting with the registration process, operations, or management. The Company is required to authorize a representative to act on its behalf;
  7. bankers;
  8. proposed interest rate regime and loan balance calculation methodologies;
  9. any licenses authorizing the business to operate; and
  10. list of all apps in operation or intended for operation. The Company is also required to notify the FCCPC of any material modifications made to these apps or the introduction of new apps.

2. In addition to the FORM DLG 001, the Company is also required to submit the following documents;

  1. certified copy of its certificate of incorporation;
  2. a brief description of the business of the Company;
  3. organogram of the Company;
    d) name and address of person(s) within the Company authorized to accept correspondences on behalf of the Company;
  4. evidence of membership in any trade or professional association;
  5. any service level agreements with service providers with respect to operations;
  6. evidence of feedback and complaint resolution mechanism;
  7. evidence of tax payments or tax waivers where applicable;
  8. all applicable fees associated with the service and
  9. a declaration of digital lending businesses in Nigeria (FORM DLG 002). This declaration is basically a confirmation by the Company’s directors of its compliance with all provisions of the law with respect to third-party privacy rights and personal data, as well as recovery practices that are consistent with fair lending principles provided for in the FCCPC Act 2019. The declaration should also confirm that the Company’s processes and operations comply with the CBN Guidelines on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).

B. Following a review of the Company’s application, the Company may also be required to provide further documents to ensure compliance with the provisions of the NDPR including the following:

  1. terms of use,
  2. privacy policy,
  3. code of conduct, and
  4. evidence of implementation of feedback and complaint resolution mechanism

Conclusion
Even though the Framework does not set out penalties for non-compliance, the penalty set out in Schedule 1 of the FCCPC Administrative Penalties Regulations 2020 will apply. There is also the risk of the Company being banned from operating until they conform and other sanctions being imposed on the Company.