TRANSFORMING NIGERIA’S DIGITAL LANDSCAPE: REVIEW OF THE NATIONAL DIGITAL ECONOMY AND E-GOVERNANCE BILL, 2024

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By Aderonke Alex-Adedipe and Qasim Ogunjimi

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Introduction 

The National Digital Economy and E-Governance Bill, 2024, (the “Bill”) represents a strategic move in Nigeria’s digital transformation journey. Primarily, the Bill aims to drive economic growth through digital technology, improve public service delivery, and create a competitive environment for the Nigerian digital economy. It also seeks to create export-oriented capacities in Nigeria’s digital economy, support international digital trade and investments, and provide a legal framework for these activities.

These efforts align closely with Nigeria’s broader ambitions in the digital space, particularly in the context of regional integration through the Digital Trade Protocol of the African Continental Free Trade Area (AfCFTA) (the “Protocol”). The Protocol aims to streamline digital trade across African nations, removing barriers and harmonizing policies to facilitate cross-border e-commerce and digital transactions. This Protocol complements the Bill by supporting a cohesive digital trade environment across the continent. Together, these initiatives create a framework that not only enhances Nigeria’s digital infrastructure and public services but also positions the country as a key player in the African digital economy.

In this newsletter, we will explore the main aspects of the Bill, including its key provisions, and potential impact on Nigeria’s businesses, citizens, and economy.

KEY PROVISIONS OF THE BILL

The Bill encompasses several key provisions designed to transform Nigeria’s digital landscape. Here are the key highlights:

  1. Scope and Application of the Bill: The Bill applies to all electronic transactions and communications within Nigeria. It establishes the legal framework for the recognition, creation, and use of electronic records, signatures, and communications. Upon enactment, the Bill will apply to all public service institutions, private establishments, individuals and organisations conducting digital activities in Nigeria, either wholly or in part.
  2. Validity of Electronic Transactions: The Bill seeks to grant legal validity to electronic transactions, affirming that electronic records and signatures hold the same legal weight as traditional paper documents. The Bill also reaffirms that electronic records can be used as evidence in legal proceedings, provided they meet specific criteria for authenticity and integrity.
  3. Electronic Contracts, Signatures, and Time Stamps: The Bill seeks to recognize the formation and validity of electronic contracts. It outlines the requirements for contract formation, ensuring that electronic agreements are legally binding and enforceable. The provisions of the Bill regarding electronic contracts also extend to contracts formed by the interaction of an automated system and an individual or by the interaction of automated systems.The Bill also defines the use of electronic signatures, detailing the conditions under which they are considered valid. This includes ensuring the signatory’s identity and intent are adequately verified. Furthermore, the Bill introduces provisions for electronic time stamps, which are essential for verifying the timing of digital transactions and ensuring that records are accurate and reliable.
  4. Digital Government and Infrastructure: The Bill mandates the digitalization of government services and processes to improve efficiency, accessibility, and transparency. It covers areas such as online service delivery, digital record-keeping, and the integration of government systems. To ensure the use of electronic records and communications within government agencies, the Bill mandates the establishment of ICT units in every public institution and digital infrastructure to facilitate electronic governance.
  5. Consumer Protection: The Bill establishes measures to protect consumers engaged in digital transactions. It outlines obligations for service providers and vendors using electronic communications to sell goods or services. It requires them to provide clear and accessible information about themselves, their products, and the terms of transactions. It also includes provisions for the protection of consumer personal information, regulations on cyber insurance, measures against anti-competitive practices, and guidelines for online dispute resolution.
  6. Digital Trade and Investment: The Bill provides a legal framework to facilitate international digital trade and investments, including regulations that support cross-border e-commerce and digital transactions. With the aim of improving the country’s balance of trade and services, the Bill also includes initiatives to develop and enhance export-oriented capacities in Nigeria’s digital economy. This provision also aligns with the Protocol, which seeks to promote and regulate digital trade across African nations.

 

CONCLUSION

Whilst the Bill in its current form, contains many ambiguities in technical standards and potential implementation challenges, it marks a significant step forward in Nigeria’s journey towards a digital transformation. The Bill offers numerous opportunities for businesses to innovate and expand. With improved digital infrastructure and a supportive regulatory environment, businesses can leverage digital tools to enhance operations and reach new markets within and outside Nigeria. Additionally, individuals stand to benefit from improved access to digital services, and better governance through e-Governance initiatives. By establishing a clear legal framework for electronic transactions, enhancing digital government services, and supporting international digital trade, the Bill positions Nigeria as a potential leader in the African digital landscape.

LABOUR LAW IN NIGERIA- 7 KEY MEASURES TO MANAGE THE EMPLOYEE/EMPLOYER RELATIONSHIP

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By Seun Timi-Koleolu and Hillary Okorotie

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Introduction

To ensure companies operate efficiently in all sectors of the economy including the Tech and the Finance sectors, the employer-employee relationship must be properly managed.

The employee and employer relationship in Nigeria is generally governed by contractual terms. There are also various laws and regulations that guide the relationship including the Labour Act. Although the Labour Act is stated to apply to lower cadre employees and unskilled workers, it also is relied on for guidance on the minimum expectation from employers in Nigeria.

A recent update to the regulation of employee/employer relationships in Nigeria is the proposed wage review bill, which aims to increase the current minimum wage by 50% to N70,000 ($44). This increase will be subject to the National Assembly’s approval before implementation is commenced. The proposed wage review is as a result of discussions between President and the Nigeria Labour Congress for better treatment of employees.

Flowing from these discussions on the treatment of employees and frequent questions we receive on the management of the employee/ employer relationship, we have set out in this article 7 key measures to adopt to properly manage employees in Nigeria.

7 Key Measures To Manage The Employee/Employer Relationship

1.Comprehensive Employment Contracts: It is important to execute employment contracts with employees. It should clearly state the responsibilities of the employee and employer, details of compensation, probationary period, termination notices during the probationary period, the employer’s right to intellectual property developed, and confidentiality obligations during the term of the employment. It should also clearly set out the conditions under which any party may terminate the contract, including the notice period or compensation when notice is not provided. It is also important the employee contract states that the employee will be bound by the Employee Handbook and Policies to ensure that it is binding on all employees.

2.Share Options: A lot of startups and companies grant employees share options to encourage an ownership mindset and to improve the employee’s compensation. Where share options will be granted to the employee this should be clearly stated in the contract and the milestones to be achieved for such share option to vest in the employee. The terms of the Share Option can be included in a separate agreement which should also be executed by the employee.

3.Employee Handbook and Policies: In addition to a well-drafted employment contract, a comprehensive employee handbook should be prepared to state in more detail the policies of the company and acceptable/unacceptable conduct by employees. This should include the leave policy; IP policy, actions considered to be misconduct; disciplinary procedures in the event of employee misconduct; how the disciplinary team will be constituted; whistle blowing policy amongst others. It is important to note that the Handbook is not merely a document but a vital part of the employment contract and should be implemented by the company.

4.Employment Pre-conditions: Where the employment is to be subject to any form of security or other checks, it should be clearly stated in the contract of employment. All required checks or investigations should be conducted before the employee is given a firm offer to avoid the challenges of withdrawing an offer or terminating the employment agreement at the onset of the relationship.

5.Documentation of Disciplinary Procedures: Employers must be transparent and consistent with the implementation of disciplinary actions. The disciplinary procedure should be documented, and a detailed record of actions taken should be maintained. This is to ensure that these measures are applied fairly amongst employees and that records are available in the event of an unfair dismissal proceeding.

6.Probationary Period: Employees should be appraised before the end of a given probationary period. Where the employee’s performance is satisfactory, the employment should be confirmed in writing. Where an employee’s probation is to be extended for failure to meet the company’s expectations, a clear extension of the probationary period should be stated in writing. In the event the employer is unsatisfied with the performance of the employee and chooses to terminate the contract, the employer must adhere to the terms of the contract in terminating and ensure such termination is handled fairly.

7.Appraisals: Employees should be advised of the key performance indicators for his or her employment and regular appraisals should be carried out to help the employee understand the expectations of the employer and areas of improvement. Employers can also use the appraisal to identify gaps in the employee’s skill set and support by recommending or conducting training sessions.

Conclusion

As a general note, we advise that companies continue to review their workplace practices to ensure compliance with laws, regulations, judicial decisions (particularly the Industrial Court in Nigeria), and international best practices. Essentially, employers should aim to build a healthy workplace culture and reduce difficult employee/employer issues arising.

INSIGHTS INTO THE SEC ACCELERATED REGULATORY INCUBATION PROGRAM FRAMEWORK

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By Aderonke Alex-Adedipe and Olawale Atanda

 

Introduction 

The Securities and Exchange Commission (SEC) on June 28 2024, released the Framework on Accelerated Regulatory Incubation Program (ARIP) for the onboarding of Virtual Assets Service Providers (VASPs) and other Digital Investments Service Providers (DISPs). The ARIP Framework (the “Framework”) aims to streamline the onboarding process for current and potential entities seeking registration as VASPs by the SEC, and overall, to enhance compliance with the SEC’s regulatory standards.

This article answers key questions regarding the ARIP Framework and provides relevant guidance for entities seeking to participate in the ARIP.

  1. What is the Objective of the ARIP?

In addition to fast-tracking the onboarding of entities applying to the SEC and potential applicants seeking registration, participation in the ARIP grants entities preliminary approval to operate as VASPs pending the implementation of the Digital Assets Rules which regulate VASPs and other DISPs.

The ARIP provides participants with the opportunity to gain guidance on the SEC’s regulatory requirements before becoming fully operational in the capital market. Conversely, it will allow the SEC gain deeper insights into digital asset business models and through this understanding, enhance its regulations to ensure they effectively address market integrity, investor protection, and anti-money laundering concerns.

The ARIP is designed to foster innovation within the virtual assets space while ensuring robust regulatory oversight from the SEC. Through the ARIP, the SEC will be able to work closely with VASPs, facilitate their compliance with existing regulations, and promote best practices.

  1. Who is Eligible For the ARIP?

The scope of the ARIP is broad and applies to VASPs and other DISPs seeking or having approached the SEC for registration.  In particular, the Framework covers:

i. VASPs, platforms, token issuers operating in Nigeria or offering services to Nigerian consumers, regardless of their physical location.

ii. Individuals or entities involved in initial token offerings and unregistered digital investment platforms operating in the Nigerian capital market.

iii. Entities involved in Distributed Ledger Technology (DLT)-related services such as order execution, portfolio management, and custodian services.

iv. Foreign or non-residential issuers or sponsors of digital assets, including foreign operators targeting Nigerian investors through promotions, publications, or direct communication.

Entities who fall under the scope of the ARIP must be incorporated and have an office in Nigeria with its Chief Executive Officer/Managing Director resident in Nigeria. In addition, eligible entities must be performing investments and securities business and seeking registration or have pending virtual asset related applications with the SEC.

  1. What are the Application Steps and Requirements for the ARIP?

Applying for the ARIP involves several steps:

i. Initial Expression of Interest: Qualified entities must submit an initial expression of interest to the SEC via its online portal.

ii. Detailed Application: Where the SEC approves the initial expression of interest, a detailed application must be submitted consisting of a sworn undertaking, an ARIP operational plan and business model, the rules of the entity, a letter of no objection (if regulated by another sectoral agency), company documents, evidence of registration with the Nigerian Financial Intelligence Unit (NFIU), and other documents as required under the SEC Rules.

iii. Issuance of Approval in Principle (AIP): The SEC will assess the application and if cleared, will issue an AIP to the entity. The entity will be required to operate in line with the Investment and Securities Act (ISA), 2007 and the SEC’s Rules. Approved entities will operate within the ARIP for a period yet to be determined by the SEC.

  1. What Happens After the ARIP Period?

Upon the expiration of the ARIP period, participants are expected to be registered formally by the SEC. The SEC may take one of several actions:

i. grant successful participants formal registration approval to operate in the Nigerian capital market, subject to compliance with all existing rules and regulations;

ii. adopt new regulations, guidelines, or notices based on insights gained from the ARIP;

iii. or deny permission for the participant to operate in Nigeria under the SEC Rules.

In granting registration status, the SEC may also organize training and examinations for sponsored individuals, with successful candidates interviewed prior to registration. It is important to note that the ARIP framework is not intended to circumvent existing rules and regulatory requirements.

  1. Can SEC Terminate or Remove Entities From the ARIP?

The SEC reserves the right to terminate participation in the ARIP if a participant is deemed unfit, breaches any imposed conditions, violates the ISA, SEC Rules, or other relevant laws, deviates from its operational plan, or for any other reason the SEC finds appropriate.

Additionally, the SEC may withdraw or suspend approval to participate in the ARIP at any time if the participant fails to implement required safety measures, submits false or misleading information, contravenes any applicable law, undergoes liquidation, breaches data security and confidentiality requirements, operates in a manner detrimental to customers or the public, or fails to address defects leading to service disruptions or fraud incidents.

  1. What Fees and Penalties Are Associated with the ARIP?

i. ARIP applicants must pay a non-refundable processing fee of N2,000,000 (Two Million Naira). They must also provide evidence of the required shareholder funds and maintain a current Fidelity Bond covering at least 25% of the required shareholder funds.* In addition, the SEC may impose additional financial requirements based on the nature, operations, and risks of the participant’s business.

ii. Participants who fail to comply with the stipulated requirements in the Framework face a penalty of at least N5,000,000 (Five Million Naira) initially, plus an additional N200,000 (Two Hundred Thousand Naira) for each day of default. Further administrative sanctions stated in the SEC Rules may apply depending on the severity of the violation.

iii. Commercialized VASPs operating trading, offering, and custody platforms without proper authorization or registration by the SEC will incur a penalty of at least N20,000,000 (Twenty Million Naira). Other digital investment platforms, including crypto brokers, dealers, advisers, and market makers operating without due authorization, will face a penalty of at least N10,000,000 (Ten Million Naira).

iv. Entities failing to comply with SEC rules and regulations may also face suspension from capital market activities.

Conclusion

The ARIP is a welcome development and a step forward in the advancement of the  regulation of digital assets and services in Nigeria. By providing a structured pathway for VASPs and DISPs to gain preliminary approval and align with regulatory standards, the SEC, through the Framework, is signaling to investors and other stakeholders that it promotes innovation while safeguarding market integrity and investor protection.

For more on digital assets, please see our articles here:

1.https://pavestoneslegal.com/regulation-of-cryptocurrencies-and-other-digital-assets-in-nigeria/

2.https://pavestoneslegal.com/regulation-of-cryptocurrency-and-other-digital-assets-in-nigeria-2-0/

3.https://pavestoneslegal.com/update-on-regulation-of-digital-assets-in-nigeria-some-lessons-from-switzerland/

4.https://pavestoneslegal.com/regulatory-update-regulation-of-issuance-offering-platform-and-custody-of-digital-assets-in-nigeria/ 

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* The SEC has not stated the required shareholder fund for participants in the ARIP as of the date of this publication.

REGULATORY UPDATE: THE NEW WITHHOLDING TAX REGIME (DEDUCTION OF TAX AT SOURCE REGULATIONS 2024)

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By Seun Timi-Koleolu and Kofoworola Ayoola

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Introduction

Withholding Tax (WHT) is an advance payment of income tax that is deductible at source on specific transactions. In simple terms, where Party A and B enter a transaction for which payment is to be received and income tax is payable, Party B is required under the law to deduct a percentage before payment to Party A for remittance to the tax authority as an advance payment of income tax for Party A. Amounts withheld can be applied as tax credit during tax return filings to reduce the overall income tax liability of Party A.

The concept of WHT was introduced into Nigeria’s tax system in 1977 to curb tax evasion, reduce tax leakages and to gain insights on the commercial activities of resident and non-resident businesses. Prior to now, the WHT regime presented challenges for businesses due to ambiguities in applicable provisions of law, burdensome compliance requirements, irregularity of the WHT credit system and inconsistent practices by tax authorities. Recognizing this, the Ministry of Finance recently issued the Deduction of Tax at Source (Withholding Tax) Regulations 2024 (the “Regulations”), effective 1st of July 2024. These regulations aim to streamline the withholding tax process in Nigeria, making it more business-friendly and efficient.

In this newsletter, we highlight the key changes and the benefits of the new Regulations for businesses.

1. What is Withholding Tax?

WHT is not another form of tax, rather it is an advance payment of income tax deducted at various rates, now ranging from 2% to 20% depending on the transaction. WHT cannot be used to offset any other type of tax liability, except income tax liabilities. Also, WHT is first used in the year of assessment to which an income relates before it can be used to settle future tax liabilities.

2. What are the Transactions Subject to WHT and Applicable Rates?

The transactions subject to WHT and the applicable rates are as follows:

Corporate Recipients Non-Corporate Recipients
Transactions Resident Non-resident Resident Non-resident
Dividend, Interest 10% 10% 10% 10%
Royalty 10% 10% 5% 5%
Rent, Hire or Lease 10% 10% 10% 10%
Commission, consultancy, technical, management, and professional fees 5% 10% 5% 10%
Supply of goods or materials other than by the manufacturer or producer 2% N/A 2% N/A
Co-location and telecommunication tower services 2% 5% 2% 5%
Supply or rendering of services other than those specifically listed in the Schedule 2% 5% 2% 5%
Construction of road, bridges, building and power plants 2% 5% 2% 5%
Any other form of construction and related activities 5% 10% 5% 10%
Brokerage fee 5% 10% 5% 10%
Directors’ fee N/A N/A 15% 20%
Compensation for loss of employment N/A N/A 10% 10%
Entertainers and sport persons N/A 15% N/A 15%
Winnings from lottery, gaming, reality shows, etc. N/A N/A 5% 15%

3. What is the Scope of Application of the Regulations?

The new Regulations will apply to all WHT payments made under the following laws:

● Capital Gains Tax Act (CGTA)
● Companies Income Tax Act (CITA)
● Petroleum Tax Profits Tax Act
● Personal Income Tax Act (PITA)

4. What Transactions are exempted from WHT?

A few transactions exempted from WHT are: distributions or dividend payments to a real estate investment trust or real estate investment company; across-the-counter transactions; interest and fees payable to a Nigerian bank through direct debit of funds domiciled with the bank; goods/materials manufactured or produced by a supplier; imported goods from a foreign supplier with no taxable presence in Nigeria; winnings from a game of chance or reality show exclusively promoting entrepreneurship, academic, technological or scientific innovation, amongst other transactions listed in the new regulation.

5. What are the Key Changes and Benefits for Businesses under the Regulations?

a. Clear Unified Rules Guiding WHT Implementation

Prior to the issuance of the Regulations, businesses struggled to understand their withholding tax obligations as the rules guiding the implementation of WHT in Nigeria were ambiguous and fragmented. Although WHT provisions are still contained in various Acts, the Regulations now provide clear and simplified rules for its implementation.

b. Clarification on Persons Required to Deduct at Source

The Regulations introduce a single, clear list of entities required to deduct WHT at specific rates on eligible transactions, explicitly excluding individuals. This list applies uniformly across all Income Tax Acts covered by the Regulations. They are:

  • body corporate or unincorporate, other than individuals
  • governments, and their Ministries, Departments and Agencies (MDAs)
  • statutory bodies
  • public authorities
  • institutions, organizations, establishments and enterprises
  • payment agents on behalf of those listed above.

c. Exemption of Small and Medium Enterprises (SMEs) and Farmers from WHT Compliance

Section 2(2) of the Regulations exempts small companies and unincorporated bodies from the requirements to deduct WHT from any transaction, provided however that the value of the transaction during the relevant calendar month, is not above Two Million Naira and the supplier they are dealing with has a valid Tax Identification Number (TIN).

d. Improved Utilization of Tax Credits

Previously, entities from whose payments WHT had been deducted (“Tax Beneficiaries”) could not claim WHT tax credits from the Federal Inland Revenue Service (FIRS) against their eventual tax liabilities if the person who deducted WHT from the payments (the “Tax Agent”) failed to remit the tax to the authorities. However, Section 6(3) of the Regulations now permit Tax Beneficiaries to claim WHT tax credits through receipts issued by Tax Agents, regardless of whether the agents have remitted the deducted amounts. These unremitted amounts become the tax liability of the agents and are recoverable with applicable penalties and interest.

e. WHT to Function as an Advance Tax Payment and not an Additional Contract Cost

While it is common practice for contracting parties to adjust negotiated contract price upwards to account for anticipated WHT deductions, in a bid to shift the burden of WHT payment to the other party to the contract (i.e. Gross Up provisions in contracts), the Regulations now expressly state that a WHT payment should not be treated as an additional cost of a contract or transaction and therefore should not be included in the contract price as an additional cost.

Conclusion

The Withholding Tax regime has been the most complex aspect of tax compliance in Nigeria. The new Deduction of Tax at Source (Withholding Tax) Regulations 2024, represent a significant step forward for the tax authorities to address long-standing challenges faced by businesses in Nigeria. While more work remains to be done, particularly with respect to some ambiguities still within the WHT regime, we expect that the implementation of these Regulations will foster a more business-friendly environment, allowing businesses to thrive in Nigeria.