Data Protection Update: Insights on the Data Protection Bill 2020

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The National Information and Technology Development Agency (“NITDA”) recently published the Draft Data Protection Bill 2020 (the “Bill”) for the input of stakeholders. The Bill, if enacted, will be an addition to the laws that govern the use and protection of the data in Nigeria.

The Bill seeks to establish a framework for the protection of personal data particularly to protect data subjects’ data vis-à-vis the use of such data by organisations and security agencies; establish a regulatory authority that will coordinate data protection and privacy issues and have oversight on data controllers and data processors; and ensure that personal data is processed in accordance with NITDA’s data protection principles.

The protections offered in the Bill are similar to those stated in the Nigeria Data Protection Regulation, 2019 (“NDPR”) issued by NITDA which regulate the collection and processing of data. However, the bill includes novel additions and expands on existing data protection rules which we have highlighted below.

 

Key Changes and Improvements in the Bill

  1. Scope of the Bill – The Bill builds on the scope of the NDPR by expressly listing the persons and bodies that will be subject to its provisions. These are: persons resident in Nigeria and Nigerian nationals irrespective of residence; public and private companies in Nigeria; unincorporated joint ventures or associations operating in Nigeria; any institution or body which maintains an office, branch or agency through which business activities are carried out in Nigeria; and foreign entities targeting persons resident in Nigeria.

 

  1. Categories of Data – The categories of data to be protected are expanded and include personal information such as religious affiliation, sexual orientation, and even trade union memberships. The Bill goes further to protect other personal information such as banking records, academic transcripts, health records, and personal subscription data. It should be noted that what constitutes personal data is not exhaustive under the Bill as it makes a provision for definitions to be included in guidelines to be made by the Data Protection Commission.

 

  1. Establishment of Data Protection Commission – The Bill seeks to establish a Data Protection Commission (the “Commission”) to enforce its provisions by regulating the processing of personal information; having oversight over data processors and controllers, amongst others. The powers of the Commission are similar to that of NITDA. It is important that there is a clear delineation of powers between the Commission and NITDA before the Bill is passed into law.

 

  1. Rights of a Data Subject – The Bill provides for persons to be notified within 48 hours after a data breach affecting them has been reported by the individual or body in possession of their data (“data controller”) to the Commission. The Bill, however, does not state when or how the data controller is to report to the Commission upon being aware of the breach of the data it controls.

 

  1. Penalties for Breach of Data Bill – The Bill strictly penalizes breaches of data by individuals/bodies, data controllers/processors, and staff of the Commission. The Bill provides for fines of up to ₦10,000,000.00 (Ten Million Naira) and imprisonment terms of up to 5 (five) years for persons or bodies convicted under the Bill. The Bill also provides for the forfeiture of assets by convicted persons under the Bill and allows for the compensation of victims of data breaches.

 

Conclusion.

The Bill, on its face, seems to repeat provisions already in the NDPR. It sheds light, however, on protections provided in the NDPR. There are also novel inclusions such as the Data Protection Commission and the significant expansion of penalties for data breaches. The Bill is in draft form and it is expected that NITDA would provide clarity on the questions that arise from the review of the Bill before it is passed into law.

DOING BUSINESS IN NIGERIA- IMPACT OF THE COMPANIES AND ALLIED MATTERS ACT 2020 ON REGISTRATION OF BUSINESS IN NIGERIA -Part 2

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1. Introduction

When President Muhammadu Buhari signed the Companies and Allied Matters Act 2020(“the Act”) into law on the 7th of August 2020, the business community was abuzz excitement in anticipation of the numerous reforms it would introduce. In our previous article, we highlighted several key provisions of the Act and their general impact on doing business in Nigeria. In today’s newsletter, we address specifically, certain newly introduced provisions which impact how businesses may be registered in the nearest future and how these new provisions will affect the ease of doing business in Nigeria.

2. What is a Small Company?

Under the Act, a small company is described as a private company which has a turnover of not more than N120,000,000, (One Hundred and Twenty Million Naira) net assets not exceeding N60,000,000 (Sixty Million Naira)  at least 51% of its shares held by its directors and which does not have any foreigner, government or government corporation as a shareholder. Such companies enjoy certain exemptions and benefits, one of which is that they can now have a single director and shareholder. This significantly reduces the bottleneck of the previous requirement to have a minimum of 2 (two) directors, thereby making business registration easier and faster for qualified businesses.

3.What are the newly introduced shareholding disclosure requirements?

To increase transparency and tackle asset shielding, the Act requires holders of significant control in a company to disclose same to the company and the Corporate Affairs Commission (“CAC”) within 7 days and 1 month of such acquisition, respectively. In addition, the Act also goes on to require disclosure of interests by a substantial shareholder in a public company. A substantial shareholder is defined under the Act as any person who directly by himself or through a nominee, holds at least 5% of shares  in a public company. While this implies that holding of shares by way of trust is now given recognition under the Act, the requirement of disclosure of nominee interest defeats the purpose of anonymity which individuals seek when nominating third parties to hold shares in trust for them.

4. Can you commence business prior to registration?

The Act imposes a penalty on any person or organisation that carries on business as a company, limited liability partnership, limited partnership or business name without being registered under the Act. This provision does not mandate individuals to register a business as Nigeria has a vast informal sector. The provision however seeks to penalise individuals who fraudulently carry on business as if they were registered. The penalty is a fine of N200 for every day during which the default continues.

5. Which data privacy concerns are addressed under the Act?

In line with current day realities of data processing and the need for protection of personal data by law, the Act now classifies Directors information, particularly their residential addresses as protected information.

Both the company and CAC are prevented from using such information unless it is required to communicate with the director or in compliance with the provisions of the Act.

6. CONCLUSION

It is clear that the provisions highlighted above were specifically introduced to facilitate the ease of forming and structuring a business entity in Nigeria. The Act took into account the complexities of business arrangements between individuals and the current trajectory of the business economy which calls for a more MSME inclusive landscape. We believe proper implementation and guidance by the Corporate Affairs Commission (CAC) as the regulatory body empowered by the Act will bring about positive changes and reforms to the commercial terrain in Nigeria.

THE NIGERIAN COMPANIES AND ALLIED MATTERS ACT 2020

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  The President of Nigeria on August 7,2020 signed into law the Companies and Allied Matters Act, 2020 (“CAMA 2020”) to replace the 1990 Act. CAMA 2020 which is now the primary legislation governing the formation and management of companies in Nigeria affects all residents and foreigners intending to or doing business in Nigeria. It is geared towards supporting the government initiative to improve ease of doing business in Nigeria[1].

Key changes introduced by CAMA 2020 are highlighted below in simple terms.

KEY CHANGE WHAT THIS MEANS
Single Shareholder for Private Companies. A company can now be registered with 1 shareholder; and businesses are no longer mandated to have a minimum of 2 shareholders. This makes setting up a business in Nigeria much easier. Section 18 of CAMA 2020.
A Company Limited by Guarantee (“CGTE”) can be registered without the Attorney General’s (“AG”) consent. Obtaining the AG’s consent remains part of the registration process for a CGTE. There is, however, now a 30days time limit for the AG to make a decision, failing which the application can progress to the advertisement stage. This should speed up the registration process. Section 26 of CAMA 2020.
Introduction of Limited Liability Partnership (LLP) and Limited Partnership (LP). The LLP and LP are newly introduced business structures by CAMA 2020. These options can now be selected by those who require the benefit of a limited liability structure with the tax status and flexibility of a partnership. Sections 746 to 810 of CAMA 2020.
Reduction of Filing Fees for the Registration of Charges. Previously, filing fees for registration or release of Charges were between 1 to 2% of the value of the charged assets. Now, the total fee payable to the Corporate Affairs Commission is not to exceed 0.35% for both private and public companies. This should result in cost savings for businesses. Section 222(12) of CAMA 2020.
Introduction of Electronic signature, electronic transfer of shares and virtual general meeting. In line with today’s world, (i) e-signatures can now be used to sign documents; (ii) companies can now maintain an e-register for share transfers; and (iii) private companies are now permitted by law to hold virtual meetings in accordance with their articles of association. Sections 101, 178(1) and 240(2) of CAMA 2020.
Small Companies are exempt from Audit requirements. Small companies and companies that are yet to commence business since incorporation are exempted from audit requirements under CAMA 2020. This reduces the regulatory burden on small businesses. Section 402 of CAMA 2020.
Appointment of a Company Secretary optional for small companies. Small companies are no longer mandated to appoint a Company Secretary. Although this should help small businesses save costs, small businesses need to weigh the advantages of outsourcing company secretarial tasks to legal professionals against cost savings. Section 330 of CAMA 2020.
Restriction on Single Person Holding Position of Chief Executive Officer and Chairman of the Board. CAMA 2020 states that, the office of Chief Executive Officer and the Chairman of the Board is not to be held by the same person, for public companies. This is in accordance with good corporate governance principles. Section 265(6) of CAMA 2020.
Restriction of Multiple Directorship in Public Companies.  The maximum number of director positions that can be held by a person in public companies is now 5. This should encourage good corporate governance. Section 307 of CAMA 2020.
Merger of Incorporated Trustees. Incorporated Trustees with similar aims are now permitted to merge. Note however that the Federal Competition and Consumer Protection Commission (FCCPC) is the apex regulator in matters of mergers and it would be useful to check the requirements of the Federal Competition and Consumer Protection Act 2018 in such cases. Section 849 of CAMA 2020.

 

[1] See our article on setting up a business in Nigeria on www.pavestoneslegal.com.

 

Startup Funding: Raising Capital as a Startup in Nigeria

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Lack of financing is a major constraint which businesses experience at the startup phase. Seed capital is required for startups to fund their operations and scale, thereby returning profits to founders and investors.

A major indicator that a startup may thrive is the availability of capital. Where capital is low or inadequate, the business operations will be impacted and the startup will likely fail. Research conducted on small businesses in the U.S. indicates that 79% of businesses fail because they start out with too little money and are unable to fund their operations.

It is therefore essential that founders are familiar with the several ways in which capital may be raised and identify the funding path that is best suited for the startup. Below are several funding sources that founders should consider when seeking capital.

  1. Crowdfunding

The proliferation of technology has seen the emergence of digital solutions aimed at solving every day problems. An example of this is the growth of crowdfunding sites which enable founders raise funds from the public. Crowdfunding[i] entails pitching the business idea of a startup to willing investors via an online platform. Investors may receive equity in exchange or a percentage of interest over a period of time. Crowdfunding is particularly advantageous to founders because they can decide the terms of the investment and easily retain control of their company.

  1. Incubators and Accelerators

Incubators and accelerators nurture and prepare startups to scale. Incubators are focused on startups  at the conception stage while accelerators target startups that are viable and ready to scale. Startups who successfully pass through incubators or accelerators typically receive a seed investment at the end of their program from the incubators/accelerators or investors/mentors introduced to the startups in exchange for nominal equity.

  1. Business Loans

Although, not typical, startups may apply for loans from banks or microlending companies. These may however attract high interest rates. Startups therefore must consider their revenue flow and ability to repay loans obtained from banks and other lending institutions.

  1. Angel Investors and Venture Capital Funding

Angel or seed investors typically fund startups at the beginning of their lifecycle while venture capital firms usually provide funds to startups that are viable with a recognized customer base and established revenue stream. These funding sources provide much needed capital in exchange for equity in the startup. The terms of the funding and equity participation are contained in agreements such as Simple Agreement for Future Equity and convertible loan agreements.

  1. Bootstrapping

Bootstrapping means growing a startup without external funding. Startups would have to rely on funding from its founders to operate and rely on revenue from sales. Bootstrapping is perhaps the toughest method of funding startups as it means that growth might be stifled or delayed due to the absence of funds required to scale their operations. However, where founders subsequently decide to receive external funding, it portrays a sense of seriousness to investors that the startup depended on the sweat and faith of its founders to grow and generate revenue. With bootstrapping, founders are also assured of absolute creative and operational control of the startup.

Conclusion

Although there are several sources of funding which startups can take advantage of, startups must consider which funding source is most suitable by weighing the pros and cons of the funding options available to them.

 

[i] Equity-based crowdfunding in Nigeria is potentially regulated by the Securities and Exchange Commission (SEC). Please find our article on the crowdfunding rules proposed by SEC here https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

You can also watch a brief analysis of the crowdfunding rules by our Partner, Aderonke Alex-Adedipe, here https://furtherafrica.com/2020/05/05/insights-funding-startups-in-nigeria-video/

 

2020 LIST OF GOODS AND SERVICES EXEMPTED FROM VALUE ADDED TAX IN NIGERIA

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Value Added Tax (VAT) is a consumption tax levied at the rate of 7.5% on goods and services supplied to consumers for a fee. The primary law governing VAT in Nigeria is the Value Added Tax Act 1993 (the “Act”), which provides for the administration of VAT and states the Goods and Services exempted from it. In addition to the Act, the Finance Act 2019 and the Value Added Tax (Modification Order), 2020, also guide the administration of VAT in Nigeria and contains provisions clarifying the list of goods and services which are exempt from VAT or zero rated VAT.

From a joint reading of the Act, the Finance Act 2019 and the Value Added Tax Act (Schedule Modification) Order 2020, the following are exempted from VAT:

  1. all medical and pharmaceutical products;
  2. basic food items;
  3. books and educational materials including educational performances and tuition from nursey to tertiary education;
  4. baby products;
  5. all exported goods and services;
  6. imported machines for use in the Export Processing Zone (EPZ) or free trade zone;
  7. fertiliser and locally made agricultural medicines and agricultural equipment;
  8. life insurance;
  9. transportation services for public use;
  10. lease on residential property;
  11. equipment for utilisation of gas in down-stream petroleum operations;
  12. microfinance banks people’s bank and mortgage institutions services; and
  13. locally manufactured sanitary towels.

Provisions of the Order

  1. The Order adopted the description of basic food items as contained in the Finance Act as agro and aqua based staple food. However, where these items are purchased in restaurants, hotels, eateries, lounges and other similar premises, they are not subject to the exemption. The Order further provides that basic food items sold by contractors, caterers and other similar vendors are not eligible for exemption.
  2. The Order provides that baby products refers to products made for children under three years including baby activity, entertainment products, clothing and even raw materials for diapers production.
  3. Educational books and materials: The Order expands the exemption to include electronic books. It also accommodates music materials, maps and charts, and materials used in vocational and religious education.
  4. Medical Products and Services: healthcare related services for both humans and animals are exempted from VAT. Furthermore, the raw materials used in manufacturing pharmaceutical products were included in the exemption list
  5. Transportation: only public road transport services shared by passengers are VAT exempt. Rented transportation for private use does not qualify for the exemption.
  6. Lease: the Order specifies that lease by individuals for residential purposes alone are VAT exempt. A lease by a corporate entity seeking residential accommodation for its staff will be subject to VAT.
  7. Petroleum Products: the Order exempts petroleum products from VAT including spirit, kerosene, natural gas, other liquefied petroleum gases and gaseous hydrocarbons.
  8. Renewable energy equipment such as wind and solar energy generators have been included in the exemption list.
  9. The Order provides the Common External Tariff (CET) Code for the products under the exemption list. This will provide clarity to importers, Nigeria Customs Service and other port authorities on the appropriate VAT treatment of the affected items and, hopefully, expedite their clearance at the ports.

However, on June 24th,2020, the Federal Inland Revenue Service (“FIRS”) issued a public notice to clarify enquiries it had received from taxpayers on the VAT exempt status of certain goods listed in the Order. In its clarification, the FIRS stated that certain items, which had been exempted from VAT by the Order, did not have the exemption status as they were not listed in the Act or a previous ministerial order. The items include: a) Natural gas; b) Essential raw materials for the production of pharmaceutical products; c) Renewable energy equipment; and d) Raw materials for the production of baby diapers and sanitary towels.

EFFECT OF THE FIRS NOTICE

The contradiction between the provision of the Order and that of the FIRS public notice on whether the items listed above are to be subject to the 7.5% VAT presents a conundrum for taxpayers, especially manufacturers and importers, in assessing their VAT liability. It is however pertinent to note that a public notice issued by the FIRS cannot override a subsidiary legislation promulgated by the Minister of Finance. Therefore, the provisions of the Order will be deemed to stand, pending the time the Ministry of Finance provides further clarity.

 

2020 LIST OF GOODS AND SERVICES EXEMPTED FROM VALUE ADDED TAX IN NIGERIA

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In Nigeria, Value Added Tax (VAT) is a consumption tax levied at the rate of 7.5% on goods and services supplied to consumers for a fee.  From a joint reading of the Value Added Tax Act 1993, the Finance Act 2019 and the recent Value Added Tax Act (Schedule Modification) Order 2020 (“Order”), below is the list of goods and services  exempted from VAT in Nigeria:

CONCLUSION

It should, however, be noted that the Federal Inland Revenue Service issued a public notice dated June 24, 2020, which seems to contradict the provisions of the Order stating that natural gases, raw materials for pharmaceutical products, renewable energy equipment, raw materials for baby diapers and sanitary products are not exempted from VAT. It is, therefore, advisable that businesses dealing in these goods seek legal advice prior to making key business decisions on the forgoing.

For more recent regulatory updates, visit our website at www.pavestoneslegal.com

THE CBN’S OPERATIONAL GUIDELINES ON GLOBAL STANDING INSTRUCTION: LEGAL MATTERS FOR CONSIDERATION

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In our newsletter of 17th July, 2020, we discussed the Operational Guidelines on Global Standing Instruction (“Guidelines”) recently issued by the Central Bank of Nigeria (“CBN”), its applicability, its triggering criteria and its potential impact on loan repayments by individual debtors. The CBN issued the Guidelines for the purpose of ensuring that debtors contractually authorize creditor financial institutions to set-off any unpaid debts by applying proceeds from any or all accounts operated by the customers across all Participating Financial Institutions licensed by the CBN. In today’s newsletter, we discuss in brief detail, some legal considerations which may arise from the application of the Guidelines. Below are some of the key legal considerations which are worthy of note:

 

What is the effect of a Global Standing Instruction (“GSI”) on accounts operated in joint ownership?

The Guidelines identify various types of accounts in respect of which a GSI can be activated. Whilst the GSI is only applicable to accounts operated by individuals, the Guidelines specifically seek to operate against accounts operated by debtors in conjunction with third parties, notwithstanding that the third parties may not be parties or beneficiaries of contractual relationships between a debtor, who is a joint account owner and the creditor financial institution.

Since the relationship between banks and their customers are contractual- in this case, a debtor and a creditor, the application of the GSI appears to deviate from the general principle of privity of contract which states that a person who is not party to a contract cannot be bound by the terms of that contract.

Consequently, in the absence of any legal agreement or written consent by a joint account holder, it becomes apparent that a question of the legality of the GSI and its application on joint account ownership arises. It is therefore unclear how the GSI will operate in this regard without violation of rights of joint account holders by the creditor.

 

How can potential disputes arising from a GSI mandate be resolved?

It is not unusual that potential disputes will arise in a debtor-creditor relationship, especially in relation to issues affecting excess bank charges and unauthorised debits. In the Guidelines, reference is made to an Arbitrator being ”… a person appointed to resolve a dispute between two parties by arbitration…” While it is not clear in what instances an Arbitrator may be appointed, or by what means, the language of the Guidelines suggest that an arbitration agreement may exist between Participating Financial Institutions/Bank and debtors and an Arbitrator may be appointed where there is a dispute in connection with an alleged wrongful GSI activation.  It is, however, uncertain whether Banks will be compelled to include arbitration clauses in their GSI mandates with customers. Assuming that this is the case, this potentially creates a restriction on the contractual right of parties to decide the forum for settling commercial disputes and ultimately, the rights of parties to the freedom of contract.

 

Are there any punitive measures against arbitrary activation of a GSI?

In addition to a fixed fine applicable to creditor banks for erroneous GSI activations, the Guidelines also specify that where an Arbitrator rules against a creditor bank for a disputed GSI transaction, the creditor bank shall also pay a fine of N10,000,000 (Ten Million Naira) or 10% of the disputed sum, whichever is greater.

This provision, it is believed will ensure that Participating Financial Institutions adhere strictly to the provisions of the Guidelines and that their powers to activate the GSI are not abused, thereby protecting the interest of debtors.

Conclusion

The ultimate purpose of the Guidelines is to increase creditor confidence by reducing non-performing loans. Prior to its proposed effective date (August 1, 2020), it is important that the highlighted legal issues be duly considered by the CBN to avoid a floodgate of disputes arising from the application of the Guidelines.

 

 

 

Loan Recovery in Nigeria – The Recent Central Bank of Nigeria Policy

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Access to credit in Nigeria has been low for a while, with the Central Bank of Nigeria affirming that only 5.3% of the adult population have access to finance. There are many reasons for this including high interest rates deterring borrowers and high rates of default on loans deterring creditors.

In a bid to reduce the high rate of defaults by borrowers, enhance loan recovery by financial institutions and generally improve creditor confidence in Nigeria, on July 13, 2020, the Central Bank of Nigeria (CBN) released Guidelines[i] on Global Standing Instruction (the “Guidelines”). Below are key points from the Guidelines.

What is a Global Standing Instruction? Global Standing Instruction (GSI) is a mandate or an instruction to be executed by a borrower authorizing financial institutions to recover a borrower’s debt from any or all accounts maintained by that borrower across various participating financial institutions through a direct set-off from deposits/investments held in those financial institutions.

What Financial Institutions can offer a GSI to a Borrower? All financial institutions in Nigeria licensed by the CBN including commercial banks, microfinance banks, finance companies, mortgage banks, and investment banks (“Financial Institutions”).

Does it apply to Individuals or Companies? The current guidelines apply to borrowers who are individuals and not companies. We expect that guidelines for company debtors would be issued by the CBN in due course.

How does the GSI work? Borrowers are to execute a GSI mandate/authorization in hard copy or digital when taking a loan from a Financial Institution. Where the Borrower defaults on the loan, the Financial Institution would be entitled to deduct the money owed plus interest due from any other personal account, joint account or child account in any other Financial Institution, linked to the borrower’s BVN (Bank Verification number)[ii].

When can a GSI be triggered? Where a Financial Institution is unable to recover debt through other means, the institution may trigger the GSI and the Nigerian Inter-Bank Settlement System will proceed to debit the Borrower’s accounts across various Financial Institutions. A GSI is to serve as a last resort by a Financial Institution and can only be used to recover the principal loan amount and accrued interest only (not penalty interests).

Can a GSI be triggered over a joint account? Yes. However, the CBN may need to clarify how GSIs are to work in relation to joint accounts. Where a GSI is triggered over a borrower’s joint account with a third party, how would the rights of the third party to the funds in the account be protected?

What happens if a GSI is triggered in error? The Guidelines provide for penalties where it is established that a Financial institution breached the provisions of the Guidelines. For example, where a Financial Institution activates a GSI in error, the bank will pay a flat fine of ₦500,000.00 and bear all liability from such erroneous GSI activation.

When will the GSI take effect? The Guidelines are to take effect from August 1, 2020 and will be applicable on all loans granted from August 28, 2019.

Conclusion.

The GSI is a good initiative which should help improve creditor confidence in the Nigerian credit system. It would also be beneficial to fintechs in Nigeria who utilize microfinance bank licences[iii] to offer credit facilities such as payday or small business loans. Fintechs/creditors who offer loans with the use of a moneylender’s license[iv]  are, however not permitted to use GSIs. Since such money lenders play a major role in improving access to credit in Nigeria, particularly to individuals, it would be useful for similar regulations to be put in place for their benefit.

[i] You can access our articles on previous guidelines issued by the CBN by clicking on this link https://pavestoneslegal.com/tag/central-bank-of-nigeria/

[ii] The CBN had previously indicated that BVNs would be utilized to assist in the recovery of loans. Please access our articles on this here https://pavestoneslegal.com/tag/bvn/

[iii] Find more articles on microfinance banks in Nigeria here  https://pavestoneslegal.com/tag/microfinance-banks/

[iv] Please access our article on Money lending services here https://pavestoneslegal.com/tag/money-lending/

Key highlights of the FIRS Circular on the Application of Stamp Duty Tax in Nigeria

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On 29 June 2020, Access Bank Plc., a tier one financial institution in Nigeria, issued a statement to its customers, promising to refund the stamp duty charges it had deducted from their accounts over the weekend. This came after the institution had notified its customers of a mistake in its operations records, wherein the bank omitted to pass the stamp duty tax on applicable transactions accrued between 1 February, 2020 and 30 April, 2020 to its customers, and instead, deducted the accumulated charge from their accounts. This was immediately followed by social media outrage on the purported illegality of such actions. While it is debatable whether the bank should have retroactively deducted such funds, the Bank’s actions were in line with the provisions of the Finance Act 2020 (Stamp Duty Act, CAP S8) (“FA”).

The FA amended Section 2 of the Stamp Duty Act  (“SDA”), by expanding the scope of the SDA’s definition of instruments liable to stamp duties, to include “electronic documents”. The FA, however, failed to provide clarity on the definition of the term. In response to this omission, the Federal Inland Revenue Service (“FIRS”) published an Information Circular (“the Circular”) on 29 April 2020 to provide clarity on the amendments introduced by the FA. The Circular also provided implementation guidelines to aid taxpayers in the remittance of their stamp duty taxes. We will therefore examine key highlights of the Circular below.

Instruments liable to Stamp Duties

The Circular provides clarity on the scope of instruments liable to be stamped, by specifically stating that written or printed dutiable instruments or receipts, Point of Sale (POS) receipts, Automated Teller Machine (ATM) printouts, receipts in form of SMS, Instant Messaging platforms or internet-based messaging service such as WhatsApp Messenger, electronically generated documents or receipts, emails etc are subject to stamp duty tax.

Banking Transactions

Section 89(3) of the FA requires all banks and financial institutions to charge stamp duties of N50 on certain transactions and remit the same to the FIRS. The Circular specifies that this charge applies to transactions of N10,000 and above on deposits and transfers. Additionally, banks are to pay stamp duties on eligible transactions including loan agreements, legal mortgage, guarantors’ forms, tenancy or lease and bonds.

Documents executed outside Nigeria

Another key highlight of the Circular is its clarification of the provision of the FA on the stamp duty charges for electronic documents executed outside Nigeria but received in Nigeria. In ascertaining the term “received”, the Circular posits that any document that has been executed outside Nigeria is received in Nigeria if it is i) retrieved or accessed in or from Nigeria, ii) stored on a device (including a computer, magnetic storage, etc.) and brought into Nigeria and iii) stored on a device in Nigeria.

Third Party Vendors

According to the Circular, corporate entities, ministries, departments, and agencies are required to charge and remit stamp duty tax on contracts with third party vendors. The charge, excluding Value Added Tax, is 1% of the contract value.

CONCLUSION

While the Circular is a forward thinking attempt to guide tax payers on the interpretation of the provisions of the FA, it raises serious questions on the feasibility of implementation, especially considering the fact that it imposes a duty on tax payers to voluntarily declare the stamp duty tax on electronic instruments. It also presupposes that the FIRS has the capacity to monitor all electronic instruments executed outside Nigeria and received in Nigeria.

FINTECH REGULATORY UPDATE – THE CENTRAL BANK OF NIGERIA REGULATORY SANDBOX

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On June 23, 2020 the Central Bank of Nigeria (CBN) released for review by stakeholders, a Draft Framework for Regulatory Sandbox Operations (the “Draft Framework”); aimed at  establishing a controlled environment where disruptive technology in the financial services can be tested under the supervision of the CBN.

The first regulatory sandbox in the world was formally established in 2015 by the United Kingdom Financial Conduct Authority (FCA) and was reported as successful with 90% of the companies that participated in the first cohort going on to market and 40% receiving investments. Since then many countries including Estonia, Indonesia, HongKong and states in the United States have established regulatory sandboxes.

The concept of a regulatory sandbox was borne from a need by regulators to not stifle Fintech innovation with unsuitable archaic Financial Services regulations. Accordingly, the regulatory sandboxes were geared towards enabling selected Fintechs test their products without formal licences; whilst the regulators are able to better understand the product and develop suitable regulations.

The Draft Framework is Nigerian government’s effort to encourage Fintech innovation whilst protecting consumer interests and is a welcome development. Below are highlights.

  1. Who is eligible to Participate in the Regulatory Sandbox? Financial Institutions already licensed by the CBN and all other companies looking to test innovative Fintech products.
  2. What kind of products will qualify? Products which are not already governed by existing regulations or prohibited by regulation. This means that products falling squarely within Mobile Money and Payment Service Bank regulations amongst other existing regulations would be unable to participate.
  3. How can a Fintech participate? Applicants are to apply through the CBN website once the CBN announces to the general public that it is taking applications. The admission process would be once a year.
  4. What is the admission criteria? Apart from documentary requirements such as corporate registration documents, applicants must show the usefulness and functionality of the product; and must have resources to support the testing.
  5. What would be the testing duration and product reach? The applicant is to advise on the duration required to test the product; the volume of consumers and the value of the product to be accessed during the testing period; subject to the CBN’s approval.
  6. What happens upon completion of the test? The Bank would decide whether to allow the product or solution to be introduced fully into the Nigerian market.
  7. Can the approval be revoked? At any time before the end of the testing period, the CBN retains the power to review and revoke the approval of any participant to partake in the Sandbox.

 

Conclusion

The sandbox is a step in the right direction by the CBN. The following points should however be considered in finalising the ‘Draft Framework.

  • The Draft Framework does not provide clear incentives for Fintechs to participate in the sandbox. For instance, will the grant of an approval or licence for the service be fast tracked for successful applicants?
  • The Draft Framework states that the Bank would advise innovators on how to align their products with existing laws and regulations. This should be clarified as it appears to defeat the concept of a regulatory sandbox which is for regulations to evolve to suit Fintech developments. For instance, the UK Financial Conduct Authority (FCA) provides for waivers or modifications of its rules to accommodate new technology.
  • It should be noted that other regulators such as the Securities and Exchange Commission and the Nigerian Communication Commission have indicated that they would establish regulatory sandboxes. The CBN should consider how an overlap between regulators would work. It would be tidier to have one regulator overseeing the regulatory sandbox for the Fintech space.