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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.

A FOREIGNER’S GUIDE TO ESTABLISHING A BUSINESS IN NIGERIA

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Aderonke Alex-Adedipe and Oghenekaro Faith Isiorho

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INTRODUCTION

As the most populous African nation, Nigeria continues to attract an increasing number of foreign investments annually. In 2020, the United Nations reported that Nigeria’s inflow of Foreign Direct investments (FDI) increased by 4.3% despite the outbreak of COVID-19. As the market expands, the government continually issues policies aimed at creating a conducive business environment. As a result of the existence of multiple regulations, however, a potential foreign investor may require some guidance in relation to establishing a business and navigating the Nigerian business environment.

 

In this article, we highlight some crucial considerations for foreigners seeking to do business in Nigeria.

 

  1. Company Registration

Generally, any individual or company registered outside Nigeria and having the intention of carrying on business in Nigeria must be registered at the Corporate Affairs Commission(“CAC”), except such company is exempt by law.[1]  The company is permitted to have 100% foreign shareholders except it operates in specific sectors such as oil and gas, aviation, domestic coastal carriage, etc, which require local ownership and control. A foreign entity must also have a minimum of two shareholders and two directors. Other requirements for registration may vary from one sector to another.

  1. Nigerian Investment Promotion Commission (NIPC) Registration:

The NIPC is empowered by the Federal Government to promote foreign investments in Nigeria. Every business with foreign participation is mandated to register with the commission and obtain a certificate of registration. To obtain a NIPC certificate the evidence of registration at the CAC is required.

  1. Business Permit

A business permit is issued by the Ministry of Interior in Nigeria. Every company with foreign participation in Nigeria is required to apply and secure the permit before commencing business activities. The process for the application has now been fully automated, thus registration can be made online.

  1. Tax Registration

It is important that after incorporation a registered company registers with the Federal Inland Revenue Service (FIRS) and obtains a Tax Identification Number (TIN). The TIN is often required to secure other licenses and operate a bank account. It is also necessary to register with the State Inland Revenue Service located in the state in Nigeria where it wishes to carry on business.

  1. Trademark Protection/Registration

 Companies that already have an existing trademark in their home countries are encouraged to register such trademarks in Nigeria to secure their usage by the company. A search must be conducted at the trademark registry to determine if the trademark is already in existence before registration will be approved or rejected.

Note that approval for trademark registration will not be granted where the trademark is already registered by another company unless permission or assignment of that trademark has been granted by that company.

  1. Operating a Bank Account

 A company will generally require capital to set up its business in Nigeria. Commercial banks in Nigeria are appointed by the Central Bank of Nigeria as authorized dealers for the purpose of importing foreign exchange and guaranteeing repatriation of foreign capital which may have been imported through a Commercial Bank. Commercial banks also play a crucial role in facilitating the importation of goods into the country.

Generally, the requirements for operating a bank account vary from one bank to another. Evidence of company registration, identities of a company’s directors, TIN of the company, proof of registered address, are however standard requirements.

  1. Sector-Specific Licensing

 A foreign company must enquire about the licenses required to do business in its proposed sector of operation.  Some sectors may have special licensing requirements which must be fulfilled by operators. For instance, a foreign company interested in the sale of cosmetics in Nigeria must first obtain a permit from the National Agency for Food and Drug Administration and Control; a company seeking to import and distribute electronics must obtain a certificate from the Standard Organisation of Nigeria (SON); also, a company that wishes to provide logistics services must be licensed by the Nigerian Postal Service (NIPOST).

  1. Advertising

 It is worthy of note that a license to operate may not always confer permission to advertise. A foreign company must ensure it obtains the requisite advertising permit before advertising to its consumers.[2]

CONCLUSION

It is advisable that a foreigner interested in doing business in Nigeria engages the services of a business lawyer who will offer transactional guidance specifically tailored to the sector which it seeks to operate.

 

 

[1] S. 80 of the Companies and Allied Matters Act 2020, exempts foreign companies engaged in specific individual loan projects on behalf of the donor country or international organization, export promotion activities or engineering consultants or technical experts engaged in individual-specific projects with the government or any of its agencies, from registration at the CAC.

[2] In Lagos state, the agency empowered to issue advertising licenses is the Lagos State Signage and Advertisement Agency (LASAA).

 

5 INCENTIVES AVAILABLE TO STARTUPS IN NIGERIA

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By Seun Timi-Koleolu and Oghenekaro Faith Isiorho

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Startups have the potential to play a major role in the growth of developing countries particularly because of their ability to: (i) improve the standard of living in countries through innovation; (ii) create wealth by attracting local and foreign investments; and (iii) reduce the rate of unemployment by creating new jobs.

Despite the potential to bring good to countries, the prevalent view amongst Startups in Nigeria is that the regulatory and business terrain provides many hurdles to their ability to the achievement of their fullest potential. These include high costs of doing business; multiple taxes and unpredictable regulatory oversight.

Notwithstanding the foregoing, there are incentives in existing regulations in Nigeria, which Startups can benefit from but might not utilize due to a lack of awareness of such incentives. We have tried to solve this problem by putting together in this article a list of incentives which can be enjoyed by Startups from various legislations.

The 5 Incentives are as follows:

  1. Exemption from Company Income Tax: Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million Startups may find this useful in their early stages. Click here to read on other impacts of the Finance Act 2019 on Startups and SMEs.
  2. Tax Holiday of Up to 5 Years: Startups who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period as established under the Nigerian Industrial Development (Income Tax Relief) Act. Startups in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives. Click here to read more on industries eligible for Pioneer status in Nigeria.
  3. Reduced Tax Rate for Investors: There are various incentives provided in the Nigerian Venture Capital Incentives Act for investors and Startups engaged in venture projects. These include: (i) up to 30% capital allowances for eligible Startups on equity investments made by Venture Capitalist firms; and (ii) up to 100% exemption on capital gains tax on capital gains accruing to Venture Capital investors upon disposal of their equity interest.
  4. Opportunity for Startups in Government Projects: One way the Nigerian government has tried to encourage the growth of Startups is by requiring companies to engage Startups in projects involving the Federal Government or any of its agencies where the gross value of the project contract is 500 million naira or above. This requirement is provided in the Guidelines for Nigerian Content Development in Information and Technology 2019.
  5. Tax Exemption for Start-ups in the Agricultural Sector: Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020 which amended the former provision under the Industrial Development (Income Tax Relief) Act. Click here to read more on the key highlights of the Finance Act, 2020.

Please note that this list is not exhaustive.

Conclusion  

As stated earlier, many Startups and investors are unaware of incentives available to them in Nigeria because of the absence of a comprehensive platform or document that highlights all applicable incentives and regulations. A search by Startups for such incentives (without the assistance of professionals) can be as tedious as searching for a needle in a haystack. It is, therefore, our recommendation that the Nigerian government collates relevant incentives and applicable regulations on a single platform for ease of reference by Startups.

 

 

 

TAX INCENTIVES IN NIGERIA: PIONEERS STATUS

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By Seun Timi-Koleolu and Eustace Aroh

 

The Pioneer Status Incentive (“PSI”) is one of the available tax incentives in Nigeria aimed at attracting investment into critical sectors of the Nigerian economy. It was created under the Nigerian Industrial Development (Income Tax Relief) Act (“IDA”) to incentivize qualifying entities. The PSI grants an income tax “holiday” of up to five years (three years initially and renewable for an additional two years) to entities that meet the criteria. In addition, pioneer companies may enjoy other benefits including an exemption from withholding tax on dividends paid out of business profits. Below are highlights:

What are the pioneer industries?

These are the industries which qualify for PSI. Companies that engage in any of the industries below may apply for the PSI. Below is an abbreviated list of applicable subsectors.

Industry Applicable Subsector
Information and communication Publishing of books; software development; motion pictures, videos and television production and distribution; music production and distribution; and telecommunication.
Financial Services Real Estate Investment Trust; and mortgage backed securities.
Administrative Services Business process outsourcing; and transportation (land, water, rail and pipeline).
Trade E-Commerce Services.
Construction Construction and operation of roads, railways, airports, utility projects, water projects, industrial projects residential and non-residential building.
Waste Management Waste treatment, disposal and material recovery.
Electricity and Gas Supply Electric power generation, transmission and distribution; and manufacture and distribution of gas.
Agriculture Crop production; livestock; fishing; and forestry
Mining and Quarrying Mining and processing of coal; mining and processing of metal ores; and quarrying and mining of other minerals
Manufacturing Manufacture of refined petroleum products; processing and preserving of meat or poultry and its products, fish, shell fish, fruits, nuts, vegetable, cocoa; manufacturing of grain mill products, edible oils, diary products, starch and starch products, sugar, coffee and tea products, animal feed; manufacturing of wearing apparel; manufacturing of paper, personal hygiene products, basic chemicals, fertilizers, pesticides, agrochemicals and nitrogen compounds; manufacturing of rubber and plastic products; manufacturing of electrical equipment and electronics; manufacturing of basic metal and steel and fabricated metal products; Manufacture of motor vehicles and components and other transport equipment etc.

What are the Qualifications?

The company must be engaged in the pioneer industry; must have physical long-term assets worth over N100 million; and must be able to show the positive impact its business will have on the Nigerian economy.

How to apply?

Application will be by a letter to the Nigerian Investment Promotion Commission (NIPC) in the first year of production, attaching legal and business documents like incorporation documents, regulatory permits, business plan etc.

What are the Obligations on Beneficiaries?

Beneficiaries are expected to submit an annual performance report to the NIPC and must comply with the requirements of IDA and other relevant regulations of the NIPC.

For more information on incentives in Nigeria, please see our article on www.https://pavestoneslegal.com/doing-business-simplified-incentives-to-invest-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.

 

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.

 

Pavestones’ Legislative Update: The Finance Bill 2019

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On November 21, 2019, the Senate passed the Finance Bill (2019). The bill makes extensive changes to the tax laws in Nigeria with the objective of introducing tax incentives for investments in infrastructure and capital markets; supporting Small and Medium Scale Enterprises (SMSEs); and raising revenue for government, amongst others.

Some Key Changes To Existing Tax Laws

  1. Companies Income Tax (CIT) Act

The Amendment:

    • introduces a basis for computation of minimum tax for companies and exempts companies with turnovers of less than ₦25,000,000 from paying minimum tax, while companies with turnovers between ₦25,000,000 – ₦100,000,000 will pay a reduced CIT of 20%;
    • exempts the dividends and rental income received by real estate companies on behalf of their shareholders from tax provided that a minimum of 75% of such dividends or rental incomes are distributed within 12 months of the end of the financial year in which they were earned; and
    • allows insurance companies to carry forward losses indefinitely as opposed to the 4-year restriction previously in place.

  2. Personal Income Tax Act

The Amendment:

  • removes provisions granting personal income tax reliefs but maintains child benefit deduction set at ₦2500 per child with a maximum of 4 children;
  • mandates banks to require Tax Identification Numbers from corporate customers who intend to open or maintain a bank account; and
  • introduces forwarding objections against tax assessments to tax authorities via electronic mail and courier services.

3. Value Added Tax (VAT) Act

The Amendment:

  • increases the VAT rate to 7.5%;
  • exempts companies with annual turnovers of less than ₦25,000,000 from filing VAT returns; and
  • no longer requires foreign entities carrying on business in Nigeria to register for VAT in Nigeria and include VAT charges in their invoices.

4. Stamp Duties Act

The Amendment increases the stamp duty on receipts to N50 on every transaction from N10,000 and above; and expands the definition of receipt to cover electronic transactions.

Some of the key reforms introduced in the Finance Bill are a welcome development and have the capacity to stimulate the growth of SMSEs operating in various sectors of the economy due to the tax reliefs available to them whilst increasing government revenue and encouraging foreign direct investment in Nigeria.