2020, the year that the FIRS was in the business of dishing out tax palliatives and mercies, is long gone. On 1 January, 2021, the Finance Act, 2020 commenced, ushering in amendments to our tax laws.
With the increased Government need to generate revenue through taxes, expanded scope of tax obligations and the lapse of major tax palliatives, never has the price of non-compliance been so high.
It goes without saying, that tax compliance is Key.
Of course, understanding the adjustments made by the Finance Act, 2020 is necessary to ascertain your Company’s new/increased tax obligations.
We have simplified the major adjustments for your reading pleasure. Get on board! (Please click here to see our previous article on changes made by the Finance Act, 2019).
1. Foreign Affairs
Remember our article on Significant Economic Presence (SEP)? (Please click here to see our previous article on Significant Economic Presence)
Well, quick recap! The Finance Act, 2019 (Big Brother) introduced SEP for the purpose of taxing Companies that are not resident in Nigeria where they derive profits from: (i) digital activities that they carry on in Nigeria; or (ii) technical, management, consultancy or professional (TMCP) services that they render to persons who are resident in Nigeria.
These Non Resident Companies (NRCs) are not automatically liable to Companies Income Tax/Withholding Tax in Nigeria though. That only happens when (i) or (ii) above occurs and the NRCs have a Significant Economic Presence in Nigeria.
Finance Act, 2020 Adjustment: The Withholding Tax payable by NRCs on the income that they earn from rendering TMCP services in Nigeria is the final tax on such income. No cap!
2. Covid-19 Donations
It was after Covid-19 hit that we all discovered that many contracts, laws, businesses among other life affairs were not initiated with raging viruses or pandemics in mind. The sudden shift in the way of doing things left room for a lot of uncertainty.
This uncertainty was also present with respect to Covid-19 donations even as various Companies in the Banking, Manufacturing and Oil and Gas Sectors donated to the Government and other bodies. The CITA did not adequately provide for the tax treatment of donations of a ‘Covid-like’ situation.
The question then arose, would these Covid-19 donation expenses be allowable deductions or taxable?
The Finance Act, 2020 addressed this by expressly allowing Companies’ cash donations or the cost equivalent of their non-cash (in-kind) donations as deductible expenses for tax purposes where these donations are made in respect of pandemics, natural disasters or other exigency subject to the following conditions:
First, such donations must be made to (i) Funds set up by the Federal or State Government; (ii) Government designated agencies; and (iii) other Funds which are in consultation with any Federal Government Ministry, Department or Agency.
Also, relevant documentation evidencing the details of the donation must be provided to the FIRS and the donation must be demonstrated to be wholly, reasonably, exclusively and necessarily incurred for the procurement, manufacture or supply of in-kind contributions.
Finally, the amounts of Covid-19 donations that are allowable for deduction must not exceed 10% of the Company’s assessable profits after deduction of other allowable donations made by the Company.
3. Penal Teas
There have been decided cases such as FIRS v Shell Petroleum Development Company of Nigeria Ltd. and MTN Communications Plc v FIRS where it was argued that penalties paid to Regulators for offences were deductible expenses and therefore not part of the Company’s profits that would be taxed.
In both cases, the Federal High Court held that Penalties are not tax deductible expenses as they did not pass the WREN test of being Wholly, Reasonably, Exclusively and Necessarily incurred by MTN and Shell.
The Finance Act, 2020 has decided to help save court fees on this matter going forward as it now expressly states that Penalties or Fines imposed by any law enacted by the National or State House of Assembly are non-allowable deductions for tax purposes.
Think about it this way. Assurance Ltd has profits of 500 Naira. Operational expenses incurred to generate this 500 Naira profit is 100 Naira, meanwhile, Assurance Ltd also paid penalties of 100 Naira to FIRS for paying taxes late.
Where Assurance Ltd takes the Operational and Penalty Expense (100 +100 Naira) as deductible from its Profit of 500 Naira, it pays Tax only on 300 Naira.
Since the Finance Act, 2020 now prohibits Companies from treating penalties as deductible expenses, Assurance Ltd must add back the 100 Naira penalty to its profits and pay Tax on the 400 Naira.
Wahala for who dey pay Penalty!
4. Minimum Tax Palliative
A Company pays Minimum Tax when: (i) it makes a loss in a year and does not have profit to pay tax from; or (ii) when its total profits after removing expenses and making necessary adjustments still results in no tax payable or in tax payable that is less than the minimum tax.
The rate of Minimum Tax was adjusted by the Finance Act, 2019 to 0.5% of the Gross Turnover of the Company minus Franked Investment Income (e.g dividends). This means Minimum Tax = (0.5% x Gross Turnover) – FII.
You probably wondered what “Gross turnover” means? Lucky for you, the Finance Act, 2020 defines Gross Turnover to mean: “the gross inflow of economic benefits during the period arising in the course of the operating activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants, including sales of goods, supply of services, receipt of interest, rents, royalties or dividends.”
The Finance Act, 2020 also reduced the minimum tax rate from 0.5% to 0.25% of gross turnover.
Many Companies did not waste time and have chosen to take this reduction as a tax concession/palliative for the devastating effect of the Covid-19 pandemic on their businesses!
This reduced minimum tax rate is only applicable to tax returns due for filing on any date between 1 January 2020 to 31 December 2021.
5. Shady Affairs
Every Company that files their Companies Income Tax Returns must compute the CIT payable in the return and must forward an evidence of payment of the tax due.
However, Companies that deliberately and dishonestly fail to declare the true and correct amount of profits or tax payable in their returns will become immediately liable to pay any outstanding tax identified and assessed by the FIRS.
This outstanding tax will be subject to penalty and interest and these will start to count from the date the incorrect return was filed.
There are concerns as to how the FIRS will be able to determine that there is a deliberate and dishonest misstatement of Company profits or tax payable in their returns. With the Finance Act, 2020 being vague on this point, it seems like a discretionary power that may be abused.
Accordingly, Companies are enjoined to forsake any shady affairs and declare the true and correct amount of their profits and tax payable so that they do not fall prey to the punitive measures laid out for them by the Finance Act, 2020.
Non-Resident Companies (NRCs):
- who derive profit from Nigeria; or
- who are taxable under the Significant Economic Presence regime
must now submit Companies Income Tax Returns to the FIRS.
These returns must contain:
(i) the NRC’s full audited financial statements and the financial statement of the Nigerian operations which must be attested by an independent qualified or certified accountant in Nigeria;
(ii) tax computation schedules based on the profits attributable to its Nigerian operations;
(iii) a true and correct written statement containing the amount of profits from each and every source in Nigeria;
(iv) duly completed Companies Income Tax Self-Assessment Forms; and
(v) evidence of payment of the tax due.
Very important to note – NRCs that only earn income for which withholding tax is the final tax (income derived from Technical, Management, Consultancy or Professional services) – do not need to file returns!
7. Books of Account
ALL Companies – even those exempted from incorporation, must keep books of account that contain sufficient information about ALL transactions they are engaged in.
These must be kept in English, or be translated into English.
Where any Company fails to provide any book of record on the FIRS’ request, the Company will be liable to pay as penalty –
- N100,000 in the first month in which the failure occurs; and
- N50.000 for each subsequent month in which the failure continues.
The FIRS can direct Companies to maintain prescribed types of books of accounts. Companies not in agreement with FIRS’ directives on this point can object or appeal to same.
Companies must keep their books of record for at least six years after the year that the income generated relates to.
8. Small and Medium Companies (SMCs)
The FIRS can by a Notice specify the form of accounts to be included in the CIT Returns filed by Small and Medium Companies. This is an alternative to the requirement to file Audited Financial Statements as part of Returns and implies that SMCs may not need to have audited accounts.
9. Internet Way!
The FIRS can now serve notices of assessment on Companies by email or any other electronic means. In the same manner, Companies can object to FIRS notices of assessment by email or other electronic means.
10. Qualifying Capital Expenditure
The Finance Act, 2020 allows Companies to claim capital allowance on Qualifying Capital Expenditure incurred on Software and electronic applications.
This means that when Companies use capital sums to purchase Software and electronic applications, they will be entitled to recover those sums expended in portions according to rates prescribed by the CITA.
The Finance Act, 2020 does not however prescribe the applicable rate of capital allowances that Companies can claim on these expenditures. Further clarification should be made by the FIRS in due course.
11. More Definitions
You may already know that Profits of Companies engaged in Ecclesiastical, charitable or education activities are exempt from Companies Income Tax as long as:
- such Companies are not of a public character; and
- the profits are not derived from a trade or business carried on by the Company.
All this while, CITA did not define what Public Character is.
This lack of definition caused arguments in cases such as Best Children International School v FIRS and American International School v FIRS.
Public Character is defined by the Finance Act, 2020 to mean:
“an organisation or institution that:
- is registered in accordance with relevant law in Nigeria; and
- does not distribute or share its profit in any manner to members or promoters.”
You’re welcome! 😁
12. Undisputed Assessments
Where a Company does not object to or appeal against the tax contained in an FIRS assessment, this means that it is happy with its stated tax liability. The tax charged must then be paid within 30 days of receiving FIRS’ notice containing the tax payable to the Company. Formerly, this timeline was two months.
13. Downstream Ops
The scope of tax incentives enjoyed by Companies engaged in gas utilization (downstream operations) has been reduced by the Finance Act, 2020.
These incentives include: (i) an initial tax free period of two years that may be renewed for an additional period of two years; (ii) accelerated capital allowances after the tax free period; and (iii) tax free dividends (on certain conditions) during the tax free period.
First, the tax incentives provided by CITA do not apply generally to downstream ops Companies anymore. It has been restricted to only the downstream ops trade or business run by a Company. This implies that where a Company runs many trade or businesses including downstream ops, they cannot as usual, claim downstream ops tax incentives for their whole business. The incentives will only relate to the downstream ops part of their business.
Also, as expected, the tax-free period only begins when the downstream ops trade or business of the Company commences production – as certified by the Ministry of Petroleum Resources.
Lastly, the CITA downstream ops incentives will not apply where a Company has claimed an incentive for the trade or business of downstream ops under any other law in Nigeria or where it has claimed incentives for capital allowances under the Industrial Development (Income Tax Relief) Act.
Majority of the adjustments we have outlined above scream Compliance.
Almost every Company has further obligations that border on filing of returns, declaring the true and honest state of their profits, keeping records that encompass all their affairs and paying taxes within a shorter time-frame. Even Non-Resident Companies are not left behind.
This evinces that there’s no money on Ground. The Federal Government greatly needs revenue from taxes and aims to minimize tax leakages by requiring that all Companies incomes and affairs are brought under the radar of the FIRS.
Given the added penalties for non-compliance, it is expected that Companies would monitor their increased tax obligations and take same into consideration while conducting their affairs.
Happy Easter Holidays everyone!
Eniola Akinoso is an Associate with Andersen Nigeria and the Initiator of TaxVille.