President Muhammadu Buhari on Tuesday signed a finance bill (VAT 7.5) into law. The signing of the bill according to the House of Representatives, seeks to achieve the following objectives:
(a) Promote fiscal equity by mitigating instances of regressive taxation; (b) Reform domestic tax laws to align with global best practices; (c) Introduce tax incentives for investments in infrastructure and capital markets; (d) Support small businesses in line with the ongoing ease of doing business reforms; and (e) Raise revenue for government.
The bill is a fairly long document and we know you are busy. So here are a few key points from it that would pertain to you.
- Individuals that want to open a bank account will be asked to provide a Tax Identification Number (TIN). Those that already have a bank account will be required to provide a TIN, in order to continue using it.
- VAT is up by 50% increase – One of the most popular (or unpopular depending on what side of the fence you are) provisions of the law, is the 50% increase in VAT from 5% to 7.5%. While the increase is a somewhat sharp one, Nigeria still has one of the lowest VAT rates in Africa. Ghana has a VAT rate of 12.5%. Kenya is at 16%, while South Africa is at 15%.
What is VAT?
VAT stands for Value Added Tax. It is an indirect form of tax. Governments around the world tend to favor it because it is harder to dodge. It also does not have a key impact on savings and investment. Value added means once you process (or add value) to an item, you pay VAT on it
Are there exemptions?
While virtually everyone will pay VAT one way or the other, there are a few goods and services that are exempt. Basic food items for instance are not subject to VAT (they are still in their raw form). Medical and pharmaceutical products are also exempt as well as books and other educational materials.
HOW WILL VAT 7.5% AFFECT NIGERIAN BUSINESSES?
(a) Improved Tax Regime for Small and Medium sized Companies
The Finance Bill introduces a new categorization of companies under both the VAT Act and CITA: (i) Small Companies, with gross turnover of not more than NGN25M (ii) Medium-Sized Companies, with a total turnover of more than NGN25M but not more than NGN100M and (iii) Large Companies, with turnovers above NGN100M.
In addition, the Finance Bill seeks to introduce new tax rates applicable to each category of the companies identified above, such that Small Companies will be exempt from paying CITA and will not be required to make VAT returns with respect to goods and services rendered.
Also, Medium Sized Companies will be liable to Companies Income Tax (CIT) at the rate of 20% of gross income. The proposed tax regime and rates is expected to stimulate the emergence and growth of small and medium-sized companies in Nigeria. This will in turn contribute to improving the economic indices in the country. It is important to note however that employees of such small and medium-sized companies will still be subject to personal income tax on their earnings
(b) The Basis of Taxation of Foreign Companies now expanded under the current regulatory regime.
It is worthy to note that a certain degree of physical presence is required for a foreign company to be liable to tax in Nigeria. However, the Finance Bill has expanded the basis for taxation of foreign companies in Nigeria. The Bill seeks to drag foreign companies providing digital services, technical, management, consultancy services into the Nigerian tax net where they are declared to have significant economic presence in Nigeria by the Minister.
(c) No Double Taxation – Excess Dividend Rules Under the current tax regime
According to Section 80(3) of CITA, dividends, when received by a Nigerian company, are deemed to be categorized as investment income and should not be subject to further tax. However, there has always been the risk that the dividends received by the Nigerian company when redistributed to its shareholders may be subject to CITA at the rate of 30% in the event that the declared dividend exceeds the company’s total profit for the year.
Another scenario is if the company did not make any profit and goes ahead to declare dividend to its shareholders. The right of the tax authority to further subject this dividend to tax has been upheld by Nigerian Courts in plethora of cases, some of which are the case of OANDO Plc. Vs. FIRS and UAC of Nigeria Plc. v FIRS. The Finance Bill now resolves this controversy such that excess dividend is to apply only to untaxed distributions other than profits specifically exempted from tax and investment income.
d) Recognition of Carrying Forward Losses
One of the problems facing Nigerian companies, particularly insurance companies is the four-year time restriction beyond which such companies are not permitted to carry forward their business losses for the purposes of determining their CIT liabilities. However, CITA was amended in 2007, perhaps with a view to removing this restriction, amongst other amendments but failed to achieve this purpose.
Going by the proposed amendment to CITA in the Finance Bill, all companies will now be entitled to carry forward their losses unrestricted. Therefore, the proposed amendment will no doubt strengthen foreign investment incentives and encourage the growth of businesses in sectors that are not otherwise immediately profitable but profitable in the long run.
(e) Introduction of Thin Capitalization Rules Under the current Nigerian regulatory regime
There are no provisions on thin capitalization rules. However, the Finance Bill now seeks to introduce thin capitalization rules such that interest on loans advanced by connected foreign companies to their Nigerian affiliates and subsidiaries will only qualify as an “allowable deduction” where such interest does not exceed 30% of earnings before interest, tax, depreciation and amortization (EBITDA) of the Nigerian companies. The thin capitalization rule, however, does not apply to Nigerian banks and insurance companies with foreign connected affiliates/ subsidiaries. With this introduction by the Finance Bill, the tax planning practice whereby many foreign companies shift away profits from Nigeria by providing loans to their Nigerian subsidiaries (which may have no economic justification) and in return receive interest from these companies, thereby reducing the taxable profits of these Nigerian companies will be put to check or reduced.
The current rate of VAT 7.5% despite some of the good things it will facilitate, will no doubt have an adverse impact on the cost of VAT-able goods and services that are consumed in Nigeria. What will then be the fate of low income earners and everyday people in Nigeria?