Nigeria

Tax Appeal Tribunal rules in favour of an expanded scope for the recovery of input VAT by manufacturers

The Value Added Tax Act in Nigeria restricts … the input tax to be allowed as a deduction from output tax to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged. Input tax on any overhead, service, and general administration of any business which otherwise can be expended through the income statement (profit and loss accounts) shall not be allowed as a deduction from output tax.

Federal High Court declares payments to Nigeria Police Trust Fund unconstitutional

The Federal High Court has ruled as unconstitutional Section 4(1)(b) of the Nigeria Police Trust Fund (Establishment) Act, 2019 which provides for an amount constituting 0.5% of the total revenue accruing to the Federation Account, and a levy of 0.005% of the net profit of companies operating in Nigeria respectively to be remitted to the Nigeria Police Trust Fund.

FIRS reinstates local filing of Country-by-Country Reports in Nigeria

In May 2021, the Federal Inland Revenue Services (FIRS) suspended the local filing of Country-by-Country (CbC) reports by Nigerian subsidiaries and permanent establishments whose headquarters are not in Nigeria. In January 2022, the FIRS issued a public notice reinstating the local filing of CbC reports by such entities. The public notice has an effective date 1 January 2022, and therefore all constituent entities of foreign multinational groups that meet the relevant conditions are expected to comply going forward. Taxpayers must ensure they prepare well in advance to avoid the penalties for non-compliance.

TAT says WHT applies on commissions deducted upfront by betting agents

In December 2021, the Tax Appeal Tribunal (TAT) issued a ruling to the effect that a principal is responsible for accounting for WHT in respect of commissions earned by its agent, notwithstanding that the agent deducts the commission upfront. The ruling suggests that agents should deduct their commissions net of the applicable WHT.

The judgment raises interesting questions especially relating to other trust, fiduciary and/or agency arrangements (such as banking and insurance brokerage). For example, for certain banking transactions, banks hold deposits on behalf of their customers and deduct bank charges or interest, at source. Would the bank customers be responsible for deducting and accounting for WHT (considering that there is no opportunity to do so)? There are also concerns regarding whether the ruling aligns with the literal reading of the law.

Betting companies (and other companies with similar arrangements with agents) in Nigeria are advised to review their operating structures and contractual agreements with their agents in this regard.

Nigeria’s Finance Act 2021 – Top 10 Changes

The 2021 Finance Bill was signed into law by the Nigerian President on 31 December 2021 and takes effect from 1 January 2022.

You may be liable to tax on your previously exempted investment income effective from 2 January 2022

There are various tax changes affecting government securities, corporate bonds, and equity investment that you should be aware of.

• On 2 January 2012, the federal government issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011. The Order granted corporate income tax waiver on all bonds and debt instruments issued by all tiers of government and corporate entities effective from 2 January 2012 for a period of 10 years. Due to the sunset clause, the exemption is no longer applicable effective from today.
• The Capital Gains Tax (CGT) Act provides exemption from capital gains tax on the disposal of Nigerian Government securities including Federal, State and Local government bonds, stocks and shares. However, an amendment via the Finance Act 2021 is seeking to impose CGT on the disposal of shares subject to a specified threshold and other conditions for roll over relief.
• Exemption from capital gains does not cover gains which are considered to be of revenue nature or trading profit depending on frequency, holding period and nature of investor’s trade, among others (generally referred to as badges of trade principles).
• The Personal Income Tax (Amendment) Act [PITA] 2011 which was published in the gazette on 24 June 2011 with a commencement date of 14 June 2011, grants tax waiver to persons taxable under PITA in respect of income earned from bonds and short-term securities issued by Federal, State and Local Governments and their agencies; corporates and supra-nationals. The exemption provision does not have a sunset clause. Consequently, the exemption subsists.
• The Value Added Tax (Exemption of Proceeds of the Disposal of Government and Corporate Securities) Order 2011 dated 9 January 2012 was issued with an effective date of 2 January 2012 valid for 10 years to exempts disposal of government and corporate securities from VAT. However, by virtue of the Finance Act 2019, the VAT Act has been amended to specifically define goods as excluding securities. Note that commissions on stock market transactions was previously exempted from VAT via the Value Added Tax (Exemption of Commissions on Stock Exchange Transactions) Order 2014 published in the gazette dated 30 July 2014 with a commencement date of 25 July 2014 for a period of 5 years which expired on 24 July 2019.

Nigeria's National Development Plan 2021 - 2025

A medium-term economic plan, the NDP, has been launched. The Plan succeeds the Vision 20:2020 introduced in 2009 and the Economic Recovery and Growth Plan (ERGP) introduced in 2017 both of which expired in 2020. The NDP is also a bridge for the country’s long-term plan currently being developed, that is, Nigeria Agenda 2050.

TAT says Withholding Tax is applicable on management fees paid to a non-resident company

On 6 December 2021, the Tax Appeal Tribunal (TAT) sitting in Lagos issued a judgement on the applicability of Withholding Tax on management fees paid to a non-resident company. The judgement suggests that describing an item as a reimbursement in a contract may not be sufficient to exclude it from WHT, and that the FIRS can disregard the wordings of a contract or any arrangement (especially where it is between related parties), if the FIRS takes the view that such arrangement is artificial. The judgement also included some contentious perspectives in assessing whether management fees (prior to the Finance Acts) were subject to WHT.

FIRS issues simplified VAT regime for non resident suppliers

Further to the Finance Act 2020, non-residents that make taxable supplies of goods and services to Nigerian customers are now required to register for VAT, include VAT on their invoices and file returns. This is even if they do not have any fixed connection with Nigeria.

The FIRS has subsequently issued a circular to simplify the VAT regime and ease the adoption of the new VAT requirements for non-residents. The circular would be effective from January 2022 for the supply of services and intangibles to Nigerian customers, and from January 2024 for the supply of goods.

Nigeria’s Ministry of Finance issues VAT (Modification) Order, 2021

The Ministry of Finance has issued a Value Added Tax (Modification) Order, 2021 with a commencement date of 30 July 2021. The Order revokes previous orders and modifies the list and definitions of exempt items under the VAT Act.

136 countries reach political agreement on a new international corporate tax framework

On October 8, 136 out of the 140 countries of the OECD Inclusive Framework (IF) on Base Erosion and Profit Shifting have politically committed to potentially fundamental changes to the international corporate tax system. The group of 136 includes some countries that had expressed reservations about the deal in July such as Ireland, Hungary, Estonia, Barbados and Peru, but have now committed to the agreement. Pakistan, which had signed up to the agreement in July, has now withdrawn its support for the agreement. The agreement allows for some optionality in terms of implementation of both constituent pillars.

Three other countries of the IF membership have not signed up to the agreement yet: Nigeria (the largest economy in Africa), Kenya (the fifth largest economy in Africa) and Sri Lanka. Cyprus, the only country in the EU 27) that is not a member of the IF, has previously indicated opposition.

Pillar One and Two will introduce two very new and very considerable sets of changes to the international corporate tax system. The application of Pillar One to the above-normal profit of less than 100 corporate groups means that many MNEs will not be in scope.

Nonetheless, the focus of the Pillar on allocating more profit to markets and on using a formula has the potential to change the approach and expectations of tax authorities around the world for all taxpayers, which may be reflected more broadly on audit.

Pillar Two has a much broader application and many MNEs will have to comply with it and line up the resources to calculate the ETR across many jurisdictions, using a mix of accounting and tax rules.

CBN issues Guidelines on shared services for financial institutions

The Central Bank of Nigeria (CBN) in May 2021 issued its Guidelines for Shared Services Arrangements (SSAs) for Banks and Other Financial Institutions (the Guidelines), to complement the CBN’s Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria. The Guidelines, which are mandatory for all institutions licensed by the CBN, require full compliance by 1 June 2022 and set out the operational standards for banks and other financial institutions looking to set up or participate in SSAs. The Guidelines also seek to ensure compliance with Executive Order 5 of the Federal Republic of Nigeria (2018) which seeks to promote the development of indigenous capacity and local content in science,engineering and technology.

TAT rules on legitimate expectation, and the application of VAT and other taxes on the operations of an airline in Nigeria

Kenya Airways Limited commenced business in Nigeria in 1999. Between 1999 and 2014, the Federal Inland Revenue Service (FIRS) assessed foreign shipping companies and airlines operating in Nigeria to Companies Income Tax (CIT) at the minimum tax rate of 2% on sums received in respect of the carriage of passengers, animals or other goods loaded in Nigeria. This is in line with Section 14(4) of the CIT Act. The Airline remitted its taxes and obtained Tax Clearance Certificates from the FIRS in line with this practice, during this period. However, the FIRS issued a Public Notice in 2015, requiring Non- Resident Companies to prepare and submit their tax returns based on their actual profits earned from Nigeria. In the Public Notice, the FIRS stated that where actual profits could not be satisfactorily determined, the FIRS retained the rights to assess such NRCs to tax under the “deemed profits” approach. This approach entails deeming a 20% profit margin, which is then subjected to CIT at 30% (resulting in an effective tax rate of 6% on turnover). This is in line with Section 30 and 14(3) of the CIT Act.

Regulatory Framework & Guidelines on Mobile Money Services (MMS) in Nigeria

The Central Bank of Nigeria (CBN) has released the Framework on Mobile Money Services in Nigeria. The Framework incorporates an updated version of the previous Guidelines on Mobile Money Services in Nigeria. One of the objectives of the Framework is to set the minimum technical and business requirements for the various participants in the MMS ecosystem and highlights the obligations and responsibilities of the identified participants. The Framework appears to have modified the document retention period under the Companies and Allied Matters Act. Participants are advised to review their processes and compliance framework to ensure they are up to date.

Companies operating in Nigeria may be liable to turnover tax under the NASENI Act

NASENI was established in 1992 by the Federal Government of Nigeria. The Agency’s mandate is to create an enabling, knowledge-driven environment for local mass-production of standard parts, goods and services required for the nation’s science and technology advancement.

The enabling legislation for the Agency is the NASENI Act (“the Act”). One of the ways in which the Agency is to be funded, is through the collection of a levy
(or tax) at a quarter percent (i.e. 0.25%) of the turnover of commercial companies.

Based on the provisions of the law, the “NASENI levy” applies to companies with turnover of N4m and above. However, the turnover threshold was subsequently increased to N100m and above. Although this law is currently not being enforced.

Federal Inland Revenue Service (FIRS) issues information circular on bodies eligible to receive tax deductible donations

The FIRS has issued a Circular pursuant to the provisions of Sections 25 and 105 of CITA regarding eligibility of a Fund, Body or Institution seeking to be listed under the Fifth Schedule.

To be eligible, an organisation must be a fund, body or an institution of a public character with the following features:

1. it is registered in accordance with the relevant law in Nigeria;
2. it does not distribute or share its profit in any manner to members or promoters;

FIRS issues Public Notice on deployment of automated tax administration solutions

The Finance Act 2020 amended Sections 25 & 26 of the FIRS Establishment Act, granting the FIRS powers to:

• deploy proprietary or third party Payment Processing Companies (PPCs) or digital platforms as agents to collect taxes due on international transactions in the supply of digital services.
• deploy technology to automate the tax administration process including assessment, collection and information gathering, provided that it gives the taxpayer a notice of 30 days.
• receive assistance in the collection of revenue claims or other tax matters relating to agreements between Nigeria and other countries or bodies.

FIRS Issues Public Notice on the Filing of Tax Returns by Entities in Tax Free Zones

The Finance Act 2020 amends section 18 of the Nigeria Export Processing Zones Act and the Oil and Gas Export Free Zone Act to require all entities registered and operating within the Zone to comply with section 55 of CITA regarding the filing of annual tax returns. The FIRS has issued a public notice in this regard.

FIRS begins audit and recovery of back-years stamp duties

An Inter-Ministerial Committee for the Audit and Recovery of Back-Years Stamp Duties has been inaugurated. Additionally, the FIRS has launched an adhesive stamp for use on dutiable documents requiring adhesive stamps.

The committee is comprised of representatives from the FIRS, the Central Bank of Nigeria, the Federal Ministry of Justice, and the Federal Ministry of Finance, Budget, and National Planning. The committee is tasked primarily with enforcing Sections 110, 112, and 114 of the Stamp Duties Act (SDA), which empowers the Federal Government to recover stamp duty as well as accompanying fines and penalties for up to five years.

Nigeria issues Order on Significant Economic Presence

The Finance Act 2019 introduced an amendment to the Companies Income Tax Act to impose tax on a foreign entity with respect to certain services or digital transactions if it has a Significant Economic Presence (SEP) in Nigeria. It further provides that the Finance Minister may by order, determine what constitutes SEP in Nigeria. Consequently, the Finance Minister has now issued an order with an effective date of 3 February 2020.

FIRS has established a new Large Tax Office (LTO)

The FIRS has established a new LTO located in Apapa, Lagos effective from 15 May 2020.

The new LTO will focus on the following companies based in Lagos with annual revenue above 2 billion Nigerian naira (NGN): (i) domestic aviation companies, (ii) construction companies, (iii) domestic shipping companies, (iv) logistics, haulage, and transportation companies, and (v) concessionaires at the Lagos ports.

FIRS extends the filing deadline for the Common Reporting Standard (CRS)

The FIRS, on 19 May 2020, issued a public notice on the extension of the reporting deadline for Reportable Financial Institutions (RFIs), under the CRS Regulations. The extension, which is effectively for four months, moves the compliance deadline from 31 May 2020 to 30 September 2020.

This extension is in recognition of the challenges arising from COVID-19, which affect many RFIs and their ability to meet their filing obligations. The FIRS has asked that the RFIs take advantage of this extension to collate the necessary information as required by the CRS Regulations and Guidelines.

FIRS introduces electronic platform for transfer pricing filings

On 17 March 2020, the FIRS organised a stakeholder’s event for the official launch of its electronic filing solution for transfer pricing, called E-TP PLAT 2.0. This electronic filing solution will allow taxpayers with transfer pricing and country-by-country reporting (CbCR) obligations to file their annual transfer pricing and CbCR returns electronically.

Nigeria's Tax Appeal Tribunal (TAT) rules in favour of FIRS in a landmark transfer pricing case

On 19 February 2020, the TAT held that the NGN 1.74 billion assessment issued by the FIRS to Prime Plastichem Nigeria Limited (PPNL) with respect to the company's transfer pricing audit was lawful. The TAT's decision is a landmark ruling as it represents the first major transfer pricing ruling in Nigeria since the introduction of transfer pricing rules in 2012. 

President Muhammadu Buhari has signed the 2019 Finance Bill into law

President of the Federal Republic of Nigeria, Muhammadu Buhari, has signed the Nigerian Tax and Fiscal Law (Amendment) Bill 2019, otherwise known as the Finance Bill, into law. The Finance Act 2019 has five objectives: (i) promoting fiscal equity by mitigating instances of regressive taxation, (ii) reforming domestic tax laws to align with global best practices, (iii) introducing tax incentives for infrastructure and capital markets, (iv) supporting small businesses in line with the ongoing ease of doing business reforms, and (v) raising revenues for the government by various fiscal measures.

A Bill to amend the Production Sharing Contract Act in the petroleum industry has been signed into law

President Muhammadu Buhari signed into law a Bill to amend the Deep Offshore (and Inland Basin Production Sharing Contract) Act.

A production sharing contract (PSC) is a contractual arrangement for exploration and production of petroleum resources where the contractor undertakes all the financial, technical, and operational risks associated with petroleum operation in return for a share of profit oil after payment of royalty, cost, and tax oil.

The arrangement was introduced during the 1991 licensing round while the PSC Act became effective on 1 January 1993. The price of oil per barrel at the time was around 13 United States dollars (USD) per barrel. It was considered that certain incentives were necessary to encourage activities in the deep offshore, which requires significant investment and technology.

The new amendment introduces the following key changes:

• Field based royalty rates of 10% for deep offshore (>200m water depth) and 7.5% for frontier/inland basin operation.
• Introduction of incremental royalty rate based on the price of oil.
• Periodic review of the PSC arrangement every eight years.
• Significant penalty for offences, including imprisonment.

The federal government estimates that the changes will generate about USD 500 million in additional revenues for the government in 2020, and over USD 1 billion from 2021. The changes are expected to take effect from fiscal year 2020.

TAT issues controversial judgement regarding value-added tax (VAT) on exporting services

A Nigerian subsidiary of a South African entity entered into an agreement to provide marketing services in Nigeria to promote the 'fund' of the South African entity. The issue in contention was whether or not the marketing services provided by the Nigerian entity qualify as exported services that are exempt from VAT.

The VAT Act defines exported services as those 'performed by a Nigerian resident or a Nigerian company to a person outside Nigeria'.

The TAT ruled that the marketing services are liable to VAT in Nigeria on the basis that the services were performed to Nigerian customers, for and on behalf of the foreign entity. The TAT mentioned that the basis for charging VAT in cross-border transactions is 'where the service was performed and not the location of the consumer'. Consequently, since the services were performed in Nigeria, such services were not exported and should be subject to VAT. 

The FIRS has published Regulations on the CRS

The FIRS has issued the Income Tax (Common Reporting Standard) Regulations, 2019 (CRS Regulations).

This follows Nigeria’s signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and the Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information, signed by Nigeria on 17 August 2017.

Fundamentally, the CRS Regulations and the various agreements signed by the FIRS will allow it to receive specified information on the bank accounts held by Nigerian tax residents in up to 105 countries. In exchange, the FIRS will be obligated to provide similar information to these other countries.   

The CRS Regulations have an effective date of 1 July 2019 and require qualifying Nigerian Financial Institutions to submit an electronic information return (i.e. a return that reports specified financial account information of certain persons) to the FIRS on an annual basis. 

Companies operating in Nigeria to pay a new Police Fund Levy

The Nigerian Police Trust Fund Act (the 'Act') was passed by the National Assembly in April 2019 and signed into law by the President on 2 July 2019.

The Act establishes a fund and imposes a new tax on the net profits of companies operating businesses in Nigeria at the rate of 0.005%. This and other sources of funds are expected to help fund capacity building and procurement of security equipment for the Nigerian police.