31 Jan 2020
NIGERIA: New Finance Act Revises VAT and Targets Digital and Service Firms
Nigeria has introduced a number changes to its tax laws, including a VAT increase to 7.5%, although smaller companies will be exempt from VAT and Corporate Income Tax (CIT) and mid-size firms will pay a reduced rate of CIT. Overseas companies earning digital or services income in the country will now be subject to a withholding tax, while the tax exemption for interest paid on foreign loans has been reduced.
The changes were introduced on 13 January 2020, when the wide-ranging Finance Act 2019 was signed into law by President Muhammadu Buhari. The Act makes sweeping changes to existing laws with the objectives of promoting fiscal equity, reform of domestic tax laws, the introduction of tax incentives for infrastructure and capital market investment, and to support small businesses. Specifically, it revises the Companies Income Tax Act (CITA), the Value Added Tax Act, the Petroleum Profits Tax Act, the Personal Income Tax Act, the Capital Gains Tax Act, the Customs and Excise Tariff Etc. (Consolidation) Act, and the Stamp Duties Act.
A number of changes are of significance to foreign investors and traders active in Nigeria. VAT has increased from 5% to 7.5%, effective from the date the Finance Act was signed into law. Moreover, outstanding VAT payments due to the government on sales made prior to that date will also be charged at the new rate, according to Ahmed Idris, Nigeria’s Accountant General of the Federation. He said: “Every payment, which for one reason or another could not be made before the coming into effect of the Finance Act, will now suffer 7.5% charge for VAT, because that is the law as at today.”
A number of reductions were also introduced that will ease the impact for smaller firms. Companies with an annual turnover of less than NGN25 million (US$69,180) will be fully exempt from VAT as well as CIT. Medium-sized companies with revenues between NGN25 million and NGN 100 million have had their CIT rate reduced from 30% to 20%, and the list of VAT exempt products and services has been increased.
The Finance Act also extends CITA to foreign firms involved in services or digital activities. Taxation of income earned by foreign companies from technical, management, consultancy or professional services provided to a Nigerian remotely will now be subject to a withholding tax. The Act also states that tax will also be due from any foreign company that: “transmits, emits or receives signals, sounds, messages, images or data of any kind from cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity.”
There are also a number of changes will affect foreign players in the finance sector. Tax rules for insurance services and securities lending have been eased, but restrictions on tax exemptions on interest paid for foreign loans have been introduced. Services provided by micro-finance institutions will also be VAT exempt, and withholding tax has been removed on dividend payments from unit trusts.
On balance, the new Act has received a cautious welcome from industry commentators. Global accounting firm Deloitte stated: “It is a welcome development in the tax landscape of Nigeria. It proposes provisions that have the capacity to boost the economy by stimulating the growth of small and medium scale enterprises and enticing foreign direct investment into Nigeria.”