The Nigerian Financial Bill was recently passed by the Senate. While it awaits the assent of the president, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the Bill will exempt companies and businesses with turnovers less than N25 million from Companies Income Tax (CIT)
She added that companies with turnovers of N25 million to N100 million yearly will be paying 20 percent as Companies Income Tax, but those earning over N100 million will pay 30 percent of their profit as income tax.
Presently, all companies are required to part with 30 percent of their profit as CIT to the Federal Government, but the Minister said there is going to be consideration to businesses earning less to enable them to expand.
“Not only will small businesses be able to do more because they are not paying taxes, we are also working together with the trade authorities to also encourage people in the formal sector to become formalize because they will see other businesses like them that are not registered doing well.
“Their productivity will increase, they will employ more Nigerians and at the end of the day, they will grow to the level of a medium size business and begin to pay taxes.
“Our assessment is that any business that has a turnover of less than N25 million needs that break, not being taxed so they can invest in their business.
“We reduce the tax for medium size businesses from 30 percent to 20 percent so they can have more resources that they can plough back in their business.
“These are the largest employers of labor. The federal and state governments have a total labor force of less than one percent of the population,” she said.
The CIT rate is currently 30 percent, assessed on a preceding year basis. For small companies in the manufacturing industry and wholly export-oriented companies with turnover not exceeding N1 million, the Company Income Tax is reduced to 20 percent in the first five calendar years of operation.
Resident companies are placed under corporate income tax on their worldwide income, while non-resident are subject to CIT on their Nigeria-source income. In business profit aspect, if a company is a Permanent Establishment (PE) or a fixed base in Nigeria, it will be taxed based on profits attributable to the fixed base.
However, the 2019 Financial Tax Bill made many changes to the already existing rules, aimed at easing the tax burden on businesses. The Bill seeks to promote fiscal equity, align domestic laws with global best practices, in support of micro, small and medium enterprises. It aims to help the government implement policies that will enable increased revenue for the government. But it also has demerits as Deloitte Nigeria analysis shows.
The key policy changes have come in these areas.
Wider base for taxing Non-Resident Companies (NRCs). Through provisions that create a taxable presence for NRCs operating digitally in areas of consultancy, technical management etc. in Nigeria, as long as there is Significant Economic Presence (SEP) and resultant profits from the activities thereof.
While this provision is a welcome development as its objective is to ensure activities with an economic base in Nigeria, it does not give definition to what constitutes SEP. It leaves the decision at the discretion of the Finance Minister, who wields autonomous power to determine SEP through executive order.
Without the executive order, the ambiguity surrounding the significant economic presence remains.
Under the Bill, Insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place. Life and non-life businesses would no longer be liable to special minimum tax provision and all wholly, exclusively, reasonably and necessarily incurred expenses will be tax deductible.
Moreover, “taxable investment income” would be limited to “income derived from the investment of shareholders funds.” The change seeks to clarify taxable income and limits it to income accruing to the insurance company as against income accruing to insurance fund.
The analysis noted the exception on Excess Dividend Tax (EDT) provisions. Currently, where a company pays a dividend in excess of its taxable profits, such dividend is subject to CIT at 30%. It does not matter if the income from which the dividend is paid has been taxed or the underlying income is altogether exempt from tax.
Mrs. Ahmed however decried the faux against VAT increment to 7.5%, saying that the Financial Tax Bill, when passed, would cushion the effects.