Nigeria’s Tax System Gets A Major Overhaul
Regan van Rooy
We are an international tax and structuring firm focusing on Africa, with offices in SA, Mauritius, Ireland & the UK.
Nigeria’s tax system have needed significant reform for a long time now. A start was made under previous governments, with a series of annual Finance Acts that dealt with at least some of the issues. The current government appointed a Presidential Committee on Fiscal Policy and Tax Reform, with wide-ranging terms of reference. This Committee’s work led to the Withholding Tax Regulations 2024, which took effect on 1 January 2025, as previously discussed.
The Committee has now drafted four Bills, which have been sent to the National Assembly for consideration. These four Bills are:
Taken together, when they are passed into law, these Bills will dramatically alter Nigeria’s tax system and administration. These Bills are lengthy. In this newsletter, we do not have space to write about every change they contain. Some of them, such as changing the name of the Federal Inland Revenue Service to the Nigerian Revenue Service, or changing the Joint Tax Board to the Joint Revenue Board of Nigeria, may not make much practical difference to the lives of many taxpayers.
These Bills are a laudable initiative and will bring major improvements to Nigeria’s tax system. They are not perfect, but tax legislation rarely is. Nevertheless, they will bring a significant improvement to the current situation for the benefit of both taxpayers and governments.
We expect that these Bills will be passed by the National Assembly, probably after some amendments. It is possible that the reductions in corporate income tax and the conversion to a “proper” VAT system with input tax credits on most forms of expenditure may not be passed. If so, this will be a disappointment and an opportunity missed to make meaningful and necessary changes to the Nigerian tax system. We hope that Nigeria will then maintain its tradition of annual Finance Acts so that the process of reforming and improving the tax system can continue.
As usual, some parts of the Bills will be more welcome to taxpayers than others. Even then, it is in the interest of taxpayers for the tax system to be more robust and appropriate, and it is inevitable that some taxpayers will be affected adversely by some of the changes proposed. As usual, there are some changes that are unwelcome, which we hope will be reconsidered. Finally, there are some matters that are not included in the Bills, which we feel represent a missed opportunity to bring further useful reform. We hope that Nigeria will continue with annual (or at least periodic) Finance Acts, and further imperfections are likely to be improved in the future.
In the rest of this newsletter, we have tried to summarise what we feel are the more important changes that will have an impact on taxpayers. This is not intended as a full list of every change. For example, we have not dealt with the specialised provisions dealing with the taxation of petroleum production and similar areas. We have also not commented where the new law is substantially similar to the current position, except where we feel an opportunity to improve the law has been missed. This is not intended to be a technical analysis of the draft legislation, but a summary of those changes that we think will interest our readership. We also apologise for the length of this newsletter and its somewhat dry tone, but there is a lot to talk about!
We start with the good news.
Points to Welcome
Decrease in Corporate Income Tax Rates
The Company Income Tax (CIT) rate will be reduced from the current 30% to 27.5% in 2025 and 25% in 2026. This makes the Nigerian company tax rate more competitive with rates in other countries.
Supplementary Income Taxes
In addition to Companies Income Tax, Nigeria levies further taxes on income, such as the Tertiary Education Trust Fund tax (TET), National Information Technology Authority (NIDTA) levy, and the National Agency for Science and Engineering Infrastructure Act (NASENI) levy. These raise the current income tax rate on companies to at least 33%, or more if they are subject to the NASENI levy or NIDTA levy, or if they incur significant capital expenditure given that capital allowances do not reduce the tax base for the TET. These taxes will be abolished.
To fund this abolition, a Development Levy will be imposed on companies. This will be at 4% of assessable profits for 2025 and 2026, 3% after that up to 2029, and then 2% from 2030 onward. This will be used to fund the TET, NIDTA, and NASENI for a transitional period until they can be funded by budget allocations and will also fund the Student Education Loan Fund. Overall, this is a welcome development, despite the complexity caused by the Development Levy.
Introduction of Value Added Tax, Replacing the Current VAT Which is More Like a Sales Tax
This is a very welcome change, which will end the problem of a “cascading” tax that applies on every value-adding step, with credit only granted for the purchase of goods for resale or raw material for use in manufacturing. The major change is that input tax will in future be allowed as a credit to set against output tax. The list of goods subject to zero rating is also expanded to reduce the possibly regressive nature of the tax. The rate of VAT will be increased over some years to compensate for the increased availability of input tax. The rate will be 10% in 2025, 12.5% from 2026, then 15% from 2030. The current rate is 7.5%, but this is not really a valid comparison due to the change in the treatment of input tax.
Oil and Gas Exports Will Still Be Exempt, As Now
This increases costs for petroleum exporters as they will still not be able to claim any input tax on operating or capital costs. We note that other countries that are very dependent on mineral exports nevertheless still apply VAT at the zero rate to those exports, other exported goods, and exported services will be zero-rated.
Crude petroleum oil and feed gas, money and securities, and land and buildings will all be exempt from VAT.
Non-residents Making Supplies to Nigeria Will Still Be Required to Register, But Their Customers Will Also Still Be Required to Withhold the VAT And Pay It to the Tax Authority
The foreign supplier is supposed to issue an invoice showing the VAT charged, but if it does not do so, the tax authority can direct the customer to pay the VAT itself. This is (or remains) a rather complicated system, and we feel that an opportunity to reform this has been missed.
The System For the Import of Goods Has Been Slightly Amended
In that the VAT will normally be paid on import, unless the goods were ordered through an electronic or digital platform and the VAT already collected through that platform.
The System of VAT Being Withheld by Federal, State and Local Governments, Ministries, Departments and Agencies Has Been Retained
As has the power for the tax authority to require other organisations (such as telephone companies) to withhold VAT. We are not sure why it was necessary to retain this provision, which will lead to cash flow strain for suppliers to these organisations.
This cash-flow strain will probably be made worse by the provisions regarding excess input tax (i.e., a situation where the input tax that can be claimed is more than the output tax due). This excess can be carried forward; however, the taxpayer can also ask for a refund. This seems a bit vague. However, another provision states that any VAT refund must be claimed not later than 12 months after the transaction giving rise to the refund took place, and the tax authority must pay the refund within 30 days of a valid request or set the refund off against any tax liability of that taxpayer. It is not clear whether the tax authority will audit each such claim, but they may decide they need to determine if a refund request is “valid.” This issue will be detrimental for exporters, as well as for those whose customers are required to deduct VAT at source when paying them. The withholding VAT system will perpetuate unnecessary administration and bureaucracy for both taxpayers and the tax authority.
Establishment of a Tax Ombud
This is a welcome development; however, it can only accept complaints if they have not been resolved by the relevant agencies.
Single Taxpayer Identification for the Entire Country
Once a person has registered with a tax authority, an individual or entity will be issued with a Taxpayer Identification (Tax ID), and that Tax ID will be used by all other tax authorities with which they must deal. Any person who opens or operates a bank account, insurance contract, stockbroker account, or an account with any other form of financial service provider in Nigeria will need a Tax ID.
Taxes Can Be Paid in Naira
This will apply even to transactions denominated in foreign currency, at the option of the taxpayer. This is a great improvement and ends the current system which de-legitimises the Nigerian currency.
Penalties For Corrupt Tax Officials (and Those Who Corrupt Them)
The penalty for a tax official who demands or accepts gratification is 200% of the amount, or up to 3 years in prison, or both. The penalty for attempting to bribe a tax official is NGN 2 million, or up to 3 years in prison, or both. This is welcome, if it can be enforced.
Stamp Duty is Simplified and Many Items Currently Subject to Stamp Duty Will No Longer Be Subject To It
This is long overdue! Many of the items under which stamp duty could be charged have been abolished, and there are other improvements. For example, there will be no stamp duty on electronic transfers of less than NGN 10 million, or on intra-bank self-transfers, or transfers for salary payments. Nor will there be stamp duty on receipts for amounts less than NGN 10 million. Leases of land for rent of less than NGN 10 million will no longer be subject to stamp duty. A sale of real property for NGN 10 million or less will not be subject to stamp duty. A transfer of real property between companies with 90% or more common ownership will also not be subject to stamp duty; otherwise, stamp duty will be 1.5% of the value. Transfer of mineral rights will be subject to stamp duty of 2%.
However, Some of The Changes Are Less Welcome
Stamp duty will now be imposed on the transfer of shares at the rate of 0.225%, plus a further 0.08% on a contract note for a marketable security. This looks like an overly complicated method. There will still not be any stamp duty on the transfer of government securities. Loans taken by a company will be liable for stamp duty at 0.1%, unless the loan is a bank overdraft or a short-term loan of less than 12 months’ duration.
The Bill Indicates That Appraisals of Value Will Be Subject to Stamp Duty
This is like the current Stamp Duties Act, but it seems a strange item to charge stamp duty on, as it is not a document that grants, recognises, or transfers rights, and this is especially so as it is ad valorum rather than a small flat rate amount. However, it seems that this item does not appear in the detailed schedule, so there is no rate specified for the duty. For greater clarity, this should also be deleted from the Bill.
We are not sure why it is desirable to have stamp duty on premiums for life insurance (at 0.075%) or on other insurance premiums, also at 0.075%. An opportunity to abolish more of the “nuisance” fixed amount stamp duties—such as cheque leaves at NGN 50, receipts at NGN 50 if the value is more than NGN 10,000, agreements or contracts at NGN 1,000 with some exceptions, and bills of lading at NGN 500—would have been preferable. This is partly due to their low value, such that we doubt that the revenue collected will exceed the cost of collection, and partly because some of these documents are associated with underlying transactions that are subject to VAT.
The penalty regime has been designed to discourage taxpayers from treating stamp duty as a “voluntary” tax.
Minimum Tax Abolished
This is great news for less well-paid individuals, or those who run their own small business. They will be subject to income tax on their income at the graduated personal income tax rates, with a flat rate as a tax-exempt amount. They will no longer be subject to a minimum tax of 1% of gross income. This is a laudable shift in policy away from taxing relatively poor people, towards taxing those with higher incomes.
Minimum tax for companies has also been abolished, but the tax authority can still tax a company that makes a loss or a profit that is less than expected. The tax authority can use a “fair and reasonable” percentage of gross income for a resident, or the profit margin applied to Nigerian-generated turnover for a non-resident. This will lead to uncertainty, as well as unfairness for companies that make losses or have a low profit margin. Any tax authority must obviously have the right to make estimated (best of judgement) assessments when necessary, but this should be for cases of suspected evasion or understatement of taxable profits. This issue must also be taken in conjunction with the new minimum tax for larger companies and members of multinational groups.
Expanded Double Taxation Credits
The current system, which only allows double tax credits for part of the tax paid in other Commonwealth countries or in countries with which Nigeria has a double taxation agreement, will be abolished. A credit for all foreign taxes will now be available for foreign income brought into Nigeria through official channels. This is still a bit restrictive, as the income will be taxable even if it is not brought into Nigeria at all.
Exclusion From Creation of a Permanent Establishment
A non-resident will not be deemed to have created a permanent establishment or a significant economic presence in Nigeria just because it employs people in Nigeria if the duties of those employees are not primarily to serve customers in Nigeria. This will protect foreign companies that wish to employ Nigerians to work remotely, which can be attractive now due to the exchange rate.
Pre-trading expenses can be deducted if they are incurred in the six years prior to the commencement of the business.
Some points that are not so nice, but probably understandable and/or necessary.
Requirement to Show The State Where Sales Were Made
This will be an administrative burden but is required to refine the method by which VAT receipts are shared between levels of government and to make that method fairer. Failure to do this carries a penalty of NGN 1 million.
Controlled Foreign Companies Legislation
The principle of CFC legislation is quite common, but this provision in the Tax Bill has problems. If a foreign company is controlled by a Nigerian company and has not (in a year) distributed profits to its shareholders, then it can be deemed to have distributed profits that could have been distributed without detriment to the company’s business, and the Nigerian shareholder will be taxed on this. The tax authority is to issue detailed rules. This is rather vague and likely to lead to uncertainty, including how this inclusion will interact with a real dividend that is actually distributed in a later year. This provision has some similarity to the current provision on closely held Nigerian companies, which is replicated in the Tax Bill. This applies to a company controlled by not more than five individuals. It is not clear if these individuals must own the company directly or whether the tax authority can “look through” intermediate holding companies or even trusts. Both provisions tax an amount that the company could distribute without detriment to its business, but it is not clear how a tax authority will determine what this amount is. We understand that this existing provision has not been much used, and this is probably due to the difficulty in determining the amount to assess.
Top Up Tax For Nigerian Companies With Foreign Subsidiaries
If the foreign company pays income tax at a rate less than 15%, the Nigerian parent company will have to pay tax to “top-up” the tax paid by the foreign company to the 15% rate. FIRS is to issue detailed rules on this. We foresee that this will be a complex matter, which could have a large impact on some Nigerian groups with foreign subsidiaries.
Limited Liability Partnerships (LLPs) will be taxed as companies, but all profits will be treated as distributed to partners. This suggests that the LLP will pay tax on profits at company income tax rates, and the partners will pay tax on their share of the profits by way of dividend withholding tax. As profits distributed by companies will suffer a higher overall effective rate of tax than profits earned by individuals, an LLP will be less attractive than a normal partnership, at least for tax reasons.
Individuals to Be Taxable On Their Global Income
This applies wherever the income arises and whether or not it is brought or received in Nigeria. This is a significant change from the current situation, where many types of foreign income were not taxed in Nigeria. Exchange of Information arrangements and Common Reporting Standards are likely to mean that Nigeria’s tax authorities will become aware of a lot of such income. A definition of a person resident in Nigeria has also been included. This encompasses any individual who is domiciled in Nigeria, has a permanent place available in Nigeria for domestic use, has a place of habitual abode in Nigeria, stays in Nigeria for at least 183 days in a 12-month period (including any period of annual leave or temporary absence), or serves as a Nigerian diplomat in another country. This will be modified by some Double Taxation Agreements, but is very broadly defined. It seems that it will include many short-term expatriate residents.
Foreign Dividends Earned By Nigerian Companies Are to Be Taxed
The amount to be taxed is the gross amount, before any withholding tax is deducted. However, double taxation credits should be available to offset the Nigerian tax payable.
Capital Gains to Be Taxed on Worldwide Assets
All forms of property are chargeable assets and thus liable for Capital Gains Tax on disposal. However, shares in a Nigerian company are not chargeable for tax if the disposal proceeds are, in aggregate, less than NGN 150 million and the gain does not exceed NGN 10 million in any 12-month period. This is a radical change from the current normal practice for applying capital gains tax.
Non-residents to Be Liable for Nigerian Capital Gains Tax on Some Assets
This will occur if the assets were used for a trade carried on by the person in Nigeria, or if the assets are in Nigeria, or are deemed to be located in Nigeria. Shares are deemed to be located in Nigeria if more than 50% of their value is derived, directly or indirectly, from immovable property or other chargeable assets located in Nigeria, or from a Nigerian entity held through one or more interposed entities. The wording is not as elegant or clear as it could have been, in our view.
Pioneer Incentive is to Be Replaced by an Economic Development Incentive
Instead of the current tax exemption, those granted priority status will receive a tax credit. This credit can be used to offset the tax payable during the period for which the status is granted (which is 5 years) or the following five years. It is not clear if this credit can be used to offset any withholding tax on dividends declared in that period. Companies with this priority status will still be subject to the 15% minimum tax on profits, if they are large enough to qualify for that.? The overall effect is that this new incentive will be less attractive than pioneer status.
Bad Debt Deductions
The requirements to claim an income tax deduction for bad debts have been tightened so that a deduction will not be granted if the debt arose from a transaction with a related party.
Deductions for Expenses on Which VAT or Import Duties Were Not Paid
If an expense was incurred and either VAT that should have been paid or import duty that should have been paid was not paid, the expense will not be allowed as a deduction in computing income tax. There is a similar restriction for capital allowances.
Abolition of Initial Allowances
Capital allowances will therefore just be the annual allowance on a straight-line basis. This is a timing effect, but it may be important in times of high inflation.
Individual Tax Rates Increased for Higher Incomes
The proposed rates are quite low by global standards, as the maximum marginal rate will be 25% for income above NGN 50 million. Taken in conjunction with another change to the amount of income exempt from tax—which will become a flat NGN 800,000—and the extension of tax to foreign income, this increase in tax will probably be noticed by those with higher incomes. At the moment, the maximum marginal personal tax rate is 19.2%.
These changes compensate for the reduction in tax for the less well paid, including the 1% minimum tax that is currently imposed. It seems right to us, broadly speaking, that those with more income should pay proportionally more tax than those with less, and that demanding tax from those with very little income or resources exacerbates poverty as well as being costly to collect.
Place of Effective Management
Foreign companies will be resident in Nigeria if they have a place of effective management in Nigeria. This is a significant change, as the current definition of a Nigerian company is limited to one that is incorporated in Nigeria.
Disclosable Transactions or Agreements to Be Disclosed to Tax Authorities
Disclosable transactions or agreements are those that enable a person to obtain a tax advantage, which is broadly defined. A tax authority can also prohibit and counteract a tax avoidance scheme.
Foreign shipping and air transport operators will be required to file a monthly return, showing the gross monthly revenue for the month, supported by invoices issued, and accompanied by the tax due for that month.
“Moratorium” Loans
Loans made to a Nigerian company in foreign currency, with a minimum term of 2 years and a period at the commencement of the loan during which no debt service payments will be due (so-called “moratorium loans”), qualify for a reduced rate of withholding tax on the interest payable. This provision does not appear in the Tax Bill, so we conclude that this beneficial treatment will be abolished. This may be understandable, but it would have been preferable if the beneficial withholding tax treatment was phased out over a period, especially for existing loans. Taxpayers have structured their affairs based on the current law and will be prejudiced by the abrupt change.
Some Unwelcome Points
Treatment of Expenses Incurred in Foreign Currency
Deductions or allowances will be for the Naira equivalent of the foreign currency cost, converted at the official exchange rate. Furthermore, an excise duty will be imposed at 100% of the difference between the official rate and the rate used. This is presumably an attempt to use the tax system to prevent the use of the parallel foreign exchange market, but it is likely to have a detrimental effect on businesses (and also on individuals) who need foreign exchange but are unable to procure it in the official market. Any person who has knowledge of a forex transaction conducted at more than the official rate is required to report the transaction to the FIRS and the Nigerian Financial Intelligence Unit within 7 days, backed by significant penalties.
CGT on Indirect Disposal of Nigerian Companies
As mentioned above, disposal of shares in a company, where those shares derive more than 50% of their value from immovable property or other chargeable assets in Nigeria, or (directly or indirectly) from a Nigerian entity, will be subject to Nigerian tax. Also, any gain accruing to a non-resident from a disposal of shares will be taxable if that disposal leads to a change in the ownership structure or group membership of any Nigerian company or of any asset located in Nigeria. Again, this wording is not very clear, and it is also not clear how the gain will be computed when only part of the gain reflects the Nigerian assets. There may be practical problems in collecting the tax on a change of ownership of widely held, listed foreign companies that derive more than 50% of their value from Nigerian assets, as even holders of a small number of shares will be taxable on their disposal.
Top Up Tax
If a company has an annual turnover of more than NGN 20 billion, or is a member of a Multinational Enterprise group, and its effective tax rate is less than 15%, it must pay additional tax to bring its effective rate to 15%. This could affect companies benefitting from tax incentives, including free trade zones and priority status.
Cascading excise duty for suppliers to telcos, if the supplier is regulated by the Nigerian Communications Commission (NCC). This introduces some uncertainty. We can understand telephone calls being subject to excise duty, and that this could extend to similar services such as mobile data or services using USSD codes. However, as worded, it seems that the excise would have to be paid by many suppliers to telcos, such as companies which provide towers to telcos, and maybe also by suppliers of equipment that are subject to regulation by the NCC. The wording suggests that this would also apply to interconnect charges. This will be an extra cost to the telco, which cannot set this excise off against the excise it charges on its own services. This seems to be a harsh way of designing the tax and will eventually lead to an increase in the price of telecom services.
Time Limit for Additional Assessments Can Be Extended Beyond 6 Years if a Tax Audit is Commenced Within the 6-Year Period
This looks unfair and is likely to mean that tax authorities will ensure that the time limit remains open for lengthy periods, reducing certainty and increasing burdens on taxpayers. Given that the time limit for assessing can be extended indefinitely if a taxpayer makes a deliberate misstatement, the increased time limit for audits commenced within the six-year period seems unnecessary and unduly generous to tax authorities.
Taxation of Bonus Shares
The Tax Bill contains a definition of Dividend. Dividends paid to a Nigerian company as shares (that is, bonus shares) will not be included in profits and will not be subject to withholding tax. However, if bonus shares are received by an individual, the nominal value of the bonus shares will be taxable. This comes from the definition of a dividend. However, the shareholder has not benefited from any flow of wealth from the company; the shareholder simply holds more shares in the company, representing the same percentage ownership as before the bonus issue. Thus, the tax treatment seems unfair, and no portion of bonus shares should be included in the definition of dividend. However, bonus shares should then also be ignored when considering repayment of share capital, as nothing was paid for the bonus share; any payment by the company for redemption or cancellation of that share should be treated as a dividend.
Some Issues Not Dealt With
As mentioned earlier, tax law is rarely, if ever, perfect and often needs further modification. However, we have set out a list of some points that could have been dealt with in these comprehensive Bills but have not been.
Certificate of Acceptance of Fixed Assets (CAFA)
The need to obtain a CAFA and to seek Government approval before incurring capital expenditure has not been abolished.
The Tax Refund System is Still Deficient
Refunds of income tax are only to be paid after an audit, even if it is excess withholding tax. No interest is paid. There is a time limit for the repayment to be made, but it only starts after a tax authority has decided on the refund. As mentioned above, the refund process for VAT is a bit uncertain. This is very important for exporters and those affected by withholding VAT.
Penalties and thresholds are denominated in Naira, so are likely to be eroded by inflation over time. The drafters could have used “penalty points” or a similar system, whereby the definition or Naira amount of a penalty point could be more easily changed by Statutory Instrument.
Penalties
Some penalties are significant, including 40% for not deducting WHT, 50% for a false or fictitious claim of a tax refund, and 100% for a false or fictitious VAT refund. However, the core penalty for deliberate understatement of taxable income remains 10%. . We are not sure that there will be much point in further tax amnesties if the “stick” (penalties) remains so benign. All honest taxpayers surely want a well-designed tax system operated in a way that encourages all taxpayers to pay the amount required of them.
Probate Duty
This is Nigeria’s version of a death duty or inheritance tax. However, it is not codified in the tax system and is rather governed by the rules of the States’ High Courts.
Capital Gains Tax on Inflation
This is a general problem in many countries, which has worsened with times of high inflation. The capital gains tax is levied on the selling price less the acquisition cost, broadly speaking. So, if an asset is purchased for, say, NGN 1 million and is sold 5 years later for NGN 1.5 million, tax will be charged on a gain of NGN 500,000. However, if inflation over that period is 60%, the value of the asset in “real” terms has decreased, but the owner still must pay tax. This can be prevented by increasing the acquisition cost by an allowance for inflation, for example, the increase in the Retail Prices Index over the ownership period. The Bill is a missed opportunity to correct this.
Transparency and Accountability for Tax Authorities
These Bills provide that the Nigerian Revenue Service will send an annual report to the President, and that report will be sent on to the National Assembly. There is a similar requirement for state tax authorities. We believe that public confidence in the tax system and administration would be enhanced if these annual reports were published and made widely available for the public to read and analyse. We also suggest that this requirement be extended to every organisation that collects or receives any tax, including those that will receive allocations from the Development Levy. This obligation should be legislated for so that it is clear. We are aware that the Federal Inland Revenue Service does produce an Annual Report, but this is not widely available and cannot be obtained from the FIRS website.
Capital Allowances on Leased Assets
The treatment of leased assets still seems a bit strange, in that allowances can only be claimed by the user on the instalments paid in a year. This creates a distinction between finance leases and assets purchased by hire purchase or some other form of finance.
Meet the author
Russell Eastaugh
Russell has extensive African experience, in particular in Nigeria and Uganda, and extensive experience of the betting industry. He is a Fellow of the Chartered Institute of Taxation of Nigeria. Contact Russell at [email protected].