A Taxing Time: Nigeria's Tax Reform at a Crossroad II

What Companies Need to Know About the New Rules.

Imagine a bustling marketplace, vibrant with commerce and potential. Now, picture an invisible network of rules shaping how every transaction unfolds. These rules are Nigeria’s tax laws, and just like the stalls and vendors in a market, they need periodic reorganization to stay relevant. Enter the 2024 tax reform bills—a sweeping overhaul of the nation’s tax landscape aimed at making it fairer, more efficient, and aligned with global trends.

For companies in Nigeria, these reforms aren’t just administrative footnotes. They signal a sea change in how businesses operate, strategize, and thrive. Let’s delve into the key highlights, their implications, and what every business should watch out for.

In this edition of Tax Trends & Tales, we unravel the story behind these reforms, dive into the changes they bring, and explore what they mean for companies operating in Nigeria.

Why These Reforms?

Nigeria faces a dual challenge: plugging revenue leaks and fostering economic growth. The new tax reform bills are a response to these needs, aiming to simplify compliance, broaden the tax base, and align Nigeria with international tax practices..

Navigating the 2024 tax reform bills through the National Assembly has been a challenging task for Mr. Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms. Lawmakers have raised concerns over certain provisions like VAT allocation formula, citing fears of regional backlash and economic strain. Additionally, resistance from entrenched interests and concerns about fiscal federalism have further complicated the process. Through strategic engagement and advocacy, Mr. Taiwo continues to balance the urgency of reform with the complexities of Nigeria’s political and federal landscape.

But where does the plot thicken? At the intersection of corporate responsibility and government ambition, these reforms are as much about addressing revenue leakages as they are about incentivizing economic activities. While these changes are ambitious, their success hinges on how well businesses understand and adapt to the new rules.

Key Changes: What’s New in the Tax Rulebook?

1. Corporate Income Tax (CIT) Adjustments

One of the most talked-about reforms is the phased reduction of CIT rates:

• From 30% to 27.5% in 2025.
• Further down to 25% in 2026.

Additionally, small businesses with annual turnovers of ?50 million or less will remain exempt, providing much-needed relief for entrepreneurs. This redefines a small company as one with an annual gross turnover of ?50,000,000 or less and total fixed assets not exceeding ?250,000,000, excluding firms providing professional services.

However, larger companies must take note of a new provision: businesses with an effective tax rate below 15% will face a supplementary tax to meet this threshold. Multinational entities and companies with turnovers exceeding ?20 billion are particularly in the spotlight. The goal of this provision is to align with global tax standards, such as the OECD's Pillar Two framework on a global minimum tax, ensuring that large corporations contribute a fair share to the economy.

2. Harmonization of Levies

Imagine decluttering a messy drawer. Gone are the days of juggling multiple tax levies. The reforms consolidate existing charges like the Tertiary Education Tax, Information Technology Tax, and others into a unified Development Levy. Starting at 4% in 2025, this levy will gradually decrease to 2% by 2030, simplifying compliance and reducing cumulative costs.

3. Value Added Tax (VAT) Redistribution

The reforms propose a new VAT sharing formula to empower local governments:

• 55% to states.
• 35% to local governments.
• 10% to the federal government.

This shift aims to spur localized development and provide states with a greater share of resources.

4. Capital Allowance Reform

Capital allowances are also getting a makeover. The reforms simplify capital allowance calculations, particularly favouring investments in technology and infrastructure. Enhanced deductions for these areas are designed to spur innovation and long-term growth. The bills further propose a 100% capital allowance deduction for qualifying research and development expenditures, encouraging businesses to invest in innovation amongst others.

5. Anti-Avoidance Measures

No story is complete without a villain. For these reforms, it’s aggressive tax avoidance. With tougher rules on transfer pricing and artificial profit shifting are also part of the package. These provisions aim to curb aggressive tax planning and ensure multinational companies pay their fair share.

What Should Businesses Watch Out For?

As with any gripping tale, the devil is in the details:

• Implementation Timelines: The reforms come with phased rollouts. Companies must track the effective dates for each provision to stay compliant and avoid penalties.
• Regulatory Clarifications: As the reforms roll out, grey areas may emerge. Staying updated with Federal Inland Revenue Service (FIRS) announcements as well as articles from Newsletters as this is crucial for clarity.
• Judicial Challenges: Controversial provisions could face judicial scrutiny, causing delays. Companies should monitor litigation and assess its impact on operations..
• Alignment with Global Trends: Provisions like the 15% effective tax rate mirror international frameworks such as the OECD’s Pillar Two. Multinationals should evaluate how Nigeria’s reforms integrate into their global tax strategies.

A New Era for Nigerian Tax Landscape

The 2024 tax reform bills represent a significant shift in Nigeria’s fiscal policy. For companies, they bring both challenges and opportunities. Adapting to these changes requires vigilance, proactive planning, and a willingness to engage with the evolving tax landscape.

Conclusion

Every reform tells a tale, and the current tax bills are no different. They offer a glimpse into the future of Nigeria’s tax environment—a future where compliance meets opportunity, and innovation drives growth. As we navigate this journey together, remember: staying ahead in the tax game requires not just knowledge but adaptability and foresight.