TEA | What does the Finance Bill do?

I am somewhat late to the party. You must have seen a lot about this new thing called the Finance Bill. Everyone is writing about it.[1] You don’t have to pretend to get a hang however. This is that safe space where we learn together, in our bleached content and easy language. This is the parte after parte. I have read the Finance Bill and I have reduced its impact to 10 headlines that I will now explain to you.

The Finance Bill was presented by the Presidency and is to amend “tax provisions and make them more responsive to the tax reform policies of the Federal Government and enhance its implementation and effectiveness.” Bla Bla. The tax laws to be amended include the Companies Income Tax Act, Value Added Tax Act, Customs and Excise Tariff Act, Personal Income Tax Act, Capital Gains Tax Act, Stamp Duties Act and the Petroleum Profit Tax Act. The Finance Bill is unprecedented in Nigeria. Not in Africa however as countries like Tanzania and Kenya did the same in 2017[2] and 2019[3] respectively.

Okay let’s get to it. Here are the top 10 tracks from the Finance Bill album!

1.      No TIN, No Bank Account!

Banks! Banks! Banks! My last article explored the role of banks in sharing financial information with tax authorities.[4] The proposed Value Added Tax on digital transactions is to be collected by banks. Banks are shouldering a lot of responsibility, you see. But when banks are involved, there is no hiding. This one involvement is even more direct…

Under the Finance Bill, Companies[5] and persons[6] are to provide their Tax Identification Number (TIN) as a precondition for opening a bank account. In the case of an account already opened before 30th September 2019, the banks will require persons and companies to provide their TIN as a precondition for the “continued operation” of their bank accounts.

Haha won ti get wa!

2.     Ta-dah! Significant Economic Presence!

My article on the Digital Economy[7] identifies the challenge of the fixed base requirement, as contained in the Companies Income Tax Act (CITA). Digital Companies can make profits in countries where they have no physical presence. Meanwhile, the CITA in section 13 makes companies taxable when they have a fixed base. Hence, tax revenue loss.

A new paragraph is to be added to Section 13(2) of the CIT Act.[8] The effect is that a non-resident company is now taxable in Nigeria to the extent that it has a “significant economic presence” in Nigeria and profit can be attributable to a digital activity (a bunch of digital activities are listed out). Yo, this is probably the most revolutionary part of the Act. And I wrote about this yo. What constitutes “significant economic presence”? The Finance Bill provides that the Minister may by Order determine this. LOL somebody is avoiding responsibility.

3.     Bye Bye to yeye EDT!

Okay EDT is Excess Dividend Tax. Let me explain simply. Companies sometimes declare a loss yeah? And that way they cannot be asked to pay CIT, because no profits. Imagine that the same company that declared a loss is sharing dividends to shareholders. I know right? So, our CITA provides that such company would be taxable on the dividends it declares as if they are profits.[9] That is, at 30%. Because you cannot come and be avoiding tax like that. This is okay right? Now to the problem…

Companies make profits yeah? And these profits are taxable on an annual basis yeah? Sometimes the profits that have already been taxed are retained for different reasons. So, imagine that I made 20,000 profits in year 2017 and they were taxed at 30%. But I kept all or some of those profits and this year I decide to pay dividends out of them. Should EDT apply? No. Because the exact same profits have already been taxed in a previous year… This would be double taxation! Ehen, you gorrit!

But our courts and tribunals don’t get it. Therefore, many decisions causing wahala upandan…

Section 19 of the CIT Act is to be amended to exempt dividends paid out of retained earnings that have already been subjected to tax (Companies Income Tax, Petroleum Profits Tax, Capital Gains Tax). It goes on to exempt (from EDT) dividends paid out of exempt profits[10], profits regarded as franked investment income[11] and distributions made by a Real Estate Investment Company.[12]

4.     Size matters!

One of the canons of taxation is efficiency. It practically means that the cost of collection should not exceed the revenue collected. The peculiar position that the Nigerian tax authorities are in requires them to choose their targets carefully. They must now go after taxpayers who can remit the most tax revenue. Aint nobody got time to be spending resources, chasing small businesses and their tiny turnover. Therefore, thresholds!

Under this Bill, companies are divided into small companies, medium-sized companies and large companies. A small company is a company that earns a gross turnover of N25,000,000 or less. A medium-sized company is a company with a gross turnover greater than N25,000,000 but less than N100,000,000. A large company means any company which is not a small or a medium-sized company.[13] Durrrgh!

The Finance Bill exempts small companies from Companies Income Tax. [14] Medium-sized companies are to be taxed at the rate of 20%.[15]

5.     Minimalism on that minimum

Minimum tax is payable when a company makes a loss or when its ascertained total profits results in no tax payable or in tax payable which is less than minimum tax. At all at all tax. The rate of minimum tax has however been a little more complicated than necessary.[16]

Section 33 of the CIT Act that provides for Minimum Tax is to be amended.[17] Minimum tax is now to be 0.5% of turnover of the company. That’s all. NSCDC. Also, it is not payable by a company that earns a gross turnover of less than twenty-five million naira in the relevant year of assessment. That is, (only) small companies are exempted from minimum tax. Issa parry!

6.     Definitions… finally!

In my article, VAT and its 99 Problems, I mentioned that a problem with the Nigerian Value Added Tax (VAT) Act is missing definitions… I meant that some key terminology used in the Act were not defined, leaving space for imprecise ascertainment. There has been conflicting court decisions and confused stakeholders.

Section 2 of the VAT Act has been re-enacted to explain when goods[18] and services[19] would be deemed to be supplied in Nigeria.[20] It is a spree of definitions really. The Finance Bill amends the interpretative section of the VAT Act and thereby proposes definitions for ‘goods’, ‘services’, ‘exported service’, ‘commencement of business’, ‘basic food items’, ‘recognized group of companies’ and ‘taxable supplies’.[21][22]

Basic food items are exempt from VAT under the VAT Act. The million-dollar question has been – what is a basic food item? Well, the Finance Bill impressively includes an exhaustive definition for “basic food items”.[23]

Totally unrelated – a new item has been added to the VAT exempt list. “Locally manufactured sanitary towels, pads or tampons.” Hallelujah. Somebody has been paying attention to social media.

7.     Jara on that VAT!

So yeah VAT's increase is not news. Remember that time the Federal Executive Council said it was 7.2 percent and we were like WTH. Then the Minister of Finance clarified that it was 7.5%.[24] LMAO. What happened there anyway? Oh well, the Finance Bill proposes to change the rate of VAT from 5 per cent to 7.5 per cent.[25] There you go!

8.     25 million you are using…

Remember my short lecture on tax efficiency and the importance of thresholds? Ehem. You have read about this already. It was another single released before the album.

The VAT threshold is necessary “to align local laws with global best practice by introducing a threshold that protects the most vulnerable from exposure to VAT”.[26] Where a taxable person has made taxable supplies or expects to make taxable supplies which in value is N25,000,000 or more, they are to file VAT returns. I know that this can be confusing so pay attention:

Let’s say the name of my business is Alubarika & Sons and we sell a range of household items. I would calculate the value of taxable supplies I have made (or I am likely to make). This means that I would separate the goods that are VATable and sum up their value. I would try to see if the value of these VATable goods equal or exceed N25,000,000. It could be from a single transaction or the total value of supplies within a calendar year. If the value of these VATable supplies reaches the threshold, I would begin to file my VAT returns with the FIRS on the 21st of that month or successive months. If it doesn’t reach that threshold, then I do not need to file returns. This does not mean that I will not pay VAT because VAT is indirect, deducted at source – when people supply me, they would still add VAT. This just means that I do not need to file returns. Got it?

9.     Digital Duty!

You see that N50 your bank keeps charging you on your online transfers? Yeah that’s some form of Stamp Duty.

The Finance Bill redefines “stamp”, “stamped” and “instrument” to accommodate electronic means. The definition of stamp is extended to include an “electronic stamp or an electronic acknowledgement for denoting any duty or fee”. An instrument is also stamped when it is “digitally tagged with electronic stamp or notional stamp on an electronic receipt”. Instrument is said to include “every written document including electronic receipt”.[27]

Importantly, a Stamp Duty of N50 on bank transfers of N10,000 upwards is to be legislated.[28] That is, if you transfer N10,000 or more from one account to another, your bank will immediately charge you N50. There is an exemption however – for transfers made by a person into his own account within the same bank.

10. Warm Regards, David.

Interestingly, the Finance Bill recognizes electronic mail as a means of correspondence with tax authorities. Markedly, section 31 amends the Personal Income Tax Act to include courier service and electronic email as means of communicating a notice of objection. The import of this is that if the tax authorities assess a person wrongly, they can object to this assessment by simply sending an email to the State Inland Revenue Service. That is, as opposed to journeying to the tax office. How cool is that?

Conclusion

The Finance Bill is simply a Bill to amend various tax laws in Nigeria. Several of our tax legislation require urgent alteration. Instead of amending them individually, the Finance Bill is that gbogbonise that will do the job at once. That is, if it scales the legislative process. This Bill passed its second reading on November 6, 2019.

I must tell you that during plenary sessions, senators were not given copies of the bill. LMAO. Senators protested this anomaly and the senate president “insisted that the general principles of the bill should be discussed without the details of the document.”[29] Yeah, so they passed a bill they did not read.

Mo ya look away.

I hope that this article was useful.

Enjoy your life!

[1] Andersen Tax https://drive.google.com/file/d/1ujFDvNReFJN9VSi4M6FC2rMaWQ9UCRRO/view KPMG https://home.kpmg/content/dam/kpmg/us/pdf/2019/11/tnf-nigeria-nov7-2019.pdf

[2] https://www.pwc.co.tz/assets/pdf/finance-bill-2017.pdf

[3] https://www.africalegalnetwork.com/wp-content/uploads/2019/07/AK-Legal-Alert-Finance-Bill-2019.pdf

[4] https://www.dhirubhai.net/pulse/what-tax-transparency-david-akindolire/

[5] Section 2, Finance Bill

[6] Section 30, Finance Bill

[7] https://www.dhirubhai.net/pulse/companies-income-tax-digital-economy-david-akindolire/

[8] Section 3, Finance Bill

[9] Section 19, Companies Income Tax Act

[10] Under the Industrial Development (Income Tax Relief) Act, the Petroleum Profits Tax Act, or the Capital Gains Tax Act or any other legislation.

[11] Income in the form of dividends paid to a company from earnings on which corporation tax has already been paid by the originating company.

[12] A company that invests in real estate on behalf of its shareholders/investors. These investors receive income yearly as dividends or rent on those investments.

[13] Section 23, Finance Bill

[14] Section 7, Finance Bill

[15] Section 14, Finance Bill

[16] 0.5 percent of gross profits; or 0.5 per cent of net assets; or 0.25 per cent of paid up capital or 0.25 per cent of turnover of the company for the year whichever is higher.

[17] Section 12, Finance Bill

[18] In respect of goods: the goods are physically present in Nigeria at the time of supply, imported into Nigeria for use by a person, assembled in Nigeria, or installed in Nigeria; or the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right thereof is situated, registered or exercisable in Nigeria.

[19] In respect of services: the services are rendered in Nigeria by a person physically present in Nigeria at the time of service provision; or the services are provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria.

[20] Section 35, Finance Bill

[21] Section 46, Finance Bill

[22] For instance, ‘goods’ means “(a) all forms of tangible properties that are movable at the point of supply, but does not include money or securities; and any (b) intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land”. ‘Services’ means “anything other than goods, money or securities which is supplied excluding services provided under a contract of employment”

[23] To mean agro and aqua based staple food described as additives, bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits, live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables and water.

[24] https://www.premiumtimesng.com/news/top-news/352233-vat-increased-to-7-5-not-7-2-minister.html

[25] Section 36, Finance Bill

[26] Section 39, Finance Bill

[27] Section 53, Finance Bill

[28] Section 54, Finance Bill

[29] Punch Newspaper, November 10, 2019 https://punchng.com/finance-bill-brouhaha-senators-threaten-showdown-over-fgs-plan-to-hike-vat/