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Nigeria’s tax reform to encourage restructuring, small business

By David Whitehouse
Posted on Monday, 13 January 2020 10:49

Sunday Alamba/AP/SIPA

Nigeria’s most far-reaching tax reform in 20 years will facilitate corporate restructuring and ease the burden on small business – while leaving the scope for private arrangements with tax inspectors untouched.

The 2019 finance bill has been passed by both chambers of the national assembly, but is still waiting for final presidential assent.

President Muhammadu Buhari had said that providing incentives for infrastructure and capital market investment is a key aim of the legislation.

The bill is likely to be signed soon, says Kelechi Ibe, a tax advisor in Lagos.  Ibe says that the delay has been caused by “pushback” from the Federal Inland Revenue Service (FIRS) over some issues. The first priority of the FIRS, he notes, is to gather revenue.

The package, Ibe says “doesn’t address” making the Nigerian tax system more transparent. If that was a serious aim, he says, there would be more provisions to make use of modern technology.

This, he argues, could have been done by making it compulsory to file tax returns on line, which would have eliminated the one-on-one meetings where the amounts to be paid are decided.

  • “Bribery would be highly reduced” if such a system were adopted, he says.
  • The bill, he says, is more about fixing the interpretation of current tax laws, and taxing tech companies who make money from Nigeria without having a physical presence there.
  • The legislation allows taxation of non-resident companies providing digital, consultancy, technical, management or professional services in Nigeria, if they have a “significant economic presence” in the country and profit can be attributable to the activity.

Corporate restructuring

Overall, the bill will “certainly” be good for business and investment and Nigeria, and will especially help small and medium-sized businesses (SMEs), Ibe says.

The tax exemption for the smallest companies will also reduce their compliance costs, he says, and overall the bill is likely to lead to a long-term increase in demand.

  • “If the SMEs grow, they can contribute massively” to Nigerian economic growth, he says.
  • Corporate restructuring will be facilitated as assets sold or transferred to a related party in a restructuring exercise will be exempt, provided the assets are not sold on within a year.
  • Insurance companies will also benefit, as they will be able to carry forward losses indefinitely, as opposed to the current four-year limit.

Balancing those benefits are an increase in VAT to 7.5% from 5%, and the repeal of the exemption of dividends paid from petroleum profits from a 10% withholding tax. Penalties for failing to file company tax returns on time are also increased.

  • Nigeria’s VAT to GDP ratio is very low when compared to its peers, at 0.8% in 2015, versus an Ecowas average of 6.7%.
  • Companies with annual revenue below 25m naira ($69,000) in annual turnover will be exempt from VAT. The government says this will allow compliance efforts to be concentrated on larger businesses.
  • Ibe argues that higher VAT and the tax on petroleum dividends will not be enough to deter any serious potential investor in Nigeria.

Bottom Line: The bill is a step in the right direction in showing that Nigeria is open for business – but until online declarations are obligatory, concerns over the opacity of the system will persist.

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