PAC Capital explains how Finance Act promotes fiscal equity, best practices

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PAC CAPITAL

PAC Capital analyst explains how Finance Act promotes fiscal equity, best practices.

Pan African Capital Holdings’ (www.panafricancapitalholdings.com) analyst led by Oluwole Adeyeye has explained that the strategic objectives of the Finance Act is to promote fiscal equity apart from the fact that it seeks to raise government revenues.

Some analysts define fiscal equity as balance or equilibrium point between the tax payers and fiscal authority.

According to Adeyeye however, he said the Act also target to align domestic tax laws with global best practices.

Adeyeye further explained that the Act introduces tax incentives for investments in infrastructure and capital markets.

This includes support for Micro, Small and Medium Enterprises (MSME) though it key target is to raise revenues for government.

The summary of the Key changes/features of the 2019 Finance Act as related to Companies Income Tax (CIT) Act points to a wider base for taxing non-resident companies (NRCs).

He said the Act preaches provisions for taxing NRCs carrying on digital activities, consultancy, technical, management or professional services in Nigeria, provided they have significant economic presence in Nigeria.

It thus deleted certain inhibitive rules for insurance companies.

With the Finance Act, insurance companies would be able to carry forward losses indefinitely as opposed to the 4-year restriction currently in place.

The Act offers Exceptions to Excess Dividend Tax (EDT) provisions. It would be recalled that before now, when a company pays dividend in excess of its taxable profits, such dividend is subject to CIT at 30%.

PAC Capital noted that this applied whether or not the income from which such dividend is paid had been taxed hitherto or whether the underlying income is altogether exempt from tax.

So, based on the Act, EDT is inapplicable to; dividends paid out of retained earnings, exempt profit and rental/dividend income of Real Estate Investment Company (REIC).

The exemption also covers franked investment income (FII)

Expansion of the categories of exempt income

Stressing further, PAC held that the Act expands categories of exempt income to include the profit of a small company and dividends declared from small manufacturing companies.

The exemption also covers Rental income/dividend of REICs and secondary payments under “Securities Lending” transaction; thereby eliminating any potential double taxation on compensating payment mimicking interest/dividends, analysts at PAC interpreted.

On expansion of the categories of allowable deductions and the introduction of thin capitalisation rules, the Act exempts dividends and rental income received by REIC on behalf of its shareholders provided 75% of the income is distributed to shareholders within 12 months of earning the income.

However, the Act introduces thin capitalisation rules by disallowing “excess interest” on related-party lending involving a foreign lender.

PAC Capital defines excess interest as any amount paid or payable as interest on a loan, which exceeds 30% of Earnings before Interest Tax Depreciation and Amortisation (EBITDA).

Act provides that where the company is unable to fully enjoy the relief based on the excess interest limit, it may carry forward such unabsorbed interest for a maximum of 5 years.

Ministerial approval no longer required.

Meanwhile, the Act removes the ministerial approval requirement for expenses incurred relating to management services between non-related parties before such expenses could be tax-deductible.

“This implies that any entity who enters into a management service agreement with an unrelated entity would be able to claim tax deductions for management fees without ministerial approval or the National Office for Technology Acquisition and Promotion’s (NOTAP) approval”, PAC capital stated.

Introduction of new commencement and cessation rules

As per commencement and cessation rules:

On the existing commencement and cessation rules, he revealed that the Act replaced the new basis for computing the assessable profit of companies just starting or ending their business.

The Finance Act provides that under the existing system, the profits of a new or liquidating company are subject to double taxation. The amendment would eliminate the risk of double taxation of such companies.

Rescaling of Company Income Tax rate

With the Act, a small company with turnover of up to ₦25 million will have a 0% tax rate while a medium company with turnover that is greater than ₦25 million but less than ₦100 million will have a tax rate of 20%.

However, a large company with turnover that is greater ₦100 million will be paying a tax rate of 30%.

The Act thus introduce early tax payment bonus.

According to the provision of the Act, Adeyeye explains that taxpayers who pay their tax liability at least 90 days before due date would be entitled to a bonus of 2% and 1% of the tax paid for medium and large companies respectively.

Personal Income Tax Act

Personal income tax has been the grey area in tax administration in Nigeria over the years. However, the new Act has repealed provisions that grant certain personal reliefs.

Deductibility of pension contributions

In assessing personal income of a taxable person, contributions to pension, provident and other retirement benefits fund, society or scheme would constitute allowable deductions for tax purposes.

However, the deductibility of such contributions would not be contingent on its approval by the state revenue authorities.

The Act provides that companies that contribute to private pension funds and other private schemes would be able to enjoy maximum tax relief for such contributions in arriving at their tax payable.

The Finance Act demands that Banks to obtain tax identification number (TIN) from customers.

Banks are expected to obtain TIN from corporate customers as a pre-condition for opening a new or maintaining an existing bank account. While this is the practice, the amendment is a welcome development, as it would give a legal basis to the practice.

Inclusion of the definition of “goods” and “services” in Value Added Tax Act (VATA):  

The Finance Act introduced inclusion of the definition of “goods” and “services” in VATA is expected to eliminate ambiguity with respect to the application of VAT to certain transactions.

It however clarified what constitute exported services which it defines as a service rendered within or outside Nigeria by a person resident in Nigeria to a person outside Nigeria.

“This would eliminate ambiguity in the application of the current definition”, Adeyeye held.

Increase in Value Added Tax rate to 7.5% from 5%

The analysts stated that the introduction of ₦25 million revenue threshold for taxable persons required to register for VAT and file returns.

According to him, anyone who does not fall within the threshold above would be exempted from registering, remitting, issuing tax invoice and collecting VAT.

“The threshold of ₦25 million within the calendar year will reduce the tax compliance burden for small companies”, he said.

On exemption of assets sold in a restructuring exercise

Adeyeye said the Act exempts assets sold or transferred to a related party in a restructuring exercise provided such assets are not sold by the acquiring company within 365 days after the date of restructuring.

As per Customs and Excise Tariffs etc. (Consolidation) Act, expansion of goods liable to excise duties to include imported goods. He said this eliminates any unfair advantage on imported products over local products.

Capital Gains Tax (CGT) Act, Cap. C1, Laws of the Federation of Nigeria (LFN), 2004 (CGTA): 

The Finance Act allow exemption on tax arising from re-organization. Analyst said transfer of assets during reorganization within a group of companies would be exempt from CGT.

On termination benefits, the Act provides that compensation received for loss of employment of up to ₦10 million would be exempted from CGT.

Adeyeye said this creates an incentive for payment of compensation for loss of employment below the ₦10 million threshold as termination benefits rather than terminal benefits, which would have been subjected to PIT.

Petroleum Profits Tax Act (PPTA)

The Act seeks to repeal the provision of PPTA that exempts dividends paid out of profits derived from petroleum operations from withholding tax.

“Taxpayers in this space would now be saddled with the responsibility of withholding tax when paying dividends”, he interpreted.

For Stamp Duties Act (SDA)

He summed up that the Act increases the stamp duty on receipts to ₦50 on every transaction from ₦10,000 and above; and expands the definition of receipt to cover electronic transactions.

By Julius Alagbe