Navigating Tax Implications in Nigeria Mergers and Acquisitions

Contributed By Cyril Samuel Dandison Esq.

Introduction

Navigating the intricate terrain of mergers and acquisitions (M&A) within Nigeria demands a keen comprehension of the associated tax implications. The success of these strategic business manoeuvres is significantly influenced by the prevailing legal and regulatory framework, with tax laws and overseeing agencies playing a pivotal role in determining their outcomes. This research delves into the consequences of non-compliance with tax regulations during M&A activities. By examining the interplay of legal obligations, regulatory oversight, and the potential pitfalls of inadequate tax adherence, this analysis aims to shed light on the critical importance of tax compliance in driving successful mergers and acquisitions in the Nigerian business landscape.

Top of Form

Merger and Acquisition

In the realm of business, the terms “merger” and “acquisition” are oftentimes used interchangeably, yet they bear distinct meanings. A merger constitutes a strategic arrangement involving the amalgamation of two or more extant companies, intending to establish a larger entity driven by economic or strategic motivations.^[1] An acquisition on the other hand is when one entity, the acquirer, assumes control over another, the target, achieved by procuring a substantial stake in the share capital or the entirety of the assets and liabilities of the target. Typically, the acquired company dissolves, its operations becoming assimilated into those of the acquiring entity. Nonetheless, there are instances where the acquisition grants the acquirer indirect control over the operations of the acquired business.^[2]

Prior to the enactment of the FCCPA, the Investment and Securities Act (ISA), the Regulations of the Securities and Exchange Commission (SEC Rules), and the Companies and Allied Matters Act (CAMA) regulated the review and assessment of M&A undertakings^[3] but within the legal framework of Nigeria today, the Federal Competition and Consumer Protection Act (FCCPA) stands as the pre-eminent legislation governing M&A activities, signifying a concerted effort to align the country’s competition and merger control practices with global standards.

TAX ADMINISTRATION IN NIGERIA

Tax administration is fundamentally the execution of a nation’s diverse tax laws to fulfil its intended goals. Each level of government in Nigeria employs dedicated mechanisms established to carry out tax administration functions. In Nigeria, there are various types of taxes payable and a few include;

1. Companies Income Tax (CIT): Companies Income Tax is levied on the profits of incorporated companies from all sources. Administered by the Federal Inland Revenue Service (FIRS), it is regulated by the Companies Income Tax Act (CITA) of 2004 (as amended). The tax rate is 30% of the company’s total profit after accounting for all relevant expenses incurred in generating taxable profit.^[4]

2. Personal Income Tax (PIT): Personal Income Tax is imposed on individuals, corporate sole entities, communities, families, trustees, or executors of any settlement. It encompasses taxation of sole traders, partnerships, and estates. Regulated by the Personal Income Tax Act of 2004 (as amended), the tax authority responsible may vary from FIRS to various State Boards of Internal Revenue.^[5]

3. Value Added Tax (VAT): VAT is a 7.5% tax charged on specified goods and services, primarily borne by the final consumer. Administered by FIRS, it is regulated by the VAT Act LFN 2004 as amended. Recently, the Federal Government approved a 50% increase in VAT, raising it from 5% to 7.5%, effective from 2020.^[6]

4. Capital Gains Tax (CGT): CGT is levied on the disposal of assets. It applies when capital sums are derived from the sale, lease, transfer, or any disposition of properties classified as chargeable assets. Regulated by the Capital Gains Tax Act of 2004 (as amended), it is typically charged at a flat rate of 10% on chargeable assets.^[7]

5. Withholding Tax (WHT): WHT is an advance tax deduction on income or disbursement due to a taxable entity, which is subsequently remitted to the relevant government authority. Rates range from 2.5% to 10% for companies and 5% to 10% for individuals, depending on the nature of the transaction.

6. Stamp Duties: Stamp Duties, regulated by the Stamp Duties Act of 2004 (as amended), apply to both individuals and corporate bodies. Individuals pay to their respective State Governments, while corporate bodies pay to the Federal Government. Rates can be flat charges or ad valorem charges.^[8]

7. Petroleum Profit Tax (PPT): PPT is levied on the income of companies engaged in petroleum operations (Upstream). Governed by the Petroleum Profits Tax Act, companies liable to PPT are not subject to Companies Income Tax on the same income.^[9]

TAXATION UNDER MERGER AND ACQUISITIONS

Before the consummation of a business merger or acquisition, it is imperative to adhere to the stipulations of Section 29(12) of the Companies Income Tax Act (CITA). This provision mandates the notification of the Board that is, the Federal Inland Revenue Service, and the acquisition of their guidance and clearance regarding potential tax liabilities under the Capital Gains Tax (CGT) Act.^[10]

The Capital Gains Tax (CGT), in furtherance, explicitly states that the sale of shares is exempted from this tax by the Finance Act 2023. Similarly, in the event of shares being acquired as part of a business sale through a Merger and Acquisition (M&A) process, such transactions are exempt from CGT.^[11]

Furthermore, with regards to transaction taxes such as Value Added Tax (VAT), Withholding Tax (WHT), and Stamp Duties, pertinent legislation and amendments govern the applicable tax implications. For instance, VAT does not apply to the sale or transfer of an asset to a Nigerian company for business considerations, provided the companies are related and the asset is not resold within 365 days after the restructuring. Conversely, intangible assets, including intellectual property rights and contractual rights, are now subject to VAT following the resolution provided by the Finance Act 2023.^[12]

In the case of Withholding Tax, it is important to note that it does not apply to the purchase consideration of a business. However, WHT will be deducted from legal fees, professional fees, etc., related to the M&A at the applicable rate and remitted to the relevant tax authority.^[13]

The Stamp Duty Act further mandates that all contractual agreements incurred during the M&A process are liable to stamp duty at the prevailing rate. Notably, certain exemptions apply under Sections 104 and 105 of the Stamp Duty Act, on property and share transfers between related parties, contingent upon business reconstruction or amalgamation.^[14]

Under the purview of the Companies Income Tax, specific provisions (Section 29(9)) offer discretionary application of the commencement and cessation rules, contingent upon the companies being related and the asset not being resold within 365 days following reorganization. Assets are also transferred at their Tax written-down value between related entities, affecting initial allowance or investment allowance eligibility for the acquiring company.^[15]

Implications of non-compliance with Tax Due – Diligence

The implications that arise from failing to meet tax obligations during mergers and acquisitions are legal, financial, and operational implications.

1. Legal Implications

In the aspect of legal implications, it constitutes a breach of Nigerian tax laws, potentially resulting in significant legal consequences. Additionally, neglecting to secure necessary approvals from regulatory bodies directly contravenes established legal requirements, leading to potential penalties and, in extreme cases, the complete annulment of the transaction. In cases of egregious non-compliance, regulatory authorities have the authority to void the merger or acquisition, rendering the transaction legally invalid. These potential legal ramifications underscore the critical importance of adhering to tax regulations in M&A activities.^[16]

1. Financial Implications

Neglecting tax obligations during mergers and acquisitions can result in substantial financial ramifications. The accumulation of accrued tax liabilities over time creates a significant financial burden for the parties involved. Additionally, late payment of taxes further compounds the issue, incurring additional costs in the form of interest and penalties. Moreover, the resolution of tax non-compliance issues requires legal representation and advisory services, leading to additional expenses in the form of legal fees and costs. These financial implications highlight the critical importance of adhering to tax regulations in M&A activities to safeguard the financial well-being of the companies involved.^[17]

1. Operational Implications

Failing to comply with tax laws can have significant operational implications for businesses engaged in M&A activities. The key implications include the diversion of crucial resources away from core operations, potential damage to reputation leading to trust erosion among stakeholders, and financial constraints due to outstanding tax liabilities. Prioritizing compliance and obtaining necessary approvals from regulatory bodies is not only a legal requirement but also a fundamental business imperative for successful M&A endeavours. This approach safeguards reputation and ensures long-term growth prospects for companies involved in M&A transactions.^[18]

Conclusion

In conclusion, it is important to be abreast with the necessary taxes before finalizing any M&A transaction. In addition, conducting comprehensive tax due diligence on both companies is crucial to ascertain potential tax liabilities. Moreover, seeking professional advice is paramount to mitigate unwarranted tax exposures in the process.

1. O. Olafaju & F. Ogunyemi, “Tax Considerations and During Mergers and Acquisitions in Nigeria (2021) Available @ Tax Considerations During Mergers And Acquisitions In Nigeria – Corporate and Company Law – Nigeria (mondaq.com) accessed 18^th September, 2023. ↑
2. Ibid ↑
3. Ibid ↑
4. Resolution Law Firm, “Brief Overview of Company Tax in Nigeria” Available @ Brief Overview Of Company Income Tax In Nigeria – Tax Authorities – Nigeria (mondaq.com) accessed 20^th September, 2023. ↑
5. Marcus Okoko & Co., “Personal Income Tax Act 2011; Understanding the Concept” Available @ Personal Income Tax Act, 2011: Understanding The Concept Of P.A.Y.E – Tax Authorities – Nigeria (mondaq.com) accessed 20^th September, 2023. ↑
6. FIRS: Value Added Tax (VAT)Available @https://www.firs.gov.ng/value-added-tax-vat accessed 21^st September, 2023. ↑
7. SimmonCooper Partners, “Capital Gain Tax in the Nigeria Capital Market and Stock Investment Under the Finance Act 2021” Available @ Capital Gains Tax In The Nigerian Capital Market And Stocks Investment Under Finance Act 2021 – Tax Authorities – Nigeria (mondaq.com) accessed 22^nd September, 2023. ↑
8. Adesanya & Partners, “Stamp Duty Tax in Nigeria” Available @ Stamp Duties Tax in Nigeria | The official Blog of Adesanya & Partners (Chartered Accountants) (adesanyapartners.com) accessed 22^nd September, 2023. ↑
9. PWC: Corporate – Taxes on corporate income. Available @ Nigeria – Corporate – Taxes on corporate income (pwc.com) accessed 21^st September, 2023. ↑
10. Vanguard: Tax matters: Tax implication of mergers and acquisitions. Available @ Tax matters: Tax implication of mergers and acquisitions – Vanguard News (vanguardngr.com) accessed 22^nd September, 2023. ↑
11. Ibid ↑
12. Ibid ↑
13. O. Olafaju & F. Ogunyemi, “Tax considerations during Mergers and Acquisitions in Nigeria” Available @ Tax Considerations During Mergers And Acquisitions In Nigeria – Corporate and Company Law – Nigeria (mondaq.com) accessed 21^st September, 2023. ↑
14. Ibid ↑
15. Ibid ↑
16. E.E. Udoaka & G.A. Ene, “Nigeria Tax Laws, Taxation and Development” Available @ (PDF) Nigerian Tax Law, Taxation and Development (researchgate.net) accessed 22^nd September, 2023. ↑
17. Ibid ↑
18. Ibid ↑