Dividends for Company Income Tax Purposes
Previously, Dividends for the purpose of Company Income Tax as defined under the act included “compensating payments received/paid in Regulated Securities Exchange Transaction (RSLT)”. This also came with a condition that the underlying transaction of the RSLT giving rise to the compensating payment, should be a receipt of dividends by a borrower on any shares or securities received from its approved agent or a lender in a RSLT.
Under the Finance Act, 2021. This condition is removed. [2]
The implication of this is that companies involved in compensating lending transactions should take care to note compensating payments that are liable to taxation, or deductible under the new definition of dividends in relation to compensating payments.
The Reduction of the Minimum Tax Rate Between January 2019 And December 2021.
One commendable fact about the passage of the Finance Act 2020, is that it aided the protection of taxpayers from the devastating effects of the COVID-19 epidemic on their enterprises, by providing a time-limited reduction in the rate of minimum tax from 0.5 per cent to 0.25 per cent of gross sales. Only the years of assessment from January 1, 2020 to December 31, 2021, were subject to the decreased minimum tax rate.
However, there was some debate over whether enterprises that filed their tax returns before the effective date of the Finance Act 2020 incentive could take advantage of the incentive. The Finance Act of 2021 clarifies this issue by stating that the incentive can be used for any two accounting periods between January 1, 2019 and December 31, 2021, as the taxpayer prefers.
Despite this explanation, the position of taxpayers who may have remitted taxes at the 0.5 per cent rate for the relevant period is still uncertain.
Data Protection
The Finance Act of 2021 revised the Federal Inland Revenue Service (FIRS) (Establishment) Act of 2007, to establish a broad responsibility on anybody operating in an official capacity or working for the Act’s administration who has access to taxpayer information to treat it as secret and private.[3]
Previously, the obligation only applied to information relating to a company’s profits or items of profits. In keeping with the Nigerian Data Protection Regulations and the global trend to assure data protection, the Finance Act of 2021 strengthened the data protection responsibility placed on FIRS personnel, not only because of its primacy as a right but also because of its economic need.
Tertiary Education Tax Rate
The Tertiary Education Tax, which was formerly imposed at a rate of 2% on the assessable profit of companies registered in Nigeria would now be imposed at a rate of 2.5 per cent. However, this tax does not apply to small businesses. As a result, corporations in Nigeria, with the exception of small businesses, are now subject to higher taxation. Furthermore, any company subject to Tertiary Education Tax must pay within 30 days of receiving a notice of assessment from the FIRS, rather than the 60 days that was previously the case. [4]
Government’s Borrowing Powers
The Fiscal Responsibility Act of 2007 (the FRA) was changed by the Finance Act of 2021 with regard to government debt management. Prior to the Finance Act of 2021, the FRA’s debt management guidelines stated that government at all levels might borrow only for “capital investment” and “human development,” and only on “concessional terms with low-interest rates and a relatively extended amortization time.” According to the FRA, “concessional terms” imply that the loan must have an interest rate of no more than 3%. In government-related financings, the FRA’s interest rate cap was a major issue. The language of the FRA has now been modified by the Finance Act of 2021.
In addition to borrowing for capital investment and human development, the Finance Act of 2021 allows government at all levels to borrow for “important reforms of major national importance.” Furthermore, government borrowing may be on “concessional terms or at relatively low-interest rates,” establishing a distinction between “concessional terms” and “relatively low-interest rate” borrowing. The changes made by the Finance Act, 2021, increases the government’s borrowing powers.[5]
Capital Gains Tax
Capital Gains Tax is now due at a rate of 10% on gains arising from the sale of shares in any Nigerian firm, unless the proceeds are used to acquire shares in the same entity or other Nigerian companies within the same assessment year, or the proceeds are less than N100 million in any 12-month period.
With the introduction of Capital Gains Tax on share transactions, it is critical for transaction parties to consider how the Capital Gains Tax due (if any), will affect the pricing conditions and tax provisions in the sale and purchase agreement. The parties may need to consider alternative transaction arrangements.[6]