NIGERIA FINANCE ACT 2021 -IMPLICATIONS FOR BUSINESSES
On 31st December 2021, President Muhammadu Buhari signed the Finance Bill, 2021 (now referred to as ”Finance Act, 2021”) into law. The overall analysis of the 2021 Finance Act depicts that it is aimed at increasing government revenue; unlike those of 2019 and 2020 which was aimed at boosting ease of doing business in Nigeria.
Below are the salient tax provisions in the Finance Act, 2021 and their potential implications on businesses for indigenous and non-resident companies.
1. Increase in Tertiary Education Tax (TET) Rate
Section 1(2) of the Tertiary Education Trust (TET) Fund Act has been amended to increase the TET rate payable on assessable profits by Nigerian companies (other than small companies) from 2% to 2.5%. In essence, companies with tax returns due effective 1 January 2022 will be required to compute and remit TET at 2.5% of assessable profits.
Implication: With this amendment, the cashflow and profitability of medium and large Nigerian businesses is expected to be negatively impacted. Therefore, Nigerian businesses need to enhance its cost reduction strategy in order that the increase in TET may be accommodated with less significant effect.
2. Amendments to Nigerian Police Trust Fund (NPTF) Act
The NPTF Act imposes a levy of 0.005% on “net profit” of companies operating business in Nigeria. However, prior to the Finance Act, 2021, the NPTF did not clarify the agency to collect the Levy and administer the Act. The Finance Act, 2021 has now clarified that the FIRS will be the relevant authority to assess, collect, account for and enforce payment of the Levy, while CITA and Federal Inland Revenue Service (Establishment) Act (FIRSEA) shall apply to the administration, assessment, collection, accounting, returns and enforcement of the levy.
Since all businesses in Nigeria are expected to comply with NPTF Act, the implication is a further reduction in the profitability of Nigerian businesses.
3. Amendments to National Agency for Science and Engineering Infrastructure (NASENI) Act
The NASENI Act was enacted in 1992 to impose a levy of 0.25% on companies with turnover of ₦4 million and above. However, since its enactment little or no traction has been achieved in terms of compliance and enforcement. Although, on 24 January 2021, President Muhammadu Buhari, directed the FIRS to ensure compliance and enforcement of the Act, compliance was however still low and may largely be attributable to some controversies in the Act such as; the due date for payment of the levy and penalty for non-compliance.
Unfortunately, the amendments by the Finance Act, 2021 still do not address these controversies, but clarified that the levy will be limited to companies operating in the banking, mobile telecommunications, ICT, aviation, maritime, oil and gas sectors, and will now apply at 0.25% of Profit Before Tax, on such companies with turnover of ₦100 million and above.
Implication: This is in addition to the subsisting NITDEF levy of 1% of Profit Before Tax. It represents another huge burden on the profitability of companies in Aviation, Maritime, ICT and Oil & Gas sectors.
4. Timeline within which tax is paid
A new Section 77 was introduced which provides that companies who seek installment payment of taxes must have concluded payment of all the taxes due before due date of filing the returns.
The implication of the above is that companies may not be able to apply for instalment payment of taxes unless the returns are filed early and instalment payment can be concluded before due date of filing. This is another negative impact on the cashflow of Nigerian businesses.
5. Restriction of capital allowance claimable by companies that earn both taxable and tax-exempt incomes
Amendment to Section 31 of CITA: Where the tax-exempt income is greater than 20% of taxable income in any year of assessment, the capital allowances computed on qualifying assets used in generating both taxable and tax-exempt incomes will be prorated and only the portion relating to the taxable income will be allowed as capital allowance deduction against the assessable profit of the company. This is an avenue of the tax authorities to reduce capital allowance claimable for the purpose of increasing taxable profits.
This implies that companies which have tax-exempt income in any assessment year should be able to prove beyond reasonable doubt that all of the assets have been used in generating the taxable income. If not, higher taxes would be paid.