Finance Act 2021: Highlight of Changes to Various Tax and Fiscal Legislations (Part 1)

On 31 December 2021, the Finance Act 2021 (FA21) was signed into law by President Muhammadu Buhari alongside the 2022 Appropriation Act themed “the Budget of Economic Growth & Sustainability”. Over the last three fiscal years, the Federal Government has consistently ensured the review of the tax and fiscal regulations via annual Finance Acts.

The Finance Act 2021 (FA21) amends 13 different tax and fiscal legislations. The FA21 was enacted in accordance with Nigeria’s macroeconomic policy reforms and to stimulate revenue mobilization for the purpose of budget implementation. Other key reform areas include tax administration, international taxation, financial sector reforms & tax equity and public financial management reforms.

Capital Gains Tax Act (CGTA)

Gains from the Disposal of Shares

Section 30 of the CGTA provides for the exemption of disposal of government securities from Capital Gains Tax (CGT). FA21 has introduced a new Section 30 that specifically provides for the exemption of disposal of shares in Nigerian companies. Based on the new provision, any gains accruing to a person from the disposal of shares in any Nigerian company shall be chargeable gains and subject to CGTA at 10%, except where the:

• proceeds from the disposal are reinvested to acquire shares in the same or other Nigerian company within the same year of assessment. However, the portion not reinvested will be subject to tax.

• total disposal proceeds are below N100,000,000 in any 12 consecutive months, and the person making the disposal renders appropriate returns to the Federal Inland Revenue Service (FIRS) on an annual basis.

• shares are transferred between an approved Borrower or Lender in a regulated Securities Lending Transaction.

CGT due from an individual will be paid to the relevant State Internal Revenue Service while companies will pay to the FIRS.

Company Income Tax Act (CITA)

Taxation of Non-Resident Companies

Section 13 of the CITA has been amended to incorporate the taxation of non-resident companies carrying on business in Nigeria previously covered in the Companies Income Tax (Significant Economic Presence) Order, 2020. Specifically, non-resident companies engaged in digital services and the provision of technical, management, consultancy or professional services will be subject to income tax in Nigeria to the extent that they have a significant economic presence. Interestingly, WHT is the final tax on the provision of technical, management, consultancy, or professional services.

Further, a new Section 30(1)(b)(iia) of CITA has been introduced to provide for the rate of tax for the taxation of non-resident companies providing digital services i.e. non-resident companies that transmit, emits or receive signals, sounds, messages, images or data of any kind by cable or any other electronic or wireless apparatus to Nigeria. These companies will be subject to income tax based on a fair and reasonable percentage of the turnover attributable to their presence. The Minister of Finance has announced an income tax rate of 6% of turnover during her public presentation of the Approved 2022 National budget on 5 January 2022.

Profit from Exported Goods

Section 23 of CITA which specifies profits exempt from income tax has been amended by the FA21. The amendment provides that the profit earned by companies engaged in the upstream, midstream, or downstream petroleum operations will now be subject to income tax, whether or not the proceeds were used to purchase raw materials, plant, equipment and spare parts. 

Restriction of Capital Allowance Claims

Section 31 of CITA on the determination of total profit has been amended by inserting new provisions. The capital allowance to be claimed in any year of assessment will be limited to the amount relating to the qualifying capital expenditure employed in generating the assessable profits of that year of assessment. If the qualifying capital expenditure is in respect of an asset that was partially utilized to generate taxable income, such asset will qualify for prorated capital allowance, provided that the proportion of non-taxable income is greater than 20% of the total income of the company.

Further, small and medium-sized companies (companies with turnover below N100 million) are now required to compute capital allowance and carry forward any unabsorbed allowance, provided that all unabsorbed allowance brought forward will be deemed as used up in each year of assessment.

Minimum Tax

Section 33 of CITA has been amended to specify the relief period in respect of the reduced minimum tax rate of 0.25% in the Finance Act 2020. The reduced minimum tax rate will be applicable for tax returns prepared and filed for any two accounting periods ending between 1 January 2019 and 31 December 2021, both days inclusive.  In effect, taxpayers will enjoy this relief in respect of two tax returns for any two accounting periods ending on any date from 1 January 2019 to 31 December 2021.

Forfeiture of Minimum Tax Relief

Section 55 of CITA specifies the requirements and penalties for late filing of tax returns. Specifically, it stipulates the period within which existing and newly incorporated companies must file their tax returns. Newly incorporated companies are required to file their first tax returns within eighteen months from the date of incorporation or not later than six months after the first accounting period, whichever is earlier. On the other hand, existing companies are required to file their annual tax returns within six months from their year-end.

A new provision has been introduced by the FA21 that provides that where any company fails to file its annual tax returns within the specified timeline and claims minimum tax relief, such taxpayer will be liable to a late filing penalty equal to the minimum tax relief claimed.

Time Within Which Tax is to be Paid

Based on the amendment to Section 77 of CITA, any tax assessment that has not been subject to objection or appeal must be paid within 30 days of service of such assessment. Notwithstanding, the FIRS may apply discretion to extend the time of payment. Any disputed tax shall remain in abeyance until an objection or appeal is determined. Once the objection or appeal is determined, the FIRS will serve a notice of tax payable, and the tax shall be paid within one month of the notice.

Interest from a Unit Trust

Section 78 of CITA has been amended to specify that withholding tax will apply on interest received from a unit trust. However, the WHT will be the final tax due from such interest when paid to the FIRS by non-resident recipient(s) or unit trust recipient(s) of the payment.

Definition of Real Estate Investment Company

Real Estate Investment Company is now defined as a company (including a Real Estate Unit Trust) duly approved by the Securities and Exchange Commission as a Real Estate Investment Scheme in Nigeria.

Tertiary Education Trust Fund (Establishment, ETC) Act (TETFA)

Imposition of Tertiary Education Tax

Section 1(2) of the TETFA has been amended to increase the tertiary education tax rate from 2% to 2.5% of the assessable profit for companies registered in Nigeria, except small companies having an annual turnover below N25 million.

To be continued....