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June 14, 2023
2023-1056

Nigeria | Highlights of Finance Act 2023

  • Nigeria's Finance Act 2023 increases tertiary education tax from 2.5% to 3%.
  • Capital losses will now be deductible against chargeable gains
  • The Finance Act 2023 recognizes the importance of digital economy
  • The Finance Act 2023 includes revised VAT filing deadline for FIRS appointed agents
  • The Investment Allowance on purchase of plant and machinery has been removed.

Executive summary

The Finance Act 2023 (FA2023 or the Act), which former President Muhammadu Buhari signed into law on 28 May 2023, introduces significant changes to the existing tax laws and regulatory framework, aiming to foster economic growth, enhance fiscal stability and promote sustainable development.

The FA2023 seeks to provide support for the funding of the 2023 Budget of Fiscal Consolidation and Transition. The Act aims to strike a balance between fiscal stability and economic growth while addressing emerging challenges in the digital economy, sustainable economic growth and improving the tax administration.

This Alert summarizes the key amendments to the tax laws and regulatory legislation (including sector-specific considerations) as provided in the Act and the impact of such changes.

Detailed discussion

Capital Gains Tax (CGT) Act

a. Introduction of CGT on disposal of digital assets

Section 3(a) of the Capital Gains Tax Act (CGTA) has been amended to include digital assets in the list of chargeable assets that will be subject to CGT upon disposal. Specpifically, a 10% CGT will now apply to gains from the disposal of digital assets.

Following the 2021 passage of a policy by the Central Bank of Nigeria that barred the involvement of Nigerian banks in crypto-related activities, further guidance from the Federal Inland Revenue Service (FIRS) would be welcome regarding how the applicable CGT on chargeable gains on digital assets will be deducted and remitted.

Furthermore, clarification should also be provided as to the basis of calculating the gains on which CGT should be applied, particularly in regard to determining the cost of the digital assets. This remains unclear as the provisions of Sections 11 to 14 of the CGTA, which provide for the computation of capital gains, do not sufficiently address the peculiar nature of digital assets.

b. Tax deductibility of capital losses from chargeable gains

Section 5 of the CGTA has been amended to include a new section 5.

This amendment provides that losses that accrue from disposal of a chargeable asset shall be deductible from gains accruing from disposing that asset, provided that such losses shall only be deductible against the same type of asset.

In addition, where the aggregate capital losses incurred by a taxable person in a tax year exceed the aggregate chargeable gains, these losses may be carried forward for up to five years immediately after the year in which the loss was incurred.

This amendment will allow taxpayers to offset capital losses from capital gains and reduce the impact of CGT that should be payable on gains from the disposal of assets.

c. Amendment of section 31 of the CGTA to include share and stocks

Section 31 of the CGTA is amended in subsection (6) by inserting after "Class 4 — Goodwill" a new "Class 5 — Shares and Stocks."

This amendment aligns section 31 of the CGTA to section 30 as amended by the Finance Act 2021. However, for the purpose of the application of rollover relief for shares under Sections 30 and 31 of this Act, the proceeds from qualifying disposals must be reinvested in the acquisition of eligible shares in the same or other Nigerian companies within the same year of assessment.

Companies Income Tax Act (CITA)

a. Shipping and airline businesses: Nonresident taxpayers may file income tax returns with a certified statement of gross revenue

Section 14 of the CITA, which provides for the taxation of shipping and airline business, has been amended by inserting a new subsection 4 (a).

Following the amendment, nonresident companies (NRCs) that carry out shipping or airline operations in Nigeria may file income tax returns without audited financial statements, provided the following documents are submitted with the tax returns:

  • Detailed gross revenue statements of the company's Nigerian operations, showing the amount of full sums receivable during the period, certified by one of the company's directors and external auditors
  • Copies of all invoices issued to the relevant customers

The amendment implies that applicable NRCs should not be required to submit audited financial statements of their Nigeria operations (as provided for in CITA Section 55) while filing their income tax returns. This reduces some of the challenges that this category of taxpayers faced in the past. Nonetheless, there is still a cost of compliance in the form of time required to collate invoices and external auditors' fee.

Furthermore, there is some concern that this waiver should not be limited to shipping and airline businesses, as there are other NRCs with similar challenges in other industries/sectors — though the challenges are more pronounced in the shipping and airline industries.

b. Shipping and airline businesses: Additional prerequisite for processing approvals and permits by other regulatory agencies

Section 14 of the CITA was further amended by introducing a new subsection (6). This amendment authorizes regulatory agencies in shipping, air transport and other relevant sectors to require all companies taxable under the provisions of Section 14 (1) of the CITA to present the following documents before issuing relevant approvals and permits to such companies:

  • Evidence of income tax filing for the preceding tax year
  • Tax Clearance Certificates showing income taxes paid for the three preceding tax years

This provision will enhance meaningful collaboration between FIRS and other government agencies, regulatory agencies in the shipping, air transport and other relevant sectors.

c. Repeal of reconstruction investment allowance and rural investment allowance

Section 32 of the CITA, which provides for reconstruction investment allowance on qualifying plants and equipment, has been deleted. However, companies that have incurred capital expenditure on plants and equipment on or before the effective date of FA2023 are permitted to claim these allowances.

Furthermore, Section 34 of CITA, which provides tax incentives to taxpayers who invest in certain amenities/infrastructure in "rural" areas, has been deleted. Similarly, previous investments will continue to enjoy the tax incentive, while subsequent investments in this category will no longer enjoy the tax incentive. This change will take effect on tax returns for accounting periods ending on or after 1 July 2023.

To align the deletions of Section 32 and Section 34 to the Second Schedule of CITA, Paragraph 18(3) and Paragraph 18(7) were deleted. By implication, there is a potential increase in total profits and tax payable by companies (if all other factors remain constant) where the companies carryout additional/new investment in plants and equipment.

d. Repeal of tax incentive on investment through reserved funds in tourism by hotels

Section 37 of the CITA, which provides for tax exemption of 25% of income in convertible currencies set aside as reserved funds for hotels infrastructural development, has been repealed. However, previously set-aside reserved funds (before the effective date of FA2023) shall continue to enjoy the tax exemption until the funds are fully utilized or for five years, whichever occurs first. This change will take effect on tax returns for accounting periods ending on or after 1 July 2023.

e. Introduction of unrestricted capital allowance for upstream and midstream gas operations

Section 24 (7) of the second schedule to the CITA was amended by replacing the existing section with an unrestricted capital allowance deductible from assessable profit for upstream and midstream gas operators (as described in the Petroleum Industry Act, No. 6, 2021), just like in the case of companies in the Agro-Allied Industry and those engaged in the trade or business of manufacturing.

Nonetheless, the value of any asset on which capital allowance is to be claimed should be reduced by the amount of any investment tax credits claimable by such company. Hence, the capital allowance claimable will only be on the tax written-down value of the asset.

Tertiary Education Trust Fund (Establishment, etc.) Act (TETFA)

a. Increase in TET rate

Section 1(2) of the TETFA was amended by increasing the rate of TET from 2.5% to 3%. It should be noted that the tertiary education tax rate was recently increased in the 2021 Finance Act from 2% to 2.5%. This additional increase will further increase the tax burden of medium and large companies incorporated in Nigeria and could increase funding for tertiary educational institutions in Nigeria. The revised rate of 3% shall take effect from accounting years ending on or after 1 July 2023.

Customs, Excise Tariff, etc. (Consolidation) Act (CETA)

a. Introduction of a levy on all eligible goods imported into Nigeria from outside Africa to fund capital contributions, etc.

Section 13 of the CETA was amended to introduce a new subsection (4), which imposes a 0.5% levy on all eligible goods imported into Nigeria from outside Africa. This levy will be used to fund capital contributions, subscriptions and other financial commitments to multilateral institutions such as the African Union, African Development Bank, African Export-Import Bank, ECOWAS Bank for Investment and Development, Islamic Development Bank, United Nations, and others as may be designated by regulation issued by the Minister of Finance.

b. Introduction of excise duty on all services provided in Nigeria

Section 21 of the CETA was amended to introduce excise duties on all services provided in Nigeria, including but not limited to telecommunication services at specific rates, which the President may by a Presidential Order prescribe pursuant to the Act.

Telecommunication services are generally in high demand in Nigeria. As such, introducing excise duties on these services may result in a decline in usage, given the potential increase in cost that could result from imposition of this excise duty. Further, we await the Presidential Order for specific detail on the excise duty on services and the rate.

Value Added Tax (VAT) Act

a. Introduction of anti-avoidance transfer pricing rules to counteract artificial/fictitious agreements between related parties for VAT purposes

Section 7 of the VAT Act was amended to empower the FIRS to assess transactions to determine their credibility and competitive market value for tax purposes.

The essence of this amendment is to grant the FIRS the power to review artificial or fictitious transactions between related parties that should ordinarily be subject to VAT and thereby make necessary adjustments for the imposition of VAT.

This amendment will combat Base Erosion and Profit Shifting, tax evasion etc. This also ensures that taxpayers' transactions with related parties are conducted in line with the arm's-length principle.

b. FIRS to appoint VAT withholding/collection agents

Section 14 of the Act was amended to empower the FIRS to appoint any person to withhold or collect VAT, and such person is obligated to remit the VAT withheld or collected in the currency of the transaction, to the FIRS on or before the 14th day of the following month. The change in filing deadline takes effect from July 2023 i.e. for June 2023 VAT returns.

This amendment reiterates the powers of the FIRS to appoint any person to act as its collection agent for VAT purposes, and the obligation to remit the VAT collected in the currency of the transaction within the statutory time. This amendment has introduced a new filing deadline for FIRS VAT appointed agents.

c. Removal of imposition of VAT at the point of clearance on imported goods purchased via electronic means through a nonresident collection agent

Section 16 of the VAT Act was amended to remove the imposition of VAT at the point of clearance on imported goods purchased via electronic/digital platforms through a nonresident supplier that has been appointed by the FIRS as a collection agent.

The amended section provides that the importer shall, at the point of clearing such goods, provide proof of such appointment, evidence of VAT charged on the invoice, and any other required document to avoid further subjecting such goods to tax before clearance by the Nigerian Customs Service.

The purpose of this amendment is to avoid instances of double taxation, as the nonresident collection agent is deemed to have already withheld the VAT on the goods and remitted the tax to the FIRS.

d. Definition of the term "building" for the purpose of the Act

Section 46 of the Act was amended to provide for a new definition of the term "building" as follows: "'building' means any structure permanently affixed to land for all or most of the useful life of that structure and shall include, without limiting the generality of the foregoing, a house, garage, dwelling apartment, hospital and institutional building, factory, warehouse, theatre, cinema, store, mill building and similarly fixed structure affording protection and shelter, but excludes any fixtures or structures that can easily be removed from such land, such as radio and television masts, transmission lines, cell towers, vehicles, mobile homes, caravans and trailers."

In essence, by this amendment, structures that are not permanently affixed to land are no longer under the purview of the term "building" for VAT purposes and such shall be subject to VAT accordingly. This change is effective from 1 July 2023.

Petroleum Profit Tax Act (PPTA)

The amended section of this Act is to ensure alignment with relevant provisions of the Petroleum Industry Act (PIA) 2021, which was signed into law on 16 August 2021.

a. Interpretation

Section 2 of the PPTA is amended to include the definition of "Commission" as "Nigerian Upstream Petroleum Regulatory Commission, established under the PIA, 2021."

This is to align the PPTA with the establishment of the Nigerian Upstream Petroleum Regulatory Commission under the PIA 2021, which replaces the Department of Petroleum Resources as the new regulatory body responsible for all technical and commercial regulation of upstream petroleum operations.

b. Deductions allowed

Section 10 of the PPTA is amended to include a new paragraph "1a," which provides that any money contributed to any fund, scheme or arrangements approved by the Commission for the purpose of decommissioning and abandonment is now tax deductible.

The tax deductibility of this expense is subject to the provision of a statement of account for the decommissioning and abandonment fund. The residue of the fund after decommissioning and abandonment of the fund will be subject to tax under the PPTA.

This amendment aligns with the PIA's introduction of the tax deductibility and cost recoverability of cash-back provisions for decommissioning and abandonment cost. It addresses any issue in relation to the tax deductibility of provisions for decommissioning and abandonment cost reported in the financial statements of the operator.

Based on the amendment, the conditions for tax deductibility can only be fulfilled if this is cash-backed, i.e., money is contributed to any fund, scheme, or arrangements in anticipation of when production is shut down in the respective field. Provisions for decommissioning and abandonment that are not cash-backed should be disallowed for tax purposes.

c. Additional chargeable tax payable in certain circumstances

Section 23 of the PPTA has been amended to reflect how additional tax will be treated and the elements of pricing that might lead to such additional tax as introduced in the PIA 2021.

Conventionally, the term "posted price" refers to the price of crude oil fixed by the government of Nigeria. However, this is now amended to "fiscal price," which is to be set by the Commission at a measurement point. The amendment also provides clearer guidelines on determining the total value of chargeable oil to be the multiplication of the volume of chargeable oil and the fiscal oil price as established by the Commission at the measurement point. Prior to this amendment, the posted price for the purpose of determining any additional tax to be paid referred to the sum per barrel of crude oil exported.

The proposed amendment provides that where there is a difference between the revenue on which chargeable tax for an accounting period was calculated in accordance with the provisions of the PPTA, and the revenue calculated by multiplying the number of barrels of that crude oil determined at the measurement point by the fiscal oil price per barrel, this difference will give rise to additional chargeable tax.

Put simply, where the chargeable tax calculated by the company is less than the chargeable tax calculated using the fiscal oil price set by the Commission, the company must pay the difference and the last installment payment is due concurrently with the final installment of the chargeable tax payable for that period.

Another proposed amendment worth noting under this section applies to a situation in which for a particular crude oil stream the Commission has not established a fiscal oil price. The amendment requires the Commission to establish a fiscal oil price for such crude stream, which should be similar to the fiscal oil price of Nigerian crude oil stream of comparable quality and specific gravity.

If there are no such Nigerian crude oil streams of comparable quality and specific gravity, the price to be set by the Commission should bear a fair and reasonable relationship to the official selling prices at main international trading centers for crude oil of comparable quality and gravity with consideration given to freight differentials and other relevant factors.

d. Preparation and delivery of accounts and particulars

Section 30 of the PPTA is amended to reflect requirements for companies engaged in petroleum operations regarding their profit and loss accounts and other particulars for determining petroleum profit tax (PPT).

  • The amended Act now requires a statement of account of profit or loss as one of the particulars for determining PPT.
  • Adjusted and assessable profit or loss computed should now be based on actual figures and not estimated figures, as was the case before the proposed amendment.
  • Self-assessment forms are now required with evidence of payment of the final installment (where installment payment is being done). The Section is to be amended to only provide for the preparation and submission of accounts and other particulars with actual figures. Prior to this, the Act allowed for estimated figures to be used in the preparation of the accounts and other particulars.

Also, this section of the PPTA is to be amended to request audited accounts and returns for companies yet to commence bulk sales or disposal of chargeable oil. In the case of a newly incorporated company, audited accounts and returns must be filed within 18 months from the date of incorporation. Other companies must still file five months after any period ending on 31 December of the following year.

Where there is an interval between 31 December of the preceding year and the date on which the company commences the bulk sale or disposal of chargeable oil or condensate, the interval shall be deemed to form part of the preceding period.

e. Penalty for late filing

Section 30 of the PPTA has been amended to include a penalty for late filing of accounts as stipulated under subsection (2) and (3) to align with the PIA.

A sum of NGN10 million on the first day the failure occurs and NGN2 million for each subsequent day in which the failure continues. Before this amendment, the penalty for late submission of a return was NGN10,000 and a further sum of NGN2,000 for every day the failure continued.

With this amendment, the Minister of Finance has also been empowered to adjust the penalty for late filing, subject to the sum being published by Order in the Gazette.

f. Penalty for offences

Section 51 of the PPTA has been amended to increase the penalty payable by a person who fails to comply with the provisions of this Act, or any Regulations made under this Act.

Where no other penalty is specifically stated, the penalty will now be NGN10 million and where the default continues beyond a period stipulated by this Act or Regulations, the person will be liable to a further penalty of NGN2 million for each day the default continues or such other sum as may, by Order, be prescribed by the Minister of Finance.

Under this section, the amendment also provides for a penalty of being guilty of an offense where no penalty has been outrightly stated. Once convicted, the person will be liable to a fine of NGN20 million or such other sum as may, by Order, be prescribed by the Minister of Finance, or to imprisonment for six months or to both fine and imprisonment.

The fine and penalty under this section are being called "administrative penalties" and any person that fails to comply with provisions of sections 30 and 33 of the Act will be liable to the administrative penalty prescribed under subsection (1) of this section or upon conviction, be liable to penalty prescribed under subsection (2) of this section

Prior to the amendment, any offense committed by a company under the Act and for which no specific penalty is prescribed makes the company liable to a fine of NGN10,000 and where the offense relates to failure to submit returns or provide information required by the Service a further penalty of NGN2000 is charged for every day during which such offense or failure continues and 6 months imprisonment where there's a default in payment of the penalty

g. Penalty for making incorrect accounts

Section 52 is amended to provide for persons who provide incorrect, false, or misleading information in their accounts which then affects his tax liability. Such a person, either convicted or not, is liable to an administrative penalty of the higher of the sum of NGN15 million and 1% of the amount of tax which has been undercharged and will still be liable to the appropriate tax which would have been charged.

Prior to the amendment, the penalty for providing incorrect accounts either through omitting or understating amounts quoted in the accounts submitted was a fine of NGN1,000 and double the amount of tax that was to be paid under this Act for the accounting period during which the offense was committed, or to imprisonment for six months, or both the fine and imprisonment

h. False statements and returns

Section 53, which relates to the preparation and submission of false statements and returns for the purpose of getting a deduction or refund, has been amended in line with the introduction of the administrative penalty under Section 52.

This section provides that all the parties involved in the preparation and submission of false returns and willful neglect to pay tax will be liable to the newly introduced administrative penalty of the higher of the sum of NGN15 million and 1% of the amount of tax for which the person is liable.

Also, anyone who is convicted of a willful omission offense will be penalized in line with the provisions of the administrative penalty stated above, in addition to the appropriate hydrocarbon tax that would have been assessed and charged and/or face imprisonment for six months.

Personal Income Tax Act (PITA)

a. Insurance company premiums

Section 33 of the PITA was amended to provide that premiums an individual paid to an insurance company for insurance or contracts for a deferred annuity on his/her life or the life of his/her spouse, during the year preceding the year of assessment, will be allowed as a deduction, subject to Section 17(1) of the PITA. Also, any portion of the deferred annuity that is withdrawn before the end of five years from the date the premium was paid, shall be subject to tax at the point of withdrawal.

This amendment reinstates the treatment of premium paid by an individual to an insurance company in respect of a contract for deferred annuity, on his/her life or that of his/her spouse, as an allowable deduction. This provision was previously eliminated by the Finance Act 2021. In addition, the amendment includes a condition, that any portion of the premium withdrawn five years from the date the payment was made, will be subject to tax.

The implication of this amendment is that the premium an individual paid to an insurance company in respect of a contract for deferred annuity, on his/her life or that of his/her spouse, can now be granted as tax relief in the individual's income tax computation. However, it is important to note that any portion of the premium that is withdrawn within five years of payment, will no longer be exempt from personal income tax.

Stamp Duties Act (SDA)

a. New revenue distribution formula

Section 89A (4) of the SDA introduced a revised sharing formula for the revenue generated from Electronic Money Transfer Levy (EMTL) as follows:

(a) 15% to the Federal Government and the Federal Capital Territory, Abuja

(b) 50% to the State Governments

(c) 35% to the Local Governments

Prior to the amendment, Section 89A (4) distributed the revenue from EMTL in the ratio of 15% to the Federal Government and the Federal Capital Territory, Abuja and 85% to the State Governments.

Corrupt Practices and Other Related Offences Act (CPORO Act)

a. Increased fine upon conviction

Section 40 of the FA2023 amended section 22 (4) of the CPORO Act by imposing a fine of NGN10 million where any public officer is found guilty of signing any contract without budget provision, administrative approvals, and procurement plan. The former penalty was fixed at NGN100,000.

Public Procurement Act (PPA)

a. New public procurement proceedings

The current section 16 (1)(b) of the PPA made public procurement proceedings by a procuring entity subject to an availability of funds to meet the obligations and subject to the threshold made by the Bureau of Public Procurement (Bureau).

However, section 41 of the FA2023 amended section 16 (1)(b) of the PPA by making all public procurement proceedings by a procuring entity subject to the availability of approved procurement plan, the threshold in the regulations made by the Bureau, as well as guidelines issued by the Minister of Finance.

Ministry of Finance (Incorporated) Act

The FA2023 established a Governing council, an Executive Board, and a Management Team for the Ministry of Finance incorporation (the corporation), whose members will be appointed by the President on the recommendation of the Minister of Finance.

The corporation shall also develop and amend regulations as appropriate in line with the Ministry of Finance (Incorporated) Act. Furthermore, changes to the initial guidelines and regulations will be adopted only after consultation with the Minister of Finance.

This amendment creates a structure to enhance the operational efficiency of the Ministry of Finance incorporation.

Sectoral key changes

  1. Oil and gas
  • Upstream and midstream gas operators are now eligible to claim unrestricted capital allowances on assessable profit.
  • Contributions to decommissioning and abandonment funds are now tax deductible, provided that a statement of account for the decommissioning and abandonment fund is made available. However, the residue of the fund after decommissioning and abandonment of the fund will be subject to tax under the PPTA.
  • Penalty for late filing, false/incorrect returns have been amended in the PPTA to align with the provisions in the PIA.
  1. Shipping and airlines
  • Nonresident companies engaged in the shipping or airline business in Nigeria may file income tax returns without audited financial statements, provided that certified detailed gross revenue statements of their Nigerian operations and invoices issued to the relevant customers are submitted to the FIRS.
  • Evidence of income tax filing for the preceding tax year and tax clearance certificates (showing income taxes paid for the three preceding tax years) shall be prerequisites for granting approvals and issuance of permits by regulators in the shipping, air transport and other relevant sectors.

Next steps

Regulators, businesses, and individuals should carefully assess the implications of these changes to ensure compliance and leverage the available incentives for their benefit. Seeking professional advice is crucial to ensure accurate interpretation and application of the Finance Act 2023 provisions.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Nigeria, Lagos

Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 
 

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