Finance Act, 2020 Impact Analysis
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Finance Act, 2020 Impact Analysis February 2021 home.kpmg/ng
Finance Act, 2020 – Impact Analysis
Contents
Chapter One General Implications of Finance Act, 2020 on the
Nigerian economy
1.1. 2020 at a glance
1.2 How Finance Act seeks to cushion the impact of
COVID-19
Chapter Two Direct Tax
2.1 Capital Gains Tax Act
2.2 Companies Income Tax Act
2.3 Industrial Development (Income Tax Relief) Act
2.4 Tertiary Education Trust Fund (Establishment, etc.) Act
2.5 Personal Income Tax Act
Chapter Three Indirect Taxes
3.1 Valued Added Tax Act
3.2 Customs, Excise Tariff, etc. (Consolidation) Act
3.3 Stamp Duties Act
Chapter Four Other Non-tax Fiscal Impact
4.1 Companies and Allied Matters Act (CAMA) 2020
4.2 Crisis Intervention Fund (CIF) and Unclaimed Dividend
Trust Fund
4.3 Fiscal Responsibility Act 2007
4.4 Public Procurement Act 2007
Chapter Five Consumer Markets Industry Impact Analysis
5.1 Consumer Markets
5.2 Agricultural Sector
5.3 Transportation and Logistics Sectors
Chapter Six Financial Services Industry Impact Analysis
6.1 Insurance Sector
6.2 Banks and Other Financial Institutions
6.3 Establishment of Unclaimed Funds Trust Fund
Chapter Seven Oil and Gas Industry Impact Analysis
7.1 Incentives available to companies engaged in gas
utilization (downstream operations)
7.2 Filing requirement for Approved Enterprises operating in
Oil and Gas Export Free Zone (OGFZ) and Nigeria Export
Processing Zones (NEPZ)
Chapter Eight Impact Analysis on the Digital Economy
8.1 Recognition of digital documents in tax administration
and enforcement
8.2 Capital allowance on software acquisition and
development
8.3 Establishment of Digital Permanent Establishment for
Personal Income Tax
Conclusion
2 | Finance Act, 2020
Finance Act, 2020– Impact Analysis
Glossary
AE – Approved Enterprise
CAMA – Companies and Allied Matters Act
CETA – Customs, Excise Tariff, etc. (Consolidation) Act
CGT – Capital Gains Tax
CIF – Crisis Intervention Fund
CIT – Companies Income Tax
CRA – Consolidated Relief Allowance
CRF – Consolidated Revenue Fund
CRS – Common Reporting Standards
ED – Excise Duty
EMT – Electronic Money Transfer
EODB – Ease of Doing Business
ETR – Effective Tax Rate
FA – Finance Act
FG – Federal Government
FIRS – Federal Inland Revenue Service
FRA – Fiscal Responsibility Act
FTZ – Free Trade Zone
FY – Financial Year
GDP – Gross Domestic Product
HMoFBNP - Honorable Minister of Finance, Budget and National Planning
IDA – Industrial Development (Income Tax Relief) Act
ISAC – International Shipping and Airline Companies
JV – Joint Venture
LFN – Laws of the Federation of Nigeria
NBS – National Bureau of Statistics
NEPZA – Nigeria Export Processing Zones Authority Act
NRC – Non-Resident Company
OECD – Organization for Economic Cooperation and Development
OGFZ – Oil and Gas Export Free Zone
PIT – Personal Income Tax
PPA – Public Procurement Act
PRA – Pension Reform Act
QCE – Qualifying Capital Expenditure
RTA – Relevant Tax Authority
SDA – Stamp Duties Act
SEP – Significant Economic Presence
TAT – Tax Appeal Tribunal
UDTF – Unclaimed Dividend Trust Fund
VAT – Value Added Tax
WHT – Withholding Tax
Finance Act, 2020 | 3
Finance Act, 2020 – Impact Analysis
Preface
On 31 December 2020, His Excellency, President Muhammadu Buhari, GCFR, signed the Finance Bill,
2020 into law.
Wole
Obayomi
The Finance Bill, 2020 which was The passage of the Act reinforces the
an Executive Bill prepared by the Federal Government’s commitment
Honourable Minister for Finance, to making incremental changes to
Budget and National Planning, was Nigeria’s fiscal framework, such
approved by His Excellency, President that Nigeria has a fiscal framework
Muhammadu Buhari and presented that enables the achievement of
together with the 2021 Budget the country’s economic growth and
proposals to the National Assembly development imperatives.
of Nigeria. The Bill was subsequently
reviewed and passed by the Senate on The amendments made by the Act are
Tuesday, 15 December 2020 and the intended to provide counter-cyclical
House of Representatives on Thursday fiscal policy measures that will aid
17 December 2020, respectively, prior economic recovery and growth given
to assent by the President to culminate the devasting effect the COVID-19
into Finance Act, 2020 (hereinafter pandemic has had on the Nigerian
referred to as “Finance Act”, “FA economy. The amendments are staged
2020” or “the Act”). across five broad thematic areas with a
view to:
Finance Act, 2020 introduces
changes to the Capital Gains Tax Act, a. enacting counter-cyclical measures
Companies Income Tax Act, Industrial and crisis intervention initiatives
Development (Income Tax Relief) Act, b. providing fiscal relief for mass
Personal Income Tax Act, Tertiary transit
Education Trust Fund (Establishment, c. implementing key procurement
etc.) Act, Customs, Excise Tariff, etc. reforms
(Consolidation) Act, Value Added Tax d. institutionalizing ease of doing
Act, Stamp Duties Act, Federal Inland business (EODB) reforms
Revenue Service (Establishment) e. ensuring fiscal responsibility
Act, Nigeria Export Processing Zones
Authority Act, Oil and Gas Export This publication contains the analysis
Free Zone Act, Companies and Allied of the amendments introduced by
Matter Act, Fiscal Responsibility Act the Act and the expected impact of
and the Public Procurement Act. the changes on tax administration,
These changes became effective on government bodies and taxpayers
1 January 2021. It is important to note operating in various sectors of the
that Finance Act, 2020 did not repeal economy.
Finance Act, 2019, although it modified
some of the amendments introduced
by the latter to provide clarity and make
it consistent with the government’s
fiscal plans and current economic
realities.
4 | Finance Act, 2020
Finance Act, 2020– Impact Analysis 1 General Implications of Finance Act, 2020 on the Nigerian Economy
Finance Act, 2020 – Impact Analysis
Ajibola
Olomola
Partner
1.1 2020 Economic Performance to continue functioning in a ensure Nigeria keeps pace with
COVID-19 constrained world. the ever-changing face of global
The COVID-19 pandemic and drop General fiscal measures were and domestic business and more
in oil prices caused significant required in recognition of the importantly, align the tax and
reduction in Government revenues continued depletion in gross other such legislation with these
and income of citizens in 2020. domestic production levels and realities. Finance Act, 2020 signals
Specifically, the enforcement of attendant impact on the income- a direction towards harnessing the
a lockdown occasioned a loss of generating capacity of businesses noted drive towards digitization
livelihood for many Nigerians who and individuals. Ideally, a combined by empowering the Federal Inland
depended on daily commercial retool of reduced taxes (leaving Revenue Service (FIRS) to deploy
activities, events and physical taxpayers with much more technology for tax administration.
movement to earn a living. Also, disposable income and cash levels
the significant fall in oil prices for spending and investment The Act also expands the
in the first half of 2020 led the activities) followed by increased framework for official interaction
Federal Government (FG) to amend government spending should and data exchange with the tax
the benchmark oil price in the 2020 provide the necessary backdrop authority, including the tax dispute
budget from $57 per barrel to $20 for sustained economic growth. resolution body, the Tax Appeal
per barrel. However, such response may have Tribunal, by electronic means. It is
proven difficult to implement in expected that these changes would
A report from the National Bureau light of the current financial enhance the EODB in today’s clime
of Statistics (NBS) shows that position of the nation particularly in and ease interaction between
Nigeria reported a growth rate of relation to budgetary commitment taxpayer and tax authorities.
1.87% in the first quarter of 2020 versus expected earnings.
compared to a growth rate of Another such change directed
2.55% in fourth quarter of 2019. Finance Act, 2020 bravely at promoting ease of doing
However, Nigeria experienced continues in the same direction business is introduction of less
negative growth of -6.1% and as Finance Act, 2019 to increase stringent filing protocols for small
-3.62% in the second and third the wallet share of taxpayers by businesses and removal of the
quarters of 2020, respectively. This reducing the tax burden on the mandatory requirement for such
led the country into its second most vulnerable sectors of the businesses to file their income tax
recession in four years. economy. These would include returns using financial statements
loss-making companies or which have been certified by an
According to the World Bank’s companies with lower profitability auditor.
Nigeria Development Update ratios that might otherwise have
report, about 11 million more It is expected that these changes
fallen into the minimum tax will lead to an improvement in the
Nigerians are expected to fall into threshold and would have had to
poverty as a result of the COVID-19 nation’s ranking in the World Bank’s
source for money with which to Ease of Doing Business report.
pandemic and the economic pay tax. Furthermore, reducing the
recession. By implication, the total Nigeria ranked 131 out of 190
excise duties and levies payable countries assessed by the World
number of persons categorized as on motor vehicles and tractors
‘poor’ will increase from 90 million Bank as the last report issued
imported into Nigeria should help in 2020, which was a 13-point
to 100 million (about half of the offset the impact of withdrawal
nation’s population) by 2022. improvement on its prior position of
of petroleum subsidies and allow 146. While there are significant
Overall, the economy performed some relief to operators in the issues that still need
poorly in 2020. This performance transport sector. Other examples to be resolved with respect to
has necessitated the formulation abound as will be discussed tax collection and administration in
of an immediate recovery plan in subsequent pages of this Nigeria, it goes without
by the Government, which publication in our sectoral analysis saying that by passing Finance Act,
includes cushioning the effect of of the impact of Finance Act, 2020. 2020, Nigeria has taken another
the pandemic on the citizenry, Beyond providing palliatives significant step towards
tightening government expenditure to individuals and businesses, modernising its tax framework and
and improving revenue collection. recognition must be given to the positioning itself as a choice
changing face of the Nigerian destination for the investing
1.2 How Finance Act seeks to community.
cushion the impact of COVID-19 industrial experience with
significant migrations recorded
In light of the well-documented from wholly brick and mortar
implications of the pandemic on activities to predominantly digital
the Nigerian economy, it became based exchanges. Admittedly, this
mandatory that the Nigerian transformation, positive as may
government respond with a seem, has been forced by current
series of counter-cyclical fiscal economic realities. Consequently,
policy measures necessary to large scale legislative reviews
enable industries and businesses and amendments are required to
6 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis
2
Direct Taxes
Finance Act, 2020 | 7
Finance Act, 2020 – Impact Analysis
Wole
Obayomi
Partner
Finance Act, 2020 amends various pieces of Nigerian income tax legislation that affect direct taxes. These changes are
discussed under the relevant tax laws as follows: 2
2.1 Capital Gains Tax Act (CGTA), Cap million and deleted the phrase It is not entirely clear how this
C1, Laws of the Federation of “in any year of assessment”. reporting framework will be
Nigeria (LFN), 2004 (as amended) With the wording of the new harmonised with the twice
Section 36(2) introduced by annual reporting framework
2.1.1 Requirement to submit Finance Act, 2020, the alleged now introduced to CGT
capital gains tax (CGT) inconsistency regarding the administration by Section 2 of
returns: intention of lawmakers and Finance Act, 2020.
the application of the section
The Act imposes an obligation has been effectively resolved. However, based on a strict
on persons who dispose of Therefore, only amounts interpretation of the Act,
a chargeable asset to self- in excess of N10 million there is the likelihood that
assess, pay and file a return received as compensation for individuals that receive
on the chargeable gain by 30 loss of office will be liable to compensation for loss of
June and 31 December of CGT under the Act. office would still be required
the same year. The obligation to file CGT returns by 30
to file returns, in our view, 2.1.3 Deduction and timeline for June or 31 December of the
applies regardless of whether payment of CGT on relevant year, albeit with no
the chargeable asset qualifies compensation for loss of CGT payment obligation on
for roll over relief. office the gain.
The self-assessment Finance Act, 2020 requires We have discussed other
requirement is not exactly any person making payment industry specific changes to
new – taxpayers were to an individual for loss of the CGT Act in the sectoral
always obligated to do so. office to deduct and remit analysis section of this
However, the timeline of the CGT thereon to the e-book.
the submission of the CGT relevant tax authority (RTA)
returns relied on the timeline within the timeline stipulated 2.2 Companies Income Tax Act
for submitting Companies under the Pay-As-You-Earn (CITA), Cap C4., LFN, 2004 (as
Income Tax (CIT) and Personal Regulations pursuant to the amended)
Income Tax (PIT) returns. This Personal Income Tax Act, Cap.
new requirement may signal 2.2.1 Response to the Impact of
P8, LFN, 2011 (as amended). COVID-19 Pandemic
a first attempt to breathe Consequently, CGT payable
life into the antiquated CGT on compensation for loss (i) 50% reduction of the
framework and separate its of office should be remitted minimum tax rate
administration from that of to the RTA not later than
the Income Tax Acts. We the tenth day of the month The Act introduces a 50%
expect that future legislative following the deduction. temporary reduction of
attention will soon be brought This amendment effectively the 0.5% minimum tax
to bear on CGT. clarifies the party responsible rate for companies liable
for the deduction and to minimum tax for the
2.1.2 Restriction of the amount subsequent payment of CGT years of assessment
exempt from CGT for on compensation for loss of falling due on any date
compensation for loss of office and the timeline for between 1 January 2020
office remitting the tax. to 31 December 2021.
Finance Act, 2020 has
amended Section 36(2) of the
CGTA to clarify the application
of CGT on compensation
for loss of office. Finance
Act, 2019 had increased the
amount exempted from CGT
for compensation for loss of
office from N10,000 to N10
8 | Finance Act, 2020
Finance Act, 2020 – Impact Analysis
(ii) Inclusion of donations made to the the year amounted to N12.5 million - to be added
government during a pandemic, natural back. How much tax relief is Company XY entitled
disaster or other exigency as allowable to in 2020 FY?
deductions for CIT purposes
The Act provides for the treatment of cash or N
in-kind donations made to any fund set up by Profit Before Tax (a) 70,000,000
the following establishments in respect of any
pandemic, natural disaster or other exigency Add: Net Tax Adjustments (b) 12,500,000
as tax-deductible expenses: Assessable Profit (c) = (a) + 82,500,000
(b)
• Federal or State Governments, or
10% of Assessable Profit (8,250,000)
• agencies designated by the Federal (deductible donation)
Government,
Taxable Assessable Profit 74,250,000
• similar funds set up in consultation with
any Ministry, Department, or Agency of the Based on the above illustration, Company XY has
Federal Government. an allowable deductible COVID-19 donation of
N8,250,000 out of the N10 million total donation it
Deductible costs include the cost of in-kind made in 2020 FY.
donations made to the Government or any of
its designated agencies, cost of procurement or The treatment of part of the cost of donations
manufacture of items contributed, and cost of made by companies in times of pandemic, natural
purchase, manufacture or supply of such in-kind disaster or other exigency as tax deductible
contributions. This is, however, subject to proving expenses for CIT purposes is in response to
with adequate documentation that such costs the assistance provided by companies to the
were incurred wholly, reasonably, exclusively Government during the COVID-19 pandemic. It is
and necessarily in relation to the procurement or hoped that this incentive will encourage companies
manufacture of such in-kind contributions. to make cash and in-kind donations in the future
where there is a crisis of a similar nature.
Moreover, the amount to be allowed as deductible
donations will be limited to 10% of the company’s 2.2.2 Introduction of new regulations for record-keeping
assessable profit after deduction of other allowable
donations. Finance Act, 2020 provides that all companies,
including those exempted from incorporation and
For ease of understanding, we have demonstrated paying tax, must maintain accounting records
in the illustration below, a practical application of in English language for a minimum period of six
this provision.
years. Non-compliance with the above attracts a
Illustration 1: penalty of N100,000 in the first month in which the
failure occurs, and N50,000 for each subsequent
Company XY, a Nigerian company with a year end month in which the failure continues. The Act
of 31 December, donated N10 million in cash to the further empowers the FIRS to request companies
FG’s COVID-19 pandemic fund in 2020 Financial to translate accounting records initially stated in
Year (FY). The Company recorded a profit before
a foreign language to English language which will
tax of N70 million after deducting its allowable
be certified by a sworn translator at the company’s
donations of N500,000 and all expenses incurred cost. However, taxpayers will have an opportunity
during the year. The net tax adjustments (non-
taxable income and non-allowable deductions) for to contest the FIRS’ directives through objection
Finance Act, 2020 | 9
Finance Act, 2020 – Impact Analysis
and/or appeal, similar to the 2.2.5 Introduction of the definition
case of an assessment. of “public character”
2.2.3 Changes to the timeline for Finance Act, 2020 introduced
settlement of undisputed tax the definition of the term
assessments “public character” to
Finance Act, 2020 has mean an organisation or
reduced the timeline required institution that is registered in
by companies to settle any accordance with the relevant
undisputed tax assessment law in Nigeria and does not
raised by the FIRS, from distribute or share its profit in
2 months to 30 days from any manner to its members
the date of service of the or promoters. This definition
assessment. Therefore, clarifies the longstanding
where an assessment debate on what constitutes
becomes final and conclusive, “public character” for the
due to the failure of the purpose of determining the
taxpayer to file a formal profits of an educational
objection within the statutory institution.
30-day period, or the That said, it may be useful
assessment has been agreed to consider a further revision
by the taxpayer or determined to the definition to align it
on objection or appeal, the with the globally accepted
additional liability must be definition of the public
settled within 30 days of character.
the service of the relevant
assessment by the FIRS. 2.2.6 Other noteworthy changes to
the CITA
2.2.4 Introduction of penalties
for filing incorrect CIT i. Correction of the ambiguity
returns in Section 4(b) of Finance
Act, 2019 (“FA 2019”),
Finance Act, 2020 has thus, clarifying that WHT
introduced sanctions for a will be the final tax on the
deliberate filing of incorrect income derived by a non- as well as the financial
CIT returns by companies. resident company statements of its Nigerian
These sanctions include (NRC) from technical, operations duly attested by an
payment of the outstanding management, consultancy, independent qualified/ certified
tax assessed by the FIRS and or professional services accountant in Nigeria, tax
penalty and interest accruing provided to persons computation schedules of the
on the outstanding amount resident in Nigeria, where profits from its Nigerian
from the date the incorrect the NRC does not have a operations, duly completed
return was filed. fixed base or engages in self-assessment forms, and a
other trade or business as statement in writing containing
There might be practical its profits from every source in
defined under Sections
challenges with the Nigeria. However, an NRC that
13(2)(a)-(d) of the CITA.
application of this provision only earns an income on which
as it may be difficult for the ii. The Act provides for WHT is the final tax, is
tax authority to determine the documents to be exempted from the above
when a taxpayer dishonestly submitted by an NRC documentation requirements.
files a return or when an deemed to be carrying on a
incorrect tax return was filed trade or business in Nigeria iii. Recognition of courier service,
by reason of an innocent when filing its CIT returns. emails and other electronic
mistake. This issue may, The documents include full means as approved channels
therefore need to be clarified in audited financial for the issuance of notices of
future Finance Acts. statements of the NRC
10 | Finance Act, 2020Finance Act, 2020 – Impact Analysis
assessment by the FIRS 2.3 Industrial Development (Income also applied to tertiary education
and submission of notices Tax Relief) Act (IDA) Cap I7, LFN tax (TET) as small companies
of objection by taxpayers. 2004 would not have assessable profits.
iv. Assigning power to the Finance Act, 2020 provides the Finance Act, 2020 has now made
FIRS to determine the following modifications to the IDA: small companies’ exemption from
form of accounts to be TET explicit. This is in line with the
i. Grant of tax holiday to policy directive of the government
included in the tax returns
small and medium sized to enable small businesses to
of small and medium
companies engaged in primary thrive in Nigeria through tax
companies in place of
agricultural production, upon concessions.
audited accounts.
an application to the President
v. Recognition of costs through the Minister of 2.5 Personal Income Tax Act (PITA)
incurred on software Finance, for an initial period Cap P8 Laws of the Federation
acquisition and of four years which can be (LFN) 2004 (as amended)
development and capital extended for another two
years, subject to satisfactory 2.5.1. Taxation of non-residents
outlays on electronic
performance of the business. individuals - Introduction of
applications as qualifying
Significant Economic
capital expenditure
It will be recalled that a Presence
for capital allowance
similar tax holiday was initially
purposes. Finance Act, 2020 has
introduced in the CITA by
Finance Act, 2019. However, introduced a new section 6A
vi. Clarification on the criteria
this has been deleted from to the PITA which provides
for tax exemption of
the CITA and effectively that income earned by
dividend and rental income
transferred to the IDA. non-resident individuals,
earned by a real estate
executors and trustees from
investment company.
ii. Definition of small and technical, management,
vii.Clarification that payment medium companies and consultancy or professional
of any penalties prescribed primary agricultural production services provided to a person
by any Act of the National to align with the provisions of resident in Nigeria shall be
Assembly or State House the CITA. subject to a final 10% WHT
of Assembly by a company in Nigeria, if the non-resident
2.4 Tertiary Education Trust Fund individual has a significant
will not qualify as a
(Establishment, etc) Act, (TETFA) economic presence (SEP) in
deductible expense for CIT
2011 Nigeria.
purposes. This provision
effectively puts to rest Finance Act, 2019 granted income The Act does not specify
the perennial dispute tax exemption to small companies what constitutes a SEP but
between tax authorities that earn gross turnover of less empowers the Honorable
and taxpayers on the than N25 million. The FIRS had Minister of Finance, Budget
eligibility of penalty as a clarified via its Information Circular and National Planning
tax-deductible expense. No. 2020/04 that the exemption (HMoFBNP) to define it
through an Order.
2.5.2.Clarification on tax
deductibility of pension or
retirement contributions
The Act amended Section 20
(1)(g) of the PITA to clarify
that only contributions to
pension, provident or other
retirement benefits fund
recognized by the Pension
Reform Act (PRA) will
qualify as tax-deductible
expenses for PIT purpose.
Finance Act, 2020 | 11Finance Act, 2020 – Impact Analysis
Consequently, all individuals, partnerships, in the first three years of business and in the
corporation sole trustees/ organisations will need last two years of business. These rules, which
to ensure that their retirement benefits funds were referred to as the “Commencement” and
comply with the provisions of the PRA in order to “Cessation” rules, respectively, had often resulted
take the tax benefit of the contributions. in double taxation of profits earned in one or
more financial years by the individual during
We have provided in the illustration below, a these periods. Finance Act, 2020 modifies the
practical application of this provision. commencement and cessation rules such that
Illustration 2: individuals will henceforth pay taxes based on
their accounting periods. The implication of this
Company X makes pension remittances on behalf modification is that individuals will now be allowed
of its staff, Mr Y, to a private pension firm, ABC to prepare and file their income tax returns in their
Pensions – a pension firm not recognized under first, second and third years of assessment based
the PRA. The pension remitted by Company X is on their first, second and third sets of financial
N1 million – assume this amount represents Mr. statements.
Y’s contribution to the pension fund. Mr. Y’s total
Further, for individuals ceasing business
income and consolidated relief allowance (CRA)
operations, the assessable income for the year of
are N13 million and N2.8 million respectively. What
cessation will be based on the profits made from
is the impact of the FA 2020 on Mr. Y’s tax
the beginning of that accounting period to the date
payable? Assume an effective tax rate of 15%.
of cessation. This is to eliminate the double tax risk
associated with the application of the erstwhile
Pre-FA 2020 FA 2020
cessation rules.
N N
This amendment is similar to the provisions
Total Income 13,000,000 13,000,000 introduced by Finance Act, 2019 to modify the
Earned same rules in the CITA for companies and ensures
uniformity in the taxation of companies and
Less:
individuals regarding new trades and cessation of
CRA (2,800,000) (2,800,000) trades.
Pension (1,000,000) (0)
2.5.4.Definition of gross income
Taxable Income 9,200,000 10,200,000
Gross income was not defined under the erstwhile
Tax Payable @ 1,380,000 1,530,000
provision of PITA. Rather, it only defined gross
15%
emolument in relation to individuals in paid
Based on the provisions of the FA 2020, employment. This resulted in a lack of clarity
the pension remittance of N1 million to the in determining what constitutes the base for
unrecognised pension firm (ABC Pensions) will no calculating CRA. Accordingly, tax authorities
longer be allowed as a tax deduction. Therefore, asserted that, taxpayers leveraged this loophole to
Mr. Y will pay additional tax of N150,000 (15% *N1 significantly reduce their tax base.
million or N1,530,000 - N1,380,000). Finance Act, 2020 has now addressed this by
effectively defining gross income as income from
This implies that Mr. Y will earn N150,000 less due
all sources less non-taxable income, franked
to the fact that his pension was remitted to a
investment income, National Housing Fund
pension company that is not approved or
contribution, National Health Insurance Scheme
recognized by the PRA.
contribution, life assurance premium, National
2.5.3.Simplification of commencement and cessation Pension Scheme contribution, gratuities, allowable
rules and elimination of double taxation risks business expenses and capital allowances.
associated with their application
The above definition has streamlined the base for
The PITA hitherto provided special rules for calculating CRA and would potentially increase the
determining the assessable income of individuals tax payable by taxpayers and tax revenue that
from a trade, business, vocation or profession would accrue to the government.
12 | Finance Act, 2020Finance Act, 2020 – Impact Analysis
We have provided in the illustration below, a practical application of this provision.
Illustration 3:
Mr. B's annual PAYE computation Pre-FA 2020 FA 2020
Income earned: N N
Basic Salary 8,000,000.00 8,000,000.00
Housing Allowance 1,600,000.00 1,600,000.00
Transport Allowance 1,000,000.00 1,000,000.00
Gratuity 3,500,000.00 3,500,000.00
Medical 900,000.00 900,000.00
Utility 600,000.00 600,000.00
Entertainment 700,000.00 700,000.00
Total income 16,300,000.00 16,300,000.00
Less: non-taxable income & tax-exempt item
NHF deduction (2.5% of Basic Salary) 0 200,000.00
Pension (8% of the sum of Basic, Housing, 0 848,000.00
Transport)
Gratuity 0 3,500,000.00
Gross income (for CRA purposes) 16,300,000.00 11,752,000.00
Less: Reliefs
Fixed Consolidated Relief Allowance 200,000.00 200,000.00
Variable Consolidated Relief Allowance (20% of 3,260,000.00 2,350,400.00
Gross Income)
Employee pension 848,000.00 848,000.00
NHF deduction 200,000.00 200,000.00
Gratuity 3,500,000.00 3,500,000.00
Total reliefs 8,008,000.00 7,098,400.00
Chargeable income (Total income less Total 8,292,000.00 9,201,600.00
reliefs)
PAYE Tax payable 1,782,080.00 2,000,384.00
Deductions:
PAYE Tax Paid 1,782,080.00 2,000,384.00
Employee pension contribution 848,000.00 848,000.00
NHF 200,000.00 200,000.00
Total deduction 2,830,080.00 3,048,384.00
Net pay (Total income less Total deduction) 13,469,920.00 13,251.616.00
This implies that Mr. B will earn N218,304 less than his earning prior to the enactment of the Act.
Finance Act, 2020 | 13Finance Act, 2020 – Impact Analysis
2.5.5.Other notable amendments to the PITA
i. Inclusion of life assurance premium as a relief claimed in writing
The Act introduces a new subsection 33(3) in the PITA which allows for the claim of the annual premium paid
by an individual in respect of insurance or a contract of deferred annuity on his life, or the life of his spouse, as
an allowable deduction for PIT purposes. Finance Act, 2019 had deleted a related section which resulted in
overstretching of the provision of Paragraph (2) of the Sixth Schedule of PITA. The inclusion of the new
subsection has effectively resolved the controversies surrounding the claim of life assurance premium as tax
deduction post-Finance Act, 2019.
ii. Exemption of individuals earning minimum wage and below from income tax
Under the erstwhile PITA framework, every individual earning income was mandated to pay income tax based
on the tax table provided in PITA, subject to a minimum tax of 1% of gross income, except where such an
income was expressly exempted from income tax.
The Act has now modified the framework to exempt the income earned by individuals with minimum wage or
less from the payment of PIT. However, these categories of individuals are still required to submit their income
tax returns, except where they earn an annual income of not more than N30,000 in line with Section 43 of the
PITA.
14 | Finance Act, 2020Finance Act, 2020– Impact Analysis
3
Indirect taxes
Finance Act,2020 | 15Finance Act, 2020– Impact Analysis
Ajibola
Olomola
Partner
Finance Act, 2020 contains the following amendments to the various pieces of Nigerian legislation that directly impact the
indirect tax regime in Nigeria:
3.1 Value Added Tax Act (VATA), Cap
V1, LFN, 2004 (as amended)
The Act further expands this Prior to the FA 2020, the
3.1.1. Place of supply rules definition by introducing Federal High Court had in
provisions relating to place the case between CNOOC
Finance Act, 2020 expands of supply rules for services Exploration and Production
the place of supply rules rendered with respect Nigeria Ltd V. Attorney
introduced by Finance Act, to immovable properties General of the Federation &
2019. According to the Act, located in Nigeria as well as Ors ruled that interest in
VATable services are incorporeal property. concessions are incorporeal
deemed to be supplied in property, and are, thus,
Nigeria where “... the For services, the Act outside the jurisdiction of
service is provided to and provides that a service shall the VAT Act. The definition
consumed by a person in be deemed to take place in of a supply of incorporeal
Nigeria, regardless of Nigeria if “the service is property as described in the
whether the service is rendered in Nigeria by a Act, may well bring the
rendered within or outside person physically present in transfer of interest
Nigeria or whether or not Nigeria at the time of in concession and rights to
the legal or contractual providing the service, the oil lease or licenses under
obligation to render such service is provided to and the jurisdiction of the VAT
service rests on person consumed by a person Act. However, the definition
within or outside Nigeria...” in Nigeria, regardless of of services in the Act as
whether the services are “…any intangible or
FA 2020 also introduces rendered within or outside incorporeal (product, asset
provisions relating to place Nigeria or whether or not or property) over which a
of supply rules for services the legal or contractual person has ownership or
rendered with respect obligation to render such rights, or from which he
to immovable properties service rests on persons derives benefits, and which
located in Nigeria as well as within or outside Nigeria, or can be transferred from
incorporeal property. the service is connected one person to another,
For services, the Act with existing immovable excluding interest in land
provides that a service shall property (including the and building, money or
be deemed to take place in services of agents, experts, security” may imply that a
Nigeria if “the service is engineers architects, disposal of a mining right in
rendered in Nigeria by a valuers etc.), where the an immovable property is
person physically present in property is located in excluded from VAT while
Nigeria at the time of Nigeria”. the disposal of an intangible
providing the service, the property which does not
service is provided to and For incorporeal property, include interest in land and
consumed by a person the Act provides that a building, money or
in Nigeria, regardless of supply is deemed to be securities will fall under the
whether the services are made in Nigeria where the purview of Nigerian VAT.
rendered within or outside “exploitation of the right is
Nigeria or whether or not made by a person in Further, these additions
the legal or contractual Nigeria; the right is clarify the ambiguities
obligation to render such registered in Nigeria, relating to the place of
service rests on persons assigned to or acquired supply rules introduced
within or outside Nigeria, or by a person in Nigeria, in Finance Act, 2019
the service is connected regardless of whether the (particularly with respect to
with existing immovable payment for its exploitation incorporeal property) and
property (including the is made within or outside align the country’s tax
services of agents, experts, Nigeria, or the incorporeal is regime with global best
engineers architects, connected with a tangible practices.
valuers etc.), where the or immovable asset located
property is located in in Nigeria”.
Nigeria".
16 | Finance Act, 2020Finance Act, 2020– Impact Analysis
3.1.2 Time of supply rules
Finance Act, 2020 available to the recipient (for The change represents
introduced time of supply goods that are not to be another significant step in
rules into the Nigerian VAT removed). For services, the standardizing the Nigerian
landscape. The need for time of supply of such VAT Act and aligning same
time of supply rules was service is the time the with global best practice.
necessitated by the change service is rendered to the
in VAT rate introduced in recipient; and for 3.1.3 Definition of “Goods” and
Finance Act, 2019 which incorporeal property, the
“Services”
became effective on the 1st time the incorporeal
February 2020 (or property is available for the Finance Act, 2020
“commencement date”) as use of the recipient. introduced new definitions
directed by an Order of the for goods and services.
HMoFBNP. Implementation The Act further provides for
One of the reasons for this
of the revised rate revealed situations where goods are
amendment is to resolve
certain ambiguities in terms supplied under a rental
the controversy that had
of the appropriate rate of agreement, or where
ensued in the past with
VAT to apply for certain services are rendered under
regard to the VAT status
types of transactions, such an agreement or law that
of rental payments made
as those contracts executed requires periodic payments,
on commercial buildings.
before the commencement that each successive supply
Recently, two contrasting
date but completed shall be deemed to occur at
decisions were reached
and paid for after the the earlier of when payment
by the Tax Appeal Tribunals
commencement date. becomes due or is
(TATs) Benin and Lagos
received, or an invoice
zones, on the VATability
To clarify this ambiguity, the relating to only that
of rental payments on
Act provides that a supply payment is issued.
commercial buildings.
shall be deemed to take
place at the earlier of the For goods supplied under a
The first TAT sitting in
time an invoice or receipt is credit agreement, the time
Benin, on the September
issued by the supplier, or of supply shall be deemed
9, 2020, ruled in Chief
payment of consideration is to be the time the goods
J.W. Ellah, Sons & Co.
due to, or received by the are delivered or the time
Limited vs the FIRS
supplier in respect of that any payment of
that rent on commercial
supply. consideration is received by
buildings is liable to VAT.
the supplier in respect of
A day later, a TAT sitting
However, where the the supply, whichever
in Lagos ruled in the case
transaction is between occurs first.
between Ess-Ay Holdings
related parties and an invoice Limited vs the FIRS that
is not issued, the time of The time of supply rules will
help resolve the debate on VAT is not applicable on
supply of goods rental payments made on
is deemed to be the time the when a transaction is
deemed to have occurred the lease of commercial
goods are moved to the buildings.
recipient (for goods which for VAT purposes and the
are to be removed) applicable rates to charge
or at the time the goods are on such transaction.
Finance Act,2020 | 17Finance Act, 2020– Impact Analysis
Given the opposing VAT in Nigeria for non- country, would now
judgements and the residents, that supply be statutorily obligated
need to provide clarity to goods or services to to register for VAT
taxpayers on the tax status customers in Nigeria. In purposes. Therefore,
of rental payments made the past, the trigger for further legislative
on the lease of commercial non-residents to register review will be required
buildings as well further for VAT in Nigeria was that in subsequent Finance
clarify the definitions of the non-resident must Acts to address the
goods and services, the carry on business in unnecessary additional
Act introduced a new Nigeria. The term administrative burden
definition of goods and “carrying on business in imposed on such non-
services. According to the Nigeria” was ambiguous resident persons by the
Act, “goods” is defined and proved difficult to provision.
as “all forms of tangible interpret definitively. The
properties, movable or Act has clarified this Meanwhile, non-resident
immovable, but does not ambiguity by changing the taxpayers would be well-
include, land and building, trigger for non-resident’s advised to comply with
money or securities.” It VAT registration to the the current provisions
defines “services” as making of "taxable supply of the VATA to avoid
“anything, other than of goods or services to applicable sanctions.”
goods, or services provided Nigeria”. Such non-
under a contract of resident vendors are c. Finance Act, 2020 has
employment, and includes required to obtain a tax further widened the scope of
any intangible or incorporeal identification number (TIN) VAT-exempt goods to include
(product, asset or property) from the FIRS upon commercial aircraft,
over which a person has registration. Also, non- commercial aircraft engines
ownership or rights, or residents who make and commercial aircraft
from which he derives taxable supply of goods spare parts. Also, the scope
benefits, and which can and services in Nigeria of VAT-exempt services was
be transferred from one may now appoint a expanded to include airline
person to another, excluding representative for the transportation tickets issued
interest in land and building, purpose of fulfilling their and sold by commercial
money or security” VAT obligation in Nigeria. airlines registered in Nigeria
and the hire, rental
These definitions now The relevance of the or lease of tractors, ploughs
clearly put to rest the requirement for non- and other agricultural
debate on the VATability residents to register for equipment for agricultural
of rental payments on VAT in Nigeria has been purposes.
commercial properties. It questioned over the years.
also further streamlines the This is because the VATA
definition of goods as only 3.2 Customs, Excise Tariff etc.
currently requires a
tangible properties whether Nigerian customer to (Consolidated) Act (CETA), Cap
movable or not, excluding withhold and remit the C49, Laws of the Federation of
land and building, money or VAT on its transactions Nigeria 2004
securities. with non-resident persons, 3.2.1 Revision of exemption from
as a result of which most
3.1.4 Other noteworthy excise duties
non-resident vendors
amendments
essentially file NIL VAT
returns with the FIRS. Finance Act, 2019 expanded
a. Finance Act, 2020 the framework for charge
also codifies the of excise duties to include
commencement date for Accordingly, the
implication of the imported goods which
charging VAT at 7.5%, as would ordinarily qualify as
1st February 2020 in line widening of the basis for
VAT registration is that excisable if manufactured
with the announcement locally. However, it
made by the HMoFBNP many non-resident
persons without any exempted imported goods
after the enactment of and raw materials which are
Finance Act, 2019. physical business activity
in Nigeria or any other tax not locally manufactured
b. FA 2020 also clarified the obligations in the or available in Nigeria
basis for registration of from excise duties. This
18 | Finance Act, 2020Finance Act, 2020– Impact Analysis
exemption paved the way transportation services bank. Finance Act, 2020
for certain luxury items increase across the deleted this provision
(such as imported alcoholic country. For this reason, and replaced it with the
beverages) to be imported and to incentivise the mass Electronic Money Transfer
into Nigeria without the transit operators as well (EMT) Levy. The EMT levy
applicable excise duties. as promote the use of replaces the stamp duties
the mass transit system on electronic transfers and
Finance Act 2020 seeks in Nigeria, FA 2020 has its administration is subject
to plug this loophole by reduced the duties and to the regulations made by
subjecting all imported and levy on motor vehicles. The the HMoFBNP as approved
locally manufactured goods same dispensation applies by the National Assembly.
to excise duties, as long as to tractors.actors.
such goods are captured in The Act also provides a
the Fifth Schedule to the 3.2.4 Exemption from duty for sharing formula for the
CETA. airlines registered in Nigeria revenue derived from EMT
Levy; 15% of the revenue
3.2.2 Excise duty on FA 2020 exempts airlines is allocated to the FG and
telecommunication services registered in Nigeria and Federal Capital Territory,
providing commercial air and the remaining 85%
Finance Act, 2020 subjects transport services, from shared amongst the State
telecommunication duty on the importation of Governments.
services provided in Nigeria their aircraft, engines, spare
to excise duty at a rate parts and components, 3.3.2 Recognition of Adhesive
which the President may whether they are purchased stamps printed by the
by order prescribe. The or leased. Nigerian Postal Service
charge of excise duties on
telecommunication services This incentive is timely Finance Act, 2020 has
is consistent with the given the current economic amended the definition of
practice in other countries, climate and expresses the “stamp” in Section 2 of the
such as Rwanda and FG’s commitment to easing SDA to include adhesive
Uganda, and is expected the challenges faced by stamps produced by the
to serve as an alternative businesses operating in Nigerian Postal Service.
revenue source for the Nigeria. This effectively resolves
FG in light of increased the long-standing dispute
telecommunication activities 3.3 Stamp Duties Act (SDA) S8, LFN between the Nigerian Postal
due to the COVID-19 2007 Service and FIRS on the
pandemic. competent authority to print
3.3.1 Removal of stamp duties on adhesive stamps used for
3.2.3 Reduction of duties and electronic receipts stamping of dutiable
levies on certain items instruments.
Finance Act, 2019
The recent increase in introduced a stamp duty of 3.3.3 Duty upon receipt
the pump price of fuel N50 on electronic receipts
coupled with impact of or electronic money transfer The Act has further deleted
the COVID-19 pandemic valued at N10,000 or above the phrases “electronic
has seen the price of which is deposited into a inscription” and “or any
acknowledgment of duty
charged on an electronic
transaction” in Sections
89(1) and 89(2) of the
SDA, respectively, and also
deleted Section 89(3). The
intent of this amendment is
to make clear that duty on
electronic receipts has now
been replaced with the EMT
Levy.
Finance Act,2020 | 19Finance Act, 2020 – Impact Analysis
4
Other Non-tax
Fiscal Impact
20 | Finance Act, 2020Finance Act, 2020 – Impact Analysis
Ajibola
Olomola
Partner
Finance Act, 2020 contains amendments to some pieces of non-tax legislation, which are discussed under the relevant Acts
as follows:
4.1 Companies and Allied Matters in or by a deposit money bank economic objectives.
Act (CAMA), 2020 which has remained unclaimed or
unutilised for a period of not less 4.3.1 Aggregate spending ceiling
Section 432(2) of the CAMA, 2020 than six years from the date of
provides that dividends that are declaring the dividend or domiciling Section 12 of the
unclaimed after 12 years should the funds in a bank account. It is FRA provides that the
be included in the profits that worthy of note that the official bank aggregate expenditure
should be distributed to the other accounts owned or belonging to and the aggregate amount
shareholders of the company. This any tier of government and their appropriated by the National
provision is, however, in contrast MDAs are exempted from this Assembly for each financial
with the intent of Section 44 of provision. year shall not be more than the
the Constitution of the Federal estimated aggregate revenue,
Republic of Nigeria, 1999 (“the The funds in the UDTF shall be a plus a deficit not exceeding
Constitution”) that frowns against special debt owed by the FG to the three per cent
the compulsory acquisition of the shareholders and dormant bank (3%) of the estimated Gross
property of any individual. account holders and shall Domestic Product or any
be available for claim, together with sustainable percentage
FA 2020 amends this provision the yield thereon, at any time such as may be determined by the
of the CAMA by providing that shareholder or bank account holder National Assembly for each
dividends of a public limited liability makes a legitimate claim. Where a financial year. This aggregate
company quoted on the Nigerian public company or a bank required to spending ceiling may, however,
Stock Exchange shall be available make such transfer of unclaimed be exceeded if in the opinion of
for claim in perpetuity. Also, FA dividend or unclaimed bank balances the President, there is a
2020 provides that where the defaults in making such transfer, a present threat to national
dividend remains unclaimed for six penalty of five times the value of the security or sovereignty of
(6) years or more from the date unclaimed dividend or unclaimed Nigeria.
of declaration, such dividend shall bank balance plus accumulated
immediately be transferred to the FA 2020 further expands the
interest on the amount will be
Unclaimed Funds Trust Fund. instance where the aggregate
payable by the public company or
expenditure may be exceeded,
bank.
4.2 Crisis Intervention Fund and to include: when the Federation
Unclaimed Dividend Trust Fund The FA 2020 also provides for is at war; the Federation is in
the administration of the UDTF. imminent danger of invasion or
FA 2020 establishes the Crisis Accordingly, the fund shall involvement in a state
Intervention Fund (CIF) and the be supervised by the Debt of war; there is clear and
Unclaimed Dividend Trust Fund Management Office (DMO) and present danger of or an actual
(UDTF). The CIF is a N500 billion co-chaired by the HMoFBNP and a breakdown of public order and
(or other such sum as approved qualified person of irreproachable public safety in the Federation
by the National Assembly) fund integrity from the private sector. or any part thereof, to such
created out of the Consolidated extent as to require
Revenue Fund (CRF) and Special 4.3 Fiscal Responsibility Act, 2007 extraordinary measures to
Accounts to fund crisis-related restore peace and security;
expenditures and other exigencies The Fiscal Responsibility Act, 2007 there is an occurrence or
pursuant to Section 12 of the Fiscal (FRA) was enacted to provide imminent danger, or the
Responsibility Act and Section 306 for prudent management of the occurrence of any pandemic or
of the Constitution. nation’s resources, ensure long- disaster or such other natural
term macro-economic stability calamity, affecting the
The FA 2020 also created a sub- of the national economy, secure community or a section of the
fund to the CIF called the UDTF, greater accountability and community in the Federation; or
which shall be funded by any transparency in fiscal operations there is any other public danger
unclaimed dividend of a public within a medium-term fiscal policy which clearly constitutes a
limited liability company quoted framework, and establish the threat to the existence of the
on the Nigerian Stock Exchange Fiscal Responsibility Commission Federation.
and any unutilized amounts in a to ensure the promotion and
dormant bank account maintained enforcement of the nation’s
Finance Act,2020 | 21Finance Act, 2020 – Impact Analysis
4.3.2 Operation surplus and 4.4.1 Scope of application
general reserve fund FA 2020 also provides
FA 2020 expands the scope for circumstances where
Section 22 of the FRA provides a procurement exceeds
that every statutory corporation of application of the PPA to
include all public procuring the Ministerial Tenders Board
must allocate one-fifth of its threshold, or any other threshold
operating surplus to a general and disposal entities under
the three arms of the FG. set by the National Council on
reserve fund created by the Public Procurement or the Bureau
corporation and any balance must It also comprises the FG of Public Procurement. In that
be paid to the CRF not later than and all entities that derive regard, the Federal Executive
one month following the statutory at least 35% of the funds Council shall be the approving
deadline for publishing each appropriated or proposed entity for the executive arm
corporation’s accounts. to be appropriated for any of government, the National
type of procurement Assembly Tender's Board
FA 2020 provides for a spending for the legislative arm of
limit for each corporation by including FG’s Ministries,
Departments and Agencies, government and the National
limiting the cost to revenue ratio Judicial Council Tender's
of each corporation to 50% or Institutions, Government
Owned Enterprises, Federal Board for the judicial arm of
such other ratio as the Minister government.
may direct subject to approval by Tertiary and Non-Tertiary
the National Assembly. Also, FA educational institutions, 4.4.3 Accounting officer
2020 changes the timeline of Federal Hospital and other
payment of surplus funds into the health institutions, Central Section 20 of the PPA defines an
CRF from one month to every Bank of Nigeria and other accounting officer as someone
quarter in accordance with the Federal Government-owned charged with the line supervision
financial guidelines or regulations Financial Institutions, the of the conduct of all procurement
that the Minister in consultation National Defence and the processes. It further assigns a
with the National Assembly may National Security Agencies, Permanent Secretary as the
issue. the National Assembly and accounting officer in the case of a
the Judiciary. Ministry and the Director-General
The Act also empowers or officer of coordinate
the HMoFBNP to enforce 4.4.2 Approving Authorities
responsibility in the case of an
compliance of the remittance of Section 17 of the PPA extra-ministerial department and
the surplus funds to the CRF. The provides that the approving corporation.
Minister in carrying out this authority for public
mandate may make a direct FA 2020 further includes a Clerk
procurements in a
deduction from the Treasury as an accounting officer, in the
government agency,
Single Account. Also, the case of the National Assembly
parastatal, or corporation shall
Minister shall direct all and the Secretaries of the judicial
be the Parastatals Tenders
corporations to conduct a bodies and the Chief Registrars of
Board, while for ministries or
reconciliation of the quarterly the courts in the case of the
extra-ministerial entities, it
direct deductions and the Judiciary.
shall be the Ministerial
aggregate annual deductions of Tenders Board. This approval
operating surplus. This FA 2020 also lays out the
is subject to thresholds set responsibilities of the accounting
reconciliation is to be concluded by the National Council on
not later than three months officer as well as his power to
Public Procurement. approve low value procurement
following the statutory deadline
for publishing each corporation’s without open competitive bidding.
FA 2020 amended the above
account. Among other things, the
section by including the
accounting officer is required to
National Assembly and the
render a quarterly report to the
Judiciary in the list of bodies
4.4 Public Procurement Act, 2007 Parastatals Tenders Board.
whose conduct of public
procurement would now 4.4.4 Tenders Board
The Public Procurement Act, 2007 come within the purview of
(PPA) establishes the National the PPA. Based on the Act, FA 2020 establishes Tenders Boards
Council on Public Procurement and the approving authority for in the three arms of the Federal
the Bureau of Public Procurement the National Assembly shall Government for the purpose of
(“the Bureau”) as the regulatory be the Parastatals Tenders approving procurements. Also,
authorities responsible for the Board, while the approving where a decision has been made by
monitoring and oversight of public authorities for the Judiciary the relevant Tenders Board with
procurement in Nigeria. will be the Judicial Bodies respect to bids submitted for a
Tender’s Board and the procurement, such decision shall be
Courts Tender’s Board. confirmed by the political head of the
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