We have continued to improve fiscal policy to bring us in line with best practices such as the Finance Act 2019. The Finance Act 2019 is the first of its kind since 1999 (20 years), in that it contains 56 sections and seeks to introduce about 98 different changes to seven different tax laws, according to Zainab Ahmed, the Honourable Minister of Finance, Budget and National Planning.

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Ahmed was in Lagos State at the Udo Udoma and Belo Osagie 2nd Private Equity Summit: Fundraising and Deal Academy themed ‘Drivers, Disruptors and Unlocking Value,’ where she fielded some questions on the recently signed Finance Act 2019.

The summit which is part of the company’s ‘Learning and Engagement’ initiative across its practice areas, aims to provide content -rich, and interactive learning forum for informed discussion and open engagement involving experienced local and international stakeholders, advisers , providing insights into emerging trends and prospects for investment in the Nigerian private equity and venture capital sector.

In the Interview conducted by Dan Agbor, Senior Partner, The Honourable Minister shed more light on the implementation of the Finance Act, among other issues. She noted that the Finance Bill is the first of its kind since 1999 (20 years), in that it contains 56 sections, introducing about 98 different changes to seven different tax laws.

The Bill, which has now become an Act of Parliament, has, according to her, resulted from various tax reform works over the past few years and the 2017 national tax policy. The implementation committee reconstituted by the Honourable Minister to draft the Bill actually cut across key stakeholder groups, including private sector experts, Joint Tax Board and Federal Inland Revenue Service (FIRS).

The key objectives of the Bill are promoting fiscal equity by mitigating instances of regressive taxation; reforming domestic tax laws to align with global best practices; introducing tax incentives for infrastructure and capital markets; supporting small businesses in line with the ongoing ease of doing business reforms; and raising revenues for the government through various fiscal measures.

Looking at the Bill through the eyes of disruption, the Honourable Minister in her words said: “The Finance Act 2019 will be a disruptor that poses risks to businesses. Risk being an uncertainty that could be positive (an opportunity) or negative (a threat) – makes it imperative for businesses to look beyond the negative aspects attached to the Finance Act to explore value creation levers. Investors and the business community need to put a positive lens and assess the Finance Act 2020 through eyes of disruption to unlock value for their respective investments and businesses. There has been a lot of focus on the VAT rate increase. However, there are many incentives and equalisers in the Act that will unlock value to businesses directly as investors or through their various investee companies.”

On the unsung aspects of the Finance Act 2019, Ahmed asserted that beyond providing better clarity on the definition of value added tax (VAT) and the exported capital and basic foods, the Finance Act also provides incentives and equalisers on many points such as insurance companies. The following are some aspects of the Act that present opportunities for businesses to harness for value creation which has thus far received little attention, especially in the media: In view of the policy objectives, measures and the expected impact, beginning with fiscal equity, in the light of the removal of double taxation arising from excess dividend tax provision (s19 of CITA),  she put forth that the amendment eliminates the double taxation of profits and removes the provision of the companies income tax (CIT) Act that undermines the fiscal incentives granted to investors.

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The insurance sector tax reforms also came up, on which she said that the reforms are to allow insurance companies to carry forward tax losses indefinitely like companies in other sectors of the economy; eliminate the specific minimum tax for insurance companies; and grant tax deductions for legitimate expenses on a time apportionment basis.

While the commencement rules are to eliminate the double taxation of profits for start-up companies thereby enhancing their chances of survival, unit trust is to eliminate multiple layers of tax costs by ensuring one point of withholding tax, because it will help unit trust investors and pension contributors where Pension Fund Administrators (PFAs) invest in mutual funds.

Ahmed also stated that harmonious treatment of tax-deductible expenses are to prevent double dipping by ensuring that the tax treatment of costs associated with tax exempt income is treated consistently across industries. On the removal of ineffective bureaucracy, she said it is meant for the removal of the requirement to obtain approval from Minister of Finance for deductibility of management fees.

There was also a mention on same owner account transfer – exemption of stamp duty from same owner account transfer; reorganisation tax exemptions – elimination of tax costs from genuine business reorganisation within a group, especially including specific exemption for VAT and CGT on the transactions, which were previously dealt with informally; and excise duty on imported goods – which applies excise duty on imported excisable products similar to locally produced substitutes. This, according to Ahmed, will also make locally produced items competitive especially as African Continental Free Trade Area (AfCFTA) kicks in; advance income tax payment charged on interim dividends – eliminate the punitive provision of the companies income tax Act; minimum tax provision, removes imposition of tax on assets and capital and limit exemption to small companies. The discrimination in favour of non-resident companies has also been removed, so all companies are treated equally except small businesses that enjoy exemption.

So far, there has been improvement in the business environment, tax compliance, and ease of doing business ranking. Nigeria as a country is taking a big step forward towards becoming an attractive headquarters and holding companies location in Africa. Insurance companies are to become competitive and better able to mobilise long term funds for development. While new businesses are to have a higher probability of survival in the early years of vulnerability, as reforms are to curb tax evasion and remove the advantage that tax evaders have over responsible citizens.

The tax law reform and global best practices initiative is to limit abuse of interest deduction. Interest on loan is restricted to 30 percent of earnings before interest, tax, depreciation and amortization. This is line with the recommendations of the Organisation for Economic Co-operation and development (OECD). On taxation of the digital economy, there will be possible income tax on foreign companies providing digital services to customers in Nigeria and thereby creating a significant economic presence in the country. This aligns with certain unilateral actions taken by some countries like France, India etc.

The VAT threshold of N25million for registration aligns with international best practices in the United Kingdom (UK), South Africa etc. Meanwhile, the Bill includes a framework for reverse charge of VAT on vatable transactions received from foreign companies by Nigeria residents. Tax exemption of rental and dividend income from income tax aligns with international best practices on the tax treatment of real estate investment companies (REICs) as tax transparent vehicle. The bill, among other provisions, also provides a legal framework for corresponding with the tax authorities through electronic means, curbs aggressive tax avoidance through interest deduction, addresses base erosion and profit shifting regarding digital transactions, reverse charge for imported services, and simplifies tax compliance.  

She said that the gross domestic product (GDP) growth had increased from 2.10 percent in the first quarter of 2019 to 2.28 percent in third quarter of 2019. According to her, the non-oil sector grew by 1.85 percent in third quarter of 2019, up from 1.64 percent in second quarter of 2019. Its contribution to GDP was 90.23 percent to GDP, a slight moderation from 91.18 percent in second quarter of 2019. “We continue to deepen our non-oil sector performance with non-oil Gross Domestic Product (GDP) at over 90 percent of GDP as at third quarter of 2019. We have been able to raise and maintain more stable oil production levels. Nigeria merchandise trade grew in third quarter, 2019 with higher exports and lower imports,” she said.

With the fact that Nigeria is endowed with a very young, innovative and resilient population, Ahmed stated that the country has made unprecedented progress with social investment programmes and is innovating ways of funding infrastructure, even with the trade balance being a positive N1.39 trillion.

Telling how the country has fared amid many challenges, she maintains that the country has made significant progress in countering the insurgency in the North-East and resolving militancy/conflicts in other parts of Nigeria. “We have continued to improve on our ease of doing business ranking. We have successfully reversed the budget cycle to a predictable Jan – Dec fiscal year. From this, we expect a multiplier effect on the economy from early spend on critical infrastructure. It will also eliminate the PFM challenges faced from the different budget cycles for recurrent and capital expenditure.

“We have continued with reforms on open governance and transparency (e.g. recently deployed open treasury portal). We have continued to improve fiscal policy to bring us in line with best practices such as the Finance Act 2019. We have maintained stable foreign exchange rate and our external reserves are back on the growth trajectory. Gross external reserves declined from USD41.85 billion recorded at the end of third quarter of 2019 to USD38.59 billion end of fourth quarter of 2019. It was USD38.32 billion as at January 16, 2020, which is more than six months import cover,” she stated further.

Concerning the Nigerian business and investment climate, she mention: “We are committed to providing easy entry and exit via improved repatriation processes. The Nigerian autonomous foreign exchange (NAFEX) gives easy access to dollars for investors. This administration continues to provide incentives for strategic sectors that are aligned to our economic growth and diversification drive as outlines in the economic and recovery growth plan (ERGP). We are extending our ease of doing business reforms to States to ensure seamless experience for our investors across the nation. Nigeria has many untapped greenfield and brownfield opportunities, especially in agriculture, manufacturing and mining. These are sectors with high potential for impact investors. We are aware of impediments to businesses such as power and infrastructure, which we are committed to resolving by embarking on bold and innovative reforms such as power tariff adjustments and the Road Trust Fund Scheme- where we issue tax credit to businesses that invest in critical infrastructure.

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