President Muhammadu Buhari, on 31 December 2020, signed the Finance Act 2020 (“the Act” or “FA20”) alongside the 2021 Appropriation Act into law. This reaffirms the Federal Government of Nigeria’s (FGN) commitment to enact fiscal policy annually, alongside the passage of the annual budget into law (i.e. enactment of Appropriation Act) and aligns with global best practice.
It is important to note that Finance Act, 2020 did not repeal 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.
The Act, which took effect on 1 January 2021, amended the provisions of several tax and fiscal related legislation. Some of these changes are discussed under the relevant tax laws as follows:
DIRECT TAXES
- Capital Gains Tax Act (CGTA), CapC1, Laws of the Federation of Nigeria (LFN), 2004 (as amended)
- Due date for filing and payment
The filing of capital gains tax (CGT) returns and the payment of CGT arising from the disposal of chargeable assets in a particular year is due on or before 30 June and 31 December of the same year.
- Compensation for loss of office
Finance Act, 2020 has amended Section 36(2) of the CGTA to clarify the application of CGT on compensation for loss of office. CGT on compensation for loss of office is limited to an amount in excess of N10million. The person paying such compensation for loss of office is required to deduct the CGT due and remit to the relevant tax authority under the Pay As You Earn (PAYE) regulations.
Employers now have an obligation to deduct CGT when they make redundancy payments in excess of N10 million, and other similar payments, to exiting employees.
- Companies Income Tax Act (CITA), Cap C4., LFN, 2004 (as amended)
- 50% reduction of the minimum tax rate
The minimum tax rate is reduced from 0.5% to 0.25% of gross turnover less franked investment income. This reduction, which is a COVID-19 incentive, is applicable to tax returns filed in respect of any year of assessment that is due on any date between 1 January 2020 and 31 December 2021.
For non-life and life insurance businesses, the base of the minimum tax is gross premium and gross income, respectively.
- Inclusion of donations made to the government during a pandemic, natural disaster or other exigency as allowable deductions for CIT purposes.
- Qualifying expenditure on software
Qualifying expenditure has been redefined to include capital expenditure incurred on the development and acquisition of software or electronic applications.
However, did not prescribe capital allowances rate and whether or not investment allowance is applicable.
- Non-resident Companies filing
The Act clarified that the income tax returns of non-resident companies include full audited financial statements of the companies and financial statements of the Nigerian operations certified by independent auditors in Nigeria. This requirement is not applicable to non-resident companies whose tax exposure in Nigeria is limited to Withholding Tax.
- Books of account
Companies exempted from incorporation and those not liable to pay tax under CITA are now required to maintain books of account in a format prescribed by FIRS. These accounts are required to be in English language and must kept for a minimum of 6 years.
Where a taxpayer fails to produce any prescribed book or record, it is liable to a penalty of N100, 000 in the first month of failure and N50, 000 every month the failure continues.
- Notice of assessment
Services of notice of assessment can be done by courier, email or any other electronic means
- Personal Income Tax Act (PITA)
- Gross Income definition
Introduction of a definition of gross income, which is the basis for calculating consolidated relief allowance. Gross income is defined as income from all sources, excluding non-taxable income, tax-exempt income, income on which no further tax is payable, allowable business expenses and capital allowances.
- Exempt income tax
Minimum tax no longer applies to persons who earn National Minimum Wage or less under Section 37 of PITA. This category of employment income earners are also exempt from PIT under the Third Schedule to PITA. National Minimum Wage is currently N30, 000 per month.
- Reinstating Life assurance as a deduction
Annual premium paid during the year preceding the year of assessment to an insurance company in respect of insurance on the individuals’ life or the life of his spouse shall be allowed as a deduction.
- Commencement and cessation rules
Revised commencement and cessation rules to prevent double tax. This is to align with the prior amendment to CITA in this regard. Tax will be applied on the basis of the individual’s accounting year. The implication of this modification is that individuals will now be allowed to prepare and file their income tax returns in their first, second and third years of assessment based on their first, second and third sets of financial statements.
- 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.
- Tertiary Education Trust Fund (Establishment, etc) Act, (TETFA) 2011
Exemption for small companies– Small companies are exempt from paying Tertiary Education Tax (TET)
