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Welcome to our first Social Media discussion of the year, 2020. It feels great to back on the Twittersphere to drop legal gems here and there.
It's only the second month of the year/ decade already and the Government of Nigeria has taken a firm legal and policy stance to foster fiscal equity and promote global best practices in the tax system.
It has been able to do this by passing the Finance Act which introduces landmark changes in the Nigerian tax legislations. These legislative changes affect various sectors of the Nigerian economy.
Proper implementation of the Finance Act is expected to drive revenue growth in the country. Today, we shall be addressing how the changes introduced by the Finance Act impact the private equity market in Nigeria.
One of the most relevant tax legislations to the private equity market is the Capital Gains Tax Act. Section 49 of the Finance Act provides that no tax shall be paid on the sale or transfer of a company to another company under the following circumstances:
One company has control over the other or both are controlled by some other person or are members of a recognised group of companies and have been so for a consecutive period of at least 365 days prior to the date of reorganisation
Provided that if the acquiring company were to make subsequent disposal of the assets within the succeeding 365 days after the date of transaction, any concession enjoyed shall be rescinded...
And the companies shall be treated as if they did not qualify for the concession as at the date of the initial reorganisation.
Apart from the changes made to the administration of capital gains in Nigeria, the Finance Act also made other changes which impact the taxation of profits realised from private equity investments.
Accordingly, Section 7 of the Finance Act amends Section 19 of the Companies Income Tax (Amendment) Act. By virtue of this provision, investment companies are not liable to pay companies' income tax on;
profits or income of a company that are regarded as franked investment income; dividends paid out of the retained earnings of a company (provided they have been subjected to CITA, PPTA, or CGT); distributions made by REICOs to shareholders from rental income
Additionally, some of the changes made to the VAT Act and CITA will be relevant to the tax liability of the investee companies in a private equity transaction. For instance, the effective tax rate for VAT in Nigeria is 7.5% beginning on February 1, 2020.
Furthermore, the expansion of goods and services in the Finance Act for the administration of VAT has been made to cater to the problems experienced with effectively taxing the digital economy.
The VAT Act has also been amended to ensure that VAT is imposed on foreign companies supplying goods and services in Nigeria.
For the administration of the companies' income tax in Nigeria, the Finance Act amends the rate of taxes from the broad application of 30% to all companies to classifying companies into 3 categories...
The first category being companies with an annual turnover of less than N25 million, the second being companies of an annual turnover of between N25 million and N100 million, and the third category being companies with a turnover of N100 million and above.
Companies in the first category pay only minimum tax and are generally exempt. The second category of companies are subject to 20% and the third category of companies are subject to the 30% companies income tax.
Furthermore, for the purpose of computing assessable profits of the company, computation is now based on the profit made in the accounting period and not the profit made in the calendar year as was previously applicable.
Conclusively, as we expect that private equity will continue to drive growth across all sectors of the economy, we believe that the changes introduced by the Government have the potential to positively impact the attraction of foreign capital...
and/ or private equity investments into the country. We hope that the Finance Act is all that the Government envisions it to be through proper administration and cooperation from corporations and the citizenry.
Thank you for joining our conversation today. We look forward to discussing more exciting topics with you in the coming weeks. Have a lovely evening!
