Introduction
Nigeria's fiscal and economic landscape is undergoing a critical transformation as the government seeks to address pressing challenges including inflation, heavy reliance on imports, exchange rate fluctuation and growing public debt, among others. With the need for a more sustainable fiscal structure, the Nigerian government, has an ambitious target of increasing the country's tax-to-GDP ratio from 10.8% to 18% by 20261. Consequently, various economic reforms to address long-standing structural issues and revitalize the economy have been initiated.
One of such initiative is the constitution of the Fiscal Policy and Tax Reforms Committee ("the Committee") with the mandate to overhaul the country's fiscal and tax system, formulate policies that enhance revenue generation and drive economic growth2. In fulfillment of its mandate, the Committee has introduced four major legislative proposals which have now been signed into law as the Nigeria Tax Act (NTA), the Nigeria Revenue Service (Establishment) Act (NRSEA), the Nigeria Tax Administration Act (NTAA) and the Joint Revenue Board (Establishment) Act (JRBEA).3
The laws which have just been signed by the President, His Excellency, Bola Tinubu, have dominated public discussions and sparked debate in the last one year. Certain provisions such as changes to the VAT revenue sharing formular, introduction of minimum effective tax rate (ETR) for large and multinational companies have piqued interest. The Nigeria Tax Act ("NTA" or "The Act") however, contains several other significant provisions with far reaching consequences for taxpayers and the economy. Some of these provisions offer benefits to low-income earners, small and medium-sized enterprises (SMEs), while others introduce increased tax and administrative obligations that will have significant impact on businesses and the broader economic landscape.
In this article, we have discussed key provisions of the NTA, its impact on individuals, businesses and the economy at large, as well as the practical considerations and challenges associated with implementation and compliance.
Highlights of Key Provisions and Economic Impact
Increased Benefits for Low-income Earners & Small Businesses
Individuals and small businesses stand to benefit significantly due to several tax exemptions aimed at easing their financial burden. The NTA increases the threshold for small companies eligible for tax exemption from ₦25million to ₦50million and with a total fixed asset value of ₦250 million. Companies within this threshold that were previously considered as medium sized and liable to tax, are now exempt from Companies Income Tax (CIT), including deduction of Withholding Tax and Value Added Tax (VAT) obligations. This should lead to a reduction in overall cost of doing business as they now have an opportunity to retain a portion of their earnings and reinvest for expansion, job creation and overall economic growth.
The Act also introduces revised graduated personal income tax (PIT) rate of 0-25% on taxable income of individuals. Individuals who earn ₦800,000 (which is below the annual minimum wage of ₦840,000) or less per annum are now exempt from PIT. This provision represents a significant shift towards a more equitable tax system that protects low-income earners from excessive tax, thereby reducing their financial burden. On the other hand, the provision ensures that high income earners contribute more to the tax base by increasing the rate for the highest band of income. This may slightly increase the tax payable for high income earners, but in the long term, it may promote income redistribution and possibly increase revenue available for public infrastructure and national development. Further, businesses may benefit from increased consumer spending from low-income earners, due to relatively higher purchasing power, which may ultimately stimulate demand and support business growth.
Additionally, the Act imposes a zero VAT rate on essential items such as food, educational items, healthcare, and transportation, which were previously VAT exempt. Zero-rated supplies allow businesses to recover the input VAT incurred on the supplies, unlike exempt items, thereby improving cashflow. The introduction of this provision at a time that inflation in Nigeria is at an all-time high demonstrates Government's willingness to support businesses by adopting business-friendly initiatives, which is commendable.
Notwithstanding the positives noted, the benefits may come with some practical challenges. The increased revenue thresholds for tax exemptions could lead to a decline in Government revenue and potentially affect public funding for infrastructure and other projects. This may happen where a significant portion of the taxpayers fall under the scope of the new exemption threshold and the additional revenue from high income earners does not immediately compensate for the shortfall. However, it is unclear how the increased tax revenue from high income earners will complement the tax revenue lost from low-income earners. Additionally, businesses may face initial compliance costs as they adjust their systems to meet new requirements. However, experience from other countries offers useful insight. For example, India has implemented various tax reforms, such as reduced corporate tax rates and incentives for startups and MSMEs. These measures have enabled businesses to reinvest their profits, expand and create more job opportunities4. Expectedly, the increased exemption threshold in Nigeria aimed at reducing the financial burden of small businesses and low-income earners may drive long term economic growth and benefits to the economy
Increased Revenue Generation
The NTA includes several provisions designed to boost government tax revenue. One of the key changes provides that where a foreign company that is controlled by a Nigerian company does not distribute dividend in a given year, the proportion of the foreign company profits attributable to the Nigerian company, which could have been distributed without detriment to the company's business shall be construed as distributed and included in the profits of the Nigerian company and subjected to tax accordingly.
In addition, the Act repeals the minimum tax previously applicable to loss-making companies and introduces a Minimum Effective Tax Rate (ETR) of 15% for multinational entity (MNE) groups and other large companies with a turnover above ₦20 billion. Furthermore, Nigerian parent companies will be required to pay a top-up tax if any of their subsidiaries operate in jurisdictions where the effective tax rate falls below 15%.
These provisions seek to curb profit shifting by multinational corporations and ensure large companies contribute fairly to Nigeria's tax base. The new ETR rule is similar to the Organization for Economic Co-operation and Development Pillar Two framework which have been endorsed by over 130 countries. Countries such as South Africa, Norway, and the United Kingdom5 have already implemented similar measures. In South Africa, the introduction of the minimum effective tax rate is expected to result in additional tax revenue of R8 billion by 2026/276. Similarly, in the United Kingdom, the imposition of this provision, particularly impacting large businesses with global revenue exceeding €750m7 per annum, is expected to significantly increase the Country's tax revenue and curb profit shifting.
While these provisions are projected to boost revenue, they may also come with challenges. For instance, enforcing the minimum ETR will require disclosures on financial information of subsidiaries and their tax position, as well as enhanced monitoring and upgraded tax systems. This may place pressure or administrative burden on the tax authorities. Businesses will also face significant exposure to increased taxes, additional compliance burdens, such as understanding ETR rules, updating software and reporting systems, and navigating through the complexities associated with computation of ETR especially for large companies that have subsidiaries operating in multiple jurisdictions.
To mitigate these challenges, the tax authorities may need to adopt a phased implementation approach, strengthen monitoring mechanisms, and continuously engage with stakeholders across sectors. Business support programs may also be necessary to ensure that the long-term benefits of these tax reforms are realized without causing strain on businesses and the economy. This would help balance the government's revenue objectives and ensure a conducive business environment.
Increased Tax Administrative Requirement
The Act introduces stricter compliance measures aimed at enhancing revenue collection and ensuring that all eligible transactions are properly accounted.
Under the VAT compliance rules, any expense on which VAT is due but not charged, or any expense where the applicable import duty or levy was not paid will be disallowed for tax purposes. Additionally, assets on which VAT has not been charged or paid will not qualify as qualifying capital expenditure and businesses will be restricted from claiming capital allowances on such asset. This provision introduces some administrative requirement mandating businesses to provide invoices on every single expense to demonstrate VAT has been charged for tax deductibility purpose. Large corporations with large volumes of expenses running into hundreds of millions may find this obligation an arduous task. The direction of travel for tax in Nigeria indicates that documentation is more critical now than ever.
To support these reforms, the Federal Government has initiated and began to deploy a national initiative known as the "E-invoicing" which entails the digital exchange of invoices between a supplier and a buyer, in a structured electronic format. Therefore, by creating a transparent and traceable system of invoicing, e-invoicing supports the VAT administration by enhancing visibility and enabling tax authorities to obtain real-time information for tax purposes. This initiative is particularly relevant in light of the revised VAT revenue-sharing formula, which has sparked debate in the last one year.
Under the existing law, VAT is allocated to Federal, State and Local government at 15%, 50%, and 35% respectively.8 However, based on the NTAA, the Federal government share has been reduced to 10%, the States revenue increased to 55% and the local government revenue remains at 35%. For the States and Local government revenue, 50% of the revenue will be distributed equally9, 20% allocated by population and 30% based on consumption. This means that where VAT is collected is as important as the amount collected. Consequently, States or Local government with higher levels of economic activity and consumption stand to benefit more.
Whilst the increased VAT administrative obligations may increase VAT collection capacity and promote equity by aligning VAT revenue with economic activity, it also introduces significant administrative challenges for businesses. Companies would be required to declare returns from the region/States where the goods or services are consumed instead of VAT returns that used to be filed centrally. Although the adoption of e-invoicing already provides a foundation for improved tracking of VAT, businesses may need to upgrade their internal systems to track revenue and VAT collection properly. The tax authorities will also need to develop robust infrastructure to effectively collect, process, and allocate VAT revenue efficiently.
Revised tax treatment on Foreign Exchange transactions
Under the NTA, expenses incurred in foreign currency will only be allowed as a deduction where conversion is done using the official exchange rate published by the Central Bank of Nigeria (CBN) on the relevant date or period.
This approach is intended to standardize foreign exchange transactions and maybe reinforce the use of the CBN Electronic Foreign Exchange Matching System (EFEMS). It also increases compliance and operational challenges for businesses, especially in volatile periods, where the official rate may not fully reflect current market conditions. One of the key considerations for government should be to ensure stability in the forex market and sufficient supply to be able to achieve the intended outcome from this provision. Otherwise, this provision may negatively impact businesses with high forex dependence and contribute to a harsh economic environment. On the other hand, businesses with high forex exposure may need to relook their business model to reduce dependence on forex and manage the potential tax exposure that may arise from accessing forex from alternative sources.
Conclusion
The Nigeria Tax Act represents a significant step in the country's ongoing fiscal reforms. Provisions such as tax exemptions for small businesses, reduction in taxable income of individuals, and zero VAT on essential goods are expected to ease financial burdens. Other compliance obligations and significant changes may pose short term challenges for both businesses and the tax authorities.
Nonetheless, if effectively implemented, these reforms have the potential to stimulate economic growth, improve tax equity, and enhance voluntary compliance in the long run. It is commendable that the Committee has been able to achieve the laudable task of introducing these reforms, however, the task is not yet at the finish line. Implementation of the reforms alongside other economic and fiscal framework will be required to ensure the desired economic agility is realized.
Footnotes
1. New FIRS Chairman targets 18% tax-to-GDP in 3 years - Businessday NG
2. About the Committee – fiscalreforms.ng
3. Explainer: Nigeria Tax Bill 2024: A Comprehensive Framework for Taxation - Vanguard News
4. https://www.ijrar.org/papers/IJRAR19D5356.pdf
5. pillar-two-implementation-status-wordwide
7. Multinational top-up tax and Domestic top-up tax: UK adoption of OECD Pillar 2 - GOV.UK
8. https://punchng.com/who-gains-in-nigerias-proposed-vat-sharing-formula/?utm_source
9. Tax reform: Reps approve new VAT sharing formula for states
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
