Discover the significant amendments to existing tax laws and related legislations in the Finance Act of 2023.
The Finance Act 2023 (FA23) was signed into law by the former President Muhammadu Buhari on 28 May 2023, a day before the end of his administration. The Act is to take retroactive effect from 1 May 2023. FA23 amends relevant tax, excise duties legislations in line with the macroeconomic policy reforms of the Federal Government and makes further provisions in specific laws in connection with the public financial management of the Federation. The various legislations amended by FA23 include the Capital Gains Tax Act, the Companies Income Tax Act, the Customs, Excise, Tariffs, Etc. (Consolidated) Act, the Personal Income Tax Act, the Petroleum Profit Tax Act, the Stamp Duties Act, Value Added Tax Act, Corrupt Practices and other related Offences Act, Tertiary Education Trust Fund (Establishment) Act, Public Procurement Act, and the Ministry of Finance (Incorporated) Act.
Capital Gains Tax Act
- Section 3(a) of the Act has been amended to include digital assets as a form of property, and a qualifying asset that is subject to Capital Gains Tax (CGT). This implies that gains arising from the disposal of digital assets are now subject to CGT at the rate of 10%.
- New section 5 allows losses accruing to any person when computing chargeable gain on the disposal of an asset to be deducted from gains accruing to that person when disposing assets of the same class. However, where the losses exceed the chargeable gain, the taxpayer can carry forward such losses for deduction from the chargeable gain that may arise from the disposal of the same class of assets in the future, for a maximum period of five years immediately succeeding the year the loss was incurred.
- Based on the amendment to S 31(6), roll-over reliefs are to be granted on the disposition of shares and stock. However, for the roll-over reliefs to apply, the proceeds from the disposal must be reinvested within the same year of assessment in the acquisition of shares of a Nigerian company.
Companies Income Tax Act
- New subsection (4A) of S 14 requires Companies that are engaged in shipping and air transportation to file tax returns without providing a separate financial statement for their Nigerian operations. Such companies are required to submit detailed gross revenue statement of their Nigerian operations, showing the amount of total sums earned. The statement is required to be certified by a director of the company, the company’s external auditor, and supported with all invoices that were issued to relevant customers.
- New subsection 5 of S 14 requires Agencies regulating the shipping and air transportation sectors to mandate companies operating in these sectors, and taxable in Nigeria, to provide evidence of income tax filing for the preceding year and tax clearance certificates as a prerequisite for these companies to continue operations in Nigeria or obtain relevant approvals and permits.
- FA23 repealed S 32 on Reconstruction Investment Allowance. However, any expenditure on plant and equipment on or before the effective date of the Act will continue to enjoy the allowance, until the allowance is fully utilized. The Act also repealed S 34 on Rural Investment Allowance but allows any company that has incurred qualifying expenditure on or before the effective date of 1 May 2023 to continue to enjoy the allowance until it is fully utilized.
- FA23 also repealed S 37 on the tax exemption that was applicable on 25% of income received in convertible currencies derived from tourists by a hotel, where such income is put in a reserved fund to be used within five years for the building or expansion of the hotels, conference centers and new facilities for the purpose of tourist development. However, a company that has set aside reserved funds will continue to enjoy the exemption until the funds are fully utilized or the five-year limit elapses.
- Paragraph 18 (3 & 7) of the 2nd schedule has been deleted to align with S 32.
- Paragraph 24 (7) of the 2nd schedule has been redefined such that Companies engaged in upstream and midstream petroleum operations are excluded from the sixty-six and two thirds’ percent (662/3) of assessable profits restriction placed on deductible capital allowances in any year of assessment. Consequently, these companies can claim capital allowance above the maximum allowable percentage.
- For the purpose of capital allowances, the 2nd schedule has been amended such that the value of any asset on which capital allowance is to be claimed shall be reduced by the investment allowance claimable.
Customs and Excise Tariffs Etc. (Consolidated) Act
- New subsection 4 of S 13 imposes a levy of 0.5% on all eligible goods imported into Nigeria from outside Africa to finance capital contributions, subscriptions and other financial obligations to the African Union, African Development Bank, African Export-Import Bank, ECOWAS Bank for Investment and Development, Islamic Development Bank, United Nations, and other multilateral institutions as may be designated by regulation issued by the Minister responsible for Finance.
- New subsection 2 of S 21 expands the scope of services liable to excise duties, to all services, including telecommunication services provided in Nigeria.
- New subsection 3 of S 22 clarifies that the Minister of Finance heads and supervises the Tariff Review Board that is responsible for the review of customs and excise tariff under the Customs and Excise Tariffs Etc. (Consolidated) Act.
Personal Income Tax Act
- New subsection 3 of S 33 provides for any premium paid by an individual to an insurance company in respect of his life or the life of his spouse; or contract for a deferred annuity on the individual’s life or life of spouse, is an allowable deduction. However, any portion of the deferred annuity that is withdrawn before the end of five years from the date that the premium is paid, will be taxable at the point of withdrawal.
Petroleum Profit Tax Act
- Section 10 was amended to allow as tax deductible in the computation of adjusted profit, an amount contributed to an approved fund, scheme, or arrangement for the purpose of decommissioning and abandonment. The remainder of the fund set aside after carrying out the decommissioning and abandonment will be subject to tax.
- New section 10 (3 & 4) requires every newly incorporated petroleum operators that are yet to commence the sales or disposal of chargeable oil to file their tax returns within 18 months from the date of incorporation. Also, existing operators are required to file their tax returns within 5 months after the accounting year end. Consequently, failure to comply with the filing requirements will attract a Late Returns Penalty (LRP) of ₦10,000,000 on the first day of default and ₦2,000,000 for each subsequent day of failure to file tax returns. The essence of this amendment is to align with the provisions of the Petroleum Industry Act.
- New section 52 stipulates a penalty of ₦10,000,000 in the first instance for failure to comply with the provisions of the Act or regulations made under the Act for which no specific penalty was stated and a further penalty of ₦2,000,000 for each subsequent day the failure continues. In addition, a sum of ₦20,000,000 or other sums as may be prescribed by the Minister of Finance or 6 months imprisonment, or both would be imposed on conviction of the offence.
- New section 52 imposes a penalty of the higher of ₦15,000,000 and 1% of the amount of tax which had been undercharged for offences relating to making incorrect accounts or providing misleading information in relation to a tax liability.
Stamp Duties Act
- New subsection 4 of S 89A included the local government as one of the recipients of the revenue accruing from the collection of Electronic Money Transfer Levy (EMTL). Thus, reviewing the revenue allocation formula as follow:
- 15% to the Federal Government and Federal Capital Territory, Abuja.
- 50% to the State Governments and
- 35% to the Local Governments.
Value Added Tax Act
- Amendment to section 7 empowers the Federal Inland Revenue Service (FIRS) to disregard any fictitious disposition by the business entities or direct that adjustment be made in that regard. However, the taxpayer has every right to appeal such adjustments or disposition made by FIRS.
- Agents appointed by the Service to collect or withhold VAT in accordance with section 14(3) of the Value Added Tax Act, are to remit on or before the 14th day of the following month, the tax withheld or collected, to the FIRS, in the currency of the transaction.
- New subsection 3 of S 16 requires that the VAT on items purchased by Nigerian importers through the online electronic or digital platform operated by a non-resident supplier must now be charged and collected by such supplier. However, such supplier must have been appointed by the Service as VAT collection agent. To avoid being subjected to an additional VAT charge, the importer is then required to show the customs authority documentation proving that it was charged VAT by the supplier.
- Section 46 was amended with respect to the definition of building to mean ‘’any structure permanently affixed to land for all or most of the useful life of that structure and shall include, without limiting the generality of the foregoing, a house, garage, dwelling apartment, hospital and institutional building, factory, warehouse, theatre, cinema, store, mill building and similarly fixed structure affording protection and shelter, but excludes any fixtures or structures that can easily be removed from such land such as radio and television masts, transmission lines, cell towers, vehicles, mobile homes, caravans, and trailers’’.
Tertiary Education Trust Fund (Establishment etc.) Act
- Section 1(2) of the Act was amended to increase the tertiary education tax rate from 2.5% to 3%.
Corrupt Practices & Other Related Offences Act
- New subsection 4 of S 22 requires public officers in awarding or signing contracts, to obtain prior administrative approvals, and make budget provision and procurement plans. Where any public officer fails to comply with this requirement, such officer shall be guilty of an offence and liable to three years imprisonment or a fine of ten million Naira on conviction.
Public Procurement Act (PPA)
- Section 16 (1b) amendment requires procurement plans to be duly approved before contracts are awarded. In addition, procurement plans must be in conformity with the guidance issued by the Minister of Finance.
Ministry of Finance (Incorporated) Act (MOFA)
- Amendments to S 3 of the Act empowers the President on the recommendation of the Minister of Finance, to appoint a Governing Council, an Executive Board and a management team required for the good governance, strategic direction, and administration of the Ministry of Finance Incorporated.
The purpose of the Finance Act is to amend existing tax and other related laws in Nigeria, to align these laws with the nation's current economic realities and fiscal expectations. Though the Federal Government has done well in the periodic passage of the Finance Act from 2019, particularly in amending some obsolete provisions in our tax laws, reforming the tax system, and keeping abreast of the impact of digitalization, it is important to note that more is expected in our drive as a nation to conform with global best practices in all ramifications.
The Finance Act 2023 which was signed into law on 28 May 2023 with a retroactive implementation date of 1 May 2023 is a subject of discussion among relevant stakeholders. Some of the concerns that readily come to mind are:
- whether the taxpayers with accounting year-ends prior to the effective date and who are yet to file their annual corporate tax returns are expected to comply with the amendments introduced by the Act.
- If the response to the above is in the affirmative, how would the corporate tax returns already filed be adjusted to reflect current amendments.
- how would the revised tertiary education tax rate of 3% be determined for a taxpayer whose accounting period (1 January 2023 to 31 December 2023) runs between the effective date of 1 May 2023 as provided by the Act.
- whether the amendments therein will take effect from 2023, 2024 or 2025 year of assessment tax returns.
- the definition of “Digital Assets” as there is a myriad of assets that might fall under the ambit of digital assets.
It is important to note that the Finance Act 2023 equally provided that a date other than 1 May 2023 may be indicated by the National Assembly or the President of the Federal Republic of Nigeria by assent or order. Based on this, one would expect that the date of implementation may be revisited.
As a way of providing clarifications to some of the concerns that may be raised by stakeholders, the Federal Inland Revenue Service (the Service) in a public notice recently issued on the enactment of the Finance Act 2023 states that the new tertiary education tax (TET) rate of 3% shall take effect in respect of accounting period ending on or after 1 July 2023. Inasmuch as the Service has given a clear definition for the implementation date in relation to VAT compliance, the interpretation given as to the date of commencement for corporate tax purposes remains a subject of discourse for all.
On digital assets, clarity is needed as regulated financial institutions are still prohibited from facilitating the trade or exchange of cryptocurrencies in Nigeria. However, we hope the FIRS will clarify further on some of the concerns bordering on the amendments in the Act in relation to tax matters to prevent avoidable controversies that may arise due to different interpretations from taxpayers and the FIRS.
In the end, we understand the need to increase the nation’s non-oil revenue by increasing taxes and removing incentives that do not reflect the current economic reality of the nation. However, we should also bear in mind the competing needs to promote ease of doing business in Nigeria, provide a favorable climate for both local and international investors in Nigeria, and promote small and medium enterprises operating in Nigeria.