Finance Act 2020; A Review of the New Minimum Tax Regime

It is no longer news that President Muhammadu Buhari signed the Finance Act 2020 (FA20) into law on 31 December 2020 alongside the 2021 National Budget. The FA20 brought about several amendments to 14 Nigerian tax and fiscal legislations in fulfillment of the Buhari administration’s promise of ongoing tax and fiscal reforms.

A notable amendment to the Companies Income Tax Act (CITA) is the amendment of Section 33 which provides for the minimum tax regime applicable to companies in Nigeria. In this article, we will be examining the minimum tax regime prior to the enactment of the Finance Act 2019 (FA19) and FA20 vis-àvis the new minimum tax regime introduced by FA19 and further modified by FA20.

Minimum Tax Regime (Pre-Finance Act 2019 and 2020)

Minimum tax is applicable to companies with no taxable profit or tax payable lower than minimum tax computed. However, prior to the introduction of FA19 and FA20, companies engaged in agricultural business, companies in the first four calendar years of business, and companies with imported equity of 25% and above, were exempt from minimum tax based on Section 33 of CITA. Further, various parameters were considered to determine the minimum tax payable by companies amongst which are gross profit, net assets, paid-up capital and the turnover of the company. This approach was cumbersome and time consuming. It also generated various controversies as companies paid tax from their equity (paid-up capital) and net assets even when the business was running at a loss.

Another controversy was the exemption granted to companies with imported equity of 25% and above, as it did not allow for a level playground when compared with companies with locally sourced equity. Although, the original intention was to attract foreign direct investment into the country, it is popular opinion that the exemption had outlived its purpose.

The Modification under the Finance Act 2019

In order to address the controversies of the old minimum tax regime, the FA19 introduced amendments to Section 33 of CITA. The FA19 introduced a new basis for computing minimum tax, moving away from a combination of equity, net assets and revenue-based approach to a strictly revenue based approach. A flat rate of 0.5% of gross turnover less franked investment income was introduced as the basis for computing minimum tax.

The amendment also deleted the exemptions granted to companies with imported equity of 25% and above and introduced minimum tax exemption for small companies with a gross turnover of less than N25,000,000. Although, these amendments seem to have addressed the controversies under the previous legislation, it however introduced a new challenge. Should a company pay income tax from its turnover where no profit was made during the year? Would this not amount to paying tax from equity and reserves as was the case under the previous minimum tax regime? Would this not negate one of the canons of taxation, equity? Should revenue and not gross profit be the basis for minimum tax computation? These questions beg for answers. 

Considerations under the Finance Act 2020

The outbreak of Covid-19 pandemic during the year 2020 resulted in global production shutdown and supply chain disruptions. This had an adverse impact on various businesses in different sectors of the economy. Consequently, governments all over the world offered palliatives in the form of tax breaks and incentives to taxpayers at various levels.

In a bid to grant similar palliatives to taxpayers, the Federal Government of Nigeria (FGN) via the FA20 introduced a 50% reduction in minimum tax rate from 0.5% of gross turnover less franked investment income to 0.25%. The reduced minimum tax rate is however applicable for the Years of Assessment (YOA) due from 1 January 2020 to 31 December 2021.

This is indeed a laudable initiative by the FGN aimed at cushioning the impact of the Covid19 pandemic on businesses. The only challenge with this initiative is the fact that the tax returns due for submission from 1 January 2020 to 31 December 2020 (the effective date of the FA20) are expected to have been filed with the Federal Inland Revenue Service (FIRS) for companies with financial years ending between 1 July 2019 to 30 June 2020. It remains unclear how these companies are expected to take advantage of this incentive where their tax returns are already filed and the minimum tax paid by the company where applicable. Are the affected companies required to apply for a tax refund in order to recoup the amounts already paid to the FIRS? Are the affected companies permitted to utilize the tax amounts paid as tax credit against future tax liabilities? Can these amounts be applied against future liabilities in respect of any tax type? These questions also beg for answers as the FA20 did not provide the framework for the recovery of the minimum tax already remitted under this circumstance.


It is important to emphasize that the reduction of minimum tax rate from 0.5% to 0.25% is only applicable for two years of assessment. While noting the effective time-limiting window for enjoying the incentive, it is expedient to applaud the FG for the successive amendments of the various tax laws in Nigeria. It is also important for the FG to provide possible answers to the many questions that have been raised with respect to these amendments.

In the coming months, we look forward to the issuance of an Executive Order to help solve these puzzles and close the missing links created by the omission of critical directives in respect of the incentive granted by the FG.


Finance Act 2020; A Review of the New Minimum Tax Regime
Finance Act 2020; A Review of the New Minimum Tax Regime