February 4, 2020
There is a general consensus that the Finance Act 2019 (the Act), is a welcome legislation which addresses some of the major issues identified in our tax laws over the years. It also returns the tradition of accompanying the annual Appropriation Act, with a Finance Act that provides a platform for meeting revenue targets in the Appropriation Act. Commentaries have however, focused on only the changes to tax laws and how they impact the tax system, taxpayers and the tax authorities.
The broader issue of the impact of the Act on Nigeria’s investment environment and the Ease of Doing Business has received little attention and analysis. However, this issue should also be on the front burner. In 2019, the World Bank ranked Nigeria 131st out of 190 Countries on its ease of doing business index and 159th on the specific area of ease of paying taxes. These are important indices that influence growth and development of national economies and deliberate steps need to be taken to continuously improve Nigeria’s ranking annually.
We have set out below an overview of efforts made so far by Government to improve the ease of doing business and a brief analysis of some provisions of the Finance Act and the potential impact on the ease of doing business in Nigeria.
Ease of Doing Business in Nigeria
In July 2016, President Muhammadu Buhari established the Presidential Enabling Business Environment Council (PEBEC) to implement reforms in the Nigerian business environment in order to make the country a progressively easier place to establish and conduct business operations.
Within this period, the PEBEC has been credited with reforms that led to the improvement in Nigeria’s ease of doing business ranking from its 169th position in 2016 to the current 131st position on the World Bank Ease of Business Index. Challenges however remain especially with respect to the ease of paying taxes where Nigeria currently ranks 159 out of 190 countries which is actually a decline from its 157th position in 2018.
This has been attributed to issues such as multiple taxation, cumbersome tax compliance processes, non-automation of core tax processes and obsolete provisions in our tax laws.
It is expected, that some of these issues will be addressed by the implementation of the Finance Act and that this will improve Nigeria’s tax system and its impact on businesses. We have discussed in brief below some of the provisions of the Act and their potential impact on the ease of doing business.
Finance Act, 2019: Relevant Provisions related to Ease of Doing Business
Under the old commencement and cessation rules, new and exiting businesses in Nigeria faced the risk of paying income tax twice or more on the same income, during the first few years of operation for new businesses and for the last two years for a business being wound up. Under the amendments introduced by the Finance Act, new businesses will now be taxed on their actual accounting periods during commencement and the same applies to companies being wound up during their cessation periods. This will ultimately reduce the tax exposure of the companies and allow shareholders benefit from profits earned during commencement and cessation.
Another major issue resolved by the Finance Act, is the taxation of dividends distributed under Section 19 of the Companies Income Tax Act (CITA), when such companies are not in a taxable position for the year of distribution, even where the profits from which the dividends are distributed have been previously taxed. This has been a major sticking point for local and foreign investors, but with the amendment of the Section by the Finance Act, dividends from retained earnings, franked investment income, pioneer profits, exempt profits and distributions from Real Estate Investment companies are now all exempted from what was previously termed “Excess Dividend Tax”. This is a major relief to shareholders as it eliminates the double taxation occasioned by the old provisions and now incentivizes distribution of dividends from retained earnings.