March 3, 2020
on 13 of January 2020, the President signed the Finance Act 2019 (‘the Act”) into law. The implementation of the Act commenced in February 2020, as announced by the Federal Ministry of Finance. The Act amended seven existing tax laws but most of the changes where in the Companies’ Income Tax Act (CITA) and Value Added Tax Act (VATA). The new changes have generated several reactions from taxpayers and other stakeholders in various industries. This article examines the impact of these changes on the manufacturing industry and how the affected companies can seek to drive compliance going forward.
What has changed – Direct Taxes
Introduction of turnover threshold
In order to improve the ease of doing business and stimulate economic growth, the Act introduced a progressive tax system. Under the new tax regime, a general corporate tax exemption is allowed for small companies with turnover of less than ₦25 million in a year, while medium sized companies with a turnover of between ₦25 million and ₦100 million are to pay CIT at a lower rate of 20%. Large companies with turnover more than ₦100 million will continue to pay CIT at 30%.
The above amendment introduced by the Act will help improve profitability for small and medium scale manufacturing companies as the tax savings resulting from the reduced tax rate can be ploughed back into the business for expansion.
Elimination of risk of excess dividend tax
The Finance Act amended the Excess Dividend Tax (EDT) provision in Section 19 of the CITA. Specifically, Section 19 of the CIT provides for the imposition of CIT on dividends paid by a company, where the company has no tax payable or the dividends paid exceeds the CIT payable. The interpretation of this Section has led to several disputes between taxpayers and the tax authorities.
While most taxpayers were of the view that the Section should not cover dividends declared from retained earnings or franked investment income which has already suffered tax, the tax authorities took a more aggressive position that the source of the dividends declared is irrelevant for this purpose. The FIRS’ position was upheld by the Judgment of the Federal High Court in Oando PLC v FIRS (Appeal No: FHC/L/6A/2014) and by the Tax Appeal Tribunal in Actis Africa (Nigeria) Limited v FIRS (Appeal No: TAT/LZ/ EDT/014/2017.
Many manufacturing companies were caught in this web as dividends declared from prior year profits (which were already taxed) and exempted profits were potentially exposed to additional income taxes under Section 19 as interpreted by the FIRS and the Courts. This had an adverse economic impact on investments in the sector.