Taxation

By Orire Agbaje

New year! New taxes! One of the taxes introduced by the Finance Act is the Sugar tax. This means that Nigeria will now impose tax on your favorite soda drinks – maybe you should consider starting a #NoSodaChallenge🚫🥤.

The Minister of Finance, Budget, and National Planning, Zainab Ahmed, asserted that the rationale behind the Sugar Tax is to generate revenue for the FG’s budget and tackle the growing obesity and diabetes menace in Nigeria.

Do you know other countries that have imposed such taxes? Over 40 countries across the globe have implemented some form of sugar levy or tax. The first sugar-related tax was implemented in Hungary in 2011, closely followed by France in 2012.

Let’s talk about the Sugar tax in Nigeria! Does the Ministry of Finance love you so much that they want you to reduce your sugar intake, or do they want you to fund Nigeria’s budget when you buy that cold Pepsi?

Health or Revenue Benefits?

A sugar tax is a levy imposed on goods with high sugar content to reduce added sugar consumption; it is known as The Soft Drinks Industry Levy. It is often introduced as part of a wider strategy to tackle the rise in public health problems such as childhood obesity, diabetes, and tooth decay. A recent meta-analysis reported that approximately 5.8 percent – about 6 million adults in Nigeria live with Diabetes.

This tax is needed to be accompanied by a political leadership scheme that prioritises health above the profit that will be accrued; it holds the benefit of improving the diets of children and preventing obesity. However, there is also a disadvantage attached: the tax is regressive – it makes poorer people pay a larger share of their limited income than the upper class.

The sugar tax in Nigeria is an excise duty of N10($0.02) per litre imposed on all non-alcoholic carbonated and sweetened beverages. This new sugar tax is introduced to raise excise duties and revenue for health-related issues and other critical expenditures, aligning with the 2022 budget priorities. The rationale behind the imposition in Nigeria is to generate more revenue – particularly for the health sector and tackle the obesity and diabetes menace in Nigeria. It is noteworthy that the sugar tax has been in consideration since the beginning of 2021 but was finally signed as a provision in the newly enacted Finance Act for the 2022 fiscal year.

Many believe that the Government did not consider the situation in Nigeria; a bottle of Coke/Pepsi presently is sold at N150. No one knows how companies will react to this law per price and production level. Others argue – including the Nigerian Customs Service that it will reduce the percentage of health-related effects of sugar in Nigeria and increase the government’s revenue intake. The National Union of Food, Beverage, and Tobacco Employees asserts that the imposition of excise duty on these companies would lead to no choice but to lay off workers. It is to be further pointed out that companies would subsequently rather reduce production lines rather than expand.

It is projected that the industry and sectors affected by the Sugar Tax will lose N1.9 trillion in sales revenue due to the tax’s imposition and adverse effects on jobs and supply chain businesses.

The taxation of sugary drinks is an effective intervention to reduce the consumption of sugar and sugar-related health ailments. Still, with the current situation of Nigeria, it is at the cost of the manufacturing company. Manufacturing companies will be affected, as well as the citizens, because the purchasing power is low. The fiscal policies implemented and the additional taxes imposed by the government are good and valid, but the economic realities in Nigeria are not often considered, which makes such policies/laws badly designed. The imposition of additional taxes in Nigeria is often at the cost of more economic pains, with more than 40 percent of Nigerians living below the poverty line.

Conclusion

As early as the late 18^th century, the pioneering political economist and social philosopher Adam Smith, deemed sugar, rum, and tobacco to be commodities that are nowhere necessaries of life and are becoming objects of almost universal consumption, making them extremely proper subjects of taxation.

Taxbulary

1. Excise Tax – A tax levied on a particular product at the point of manufacture. It can either be: Specific: based on the quantity i.e. volume/ sugar content percent Ad valorem: it is calculated based on the percentage of wholesale or retail price.
2. Value-added Tax – a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to point of sales.

Written By Olajesu Lordsfavour,
400Level Law Student, University of Ibadan.

Voluntary non-compliance in tax payment has grown to become a stain that the Federal Government has been making efforts over the years to remove. Sadly, despite the several strategies, credits, incentives including sensitization programs,  many taxpayers are still non-compliant.

In light of this challenge which tax officials are trying to tackle, there is also on one hand, the clamor for Nigeria to meet up with her other African counterparts in the emerging digitization of tax process. The Nigerian Presidential Enabling Business Environment Council suggested various solutions that would simplify and automate the tax administration process. In addition to these advantages, The West African Tax Partner and Lead, Deloitte, Mr Tomi Olugbenro posited that digitization will go a long way in addressing low tax penetration and increase fiscal revenues while supporting economic stability in Nigeria. The Finance Act also lends credence to this submission by making provisions for the use of technology in improving tax administration.

While this sounds like a welcome development and a step in the right direction towards the ease of tax payments and administration, it is still important to consider the efficacy of digitization in tandem with the reality of the Nigerian environment.

Some of the digitization methods introduced include; e-registration of new taxpayers, e-payment of federal taxes and stamp duties, e-fling of returns, e-receipting and electronic issue of tax clearance certificate needed. As pleasing as it is to the ears, bringing it to life will pose some challenges.

The first challenge is the level of education in this part of the world. The Adult Literacy in Nigeria was pegged at 69.1% by The United Nations Development Program (UNDP). 60 million Nigerians can also not read and write according to the National Commission for Mass Literacy, Adult and non-formal education. This fact goes deep into the root of the problem Nigeria has always faced, long before the introduction of digitization. Many Nigerians are uneducated and the difficulty of communicating the importance of paying their taxes led us to the state of voluntary non-compliance. Digitization therefore presents more difficulty in ensuring that majority of the population pay their taxes. First is the difficulty in the access to digital platforms. Second is the uncertainty of comprehending the payment process and the e-system language. Except forms are printed on paper forms and made comprehensive in Nigerian native platforms, using digital technology will be typical of pouring water in a basket. 

Furthermore, there is another challenge that stems from both uneducated and literate people. It is the distrust several citizens have with technology. Nigerians have become unreceptive to divulging sensitive financial information which can be used against them by fraud or cyber criminals.

Moreover, it is important to note that while the government advocates for digitization, the country is still way behind in the race for technological development. There is still no constant electricity supply, neither is there enough penetration of computers.

Regardless, these challenges are surmountable as long as the right steps are taken. Before fully delving into the digital world, administrators have to pay more attention to the Nigerian tax environment. It is after this that proper sensitization methods can then be strategized to prepare citizens for a change.

References:

Abimbola AbdulRahman Lekki (2021): Digitizing Taxation in Nigeria: Challenges and Recommendations.

Pro share ng: Digitization will help to address low tax penetration in Nigeria

We did it people! Finally, we have an answer to Nigeria’s pesky revenue problem and who would have thought that the answer would be something that has always been with us. Taxation is not a new concept to the Nigerian reality and it just might be the cure to all our budget deficit issues and our borrow borrow that doesn’t seem to make us shine.

The good thing about taxation is that it comes in different flavors depending on your taste: there is a direct tax for people that are straightforward and do not hide their ‘agenda’ and an indirect tax for foxy individuals that like to play mind games. Both direct tax and indirect tax have sub-divisions, making taxation a fully loaded weapon.
It should be noted that when something is termed ‘the new gold’ it generally suggests that the item, hopefully, can generate wealth and improve the condition of the owner.

The term also brings to mind the gold rush that happened in the early days of the United States of America, where people left their homes, got loans and traveled to various promised gold sites with the aim of making it big. Many gold dreams were shattered as the reality did not match what most dreamed of, a situation that can be said to fit the last thing that was termed ‘the new gold’ in Nigeria.

In the year 1956, oil was found in Oloibiri, Nigeria and so was born the country’s ‘new gold’ or ‘the new black gold’ as it was called. Oil promised to change the landscape of the country for the better. Money from oil was fast and plenty. There was now no need for the government to stress themselves on sectors like agriculture or manufacturing when the government could easily give out licenses to oil companies and boom money starts coming in. Traditional sectors like agriculture could not keep up.

Nigeria, like the prospectors of the US gold rush started dreaming big as this newly found wealth had the potential to change everything- or so we hoped. Hooked on money from oil, the country forgot that the value of oil would not always be constant and that it would be better to rely on a more sustainable means of funding. Somewhere along the line, corruption, wastage and environmental destruction were used to replace the promise of economic growth and development that this new found wealth promised and so, ‘the new gold’ turned out not to be a blessing but a source of distraction to the goals of the country.

Nigerian’s relationship with oil should therefore place caution on any item being called ‘the new gold’ let alone a complex item as taxation. Taxation methods should therefore be properly studied and put in place with Nigeria’s peculiarities in mind and not rushed into because of the ‘the new gold’ promise it appears to hold.

Also, given that Nigeria would not be the first country to aim to rely on taxation as its main source of revenue, it would do the country some good if it could copy tax strategies of other countries and voila mission accomplished. Sadly, copying without consideration of the local landscape is a recipe for disaster leading to a worse situation than before. Nigeria cannot just copy its way into achieving its taxation goals but most take into proper consideration the uniqueness of the Nigerian situation.

The promise of taxation is exciting but can only work if the social contract of the nation is reworked and the citizens are convinced into believing that the cycle of corruption that was fueled by money from oil will now not be fueled from taxation. This can only happen when there is accountability, responsiveness and performance on the part of the government as the people would want to know and see what exactly their money is being used for. Policy makers would also have to commit themselves to tax policies that would not make the poor poorer but will be fair, transparent and based on the taxpayers relative ability to pay.

The hope is that with a fully renewed social contract the people would have faith in the government and then taxation can truly be ‘the new gold’. With proper implementation taxation can break free from the shackles of past ‘new gold’s’ and become the bedrock of development in the country.

Over the years, Company Income Tax has contributed greatly to the overall revenue generated by the Federal Inland Revenue Services (FIRS). A recent study signified that the CIT contributed about 283 billion to the 2020 Q1 revenue generation by the FIRS. Although the focus of the FIRS is shifting to other means of taxation such as the stamp duties, but the importance of Company Income Tax in  revenue generation can not be overlooked.

Company Income Tax is therefore one of the categories of tax provided for by the Nigerian Tax Laws by virtue of the Company Income Tax Act. Company Income tax also known as ‘corporate tax’ applies both to local companies as well as foreign  companies operating in Nigeria. 

Company income tax as it relates to foreign companies is that category of tax that is imposed on any income or profit derived from Nigeria by a foreign based company carrying out businesses in Nigeria. Such foreign companies are generally referred to  as Non resident companies and can be defined as companies established under any law in force in any territory outside Nigeria. 

Further more, It is clear that a resident company (company incorporated in Nigeria)is deemed liable to tax on it’s worldwide income, however this is not the case with non  resident companies (NRC) as they are only liable to tax on their Nigerian sourced income that is, any income derived or sourced from Nigeria.  

A foreign company can either derive active income or passive income in Nigeria.      In scenarios where a foreign company derives active income in Nigeria it would be mandated to register and file tax returns just as Nigerian companies would do with the Federal Inland Revenue Service.  But where a foreign company earns a passive income from Nigeria it need not go through the processes and such taxes would be deducted by way of withholding tax. 

Prior to the finance Act, the question as to whether a non resident company would be deemed taxable in Nigeria largely depended on the physical presence of such  company in Nigeria. According to the ‘then’ Section 13 of the CITA  a non resident company’s income can only be deemed to be derived from Nigeria if the NRC had any of the following : 

(a) A fixed base in Nigeria to the extent that the profits are attributed to the fixed  base.

(b) A Nigerian dependents agent or company empowered to conclude business or contract on it.

(c) execution of a project in Nigeria or a related party transaction that was not at arm’s length. 

So from the forgoing it is crystal clear that prior to the Finance Act some sort of physical presence was required for a foreign company to be subjected to CIT in Nigeria.  So by virtue of that any profits derived remotely in Nigeria either through online activities and any related digital activities would not be subject to CIT.  

Significant Economic Presence. 

But following the introduction of the Finance Act 2019 which signifies a new tax  regime. 

Taxation of non resident companies became not only limited to physical presence or having a fixed base in Nigeria but also to significant economic presence,  which by implication means that non resident companies would now become taxable on income remotely derived from Nigeria.  

In this regard the finance Act seeks to establish a nexus for taxing income earned by foreign companies for technical, management or professional services remotely provided to a person resident in Nigeria. And also for digital operations such as advertising,movie streaming and e-commerce operations rendered  to a person resident in Nigeria. The implication of this amendment is that affected NRCs  in       e-commerce, filming, computing, ride-hailing, media, etc., who previously had no fixed base in Nigeria under the conventional rules, and no Nigerian tax obligations, will be liable to Nigerian income tax provided they meet the SEP threshold. 

Also, such NRCs may be required to register for taxes and file income tax returns in Nigeria in line with Section 55 of CITA.So companies like spotify, Netflix and Alibaba might be caught in the web of paying CITA in Nigeria. 

Although the finance act does not expressly define the concept of significant  economic presence but empowers the Minister for finance to define such term.  

Recently, the Minister for Finance Budget and National Planning,in the person of   Mrs Zainab Ahmed defined this term by issuing an order to clarify the meaning of Significant Economic Presence. Although it is worthy to note that the order was issued on the 29th of May 2019 but as a commencement date of 3rd of February 2020 which by implication would would apply to all businesses carried out within this time frame.   

And according to the order which gives clarification to the concept of Significant Economic Presence, thus stated that any foreign company  involved in any digital related operations in Nigeria would be deemed to have Significant Economic Presence if it falls under the following category: 

(a) If the foreign company derives gross turnover or income of more than N25 million or its equivalent in any currency, from streaming or downloading services of digital contents;transmission of data collected about Nigerian users generated from users’ digital activity;provision of goods or services other than technical, management, consultancy or professional services; or provision of intermediate services through digital platform that links suppliers and customers in Nigeria; 

(b) If the foreign company uses a Nigerian domain name (“.ng”) or registers a website address in Nigeria; 

(c) If the foreign company has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria, including reflecting prices, billing and payment options in Nigerian currency. 

Company Income Tax Rate for Foreign Companies.

Foreign Companies are however exposed to 30% company income tax to the extent that they derive at least 25M about $65,000 in a year from Nigeria, which is the threshold from which they can be taxed. So if Caramile  company does not make up to 25M in a year it would not be subject to CIT. 

Also double taxation relief would definitely apply if a non resident company resides  in a jurisdiction where Nigeria has DTA with. Currently, Nigeria has DTA with about 14 countries 

Compliance And Implementation.

It  is very much not clear as to how the order would be implemented or as to how the Federal Inland Revenue Service would ensure compliance but it still very clear that  passive income earned in Nigeria would be subjected to withholding tax deducted from them at source. 

In conclusion, while the introduction of the concept of Significant Economic Presence for the taxation of foreign companies might be a good news to the treasury, there are however doubts as to how it is going to be implemented because too many foreign companies are covered so there may be capacity issues on the part of the revenue authorities. However the smart approach might be to rely on country by country report by the revenue authorities of other foreign countries. 

All over the world, things have been quite different from ‘the norm’, for a while now. No thanks to the outbreak of the COVID-19 pandemic. Nigeria, just like other countries of the world has had her setbacks. To be more accurate, is still in the middle of her setbacks. On of the most alarming of these setbacks is the state of the nation’s economy. According to the Nigerian Bureau of Statistics, Nigeria’s inflation rate rose further in June 2020 to 12.56%. This recent inflation simply means that, the purchasing power of consumers (the citizens) has further worsened, and their ability to afford the same quantity of goods and services has reduced significantly.  

 Thus, it is a relief to see that some State Governments across the country have taken the initiative to relieve tax payers of their tax burden, a little. Just recently, Dr Okezie Ikpeazu, Governor of Abia State approved tax relief to tax payers in the State. The sectors affected by this relief include; PAYE, PIT, Capital Gains Tax, Property Tax, Lands, Tax Clearance (according to Daily Post). Other states such as Gombe State, Ebonyi State and Kebbi State have made the decision to grant tax concessions, tax reliefs and tax waivers respectively to tax payers.  

While the attempts of several state governments to reduce tax burden are being applauded and welcomed by all, the FIRS has decided to look the other way. On the 21st of July 2020, the FIRS through a statement by the Director, Communications and Liaison Department of the Agency, Abdullahi Ahmed, announced a compulsory payment of 6% stamp duty on tenancy and lease agreements. These stamp duties are to be paid by tenants, and to be remitted to the FIRS by property owners. 

What exactly is this stamp duty ‘matter’ all about? 

According to Investopedia, stamp duty is the tax government place on legal documents, usually in the transfer of assets or property. Under the Stamp Duty Act, stamp duty is a payable on any agreement executed in Nigeria or relating, whatsoever, to any property situated in or to any matter or thing done in Nigeria. 

 Below is an example to explain the concept of the new stamp duty payment: 

You want to rent a house that goes for #400,000 per annum. Ceteris paribus, you’ll have to pay; Rent (#400,000), 10% Agency Fee (#40,000), Legal 10% of the rent (#40,000) and an additional Stamp Duty of 6% of the rent (#24,000). 

That’s a sum total of #504,000. Sounds unpleasing to the ears, right? This decision of the FIRS has come under great scrutiny. 

There are several questions on the minds of Nigerians. Personally, i have my questions.  However, I’ll ask just three of those questions.

1). Is this the best period to introduce this initiative (the payment of stamp duties)?

Nigerians at large are still lamenting about the state of the nation’s economy. Many people, especially private workers have been hit by the adverse effects of the pandemic. A period when there is a nationwide inflation and the purchasing power of citizens has been affected. A period where people are finding it quite difficult to make ends meet, and many are now without jobs. So, the question still stands, is it right to enforce the payment of the 6% stamp duty at a time like this? 

2). What measures have been/are being put in place to ensure that owners of property will dutifully remit the stamp duties to the FIRS? 

 One issue that has plagued the taxation system of Nigeria over time is the issue of Accountability and Transparency. Now that the FIRS has stated that it is the duty of the property owners to remit the stamp duties, how will they (property owners) be held accountable by the FIRS? What system has been put in place to ensure that property owners will remit the stamp duties in full to the appropriate authorities? How accountable will the property owners be to the FIRS?

3). In a situation where property owners fail to remit the stamp duties to the government, will the tenants be unaffected from whatsoever inconvenience may occur if the FIRS decides to take actions? 

Won’t there be a blame game between tenants and property owners upon the inability of the property owners to perform their duty of fully remitting the stamp duty to the FIRS?