On Monday, January 13, 2020, President Muhammadu Buhari signed and thereby morphed the erstwhile Finance Bill passed by the National Assembly on December 11, 2019, into the Finance Act, 2019 (“the Act”). The Act, according to the Minister of Finance, has strategic objectives that recognise the crucial relationship between fiscal policy, the regulatory environment and the strong capital market we all seek to effect in Nigeria.
A perusal of the Act reveals that indeed, it contains watershed provisions that alter various tax provisions within the Nigerian tax code. The strategic objectives of the Act include Generation of more revenue for the Government, Introduction of tax incentives for investments in infrastructure and capital markets; promotion of fiscal equity by addressing the issue of regressive taxation; Reformation of domestic tax laws to align with global best practice; and Support for Micro, Small and Medium-sized businesses in line with the Government’s Ease of Doing Business objectives.
The Finance Act, 2020 has introduced landmark changes in the Nigerian tax legislation, such as the Companies Income Tax Act, The Capital Gains Tax Act, The Personal Income Tax Act, and the Petroleum Profit Tax Act, amongst others. Notably, with its core objective being the revenue growth and sustainability, the Finance Act, 2020 and the legislative changes have ushered in cut across various sectors of the Nigerian economy. One of such sectors of the Nigerian economy. Accordingly, this article will make a concise analysis of the potential implications of the Finance Act on the private equity market in Nigeria.
Implications arising out of changes to the Capital Gains Tax Act (CGTA)
One of the most relevant tax legislation to the private equity market is the Capital Gains Tax Act and has been earlier noted, the Capital Gains Tax Act happens to be one of the extant legislation which has been amended by relevant provisions of the Finance Act, 2020. Having laid the above foundation, it becomes imperative to consider salient changes to the Capital Gains Tax Act, by virtue of the Finance Act; as well as how same touches on private equity dealings.
One important provision of the Finance Act is Section 49 which amends section 32 of the Capital Gains Tax Act, with a view to closing out loopholes which appear to allow the abuse of reorganisations by affiliate companies. Hence, section 49 of the Finance Act includes a more elaborate provision on the issue of exemption of gains arising from Takeovers from Capital Gains Tax.
By section 49 of the Act, where business carried on by a company is transferred or sold to a Nigerian company for the purpose of the reorganisation of that business or for the transfer of its management to Nigeria. Thus if any assets in such business (which has been acquired) is sold or transferred, such transfer will not be subject to Capital Gains Tax.
It is however imperative to note that the applicability of the above exemption is dependent on whether both the transferor and the transferee are recognised as belonging to the same group of companies and have been in such affiliation for a (minimum) consecutive period of 365 days before the reorganisation. In addition to the above, the exemption provided under the section 32 of the Act, will not apply if a transferee disposes the received assets/ management within the following 365 days after the date of receiving the assets.
Implications Arising out of Changes to the Companies Income Tax Act
Nigeria’s Real Estate Investment Scheme potentials are perceived to be healthy due to the high demand for real estate assets as well as a limited institutional investment. Unfortunately, however, for varying reasons, one of which includes the seeming absence of an enabling tax regime, the potentials of the sector have not been fully maximised.
However, a critical introduction of the Finance Act 2020 is the review of the position of the law with respect to the taxation of dividend income of Real Estate Investment Companies. Under the erstwhile framework, particularly as a result of the operation of section 19 of the Companies Income Tax Act (CITA), a Real Estate Investment Company which earns dividend income that has been subject to Withholding tax was susceptible to double tax on such dividends in the form of Excess Dividend tax when such dividends were distributed to the beneficiaries of Real Estate Investment Companies.
Laudably, however, by section 7 of the Finance Act (which amends section 19 of CITA) distributions by real estate investment companies to shareholders from rental income and dividend income received on behalf of those shareholders are exempted from excess dividend tax. It is envisaged that this introduction to the tax framework will positively impact on Nigeria’s Real Estate investment market.
On a similar note, vis-à-vis the administration of the companies’ income tax in Nigeria, the Finance Act amends the rate of taxes from the broad application of 30% to all companies to classifying companies into three categories. The first category being companies with an annual turnover of less than N25 million, the second being companies of an annual turnover of between N25 million and N100 million, and the third category being companies with a turnover of N100 million and above. Companies in the first category pay only minimum tax and are generally exempt. The second category of companies are subject to 20%, and the third category of companies are subject to the 30% companies’ income tax.
Without any doubts, these alterations of the initial state of affairs will come to bear on the tax considerations and decisions of businesses involved in private equity.
Implications Arising out of Changes to the Value Added Tax Act
Some of the changes made to the VAT Act will be relevant to the tax liability of the investee companies in a private equity transaction. For instance, the effective tax rate for VAT in Nigeria is 7.5% as well as the expansion of the meaning of goods and services (to cater to the problems experienced with effectively taxing the digital economy) no doubt have cognisable implications for several classes of transactions, private equity inclusive.
As we expect that private equity will continue to drive growth across all sectors of the economy, we believe that the changes introduced by the government have the potential to positively impact the attraction of foreign capital and/ or private equity investments into the country. We hope that the Finance Act is all that the government envisions it to be through proper administration and cooperation from corporations and the citizenry.