Tax & Business Matters - Nigeria

Finance Act 2021: What the removal of tax exemption for educational institutions means for education in Nigeria

Prior to the Finance Act 2021, section 23 (1) of the Companies Income Tax Act (CITA) exempted profits generated from educational, ecclesiastical and charitable activities of public character from income tax, as far as such profits are not derived from a trade or business carried on by such a company.

To provide clarity on what constitutes “public character” the earlier amendment via Finance Act 2020 introduced a definition in CITA which states that "public character' with respect to any - organisation or institution means "organisation or institution: (a) that is registered in accordance with relevant law in Nigeria; and (b) does not distribute or share its profit in any manner to members or promoters."

The above tax exemption has now been removed by the Finance Act 2021. Read our publication below for insights on the implications of this amendment.

Download PwC Tax Alert_Implications of tax on educational institutions_Feb 2022

 

Tax Appeal Tribunal rules in favour of an expanded scope for the recovery of input VAT by manufacturers

The Value Added Tax Act in Nigeria restricts … the input tax to be allowed as a deduction from output tax to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged. Input tax on any overhead, service, and general administration of any business which otherwise can be expended through the income statement (profit and loss accounts) shall not be allowed as a deduction from output tax.

The VAT Act, however, does not define “stock-in-trade” and as a result, there has been a long running dispute on what constitutes stock-in-trade for the purpose of determining the extent of a company’s right to recover input VAT.

In a landmark decision, the Tribunal has provided clarity on the definition of stock-in-trade and the proper construction of the relevant section of the VAT law. The decision now represents the position of the law and taxpayers can rely on it to recover input VAT provided they can demonstrate that there is an undeviating link or correlation between such items and their vatable products/output.

Read our alert and a copy of the ruling for details: 

Download PwC Tax Alert_TAT says VAT is claimable on all direct production costs_Feb 2022

Download TAT Decision on input VAT_CHI LTD V FIRS

Federal High Court declares payments to Nigeria Police Trust Fund unconstitutional

The Federal High Court has ruled as unconstitutional Section 4(1)(b) of the Nigeria Police Trust Fund (Establishment) Act, 2019 which provides for an amount constituting 0.5% of the total revenue accruing to the Federation Account, and a levy of 0.005% of the net profit of companies operating in Nigeria respectively to be remitted to the Nigeria Police Trust Fund.

Section 162(1) of the Constitution requires that all revenue collected by the government of the federation, except for the revenue specifically exempted by the section, must be paid into the Federation Account. The Court also held that the only entities who are entitled to partake in the sharing of the funds in the federation account are the federal government, state government, and local councils in each state of the federation.

There are two possible interpretations of the FHC declaration of Section 4(1)(b) of the Act as unconstitutional, null and void.  One is that the Court declared the whole Section as unconstitutional which means that the FIRS can no longer enforce that provision and demand for the levy from companies.

The other interpretation is that the Section was only declared unconstitutional to the extent of its inconsistency with the Constitution. This means the payment of the levy into the Federation Account is null and void, but the levy itself is still valid and the FIRS can continue to collect the levy and remit into the Federation Account.

This judgment also raises interesting questions around the legality of the laws setting up other earmarked taxes and levies in Nigeria including the National Agency for Science and Engineering Infrastructure (NASENI) levy, Tertiary Education Tax, National Housing Fund Levy, National Information Technology Development Agency (NITDA) levy, among others. Based on this judgment, the remittance of those earmarked taxes into Funds and accounts other than the Federation Account arguably renders them unconstitutional. The provision of the NASENI Act which allows for 1% of the Federation Account to be deducted and remitted to the Agency would also be null and void.

Read our alert for more: Download PwC Tax Alert_FHC declares payments to Nigeria Police Trust Fund unconstitutional_Feb 2022

Copy of the judgement: Download CTC AG Rivers v AGF Judgment _Police Trust Fund

FIRS Issues Circular on the Taxation of Government Securities and Corporate Bonds

Following the expiration of the Exemption Order on bonds and short term securities effective from 2 January 2022, The Federal Inland Revenue Service (FIRS) has issued an information circular with regards to the tax treatment of interest and other gains arising from investment in government securities and corporate bonds. Essentially withholding tax will be deducted at source while the income will be included in the determination of corporate income tax as the case may be.

Affected securities include:

1. Short term Federal Government of Nigeria Securities, such as Treasury Bills and Promissory Notes
2. Bonds Issued by State and Local Governments and their Agencies
3. Bonds issued by corporate bodies including supra-nationals

Attached below is a copy of the Circular.

Download FIRS Public Notice on Taxation of Bonds and Government Securities_Feb2022