On the 13th of January, President Muhammadu Buhari assented to the Finance Bill 2019, which is now known as the Finance Act 2020 (the “Act”).
Following this, the Minister of Finance announced February 1 as the commencement date of the Act. In our previous newsletter we detailed some of the changes made to the various tax laws. This week, however, we identify the effects the Act will have on Startups and Small and Medium Scale Enterprises (SMEs) in Nigeria.
New Basis for Charging Companies Income Tax (CIT)
Startups and SMEs may pay 0% CIT due to the new basis of computing CIT. Though, this depends on their annual turnover. The Act exempts small companies (defined as companies with turnovers of less than ₦25,000,000) from paying minimum tax. In addition, medium sized companies (with turnovers between ₦25,000,000 and ₦100,000,000) are now required to pay a lesser rate of 20% as CIT; however, the former CIT rate of 30% is still applicable to large companies (with turnovers above ₦100,000,000).
Digital Tax Introduced
An interesting amendment to the CIT Act is that its provisions will now apply to companies providing online/digital services or goods and who have significant economic presence in Nigeria. This deviates from the previous provisions of the CIT Act, which requires foreign companies to have a physical presence or a fixes base in Nigeria. This expands tax revenue sources by including digital services such as e-commerce businesses, online payment platforms, cloud storage platforms, and online consultancy and management services, provided such companies have a significant economic presence. Although the Act does not define what “significant economic presence” means, this may see tech companies such as Google and Alibaba, who operate some of the digital services mentioned above, pay tax on the services they provide to Nigerians.
Non-Resident Tech Companies Affected
Foreign companies (or Non-Resident Companies) supplying goods or services are also required to include the VAT of 7.5% on their invoices. However, a foreign company is not required to withhold and remit VAT as that burden rests on the Nigerian company receiving the services provided. For example, where a foreign tech company (not incorporated in Nigeria but derives income or profits from Nigeria) provides tech services to a Nigerian startup, the Nigerian startup is required to withhold and remit VAT on behalf of the foreign tech company to the FIRS.
The Act introduces laudable changes to Nigeria’s tax laws and brings it on par with global best standards. It encourages the growth of early stage startups and SMEs through the various tax palliatives targeted at them. These companies will be able to redirect revenue saved from these palliatives back to their businesses. Considering that SMEs account for 96% of all businesses and 84% of employment, it is likely to impact positively on economic growth.