The Finance Act 2023: Highlights Of Changes To Tax Legislation And The FIRS' Comments On The Changes

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The Act provides that the amendments therein come into force on "1 May 2023 or such other date that shall be indicated by the National Assembly by law, or the President by assent or order".

INTRODUCTION

The Finance Act 2023 (the “Act”) was signed into law on 28 May 2023 by former President, Muhammadu Buhari, GCFR.

The Act provides that the amendments therein come into force on “1 May 2023 or such other date that shall be indicated by the National Assembly by law, or the President by assent or order”. Therefore, until the National Assembly or the President specifies a different date, the amendments introduced by the Act take effect from 1 May 2023.

In this publication, we have highlighted some key amendments to tax legislation introduced by the Act and also analysed the position of the FIRS in the Public Notice.

KEY AMENDMENTS TO TAX LEGISLATION

The Capital Gains Tax Act (CGTA)

Digital Assets as Chargeable Assets

1. The CGTA has been amended to expressly specify “digital assets” as “chargeable assets” in respect of which capital gains tax can arise upon disposal. It appears that the intention of this amendment is to avoid any doubt regarding the taxation of digital assets. This is because prior to the Act, any capital gain arising from the disposal of any form of property (which would include digital assets) was liable to capital gains tax.
   Relief for Capital Losses
2. Prior to the Act, there was no relief for capital losses. With the amendment introduced by the Act, capital losses on the disposal of chargeable assets can be deducted from chargeable gains arising from the disposal of assets of the same class, and any unutilised capital loss can be carried forward for a maximum of 5 years. This relief complements the existing roll over relief.

The Companies Income Tax Act (CITA)

Deletion of Reconstruction Investment Allowance

1. Prior to the Act, a 10% reconstruction investment allowance was available for expenditure on plant and equipment. With the passage of the Act, the allowance is no longer available for any expenditure on plant and equipment incurred after the effective date of the Act. However, for expenditure on plant and equipment incurred before the effective date of the Act, companies can continue to claim any unutilised allowances until they are fully utilised.
   Deletion of Rural Investment Allowance
2. Prior to the Act, a rural investment allowance varying between 15-100% was available to companies that provided electricity, water, or tarred road to a rural area for the purpose of trade or business. With the passage of the Act, this allowance is no longer available. However, companies with any unutilised allowances can continue to claim the allowances until they are fully utilised. Deletion of the 25% Exemption of FX Earnings by Hotels
3. Prior to the Act, a 25% tax exemption was available to hotels in respect of foreign currency income earned from guests if the income is placed in a reserve fund for expansion purposes and utilised within 5 years. The Act has deleted this exemption. However, a hotel that has set aside funds prior to the effective date of the Act can continue to enjoy the exemption until the earlier of the utilisation of the funds or the expiry of the five-year limit. Deletion of Investment Allowance on Lease Arrangements
4. Prior to the Act, investment allowance was available on plant and equipment acquired under a finance lease arrangement and on agricultural plant and equipment acquired either under a finance or operating lease arrangments. This allowance is no longer available with the passage of the Act. Unlimited Claiming of Capital Allowance by Companies Engaged in Upstream and Midstream Gas Operations
5. The unlimited claiming of capital allowances hitherto enjoyed only by agro-allied and manufacturing companies has now been extended to companies engaged in upstream and midstream gas operations as defined in the Petroleum Industry Act or the Petroleum Profits Tax Act. The capital allowance claimable per annum by all other companies is limited to 66 2/3 per cent of profits. Tax Returns by Non-Resident Shipping and Air Transport Companies
6. Non-resident shipping and air transport companies that do not provide financial statements of their Nigerian operations are now required to submit a detailed gross revenue statement of their Nigerian operations showing the full sums earned and supported by all invoices issued to their customers. The statement must be certified by the company's external auditor and one of its directors. Evidence of Tax Returns Filings and Tax Clearance Certificates Required for Shipping and Air Transport Approvals and Permits
7. Regulators in the shipping and air transport sectors are mandated to require companies to provide evidence of income tax returns filings and tax clearance certificates before relevant approvals and permits are processed.

The Customs, Excise, Tariff Etc. (Consolidation) Act (CETA)

Import Levy to Finance External Obligations

1. An import levy of 0.5% is payable on all eligible goods imported into Nigeria from outside Africa to finance Nigeria's capital contributions, subscriptions, and other financial obligations to the:
   1. African Union, African Development Bank;
   2. African Export-Import Bank;
   3. ECOWAS Bank for Investment and Development;
   4. Islamic Development Bank;
   5. United Nations; and
   6. other multilateral institutions as may be designated by the Minister of Finance.

   The Personal Income Tax Act

   Deduction of Premium on Deferred Annuity

   Any amount paid as a premium by an individual in relation to a contract for a deferred annuity is tax-deductible. However, any portion of a deferred annuity withdrawn within five years of paying the premium will be taxed at the point of withdrawal.

   The Petroleum Profits Tax Act (PPTA)

   The Act makes the following amendments to the PPTA in order to align it with the PIA:

   1. Under the PIA, contributions to a decommissioning and abandonment fund are tax-deductible. It was, however, unclear whether it was deductible under the PPTA. With the amendment introduced by the Act, it is now clear that such contributions are deductible, provided a statement of account of the fund is provided. Any surplus fund after decommissioning and abandonment of the field would be subject to petroleum profits tax.
   2. The Nigerian Upstream Regulatory Commission has been empowered to determine the fiscal price of crude oil for tax purposes. Previously, pricing was to be agreed upon by the Federal Government of Nigeria and taxpayers.
   3. Petroleum profits tax returns must include a duly completed self-assessment form attested to by a principal officer.

   The Stamp Duties Act

   Local governments are to now receive a share of the revenue from the Electronic Money Transfer Levy. The new formula is 15%, 50%, and 35% to the Federal Government, state governments, and local governments, respectively.

   The Value Added Tax Act

   Deadline for filing VAT Returns by Appointed Agents

   1. The deadline for the remittance of VAT withheld by FIRS-appointed agents is now the 14thday of the following month as against the previous deadline of the 21st day of the following month.
      VAT Anti-Avoidance Rule
   2. A VAT anti-avoidance rule has been introduced. The FIRS is now empowered to make necessary adjustments to counteract the effect of any artificial or fictitious transaction.
      Goods Purchased Online from a Non-Resident Supplier
   3. An importer of goods purchased online from a non-resident supplier appointed by the FIRS to charge and collect VAT is now required to provide proof of such appointment and registration in order to avoid paying VAT at the port.
      Limiting the Definition of “Building”
   4. The definition of “building” (the sale or rental of which is exempt from VAT) has been amended to exclude any fixture or structure that can easily be removed from land, such as radio and television masts, transmission lines, cell towers, vehicles, mobile homes, caravans, and trailers. As such, VAT is now payable on these fixtures.

   The Tertiary Education Trust Fund Act

   The rate of tertiary education tax has been increased from 2.5% to 3%.

   THE FIRS' POSITION IN THE PUBLIC NOTICE

   In a public notice titled “Enactment of the Finance Act, 2023” (the “Public Notice”), the FIRS has provided its position on the timeline for complying with some of the changes introduced by the Act. The position of the FIRS is examined below:

   Remittance of VAT by FIRS-Appointed Agents

   The FIRS has directed that persons appointed to withhold VAT are to remit VAT withheld in June on or before 14 July.

   VAT on Items Excluded from the Definition of Building

   The FIRS has directed taxpayers to start charging VAT on items excluded from the definition of “building” from 1 July 2023.

   Rural and Reconstruction Investment Allowances and the 25% Exemption of FX Earnings by Hotels

   The FIRS has stated that rural and reconstruction investment allowances and the 25% exemption of FX earnings by hotels will not apply to “tax returns becoming due in respect of accounting period ending on or after 1 July, 2023.”

   Given that tax is payable in respect of trading and not on returns reporting the trading, it is unlikely that the FIRS intended that the amendment will not apply to “…tax returns…” Rather, it appears that the FIRS has effectively taken the view that any portion of these allowances that is unutilised before the effective date of the Act cannot be enjoyed by taxpayers whose tax returns are due for filing on or after 1 July 2023. In respect of the 25% exemption of FX earnings, it also appears that the FIRS has taken the view that taxpayers whose tax returns are due for filing on or after 1 July 2023 cannot enjoy the exemption in relation to funds that were reserved prior to the effective date of the Act.

   However, the foregoing positions of the FIRS conflict with the amendment introduced by the Act. As mentioned earlier, the Act provides that companies with any unutilised portion of the allowance can continue to claim the allowance until it is fully utilised. Also, the Act provides that a hotel that has set aside reserved funds prior to the effective date of the Act can continue to enjoy the exemption until the earlier of the utilisation of the funds or the expiry of the five-year limit.

   Rate of Tertiary Education Trust Fund Act

   The FIRS has directed that the new TET rate of 3% “shall take effect for TET becoming due in respect of accounting period ending on or after 1 July, 2023.”

   If the FIRS' position were to be adopted, the new rate will apply to transactions that occurred before the effective date of the Act, which would amount to a retroactive application of the new rate. It is worth noting that the FIRS had attempted to retroactively apply an amendment introduced by the Finance Act 2019 to CITA, and Accugas Limited challenged the FIRS' position at the Federal High Court in Suit No.:FHC/ABJ/CS/1289/2020; Accugas Limited v. FIRS.

   The Finance Act 2019, with an effective date of 13 January 2019, deleted section 33(3)(b) of CITA, which exempted from the payment of minimum tax a company with at least 25% imported equity capital. Accugas met this threshold and took the position that it should still enjoy the exemption in respect of any trade activity conducted by it between January and December 2019, before the Finance Act came into force. The FIRS took the view that because Accugas filed its returns in July 2020, after FA 2019 had become law, Accugas had lost its entitlement to the minimum tax exemption.

   In a judgment delivered on 27 June 2022, the Federal High Court agreed with Accugas and held that amendments to tax legislation cannot be applied retroactively unless the law expressly provides otherwise.

   In reliance on the Accugas judgment, it can be argued that the new rate should not apply to income from trading activity occurring before the effective date of the Act, even if the returns reporting the trading activity were filed after the effective date.

   The information contained in this publication is not to be construed as legal or tax advice. Taxpayers are advised to seek professional advice on the implications to their business of the amendments introduced by the Finance Act 2023.

   The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.