The Nigerian Tax Reform Acts

1. Increased exemption threshold for small companies - Small companies are now exempt from Companies Income Tax (CIT), Capital Gains Tax (CGT) and the newly introduced Development levy (see below). Small companies are defined as companies with annual gross turnovers of NGN100million (previously NGN25million) and below and total fixed assets not exceeding NGN250million.
2. Increased Capital Gains Tax (CGT) rate – The NTA increases the Capital Gains Tax rate from 10% to 30% for companies. This effectively aligns the CGT and Companies Income Tax rate and reduces any tax arbitrage that could have been unduly enjoyed in the classification between chargeable gains and trading income. For individuals, capital gains will be taxed at the applicable income tax rate based on the progressive tax band of the individual.
3. CGT on Indirect transfer of shares - The NTA introduces CGT on indirect transfers of shares in Nigerian companies so that where shares are disposed of in intermediary holding companies offshore, a Nigeria CGT is triggered (subject to treaty exemptions). Also, the tax exemption threshold for the sale of shares in Nigerian companies has been increased to NGN150million (from NGN 100 million) in any 12 consecutive months, provided that the gains do not exceed NGN10million.
4. Introduction of Development Levy - Nigerian companies except small companies will pay a “Development Levy” at 4% of their assessable profits (i,e. tax profits before deducting tax depreciation and losses). The Development Levy consolidates the Tertiary Education Tax (TET), Information Technology Levy (IT), the National Agency for Science and Engineering Infrastructure (NASENI) levy and the Police Trust Fund (PTF) levy.
5. Minimum Effective Tax Rate (ETR) - Nigerian companies who are members of a multinational group with aggregate group turnover of EUR750million and above or have an annual turnover of NGN50billion and above, will now be subject to a minimum effective tax rate (ETR) of 15% of their “Net Income”. Net Income is defined as profits before tax excluding franked investment income and unrealised gains or losses, except for life insurance companies where the definition of Net Income also excludes gross and investment income for policyholders. The minimum effective tax rule does not apply to Free Zone companies on their exports out of Nigeria, provided that such companies are not part of multinational groups. The Nigerian parent company of a multinational group will have to pay a top up tax where its subsidiaries have paid taxes below the minimum 15% ETR.
6. A more progressive Personal Income Tax (PIT) regime - The NTA changes the income brackets and applicable tax rates for each bracket. Individuals earning NGN800,000 or less per annum will now be exempt from tax on their income and gains, while higher income earners will be taxed at a higher rate up to 25%. The Act also increases the tax exemption threshold for compensation for loss of employment or injury from NGN10million to NGN50million.
7. Introduction of Economic Development Incentive - The Acts replace the “pioneer” tax holiday incentive, with an “Economic Development Incentive” (or EDI). This incentive introduces a tax credit of 5% per annum for 5 years on qualifying capital expenditure purchased by eligible companies within 5 years effective from the production date. If a company has unused tax credits or qualifying capital expenses, it can carry them forward for another 5 years. Any credits still unused after this timeline will expire.
8. Resident and Non-Resident Individuals defined - PIT will apply to the worldwide income of a resident individual which is now clearly defined in the new Act. Prior to now there had been varied interpretations due to a lack of proper definition of “residence”. With the definition extending to individuals with substantial economic and immediate family ties in a year of assessment, the law widens the tax net. Employment income will now be taxed in Nigeria only if the individual is resident in Nigeria or performs duties in Nigeria without paying tax in their country of residence.
9. Introduction of the Tax Ombuds office - The Acts introduce the Tax Ombuds office to liaise with the tax authorities on behalf of taxpayers, and serve as an independent arbiter to review and resolve complaints relating to taxes, levies, duties or similar regulatory charges.
10. VAT at zero rate on essential goods and services - The NTA expands the list of zero-rated items to include essential goods and services such as basic food items, medical and pharmaceutical products, educational books and materials, electricity generation and transmission services, medical equipment and services, tuition fees, exports (excluding oil and gas exports) etc. The impact of this is that businesses selling these goods and services can recover their VAT costs, despite the zero rate which was previously not possible by law.
11. Input VAT Recovery - The VAT rate of 7.5% has been retained. Nigeria now adopts globally recognised VAT principles that allow for the claim of input VAT on all purchases including services and fixed assets. Businesses providing services which were previously unable to claim input VAT can now do so, provided that the input VAT is directly related to their supplies that are also subject to VAT.
12. VAT fiscalisation rules - Nigeria has now codified VAT fiscalisation rules and mandatory e-invoicing for businesses operating in the country. This sets Nigeria apart as an early adopter of e-invoicing in Africa. Companies in Nigeria are now mandated to implement the fiscalisation system deployed by the tax authority for the collection of VAT.

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