BREAKDOWN: How Nigeria’s New Tax Laws Will Affect Business Owners and Individuals?

Last October, Nigeria’s President, Bola Tinubu, proposed bills to reform the country’s more than three-decade-old taxation systems. The decision involved some nuances that got many, including the political class, uncomfortable. However, the president refused to back down from his decision. Rather, he reaffirmed that the decision to reform the system of taxation in the country is the best for Nigerians, especially low-income earners and small-scale businesses. Economists have also said the proposed reforms are performance-based, and suitable for a struggling economy like Nigeria that is planning to rise. How Nigeria’s New Tax Laws Will Affect Business Owners and Individuals

Given this, on Thursday, President Tinubu, having previously informed Nigerians his decision, at last, signed the tax reform bills into law. The bills (now laws) were four of significant reforms that will permanently change the way Nigerians earn and spend their money. These bills are the Nigeria Tax (Fair Taxation) Act, the Nigeria Tax Administration Act, the Nigeria Revenue Service (Establishment) Act, and the Joint Revenue Board (Establishment) Act. Upon signing these bills into laws, employers and business owners are expected to adjust their policies to reflect the reality of the new taxation systems.

 

PIJAlance explains how these Nigeria’s new tax laws can affect business owners and individuals.

“They are combined into a compendium single legal document, giving room for “coherence and consistency in tax policy, thereby reducing the risk of unintended consequences and enhancing tax administration,”

What are these new tax laws all about?

The Nigeria Tax (Fair Taxation) Act, the Nigeria Tax Administration Act, the Nigeria Revenue Service (Establishment) Act, and the Joint Revenue Board (Establishment) Act collectively referred to as “the Acts” are products of Nigeria’s consolidated taxation policies. They are combined into a compendium single legal document, giving room for “coherence and consistency in tax policy, thereby reducing the risk of unintended consequences and enhancing tax administration,” KPMG, a global network of professional services firms providing audit, tax and advisory services, noted in a document obtained by PIJAlance.

Unlike before where Nigeria has different legal documents for taxation procedures, Nigerians can now refer to Nigeria Tax Act (NTA), as the only legal document for taxation.

According to the president, NTA aims to ensure equity and justice in the tax system by making it more progressive, enforcing regulations to make the wealthier pay proportionally more, and the poor are protected from over-taxation.

Nigeria Tax Administration Act only works under the Acts to standardise and digitise how taxes are collected, reported, and audited across all tiers of government. While the Nigeria Revenue Service (Establishment) Act stands for the Act to restructure and empower the Federal Inland Revenue Service (FIRS) into a more autonomous, efficient, and accountable institution. Under this Act, Nigeria’s tax service, FIRS will now be regarded as NRS—Nigeria Revenue Service, hence.

The last of the Act, Joint Revenue Board (Establishment) Act is to create a collaborative platform between the Federal, State, and Local Government tax bodies for improved coordination and transparency. All of these establishments will also be subjected to NTA policies, hence.

How will Nigeria’s these new tax laws affect business owners and individuals?

President Tinubu has longed reiterated that the new tax laws are performance-based and will only be effective on businesses and individuals based on their contributions to the economy through what NTA describes as “gains, profits and income.” The following applies:

All Transactions are now chargeable to tax

NTA vividly posits that prizes, winnings, honoraria, grants, awards, profits or gains from transactions in digital or virtual assets are chargeable to tax. Though, the taxation of digital assets will pose some challenges to the tax authorities, this means, even content creators and anyone who earns digitally will now be subjected to all NTA provisions for tax deduction.

Not All Transactions are chargeable to tax

Despite that NTA said all transactions are chargeable to tax, it explicitly states not all transactions are taxable. Section 58 of the Act introduces a tax-exempt threshold of N800, 000 and increases tax rates for high income earners. The new tax rates range from 0% to 25%. For example, individuals with income as defined in the Act, within the threshold of anything below N800, 000 will be tax-free. Meanwhile, individuals who earn up to N2,200,000 monthly gets 15% tax deductions; N9,000,000 at 18%; N13,000,000 at 21%; N25,000,000 at 23%; and above N50,000,000 at 25. This provision particularly eliminates VAT and income tax payments for the majority of Nigerian low-income earners who earn between N100,000 to N500,000 monthly.

Also, businesses with annual turnover not higher than N100m are classified as small-scale businesses and will be exempted from tax. Section 56 of the Act stipulates that small companies (companies that earn gross turnover of ₦100m or less per annum and with total fixed assets not exceeding ₦250m) and large companies be subjected to tax at 0% and 30% respectively. The 30% rate for large companies can be reduced to 25% effective from a date as may be determined in an Order issued by the President on the advice of the National Economic Council.

The Act also introduces Effective Tax Rate (ETR) in Section 57 of the NTA. Described as 15% of net income of a company. The NTA defines net income as the profits before tax as reported in the Audited Financial Statements (AFS) excluding franked investment income and unrealised gains and losses. This provision applies to companies with turnover exceeding ₦50 billion, and companies that are part of a multinational enterprise (MNE) group with an aggregate turnover of at least €750 million or its equivalent. This 15% ETR aligns with the OECD Pillar II framework, which mandates a top-up tax to ensure that large multinational groups with a turnover exceeding €750 million or its equivalent pay tax at an ETR of 15% on the income generated in each jurisdiction they operate in.

The provision specifies that, for the purpose of a life insurance company, the net income will not include gross income and investment income for policyholders. The ETR provisions will not apply to licensed entities within the free trade zones except.

Not All Goods are taxable

NTA provides that some daily purchase of a regular Nigerian are tax-free. According to the Part IV, section 187 of the Act, the following are not taxable: all petroleum products, locally manufactured sanitary pads, all processed gas; goods purchased for use in humanitarian donor funded projects; baby products; military hardware, arms, ammunitions and locally manufactured uniforms supplied to armed forces, para-military and other security agencies of a Nigerian government among others.

Section 188 of the Act also listed the following goods which are at the centre of every average Nigerian’s daily consumption at zero-percent charge to VAT: basic food items; all medical and pharmaceutical products including medicinal herbal products; educational books and materials; fertilizers; locally produced agricultural chemicals; locally produced veterinary medicine; locally produced animal feeds;  agricultural seeds and seedlings; Electricity generated by generation companies (GENCOs) and supplied to National Grid or Nigeria Bulk Electricity Trading Company (NBET); Electricity transmitted by Transmission Company of Nigeria (TCN) to Electricity Distribution Companies (DISCOs); medical services; tuition relating to nursery, primary, secondary or tertiary education; exported goods excluding oil and gas; exported services; exported incorporeal property; and medical equipment. This means, hence, while purchasing all these goods, VAT rate often previously applied to them will be free.

Offshore Companies Will no longer be tax-free

NTA gives the breakdown of how any Nigerian companies will be taxed. This includes but not limited to the introduction of Controlled Foreign

Corporation (CFC) rules which rules to counter profit shifting where a foreign subsidiary of a Nigerian company retains profits that could have been distributed without adversely affecting its operations, those profits will be deemed distributed and taxed in Nigeria. This, according to KPMG, eliminates the deferral advantage sometimes used in tax planning and strengthens Nigeria’s ability to tax offshore profits that economically belong to Nigerian entities.

The provision also includes anti-base erosion through minimum Effective Tax Rate (ETR). This adopts a top-up tax mechanism aligned with the OECD’s BEPS Pillar 2 framework, said KPMG Advisory Services in a document. If a foreign subsidiary of a Nigerian company (or a group member) pays less than the minimum ETR of 15%, the Nigerian parent must pay the shortfall. This provision discourages the use of low-tax jurisdictions for profit shifting and ensures a fairer allocation of taxing rights to Nigeria.

Taxation of Non-Resident Persons (NRPs)

In determining the total profits, only expenses incurred in producing the profits attributable to the permanent establishment in Nigeria will qualify for deduction. However, no deduction will be allowed in respect of royalty, fees, or similar payments in return for the use of patents or other rights.

Nigerians Have Access to Tax Relief

The NTA eliminates the Consolidated Relief Allowance (CRA) and introduces a rent relief under Part VII, Section 30(vi), PIJAlance found. This section states that the rent relief is 20% of annual rent paid, subject to a maximum of ₦500,000, whichever is lower. However, to claim this relief, declarations must be made regarding the actual rent paid, and the tax authority has the right to request additional relevant information. The takeaway from this is that individuals that live in their own accommodation cannot claim such relief. This begs the question of why the CRA has not been retained.

As a Layman, What Does Tax Rent Relief Mean?

Reliefs, in NTA, are tax-enabled government assistance to individuals and businesses set aside for any provisions, whatsoever, in the Act. In Part VII of the Act, section 28, 29 and 30 address the matter related to reliefs and how to claim them.

Section 28 – Personal Reliefs

This section restructures and reduces the range of personal income tax reliefs previously available under the Personal Income Tax Act (PITA). Personal reliefs, which used to include allowances like Consolidated Relief Allowance (CRA), children’s education, dependent relatives, and life assurance premiums, have been largely streamlined.

The new tax regime under the President now focuses more on targeted, verifiable deductions, thus eliminating what experts called ‘blanket’ reliefs that were prone to abuse and administrative complexity.

Individual taxpayers may see reduced automatic reliefs. Reliefs now hinge on actual economic activities (like rent paid or contributions made), backed by documentation, according to the Act.

Section 30 – Rent Relief (New Provision)

This section contains the directive that abolishes the CRA and introduces a targeted rent relief for renters. This is expected to provide a rent relief of 20% of the annual rent paid, capped at ₦500,000, whichever is lower.

According to the Act, the relief is claimable only by individuals who are tenants, not homeowners, and it is not in the form of cash or refund; rather, it will be deducted from the actual tax that taxpayers are expected to pay. For example, if an average Nigerian has an annual income of ₦2,000,000 and pays ₦400,000 as rent for the year. The tax-enabled rent relief of 20% on ₦400,000 will be deductible. So, the NRS will reduce the taxable income by ₦80,000, and be taxed only on ₦1,920,000 instead of ₦2,000,000.

Read Also: Kenya’s Grief Repeats One Year After Bloody Anti-tax Protests

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