Recent reforms: Changes to tax regulations raise the level of enforcement

Nigeria undertook a rebasing exercise of its GDP in 2014. This brings into sharper focus the very low taxrevenue-to-GDP ratio, which is now about 8% and a much lower ratio of 4% for non-oil taxes. There is pressure on the government to improve the ratio, but in reality this is not a quick fix. It will require a broad-based approach to address the complexity of tax administration, the ambiguities in the tax laws and the slow pace of tax dispute resolution. Below are some recent changes in the tax environment which will likely have a significant impact for businesses operating in the country.

The Pension Reform Act 2014

The Pension Reform Act 2014, which governs the contributory pension scheme in Nigeria, was enacted on July 1, 2014. The scheme now covers all employers with 15 or more employees (previously five staff was required). Employers with less than the prescribed number of workers may voluntarily join the scheme subject to guidelines to be issued by the National Pension Commission.

Employers and employees are required to make a minimum contribution of 10% and 8%, respectively, of the employee’s monthly emoluments (previously this was 7.5% of the employee’s monthly basic wage, housing and transport allowances by both parties). Apart from the higher rates, the base of contributions has also been potentially raised. The new law defines “monthly emoluments” for the purpose of pension contribution as the total emoluments outlined in the employment contract, provided it is not less than the total of the employee’s basic salary, housing and transport allowances.

Pioneer Status Incentive Regulations 2014

The Nigerian Investment Promotion Commission issued the Pioneer Status Incentive Regulations with effect from January 30, 2014. The regulations include additional conditions to those contained in the principal legislation – the Industrial Development Income Tax Relief Act – for processing a pioneer status application.

The pioneer status incentive confers on a company an income tax holiday for up to five years. A major development is that the regulations introduced a levy of 2% of estimated tax savings on applicants to be derived from five-year financial projections or the higher of 0.5% of net assets or 0.25% of turnover where the financial projections indicate a loss.

Local Content Guidelines for ICT

Guidelines on Nigerian content development in the ICT sector came into effect from December 3, 2013. The guidelines seek to achieve 50% local content in the industry, requiring all ICT companies to register Nigerian entities with predominant Nigerian representation. They also introduced tax incentives including a 120% deduction for research and development expenses incurred by ICT training firms and a five-year import duty waiver on computer components used for hardware assembly. However, the advisory board for the implementation of the regulations was only recently set up and there may be changes to the regulations and their implementation.

Transfer Pricing (TP) Regulations

The Income Tax (Transfer Pricing) Regulations No. 1, 2012 were released by the Federal Inland Revenue Service (FIRS) with a commencement date of August 2, 2012 and applicable to accounting periods after this date. Affected taxpayers submitted their first TP returns for the 2013 accounting period in 2014 alongside their regular income tax returns. The TP returns comprise a disclosure of the values and types of related-party transactions undertaken over the year, the TP method used to evaluate the arm’s length nature of these transactions, and a declaration of the particulars of directors, shareholders and other connected persons.

Taxation of Non-Resident Companies

The FIRS is proposing a change to the requirements for tax returns filed by non-resident companies. Historically, these firms have been taxed on the deemed profit basis being 6% of their turnover derived from Nigeria. The FIRS is now requesting that non-resident companies submit detailed information including audited financial statements, tax and capital allowance computations, and other information, and for their tax return to be attested by a director or secretary of the company.