As Nigeria continues to seek ways to diversify its economy, governments and corporate organisations recognise the importance of a dynamic tax system that is not only geared toward fiscal growth but addresses today’s business environment. The government, especially through the Federal Inland Revenue Service (FIRS) and the Joint Tax Board, is adopting a proactive approach to building the system. Below are some recent changes in the tax environment and other impending changes likely to have a significant impact on businesses.
AMENDMENT TO THE COMPANIES INCOME TAX ACT: undefined The Companies Income Tax (Exemption of Profit) Order 2012 provides tax incentives to companies under certain conditions, including new employment tax relief (NETR), work experience acquisition programme relief (WER) and infrastructure tax relief (ITR).
NETR is focused on the employment of new graduates. A company can only qualify if it has a minimum net employment of 10 employees, with a minimum of 60% being new graduates without previous work experience employed by the company within three years of graduation. NETR provides a deduction of the lower of 5% of assessable profit and qualifying employees’ salaries. This is in addition to the normal treatment of the salary expense as deductible for tax purposes.
WER encourages companies that invest heavily in capacity development and staff retention. A Nigerian company must have minimum net employment of five new employees, and retain them for a minimum of two years from the year of assessment in which they were first employed, to enjoy an exemption from income tax of 5% of its assessable profits in the assessment period in which the company qualifies.
The ITR states that where a company provides infrastructure of a public nature (which it can also use for its own benefit), 30% of its cost will be granted as a tax-deductible expense, in addition to any other tax deductions granted in respect of these expenses. Qualifying infrastructure includes electricity, roads, bridges, water, and health, educational and sports facilities.
REVISED PETROLEUM INDUSTRY BILL (PIB): The PIB, which seeks to combine 16 different petroleum laws, has undergone several legislative reviews. In 2012 a new draft was submitted to the legislative arm for consideration. The bill aims to ensure transparency, provide equitable participation and maximise government revenues. Once enacted, a two-tier tax system consisting of a corporate income tax and a hydrocarbons tax will apply to exploration and production companies.
TRANSFER PRICING & THIN CAPITALISATION: In October 2012 the FIRS released the Income Tax ( Transfer Pricing) Regulations No. 1, 2012. The transfer pricing regulations aim to give effect to the anti-avoidance provisions in the income tax laws. Transfer pricing generally refers to how related parties price goods, assets, services, intellectual property, loans, guarantees and other commercial transactions between them, and apply to both domestic and cross-border related-party transactions. The regulations came into force on 2 August 2012 and are applicable to accounting periods starting after this. Related parties are allowed to use any of the methods listed as a basis for the pricing of their controlled transactions. These methods are the same as those prescribed by the OECD and the UN.
Also, the FIRS plans to introduce thin capitalisation rules to limit the ratio of related party debt to equity permissible for tax purposes. However, the rules are not likely to be published until 2014 or after, with a cut-off date or transition period for existing related-party debts.
As the government and regulatory agencies observe trends in developed economies, they will focus on enforcing total compliance. Business owners and managers must be prepared to defend the taxes they pay relative to their activities and commercial profits. Taxpayers must manage their affairs to ensure compliance at minimum cost, and balance tax planning with corporate responsibility and business sustainability.
OBG would like to thank PwC Nigeria for their contribution to THE REPORT Nigeria 2013
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