Recently, the government of Nigeria implemented the Finance Act of 2023, bringing forth significant changes to the nation’s financial landscape. The Act encompasses various measures, including the taxation of digital assets, enhanced reporting requirements, industry-specific deductions, levies on imported goods, tax benefits related to insurance, and penalties for non-compliance. Understanding these key provisions is crucial for individuals and businesses navigating Nigeria’s evolving financial environment. Below, we delve into the details of these changes.
Introduction of a New Digital Asset Tax at a Rate of 10%
Under the Nigeria Finance Act of 2023, a capital gains tax of 10% has been introduced for digital assets. This tax is applicable when selling or disposing of valuable digital items that result in a profit. The tax calculation involves deducting allowable deductions from the total earnings in a specific assessment year. It applies to a wide range of property types, including options, debts, and intangible assets, regardless of their physical location. The tax also covers foreign currencies, except for the Nigerian currency. Any property that is created or acquired without purchase is considered an asset for tax purposes. However, the Act does not provide a clear definition of what constitutes a digital asset, leading to controversies regarding its scope and intentions.
Companies Required to Provide Detailed Revenue Statements for Nigerian Operations
According to the new law, companies that file tax returns without submitting separate financial statements for their operations in Nigeria must now provide detailed statements of the total revenue generated from their Nigerian activities during the relevant period. These statements should be certified by one of the company’s directors and their external auditor and must include all invoices issued to customers.
Deductible Expenses for Lowering Tax Liabilities
Companies can now deduct a certain percentage called “capital allowances” from their profits for a specific year to reduce their tax liabilities. Generally, the maximum deduction percentage is limited to 66.67% of the company’s profit. However, the new law introduces exceptions for specific industries such as gas operations, agro-allied businesses (related to agriculture and farming), and manufacturing companies. These exceptions allow qualifying companies to deduct more than 66.67% if they meet the criteria. To claim these deductions, companies must reduce the value of the asset purchased by the amount of any other deduction associated with that asset, referred to as an “investment allowance.” It is important to subtract the investment allowance from the asset’s value before calculating the capital allowances.
Introduction of a 0.5% Levy on Imported Goods
The Finance Act imposes a 0.5% levy on goods imported into Nigeria from countries outside Africa. This levy aims to support Nigeria’s financial contributions to organizations such as the African Union, the African Development Bank, and other international groups fostering development projects, trade, and cooperation among nations. The funds collected through this levy assist in fulfilling Nigeria’s financial obligations to these organizations.
Tax Benefits Related to Insurance Premium Payments
The new law grants tax deductions for premium payments made to insurance companies. Individuals can subtract the amount paid in premiums from their total earnings for the year. Two types of insurance qualify for this deduction: insurance on one’s own life or the life of a spouse and a deferred annuity plan, which functions as a savings plan providing future payouts based on the individual’s life or the life of their spouse. However, if a person withdraws funds from the deferred annuity before five years have passed since paying the premium, they must pay taxes on the withdrawn amount. It is advisable to wait at least five years to avoid additional taxes.
Increased Tertiary Institution Trust Fund Tax Rate
The new law revises the rate for the Tertiary Institution Trust Fund Tax, increasing it from 2.5% to a new rate of 3%.
Consequences of Breaking the New Law: Understanding Tax Penalties and Offenses
Failure to comply with the law or regulations can result in significant penalties and legal consequences. It is essential to be aware of the following penalties and offenses outlined in the Finance Act of 2023:
- Penalties for Not Following the Law: If an individual or company fails to comply with the law or regulations, they may be subject to an administrative penalty. The penalty amount is set at N10,000,000.
- Extended Penalties: Continued violation of the rules over an extended period can lead to additional penalties. These penalties amount to N2,000,000 for each day the violation persists, or an amount determined by the Minister of Finance.
- Penalties if Found Guilty: If an individual or company is found guilty by a court of law for violating the law or related regulations, they may face a substantial fine. The fine imposed is N20,000,000.
- Imprisonment: In addition to fines, individuals found guilty of violating the law may also be sentenced to imprisonment for a period of six months.
- Penalties for Specific Violations: The law specifies penalties for specific violations such as failing to comply with notices, refusing to answer questions, or neglecting to submit required forms. The penalties for these violations are determined in accordance with the provisions of the law.
- Penalty for Incorrect Accounts: Creating fraudulent accounts, preparing false schedules or statements, or providing incorrect or misleading information about the amount of tax owed can result in penalties. The penalty imposed is either N15,000,000 or 1% of the tax underpayment, whichever is higher. In addition to the penalty, the correct amount of tax must still be paid.
- Fine for False or Misleading Information: If an individual or company provides false or misleading information regarding the amount of tax owed, a fine is imposed. The fine amount is either N15,000,000 or 1% of the tax underpayment, whichever is higher. The correct amount of tax must still be paid in addition to the fine.
- Compounding Offenses: The tax service has the authority to resolve offenses by accepting payment instead of imposing further punishment. The amount paid as part of this resolution cannot exceed the maximum fine allowed. Official receipts are provided for the payment made in this manner.
It is crucial for individuals and businesses to fully understand and comply with the provisions of the Finance Act of 2023 to avoid penalties, legal complications, and potential imprisonment. Seeking professional advice from tax experts and staying informed about updates to tax laws can help ensure compliance within Nigeria’s evolving financial landscape.
The new law is available in full here.
Nigeria New Finance Act 2023 Nigeria New Finance Act 2023
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