The Minimum Tax Regime In Nigeria

Introduction

Tax in Nigeria has in recent times taken a more important role in the conversations around Government revenue. The consistent introduction of changes to the fiscal regime by way of Finance Acts, Presidential Orders and Regulations are indications that the Federal Government, is amongst other options, looking to taxes to significantly increase its revenue. The minimum tax (MinTax) provisions, though as old as the income taxes themselves, are some of the sections that have been amended by the relevant Finance Acts (FA).

The MinTax provisions are anti-tax avoidance rules enshrined in the Nigerian Companies Income Tax Act (CITA or "the Act"). The provisions seek to ensure that companies pay some taxes (irrespective of their profitability position). There are various MinTax rules encoded in the tax laws e.g., MinTax for unincorporated entities, insurance companies, manufacturing companies etc., but this article focuses on the MinTax regime detailed in Section 33 of the CITA. It reviews the regime based on the amendments introduced by the Finance Acts, and the key issues that affect companies doing businesses in Nigeria.

Basis of Calculation

MinTax had a rather complex formular prior to the enactments of the FAs, as shown below:

1. Where the turnover of the Company is equal to or lower than ₦500,000;
   • The higher of:
   • 0.5% of gross profits; or
   • 0.5% of net assets;
   • 0.25% of paid-up capital; or
   • 0.25% of turnover of the company for the year.
   Plus
2. Where Turnover is greater than ₦500,000;
   • 0.125% of revenue in excess of ₦500,000.

However, the FA, 2019 amended the basis of computation. MinTax is now to be computed as 0.5% of an eligible company's gross turnover (GT) less any franked investment income. This is no doubt a more simplified approach compared to the previous complex formular which focused on a company's capital base (i.e., net assets, paid-up capital) as well as its revenue base. The amendment was welcomed by taxpayers as they believed the previous approach was unfair especially as struggling companies with a high asset base were compelled to pay huge taxes year after year.

A reduced MinTax rate of 0.25% was introduced by the FA, 2020 (in Section 33(2)) for any two financial years (FYs) between 1 January 2019 and 31 December 2021, in reaction to the effects of Covid-19 on businesses and the economy Most companies had filed their 2020 tax returns (based on 2019 financial information) before the FA 2020 was issued. Thus, companies were constrained to utilize the relief in 2020 and 2021 financial years. However, there were some companies who attempted to refile their 2020 tax returns upon determination that the relief would be most beneficial in that tax year.

It is good to note that this relief was only claimable by companies who filed their returns as and when due. Section 55(8) of the Act prescribes that companies that file their returns after the due date are liable to a penalty equal to the relief sought under Section 33(2). This means that a company liable to MinTax in that period but submitted its returns late would in effect pay MinTax at the flat rate of 0.5% of their GT (i.e., 0.25% MinTax and 0.25% penalty or MinTax forfeited).

Companies Exempted

The following categories of companies are exempted from MinTax under the Act:

1. companies carrying on agricultural trade or business as defined by the Act;
2. companies earning gross turnover of less than ₦25,000,000 in the relevant year of assessment i.e., small companies;
3. companies within the first four calendar years of its commencement of business.

It is pretty obvious why the above categories were exempted from MinTax. Small companies (companies with less than ₦25 million gross turnover) and those that newly commenced business need to be encouraged and provided with a soft landing in their formative years. Also, the agricultural sector is a key sector which needs to be constantly incentivized.

Companies with over 25% imported capital, prior to the 2019 FA amendments, were exempted from MinTax to encourage Foreign Direct Investment (FDI) into the country. However, it would seem that the FG, by deleting this category of companies, intends to provide a level playing field for both Nigerian and Foreign owned companies.

Key Matters Arising from the Amendments Introduced

Most amendments introduced to the tax laws often comes with mixed feeling among taxpayers. Some businesses might be grateful having been favored by the amendments, while others may not feel same way. The amendments introduced to Section 33 of the Act sparked some interesting debates, as discussed below:

1. Definition of GT
   
   One question that has reverberated among taxpayers since the introduction of the above provision is "What is my GT for MinTax purpose?". Section 105 of the Act (as amended by FA 2020) defines GT as:
   
   "the gross inflow of economic benefits during the period arising in the course of the operating activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants, including sales of goods, supply of services, receipt of interest, rents, royalties or dividends;"
   
   Yes, the Act defines GT. However, there has been varying interpretation of the above definition especially for the purpose of computing MinTax.
   
   The first is the meaning of operating activity. A school of thought believes operating activity means all activities performed by the company during its operations, and thus, MinTax should be computed on all streams of income (active and passive). However, had the drafters of the law had this definition in mind, why did they not use only the word 'activities' instead of qualifying what kind of activity it should be? Is it not possible that they wanted to streamline the income that should form part of GT?
   
   Another school of thought believes that the strict accounting definition of operating activities should be followed. This position holds that the principle of taxation follows from accounting principles. Hence, one should seek to understand the accounting treatment before determining the treatment for tax purposes. Following in that line of thought, the International Accounting Standards (IAS) 7 provides the definition of operating activities. It splits a company's activities into three – Operating, Financing and Investing and provides the following definitions:
   1. Operating Activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. (emphasis are those of the author);
   2. Investing Activities include the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples are the purchase or sale of property, plant, and equipment, or investments in subsidiaries.
   3. Financing Activities involve changes in the size and composition of the equity capital and borrowings of the entity. Examples include cash proceeds from issuing shares, payments to shareholders, and repayments of amounts borrowed.
   The above definitions suggest that all of a company's activities cannot be deemed to be operating, and thus, not all of its income can be deemed to be from operating activities.
   
   The GT definition provides some examples of operating income - sales of goods, supply of services, receipt of interest, rents, royalties or dividends, which is the main argument for supporters of the first school of thought in stating that all forms of active and passive incomes are included. However, it is also possible to interpret these examples while considering the key phrase – 'operating activities' i.e., these examples should only be considered where they align with a company's operating activities, as these examples can qualify as inflow from an operating activity of a company. A manufacturing company's operating activity is sale of goods, which should be included in its MinTax computation. A bank or financial institution earns interest income as part of its operating activity and should be included as part of its MinTax computation. A holding company would earn dividends as part of its operating activity. Hence, inflows from operating activities would vary from company to company and should not necessarily be all-encompassing.
   
   In view of the above, where a manufacturing company earns interest income, it should not be classified as part of its operating activities and should not be considered for MinTax purposes. Similarly, the income earned from a bank selling off some of its fixed assets should also not be considered for MinTax purposes.
   
   Another interesting question that arises with respect to the components of GT is whether realized gains also qualify as one. Following from the above analogy, it may be sage to conclude that realized gains should only form part of a company's GT where they relate to or arise from operating activities. In practice, exchange gains do not only arise from operating activities but can also arise from investing and financing activities. Hence, it can be argued that where a company is able to delineate its exchange gains into the relevant component source, only that which is deemed to arise from its operating activities should be liable to MinTax.
   
   It's safe to say that the argument posed by second school gives a strict / literal interpretation to the definition of gross turnover and ensures fairness to the taxpayers. However, the Federal Inland Revenue Service (FIRS) in its Information Circular 2020/04 titled "Clarification on sundry provisions of the finance act 2019 as it relates to CITA" appeared to align with the first school i.e., all inflows / income streams, irrespective of source, is part of GT for MinTax purpose. This position has also been hard coded into its digital income tax filing platform – TaxPro Max (TPM). Thus, this may be a matter for the law courts to arbitrate on to provide any sort of landing on the matter.
   
   Another issue arising from the definition of GT is the inclusion of the phrase 'when those inflows result in increases in equity'. A company's equity is increased by its profit after tax amount as seen in the Statement of Changes in Equity (SOCE). In some circumstances, companies that are "liable" to MinTax might have reported a loss after tax position and as such their inflows technically do not result in any increase in equity. Would this mean that such companies should not be liable to MinTax? If not, what is the basis of that inclusion in the tax law? It is good to note at this point that when the term gross turnover was first introduced and defined in the FA, 2019, it did not include the phrase. The phrase was introduced by FA, 2020.
   
   Interestingly, the referenced phrase was included in IAS 18's (which has now been replaced by IFRS 15) definition of "revenue". Companies with a loss after tax (which reduced their equity position) were still able to recognise revenue using the IAS 18 rules. This renders the argument posed in the preceding paragraph weak as it means the literal interpretation of the phrase was not considered before determining a company's revenue.
   
   Furthermore, IFRS 15's definition of revenue is simplified and excludes the referenced phrase. Consequently, the drafters of the law may need to review the GT definition to ensure that it aligns with global best standards and current realities. The definition can be made less ambiguous considering that the current form may also be interpreted to mean the drafters' intention for introducing the phrase was to give additional respite to companies whose contribution to equity in any particular tax year is on a decline.
2. Impact on Cost Plus Arrangement
   
   Irrespective of the school of thought one aligns with regarding the definition of GT, it is generally agreed that GT would include the reported turnover of the Company in any tax year. Hence, the streamlined focus on GT would lead to huge tax exposure for companies who operate a cost-plus model for their main operating activity, as such companies would typically record revenue as a combination of reimbursable cost plus the mark-up. Typically, cost plus companies are not loss making. However, there are some cost-plus arrangements where all the cost incurred by company are not reimbursed (e.g., the arrangement may be such that only the direct costs are reimbursed, and other administrative costs would be the responsibility of the company). In such instances, they may make a loss and then may be liable to MinTax.
   
   It can be argued, under such circumstances, that the actual economic inflow / income to the company is the mark-up, which should be the taxable income (gross turnover). However, since taxpayers have not won this argument under the deemed profit regime, it would continue to be a difficult position for the affected companies.
3. Capital Allowances
   
   The Second Schedule to the Act provides that companies that incur qualifying capital expenditure (CAPEX) are entitled to claim Capital Allowance (CA) on such CAPEX, over the life of the asset. CA is claimed as a tax relief against the assessable profit of a company before arriving at the taxable profits on which the CIT rate is applied. Section 33(4b) of the Act details the modalities for the claim of CA for companies that are liable to MinTax in a year of assessment. It prescribes that:
   
   "For the purposes of this section and the Second Schedule to this Act, the capital allowance for any assessment year in which a MinTax is payable, shall be computed and the amount so computed, together with any unabsorbed allowances brought forward from previous years, shall be deducted as far as possible from the assessable profits of the assessment year and, so far as it cannot be completely deducted, the amount by which the total amount of the capital allowance exceeds the amount of the assessable profit of the assessment year, shall be carried forward to the next assessment year".
   
   The above cited provision states that companies are supposed to claim CA as much as possible from their assessable profit before calculating the CIT payable that would be compared to MinTax liability. The cited provision seems to contradict some of the unambiguous provisions of the Schedules issued pursuant to the Act.
   
   Specifically, Paragraph 22 of the Second Schedule to the Act suggests that the decision on whether to utilize CA in a given year rests with the Company. Paragraph 24(7) also states that the CA to be deducted from assessable profits shall not exceed sixty-six and two thirds of a per cent of such assessable profits (for specified companies). A joint reading of both provisions can be interpreted to mean companies can choose to claim CA, but the amount claimed or utilized should not exceed the specified restriction (where applicable). However, Section 33(4b) quoted above, suggests that the referenced provisions of the Second schedule to the Act are moot for companies liable to pay MinTax in any YOA. This position has been encoded into TPM, such that all companies must claim CA up to the specified restriction contained the tax laws.
   
   As discussed above, MinTax is only payable where a company has no tax payable or a payable lower than the MinTax amount. Thus, most companies that would be paying MinTax may have made losses and experienced some business difficulties during the year. It therefore appears counter intuitive for the drafters of the law to seek to subject such struggling companies to MinTax and still insist that such companies should "utilize" as much CA as can be absorbed, even when not needed. What then happens when such business becomes profitable in the future (as there would be little or no CA left to offset the huge tax payable then)? The law makers may consider revising this position to allow taxpayers to claim CA as they deem fit in the relevant YOA.
4. MinTax for Companies in the Upstream Sector of the Oil and Gas Industry
   
   The Petroleum Industry Act (PIA) prescribes that companies operating in the upstream sector of the industry would be liable to CIT and Hydrocarbon tax (HCT) where applicable. The PIA also 'amends' the Act for upstream companies by providing additional provisions that should be read in conjunction with the Act. However, no reference was made to Section 33 of the Act in the PIA. This presupposes that upstream companies, though liable to CIT, may not be exposed to the sections of the Act not expressly mentioned, including MinTax. Further, the fact there was no reference to MinTax in the erstwhile Petroleum Profits Tax Act and also in the PIA (with respect to HCT) reinforces this position.
   
   However, a counter argument is that the PIA could have expressly exempted upstream companies from MinTax if it was intended. More so, there are provisions not referenced in the PIA that apply to upstream companies e.g., Section 40 of the Act which provides the rates for the computation of CIT. Thus, it would seem that upstream companies are now liable to MinTax. However, it would be interesting to see how MinTax is applied in light of the gas tax credits and allowances that was granted as incentives by the President for non-associated gas development. As this might mean that such companies would still be liable to taxes where the gas credits / allowances have reduced the tax payable to almost or completely NIL position. The MinTax payable in such instances may be substantial considering the fact that upstream companies typically have high operating revenue.

MinTax Regime in Other Countries

One of the objectives of the FA is to reform domestic tax law to align with global best practices. The simplification of the MinTax formular conforms with global practices (where applicable), but the popularity of MinTax seem to be waning in developed countries, making it arguable if the new Nigerian MinTax regime is in sync with the above objective.

For instance, Corporations, whether resident or non-resident are not subject to MinTax in Canada¹. Similarly, Countries like France and China do not have corporate MinTax provisions.

In Africa, countries like Egypt, South Africa¹ and Uganda do not have operational MinTax provisions. Some other countries have less punitive MinTax provisions e.g. In Tanzania, MinTax is computed as 0.5% of turnover for companies with perpetual unrelieved tax losses for the current and preceding two income years.

The MinTax regime in South Korea, Ghana and Ivory coast are like that of Nigeria with respect to the basis for payment i.e., as a percentage of Turnover; and applicable companies are required to pay the higher of their tax payable and MinTax liability.

Conclusion

The MinTax regime has been a successful anti-tax avoidance rule that has helped to increase the corporate taxes paid in Nigeria. However, there are ambiguous interpretations of the rules governing MinTax in Nigeria. Thus, the Federal Government must once again review the rules to provide clarity and fairness to the taxpayers to ensure continued growth of the Nigerian economy. This is especially in the wake of the economic realities that have resulted in a lot of companies recording losses and having to pay MinTax.

Footnote

1 Canada and South Africa are adopting the Pillar Two Solution which introduces a global MinTax rate of 15%. However, this is to ensure the taxation of Multinationals and not for all companies.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.