2020 finance law; A review of the new minimum tax regime – Finance and Banking



It is no longer news that President Muhammadu Buhari enacted the 2020 Finance Law (FA20) on December 31, 2020 at the same time as the 2021 national budget. The FA20 has made several changes to 14 Nigerian tax and tax laws, in accordance with to the Buhari administration’s promise of ongoing tax and tax reforms.

A notable amendment to the Corporate Income Tax Act (CITA) is the Section 33 amendment which provides for the minimum corporate tax regime in Nigeria. In this article, we will examine the minimum tax regime before the promulgation of the 2019 finance law (FA19) and FA20 with respect to the new minimum tax regime introduced by the FA19 and further modified by the FA20.

Minimum tax regime (pre-financial law 2019 and 2020)

The minimum tax is applicable to companies without taxable profit or whose tax payable is lower than the calculated minimum tax. However, before the introduction of FA19 and FA20, companies engaged in agricultural activity, companies in the first four calendar years of activity and companies with imported capital of 25% and more, were exempt from the minimum tax. on the basis of Article 33 CITA. In addition, various parameters have been taken into account to determine the minimum tax payable by companies which include gross profit, net assets, paid-up capital and turnover of the company. This approach was cumbersome and time consuming. It also generated various controversies, as companies paid taxes on their equity (paid-in capital) and net assets even when the business was operating at a loss.

Another controversy was the exemption granted to companies with imported equity of 25% and more, as it did not provide a level playing field compared to companies with locally sourced capital. Although the original intention was to attract foreign direct investment to the country, the general opinion is that the exemption had exceeded its target.

The Amendment under the 2019 Finance Law

In order to respond to the controversies over the old minimum tax regime, the FA19 made changes to Article 33 of the ITA. The FA19 introduced a new basis for calculating the minimum tax, moving from a combination of equity, net assets and an income-based approach to a strictly income-based approach. A flat rate of 0.5% of gross turnover less franked investment income has been introduced as the basis for calculating the minimum tax.

The amendment also removed the exemptions granted to companies with imported capital equal to or greater than 25% and introduced a minimum tax exemption for small businesses with gross turnover less than N 25,000,000. Although these changes appear to have resolved the controversies raised by the previous legislation, they nevertheless introduced a new challenge. Does a business have to pay income tax on its turnover when no profit was made during the year? Wouldn’t that be like paying a tax on equity and reserves as was the case under the old minimum tax regime? Wouldn’t that negate one of the canons of taxation, equity? Should income and not gross profit be the basis for calculating the minimum tax? These questions demand answers.

Considerations under the 2020 finance law

The outbreak of the Covid-19 pandemic during the year 2020 resulted in the shutdown of global production and disruptions in the supply chain. This has had a negative impact on various companies in different sectors of the economy. Therefore, governments around the world have offered palliatives in the form of tax breaks and incentives to taxpayers at various levels.

With the aim of granting similar palliatives to taxpayers, the Federal Government of Nigeria (FGN) through the FA20 introduced a 50% reduction in the minimum tax rate of 0.5% of gross turnover less income. placement franked at 0.25%. The reduced minimum tax rate is however applicable for Contribution Years (YA) due from January 1, 2020 to December 31, 2021.

This is indeed a commendable FGN initiative aimed at cushioning the impact of the Covid19 pandemic on businesses. The only challenge with this initiative is the fact that tax returns to be submitted from January 1, 2020 to December 31, 2020 (the effective date of the FA20) should have been filed with the Federal Inland Revenue Service (FIRS) for businesses. having fiscal years ended between July 1, 2019 and June 30, 2020. It is still unclear how these companies should take advantage of this incentive when their tax returns are already filed and the minimum tax paid by the company where applicable. Are the companies concerned required to request a tax refund in order to recover the amounts already paid to FIRS? Are the companies concerned allowed to use the amounts of tax paid as a tax credit against future tax obligations? Can these amounts be applied against future liabilities for any type of tax? These questions also call for answers because the FA20 did not provide the framework for the recovery of the minimum tax already paid in this circumstance.


It is important to note that the reduction of the minimum tax rate from 0.5% to 0.25% is only applicable for two tax years. While noting the effective time window to take advantage of the incentive, the FG should be applauded for the successive changes to the various tax laws in Nigeria. It is also important for the FG to provide possible answers to the many questions that have been raised about these amendments.

In the coming months, we look forward to the release of an Executive Order to help solve these puzzles and close the missing links created by the omission of critical guidelines regarding the incentive granted by the FG.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.



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