FINANCE ACT, 2019 (Continued)
The Impacts on Companies Income Tax
In continuation from our last column, we will still focus on the changes that affect the Companies Income Tax Cap C21, LFN 2007 (CITA) to guide corporate and individual taxpayers on the impact of the Act on their businesses.
- Pioneer Incentive to companies in Agricultural business – S.23(1C)
The Act introduced special pioneer status incentive scheme of the initial period of five years which can be extended for another maximum period of three years to companies engaged in agricultural business with a proviso that such company cannot be granted similar incentive under any other Act in Nigeria.
- Business Organisation and Restructuring – S. 29(9)
Section 12 of Finance Act 2019 states that the commencement and cessation rules for computing the income tax payable by new and liquidating businesses respectively, have been modified to incorporate actual year basis of taxation.
The tax exemption on the transfer of assets at the Tax Written Down Value (TWDV) between related parties shall be rescinded if the asset in question is subsequently disposed of to a third party within 365 days of such initial transfer, and therefore subject to the applicable taxes.
Conditions to enjoy the above concessions in the new Act are:
- the parties must obtain the consent of the Federal Inland Revenue Service;
- the companies must prove to the satisfaction of the Service that one company has control over the other or that the companies are controlled by some other person or are members of a recognised group of companies;
- Membership of the group of companies as above must have been so for a consecutive period of at least 365 days prior to the date of reorganization.
However, the above concessions shall be rescinded if the acquiring company makes a subsequent disposal of the assets acquired within 365 days of the date of transaction.
- Payment of Provisional Tax – S. 77(1)
Provisional Tax payment within three months of the assessment year has been repealed in the new Act.
- Insurance Companies (S.16)
The restriction of four year placed on insurance companies for relieving losses has been repealed in the new Act as the insurance business losses can now be carried forward for relief indefinitely until full relieved like all other companies.
- New definition of Investment Income for Life Assurance Business
A new subsection 6 has been added to this section where Investment Income for the purpose of taxation of life insurance company has been defined as income derived from investment of shareholder’s funds. This was not defined in the old Act.
- New basis for computing minimum tax for Insurance Companies – S. 16(12)
A new subsection 12 has been added under this section as follows for companies in insurance businesses: “the tax payable by any insurance company for any year of assessment shall not be less than:
- 0.5% of the gross premium for non-life insurance business; or
- 0.5% of gross income for life assurance businesses.
- S. 23. PROFITS EXEMPTED FROM TAX
In addition to the list in the old Act the following profits/income have been exempted from tax.
- The profits of a small company;
- The dividend and rental income by a real estate investment company on behalf of its shareholders provided that:
- a minimum of 75% of dividend and rental income is distributed, and
- such distribution is made within 12 months.
- S. 24 (CITA) – Deductions Allowed
The old Act, in additions to the specifically mentioned business expenses also states that allowable deductions shall be those expenses “wholly, reasonably, exclusively and necessarily” incurred in the production of those profits.
The above clause has been amended in the new Act such that allowable deductions shall be restricted to those expensesincurred in the production of those profits chargeable to tax.
The implication of the above is that expenses incurred on profits exempted from tax shall not be allowed as deductions for tax purpose.
The following expenses are also disallowed as deductions in the new Act:
- any expense incurred within or outside Nigeria with related parties that is not in compliance with Transfer Pricing Regulations;
- any expense incurred in deriving tax exempt income, losses of a capital nature and any expenses allowable as a deduction under the Capital Gains Tax Act for the purpose of determining chargeable gains.
- any penalty prescribed by any Act of the National Assembly for violation of any statute, and
- any tax or penalty borne by a company on behalf of another person.
We shall continue with the key changes in the Act as it affects Value Added Tax Act Cap V1, LFN 2004 as amended in the next publication.
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|Lateef M. Ayofe|
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