Finance Act 2019: implications for banking sector, capital market —PWC

The Nigerian Tax and Fiscal Law (Amendment) Bill 2019 otherwise known as the Finance Bill signed by President Muhammadu Buhari on January 13, 2020, has implications for the banking sector and the capital market, says PriceWaterHouseCoopers (PWC).

In its Insights Series on Nigeria’s Finance Act, the global consulting firm stated that the bill, now Act providedseveral changes which will affect the banking and capital markets sector.

Significant among these changes are the provisions to clarify the tax treatment of securities lending transactions in the capital market.

The Bill seeks to provide clarity on the tax consequences of Regulated Securities Lending Transactions (RSLT).

Generally, an RSLT may involve the exchange of shares between a Lender and Borrower for short selling, for example in a regulated securities market.

Also, the ability to deduct business expenses for tax purposes is an important consideration for companies. The current provisions as contained in the Companies Income Tax Act (CITA) grants deductions for expenses wholly, reasonably, exclusively and necessarily (WREN) incurred in generating profits.

“Overall, we expect the general changes being introduced by the Finance Bill and the specific amendments targeted at the banking sector and the capital market to have a positive impact especially in the medium to long term. The clarifications provide better certainty around taxation for companies operating in the sectors. It is also expected to bring about a significant increase in investments and stimulate activities in the capital market,” PWC stated.

In 2011, the Federal Government  introduced the Companies Income Tax Exemption Order (the Order) which exempted interest income on corporate and government securities from taxes for 10 years. Consequently, financial institutions earn significant amounts of exempt income and often claim full deduction for their expenses without excluding any portion relating to tax-exempt income.

“The Bill introduces amendments by stating that expenses must be WREN incurred for generating profits that are ‘chargeable to  tax’.

“It also states that expenses would be disallowed if they are … incurred in deriving tax-exempt income, losses of a capital nature and any expense allowable as a deduction under the Capital Gains Tax Act…” it explained.

According to PWC, the amendment however does not address how to apportion general expenses incurred to earn both taxable and exempt income.

Similarly, the Act now introduces a specific benchmark of thirty percent of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) as the limit for interest deduction on loans by a foreign ‘connected person’.

Any excess interest expense can only be carried forward for 5 subsequent years, even as it  exempts Nigerian subsidiaries of foreign companies engaged in banking and insurance from this rule.

According to the tax experts, the proposed benchmark is consistent with the recommendation of the Organisation for Economic Cooperation and Development (OECD) through its Article 4 on Base Erosion and Profit Shifting (BEPS) project.

In the area of financial inclusion, the CBN recently issued a directive for banks to charge a stamp duty of N50 on Point of Sale (POS) transactions of N1,000 and above.

This directive has been viewed by many as retrogressive and contrary to the government’s plan to reduce the proportion of financially excluded adults to 20per cent by the year 2020.

The Act however provides some succour by raising the minimum threshold of N1,000 to N10,000.

The Act aims to further encourage lending to the real sector by disallowing tax deductions for expenses related to tax-exempt income.

The CBN has also excluded resident individuals and non-bank corporates from participating in its open market operations (OMO) at both the primary and secondary market.

This is an indication that there may not be an appetite for government to extend the current tax exemption on treasury bills and corporate bonds beyond the 10 years, that is, 2 January 2022, the firm observed.