Law and the Financial Act 2020

Law’s empire covers all those rules, institutions and norms that define the legal order of a society. Economics, on the other hand, is the science of reconciling scarcity and wants to enhance the wealth of nations.

Richard Posner at Chicago Law School was a pioneer in the study of law as a social tool to promote economic efficiency. Economist and Nobel laureate Joseph Stiglitz has argued that the structural challenges facing the American economy, for example, have to do with the inefficient rule-making that underpins American capitalism.

Daron Acemoglu and James Robinson, in their book, Why Nations Fail (Crown Publishing 2012), underline the system of rules governing institutions, markets and property rights as being key critical success factors for the prosperity of nations.

The normative framework for macroeconomic policy management derives from both fiscal and monetary policy. Fiscal policy is about government revenue mobilisation, taxation, budgeting and public expenditure. Monetary policy, on the other hand, has to do with the work of the central bank in controlling monetary aggregates, moderating inflation and ensuring a sound monetary and payments system. In an ideal world, the fiscal and monetary side must work in tandem to ensure financial balance, macroeconomic equilibrium and long-term prosperity. Economic policy efficiency is critical in sending the right signals by which market players and other economic actors can anchor their rational expectations for the future.

The Financial Act 2020 is a 26-page documented that was signed into law by General Muhammadu Buhari on 13 January 2020 and was gazetted on the following day of 14 January, 2020. Several factors brought it into being.

First, as of June last year, our economy entered into another recession; coming at the wake of the generalised and unprecedented lockdown occasioned by the novel coronavirus global pandemic.

Our second recession came when we were just coming out of one of the worst recessions in our national history during 2015-2017. Any economy that is plagued largely by recession punctuated by a few years of recovery cannot be a healthy one. The collapse of global oil prices following Covid-19 led to rather severe fiscal challenges for our decision-makers. Something needed to be done.

Not many people know that during 2018-2020 the Bill and Melinda Gates Foundation set up a Fiscal Commission to advise the federal government about financial reforms. Yours sincerely was a member of that Commission. The Gates Commission did its part in advising on the need for government to provide a financial policy framework for the annual budget. The Financial Act 2020 was partly a response to that advice.

The new Act expressly aims to promote fiscal equity; reform existing tax laws to put them in tune with global best practices; provide incentives for investors; and enhance Ease of Doing Business while boosting government revenue at federal and state levels.

The key laws amended in the new Act cover: Companies Income Tax Act (CITA); Personal Income Tax (PIT); Stamp Duties Act; Custom and Excise Tariff; Petroleum Profit Tax; Capital Gains Tax; and the Value Added Tax (VAT).

In terms of CITA, the Act creates three thresholds of turnover for tax purposes. Small businesses with a turnover of less than N25,000,000 are now exempt from corporate tax.  Medium-sized businesses with income of between N25,000,000 and N100,000,000 will pay a corporate tax rate of 20% while those with a turnover exceeding N100,000,000 will pay a tax rate of 30 percent. However, when a company makes a loss, the minimum tax to be paid is 0.5% of total turnover. There is a 5-year tax holiday for all small businesses. A rebate of 1% and 2% for small and medium firms respectively applies to all firms that make early tax payments. The VAT has been raised from 5% to 7.5%, but small firms with less than N25,000.000 turnover are exempted. A new penalty amounting to 10% of the value of the tax not remitted, plus interest accruable will not apply to those who do not pay their VAT on the stipulated time.

All bank account holders are now required to provide a Tax Identification Number (TIN) to their banks. Stamp duty is now payable on all bank transfers for amounts above N10,000, including POS transfers. Those above that figure will attract a stamp duty of N50. Excess dividend charges that amounted to double taxation have been phased out, with a fixed charge of 30% to apply on all excess dividends. This is expected to boost more investor confidence while encouraging more people to save and invest.

Our primary focus today is on the twin issues of unclaimed dividends and dormant accounts in commercial banks. The essence of the new policy is that FGN plans to securitise unclaimed dividends and dormant account balances that have existed for up to six years will be pooled into a trust fund to be managed by the Debt Management Office (DMO).

According to available data, unclaimed dividends and dormant accounts in Nigeria currently exceed N1 trillion.

This new policy raises several issues. Attention has been drawn to the fact that the Finance Act never uses the word “borrow” with regards to those funds. This implies that FGN can commandeer those funds without obligation to pay back. There is also the fact that it seems to ignore a provision in CAMA that allows for a period of 12 years for unclaimed dividends before such funds can be passed back to the issuing company.

Critics believe this new policy is not only retrograde; it is both discriminatory and capricious. It appears to be offering a carte blanche for government to commandeer people’s money in the name of a “Crisis Intervention Fund” for anything whatsoever as it deems fit. So, far, according to some sources, total looted funds recovered over the past decade total a staggering $31.98 billion. Government has never been transparently accountable for how these moneys have been spent. This creates doubts in the minds of many that government can be trusted to do what is right.

The experience of the UK has important lessons for us. In 2008 the British government passed the Dormant Bank and Building Society Accounts Act. A commission was established comprising both government and the private sector to undertake a review of all dormant assets, both public and private. Unclaimed dividends in the UK are currently estimated to range between £3 to £4 billion while dormant accounts amount to a staggering £15 billion in commercial banks and building society vaults. An account is considered dormant when there have been no activities on it for a period of 15 years. In terms of principles, the fundamental objective is to link assets with owners. And even if this cannot be achieved, the principle is maintained that the right of owners to reclaim assets must exist in perpetuity.

The new approach on dormant accounts and unclaimed dividends under our new Financial Act 2020 is bad policy both in spirit and in law. It sends the wrong signal that government can commandeer the private assets of individuals for purposes that may never be clear or legitimate. Property rights are a cornerstone of economic and political freedom. In a free-market economy and in a constitutional democracy, it is the bounden duty of government to protect the rights of individual property. It is a right that is as old as John Locke, al-Farabi and de Tocqueville.

In the words of the legal philosopher Ronald Dworkin, “We are subjects of law’s empire, liegemen to its methods and ideals, bound in spirit while we debate what we must therefore do.” What we must do is revise that bad law!

(Being the Text of a Lecture Delivered to a Webinar Organised by the Rule of Law Development Foundation, Kaduna, on Monday 22 February, 2021)

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