INTRODUCTION
As Nigeria gears towards a new tax regime through its tax reforms bills before the National Assembly, new concepts under the reform bills will be introduced into the Nigerian fiscal system, which will have significant and far-reaching impact on doing business in Nigeria. One of such concepts is the concept of the Minimum Effective Tax under the Nigeria Tax Bill (the “Bill”).[1] This briefing note examines the concept of Minimum Effective Tax and its potential effects.
WHAT IS MINIMUM EFFECTIVE TAX?
Under Pillar Two of the Global Anti-Base Erosion (GloBE) Rules by the Organisation for Economic Co-operation and Development, there is a global minimum effective corporate tax rate of 15% for large multinational enterprises (MNEs), which seeks to respond to the continued concerns regarding profit shifting, harmful competition, and a damaging “race-to-the bottom” on corporate tax rates. This rule is to the effect that large MNEs with global turnover of EUR 750 million or more would potentially be subject to top-up tax in a jurisdiction where their tax is below 15%.
Therefore, the introduction of Minimum Effective Tax under the Nigeria Tax Bill is to align the Nigerian tax regime with global standards to tackle base erosion and profit shifting.
WHEN WILL MINIMUM EFFECTIVE TAX APPLY UNDER THE NIGERIA TAX BILL?
Minimum Effective Tax will apply in a year of assessment where the effective tax rate of a Nigerian Company (other than a small company) is less than 15% and such Nigerian Company is (i) either a constituent entity of an MNE[2] group or (ii) is a Company that has turnover of ₦20billion and above.[3] As compared to the EUR 750 million, the threshold for turnovers for MNEs under the Bill is significantly lower at an estimated amount of EUR 12 million.[4] The reasons for this lower threshold may be due to the low tax to GDP ratio of Nigeria and the fact that Nigeria is a developing country.
HOW WILL THE EFFECTIVE TAX RATE BE COMPUTED?
Based on the interpretation section of the Bill, effective tax rate is determined as follows:
Effective Tax Rate = Aggregate Tax Paid
Qualifying profits before tax
It is necessary to bear in mind that the Bill does not define “aggregate tax paid” neither does it define “qualifying profits before tax”, therefore these concepts may be subject to various interpretations. That said, it must be borne in mind that the Bill anticipates (under the definition of effective tax rate) that regulations will be issued by the Nigeria Revenue Service. It is our expectation that upon enactment of the Bill, regulations which adequately define/describe what will constitute “aggregate tax paid” and “qualifying profits before tax” will be put in place. In the formulation of the relevant regulations, there is the likelihood that taxes such as corporate taxes, deferred taxes, development levy, tax incentives for qualifying sectors, will form part of the definition of “aggregate tax paid”. On the other hand, there is the likelihood that exempt income may not form part of “qualifying profits before tax”.
IS MINIMUM EFFECTIVE TAX THE SAME AS MINIMUM TAX?
No. Under the current fiscal system, companies (whether MNE or not) are subject to minimum tax at the rate of 0.5% of gross income of the company less franked investment income. The Bill seeks to abolish the concept of Minimum Tax as it makes no provision for same. On the other hand, Minimum Effective Tax is a top-up tax that will apply under limited instances where the aggregate tax paid by a company is less than 15% provided such company is a constituent of an MNE or has turnover above ₦20billion.
WILL MINIMUM EFFECTIVE TAX APPLY TO COMPANIES IN A LOSS-MAKING POSITION?
No. To the extent that a company has made verifiable losses, there should be no basis for the imposition of minimum effective tax. We believe that the basis for the determination of “qualifying profits before tax” should take account of the provisions of section 27(1) of the Bill which deals with the ascertainment of total profits of a company and invariably considers losses.[5]
CONCLUSION
While the proposed introduction of the minimum effective tax is in line with OECD Pillar Two, it is our expectation that upon enactment of the Nigeria Tax Bill, the regulations that will be introduced by the Nigeria Revenue Service would address some of the potential gaps and challenges identified above.
Please see some of our other thought leadership pieces on the Nigeria Tax Reforms Bills. Click here (https://ao2law.com/tag/tax-reforms-bills/)
REFERENCES
[1] The Nigeria Tax Bill has been passed by the Nigerian House of Representatives is but yet to be passed by the Nigerian Senate.
[2] An MNE (Multinational Enterprise) Group is defined by section 203 of the NTB to mean any group that includes two or more enterprises, the tax residence for which is in different jurisdictions, or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.
[3] Please note that the version of the Nigeria Tax Bill reviewed by our Firm puts the turnover at ₦20billion. It is our understanding that the Nigerian National Assembly are considering increasing the turnover threshold to ₦50billion.
[4] Based on the footnote above, in the event the turnover is increased to ₦50billion, the turnover threshold will be as high as EUR 50 million which is still far lower than OECD threshold of EUR 750 million.
[5] Section 27(1) provides that “The total profits of a company for any year of assessment shall be the amount of its total assessable profits from all sources, including chargeable gains computed in accordance with part VIII of chapter two, less the amount of any loss ascertained in accordance with subsection (6) of this section, and capital allowance in accordance with the provisions of part I of the First Schedule to this Act.”
Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries on this should please be directed at the authors.
