Tax Reform Shake-Up: 10 Key Changes You Need to Know

On Thursday, Nigeria’s House of Representatives made a notable advancement in tax reform by approving the Finance Committee’s report on four essential tax reform bills. These bills were presented by President Bola Tinubu in October 2024 and are designed to transform Nigeria’s tax framework.

The reports underwent a meticulous clause-by-clause examination prior to their approval, paving the way for the third reading. The four bills are as follows:

·         The Nigeria Tax Bill 2024: This legislation proposes a phased increase in the Value Added Tax (VAT) from 7.5% to 12.5% between 2026 and 2029, with an additional rise to 15% by 2030.

·         The Nigeria Tax Administration Bill 2024: This bill aims to enhance the efficiency of tax administration in Nigeria.

·         The Nigeria Revenue Service Bill 2024: This legislation proposes the creation of the Nigeria Revenue Service, which will take over the functions of the Federal Inland Revenue Service (FIRS).

·         The Joint Revenue Board Tax Bill, 2024:  This bill is intended to improve the collection and distribution of revenue among the three tiers of government in Nigeria.

 Significant Amendments to Nigeria’s Tax Reform Legislation

The key highlights from the reform bill are as follows:

·         Revenue Derivation Formula:  The revised bill modifies the derivation formula, decreasing it from 60% to 30%. The distribution of VAT revenue will be allocated as follows: 10% to the federal government, 55% to state governments, and 35% to local governments. Additionally, the House has proposed that the VAT revenue credited to states and local governments be distributed based on the following criteria: equally – 50%; population – 20%; and consumption – 30%.

·         VAT Rate: The existing VAT rate of 7.5% will remain unchanged, rather than increasing to 15% by 2030. This decision aims to ease the financial burden on Nigerian citizens.

·         Funding for Essential Agencies: Financial support for agencies such as TETFUND, NITDA, and NASENI will persist, with an expansion of beneficiary agencies. The amended bill designates the following allocations: Tertiary Education Trust Fund (50%); Nigerian Education Loan Fund (3%); National Information Technology Development Agency Act (5%); National Agency for Science and Engineering Infrastructure (10%); Defence Infrastructure Fund (10%); Nigeria Police Trust Fund (5%); National Sports Development Fund (5%); Social Security Fund (10%); National Board for Technological Incubation (10%); and National Cybersecurity Fund (1%).

·         Limitation of Presidential Powers: The president or governor is now required to secure National Assembly approval before remitting taxes or granting income tax exemptions to companies. This amendment is intended to enhance transparency and accountability in tax administration.

·         Elimination of Excise Duty: The proposed 5% excise duty on telecommunications and foreign exchange transactions has been removed. The House contended that this excise duty would lead to increased tariffs, potentially causing job losses and worsening unemployment.

·         Elimination of Inheritance Tax: Inherited assets will not incur taxation, clarifying that the introduction of an inheritance tax is not being considered. This amendment seeks to address the concerns of Nigerians regarding the possible taxation of inherited assets.

·         Company Income Tax: The corporate tax rate remains at 30%, with a reduced rate of 25% applicable to priority sectors for a duration of five years. The House has also suggested that companies within the priority sector benefit from a tax reduction to 25% during this five-year period.

·         Taxation of Free Trade Zones: Companies operating in free trade zones may access incentives if they fulfill specific criteria, such as exporting a minimum of 75% of their goods or services. Documentation of export proceeds, whether in cash flow, imported materials, or equipment, must be submitted.

·          Lottery and Gaming Business: The House has eliminated references to the Lottery Trust Fund, in accordance with a Supreme Court ruling. Additionally, the proposed tax on lottery and gaming enterprises has been rescinded.

·         Exemption for Military Personnel: Military personnel will be exempt from personal income tax due to the essential nature of their duties.

The amendments approved by the House of Representatives represent a crucial advancement in the reform of Nigeria’s tax framework. These changes are designed to enhance transparency, accountability, and equity in tax administration while offering relief to Nigerian citizens and military members. As these bills progress to the Senate for review, there is optimism that they will positively influence Nigeria’s economy and tax structure.