Commencement Rules: Subtle Changes Section 12 of the Finance Act 2019 Make in Section 29 of the Company Income Tax Act 1990

 

In Nigeria, taxation laws are crucial for businesses to understand and comply with. One of the key laws governing company income tax is the Company Income Tax Act (CITA) 1990. However, like any legal framework, CITA has undergone amendments to address changing economic realities and improve clarity. A significant update came with the Finance Act 2019, particularly in Section 12, which amends Section 29 of the CITA.

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In this article, let’s highlight the subtle modifications section 12 of the Finance Act 2019 make in the CITA 1990, focusing on the computation of assessable profits for a company just commencing business or trade—commencement rules—in Nigeria.

Assessable Profit of Companies Commencing Business: The Old Rules

Originally, under the old rules, Section 29 of the CITA 1990 detailed how the profits for the first three years of a new trade or business in Nigeria should be assessed. The rules then are:

1. In the first year, the assessable profit is the profit of that year. That’s the profit of the business from the date of commencing business or trade to the end of the accounting year of the business. For instance, if the business organization, say Organic Nigeria Limited commences business or trade on June 1, 2016 and it accounting year end is December 31 of every year. Its assessable profit for the first year i.e., Year of Assessment 2016, is the profit from the business calculated from June 1, 2016 to December 31, 2016.

2. In the second year, the assessable profit is the profit of one year from the commencement date. In the case of Organic Nigeria Limited, the assessable profit for the second year i.e., Year of Assessment 2017, is the profits from June 1, 2016 to May 31, 2017.

3. In the third year, the assessable profit of the business shall be the profit computed similarly for an ongoing business using the preceding year basis rule. In the case of Organic Nigeria Limited, the assessable profit for the third year i.e., Year of Assessment 2018, is the profit for the period January 1, 2017 to December 31, 2017.

Assessable Profit of Companies Commencing Business: The New Rules

But with the promulgation of the Finance Act 2019, the old rules on commencement of business or trade were abrogated and replaced with the following rules:

1. Now in the first year, the assessable profit for a new company or a business just commencing business or trade in Nigeria is the profits from the date the company began trading in Nigeria to the end of its first accounting period. This is pretty similar to the rule under the amended section 29 of CITA 1990. For instance, if Organic Nigeria Limited commences business or trade on June 1, 2020 and it accounting year end is December 31 of every year. Its assessable profit for the first year i.e., Year of Assessment 2020, is the profit from the business calculated from June 1, 2020 to December 31, 2020.

2. But in the second year, there’s a clear-cut amendment. The assessable profit of the business is the profit from the day after the first accounting period to the end of the second accounting period. In the case of our hypothetical company—Organic Nigeria Limited—, the assessable profit for the second year i.e., Year of Assessment 2021, is the profit from the business calculated from January 1, 2021 to December 31, 2021.

3. In the third Year, profits are assessed from the day after the second accounting period ended, continuing as per standard practice. That’s, for Organic Nigeria Limited, the assessable profit for the third year i.e., Year of Assessment 2022, is the profit from the business calculated from January 1, 2022 to December 31, 2022.

Conclusion

These amendments to the CITA 1990 in the Finance Act 2019, although subtle for most tax practitioners (and student of tax), simplify the process, ensuring that profits are consistently tied to the company’s accounting periods, which makes it easier for businesses to understand and comply with.