Impact of Finance Act 2019 on Nigeria's Tax System: Prepayment of Company Income Tax on Interim Dividends

 

If you're a business owner or an investor in Nigeria, you’ve probably noticed that tax under the Finance Act 2019, is a whole lot easier—at least for companies and businesses! Let’s look at some changes in the Company Income Tax Act (CITA) 1990 occasioned by the Finance Act 2019 and how these affect businesses, investors, and even the economy.

I.                    The Old Rules: Section 43 of CITA 1990 – A Throwback

Remember the days when tax rules were all about certificates, computations, and endless paperwork? Well, that was the crux of Section 43 of the CITA 1990. Here’s what it used to look like:

1. Dividend Certificates   

Back then, companies had to hand out certificates to every shareholder, detailing the dividend amount and the profits it was paid from. Think of it like a receipt, but one you probably never asked for!

2. Complex Tax Calculations

Ever tried to solve a tricky math problem? That’s what calculating the “net Nigerian rate of tax” on dividends was like! It was all about figuring out the right rate, dividing the tax payable by profits, and making sure everything matched up with the accounting periods. The spoiler is: this process was anything but simple!

3. Companies as Open Books

Companies had just 14 days to report all their dividend details to the tax authorities. And if they didn’t, well, things could get pretty messy. It was all about transparency—full disclosure to make sure the tax authorities got their share.

4. Pre-Payment of Company Income Tax Before You Pay Interim Dividends

If you thought paying dividends was easy, think again! Under the old rules, companies had to pre-pay company income tax on the interim dividends before paying them out to shareholders. Basically, companies had to front the tax money first and settle the actual tax bill later. Of course this can put a damper on your cash flow! Imagine paying dividend and front-paying income tax also.

5. Non-Cash Dividends Were Tax-Free

One cool thing was that if companies paid dividends in non-monetary forms, like shares or property, they didn’t have to worry about tax deductions. So, shareholders could get creative returns without the taxman lurking.

II.                  The Big Shift: Section 17 of the Finance Act 2019 – Out with the Old, In with the New!

The Finance Act 2019, entered and swept away Section 43 of CITA 1990. It brought some serious simplicity to the scene. It practically deleted the whole of section 43 of the CITA 1990. But what does this mean for businesses and investors? Let’s break it down:

1. No More Dividend Certificates

Companies are now free from the burden of issuing certificates for every dividend paid out. If you were ever annoyed by that paperwork, this is your victory dance moment!

2. Simplified Tax Process

With the removal of Section 43, businesses no longer need to sweat over calculating the “net Nigerian rate of tax” on dividends. The tax authorities won’t be asking for detailed profit calculations anymore. Tax on dividend is now simply 15% withholding tax as per the new rule released on July 1, 2024.

3. Bye-Bye to Pre-Payment of Company Income Tax

One of the biggest wins for businesses? They don’t have to prepay company income taxes whenever they are about to pay interim dividends anymore! That means companies get to hold on to their cash for a bit longer before settling the tax bill. This change is all about better cash flow and fewer headaches for companies.

III.                The Impact: What Does This Mean for Businesses, Investors, and the Economy?

Alright, so we know the rules have changed—but what’s in it for businesses, investors, and the economy? Here’s how it all plays out:

1. Businesses: More Cash, Less Hassle

It means better cash flow for businesses. Without the need to prepay company income taxes whenever they are about to pay interim dividends, companies now have more money to play with before the taxman comes calling. This could be a game-changer for businesses trying to reinvest, expand, or just keep operations running smoothly.

There are also fewer compliance burdens. The tax process is now WAY easier for companies. No more juggling dividend certificates or calculating tax rates on dividends. The simpler, the better!

2. Investors: More Uncertainty, but Potentially Higher Returns 

With companies holding on to more cash (thanks to the elimination of pre-paid taxes), investors might see higher dividends. More cash for the company could mean more cash for you as an investor!

3. The Economy: Stimulating Growth

Simpler tax rules often lead to more investments—both locally and from abroad. With businesses saving time and money on compliance, they might have more incentives to invest in expansion and growth. And more business growth = a stronger economy.

 

IV.               In Conclusion: A Step Towards Simplicity

The deletion of Section 43 from CITA 1990 by the Finance Act 2019 marks a huge step towards a simpler tax environment for businesses in Nigeria. While investors may face some uncertainty, the overall impact looks promising for businesses and the economy. Fewer tax complications, better cash flow, and a more straightforward system?