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The Deduction of Tax at Source Withholding Tax (WHT) Regulations 2024 released on July 1, 2024, by the office of the Honourable Minister of Finance and Coordinating Minister of the Economy, has now been gazetted on October 2, 2024.

The regulations have an effective date of 1 January 2025 and supersede all previous regulations concerning deductions at source or Withholding Tax.  It also simplified areas of complexity in the old regulations as well as the issue of reduced rates for industries with low margins have now been adequately addressed by the new regulations.

Also, the regulations are designed to promote easier tax compliance and administration, reduce arbitrage between corporate and non-corporate business structures, and address emerging issues, while also aligning with global best practices.

What to Know about Withholding Tax (WHT)

Withholding Tax (WHT) is a tax deducted at source from payments made to a taxable person for the supply of goods and services or any other eligible transaction involving both passive and non-passive income.  It is not a separate form of tax but an advance payment of income tax.

WHT can be used as a tax credit to offset any subsequent income tax liability.  However, in certain cases, the WHT deducted at source serves as the final tax in the hands of the recipients. WHT was designed to curb tax evasion by widening the tax net, which in the long run improves overall tax revenue generation.

Key Updates on the New Withholding Tax Regulations

Below are the notable changes brought by the “Deduction of Tax at Source (Withholding) Regulations 2024” to address the challenges faced by taxpayers and to promote tax compliance:

Tax to be deducted at source

• ‘The new Regulations’ has expanded the list of eligible transactions liable to WHT, providing simplified and clear descriptions.  There have also been reduced rates to address low-margin industries.  Additionally, if a double tax treaty (DTT) duly ratified by the National Assembly exists between Nigeria and any other country, the reduced rates specified in the treaty will apply to eligible recipients who are residents of that treaty country.
• If recipients of payments for goods, services, or other eligible non-passive income transactions do not have a Tax Identification Number (TIN), the amount to be deducted at source shall be twice the specified rate. This is a drive to widen the tax net.

Exemption of small businesses from Withholding Tax compliance.

The new Regulations exempt “small companies” (defined under the Companies Income Tax Act as having a gross turnover of N25 million or less) and unincorporated business entities with the same turnover threshold from the requirement to deduct tax at source from any transactions, provided the supplier is registered for tax (i.e. has a Valid TIN) and the transaction value is N2 million or less during the calendar month.

This exemption encourages small companies and unincorporated business entities to maximize their working capital without the burden of tax compliance.  Remember, WHT deductions will not apply to transactions of small companies, since their profits are exempted from income tax.

Deduction at Source Obligations (i.e. When to deduct?)

• For transactions between independent parties, the obligation to deduct at source shall arise at the earliest of when payment is made or the amount due is otherwise settled (i.e. deduction is solely on a “cash basis”).
• For transactions between related parties, a deduction shall be made at the time of payment or when the liability is recognized, whichever is earlier.
• Also, deductions on any payment to a non-resident person shall be the final tax except such income is still subject to any other further tax by reason of a taxable presence in Nigeria.

Deduction to be Receipted

• The Regulations mandate that when an entity deducts tax from a supplier’s invoice and remits it to the relevant tax authority, it must provide the supplier with a receipt for tax deducted at source.
• This receipt should include all relevant information about the supplier, such as their name, address, Tax Identification Number, National Identification Number (for individuals), or RC number (for companies), nature of the transactions, the gross amount payable or settled, the amount deducted, and the month of the transaction.
• The person from whom the deduction has been made (i.e. the beneficiary) may submit the receipt to the relevant tax authority as evidence of the amount deducted for the purpose of claiming tax credit irrespective of whether the amount has been remitted or not.

Offences

The regulations also specify the penalties for those who either fail to withhold tax at source (WHT) or, after withholding, fail to remit the deducted amount to the appropriate tax authority. The penalties include:

• Failure to deduct the required amount attracts an administrative penalty.
• Failure to remit the amount already deducted attracts an administrative penalty, and annual interest.

Transactions Exempt from WHT deductions:

The following transactions are exempt from withholding tax deductions as stipulated by the regulations.

• Compensating payments under a Registered Securities Lending Transaction
• Any distribution or dividend payment to Real Estate Investment Trust or Real Estate Investment Company
• Across-the-counter- transactions: This refers to “any transaction carried out between parties without an established contractual relationship or any prior formal contracting arrangement and in which payment is made instantly in cash or on the spot via electronic means”. (i.e. transactions where there is no formal agreement or contract).
• Interest and fees paid to a Nigerian bank by way of direct debit of the funds domiciled with the bank
• Goods manufactured or materials produced by the person making the supply: This involves the assembling of a final product or the making of a part or component of a product utilizing raw materials or other inputs including labor and production overhead.  This also includes the production of energy, including electricity, gas, and petroleum products.
• Imported goods where the non-resident suppliers do not have an Income tax presence in Nigeria
• Any payment in respect of income or profit which exempt from tax
• Out-of-pocket expense that is normally expected to be incurred directly by the supplier and is distinguishable from the contract fees.
• Insurance Premium
• Telephone charges, internet data and airline tickets.
• Supply of Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK) and JET-A1.
• Commission retained by a broker from monies collected on behalf of the principal in line with the industry norm for such transactions
• Winnings from games of chance or reality shows with contents designed exclusively to promote entrepreneurship, academics, technological or scientific innovation.

Timeline for Remittance

• In case of payment to the Federal Inland Revenue Service (FIRS), not later than the 21st day of the month following the month of payment.
• In case of payment to the State Internal Revenue Service (SIRS), with respect to Capital Gains Tax and Pay-As-You-Earn, not later than the 10th day of the month following the month of payment, while with respect to any other deduction, not later than the 30th day of the month following the month of payment.

Download summarised fact sheet

Legal Implications of the Gazetted Regulations

The earlier version of the WHT regulations that was initially published stated 1 July 2024 as its commencement date. A lot of taxpayers had since commenced implementation of the regulations. However, the recently gazetted version states that implementation of the regulations shall be effective from 1 January 2025. It also stated in the new Regulations that the relevant tax authority shall, with the permission of the Minister, issue guidelines for the effective implementation of the Regulations.

The Federal Inland Revenue Service (FIRS) subsequently issued a public notice stating that the new regulations shall take effect from 1 January 2025, while the Companies Income Tax (Rates, etc of Taxes Deducted at Source (Withholding Tax) Regulations (old CIT WHT Regime) shall continue up until 31 December 2024. However, it is important to note that this FIRS notice only affects corporate taxpayers. All other unincorporated business entities, whose taxes are administered by their respective State Revenue Authorities, are not affected by this FIRS notice.

Nonetheless, corporate taxpayers who began complying with the new regulations from July may be concerned about whether their actions were lawful or whether they have inadvertently breached the regulations.

Did Taxpayers Breach the Law by Complying Early?

No, taxpayers who began complying with the new regulations from July were acting within the confines of the law, based on the information available at the time. While the gazetted version has now shifted the official start date to January 2025, any deductions made before it was published in the official gazette are not considered unlawful.

We understand that tax compliance can be complex, especially with shifting regulatory landscapes, but rest assured that your early compliance efforts were entirely legitimate. For more detailed information on why early compliance with ungazetted regulations does not constitute a breach of law, we encourage you to read our in-depth article on this topic: The Legal Propriety of Ungazetted Acts or Regulations in Nigeria.

Next Steps for Taxpayers

Now that the gazetted version is officially in place and the FIRS has clarified the start date for corporate taxpayers, we advise all taxpayers to discontinue the use of the new regulations and revert to the previous withholding tax regulations until 1st January 2025. This delay provides additional time to adjust and prepare for the new WHT regulations without fear of legal consequences.

Written By:

Ajaba Okachi – Tax Consultant

Similoluwa Awodeyi – Tax Consultant

Victor Athe – Partner, Tax & Strategy Services

In an exclusive interview with The Nation newspaper’s Ibrahim Apekhade Yusuf, Victor Athe, partner at Stransact (Chartered Accountants), correspondent firm of RSM in Nigeria, shared insights on the federal government’s latest withholding tax policy. He discussed the advantages and disadvantages of the new regime, providing a comprehensive overview of its implications for taxpayers and businesses.

Who is exempted from withholding tax?

The original idea behind the introduction of the WHT system in Nigeria, as early as 1977,was to widen the tax net by capturing details of entities that were then engaged in business transactions, without being formally registered for tax compliance. The implication of being unregistered for tax compliance purpose, is that these entities would continue to do business and earn income, but would never pay their fair share of income taxes to the government, whilst enjoying benefits from the resources contributed by the registered taxpayers.

However, with the Withholding Tax system in place, the invoices issued by an entity for goods or services sold would have to be subjected to tax deduction at a specified rate. A credit note is then issued in favour of the tax deduction suffered, such that the taxpayer can then apply the Withholding Tax credit note against the final income tax payable when filing its income tax returns for the relevant year. This is why Withholding Tax is referred to as an advance payment of income tax. It therefore follows that if an entity is not liable to pay income tax, perhaps due to some tax incentive that confers exemption on its income, its sales invoices should never be subject to Withholding Tax deductions. This is currently the case for Non-Resident Companies that have no income tax presence and are not rendering Technical, Management, Consultancy or Professional services to Nigerian customers, Small companies (i.e. those having gross turnover of N25 million or less), Companies that currently enjoy the Pioneer Status Incentive and other category of Nigerian companies that are outrightly exempted from income tax payment.

The Federal Ministry of Finance recently published the new “Deductions at Source (Withholding) Regulations 2024” which now replaces the previous Withholding Tax Regulations.  The new Regulations now exempts small companies and unincorporated business entities (with the same turnover threshold as small companies) from the requirement to deduct tax at source provided the supplier is registered for tax and the transaction value is N2 million or less.

The debacle over the interpretation of the term “Sales in the ordinary Course of Business” has now also been effectively put to rest.  The new Regulations now specifically exempts “Across -the-counter- transactions” (defined as transactions involving no established contractual relationship) from deductions at source.

Is withholding tax any different from VAT?

Withholding Tax is an advance income tax deduction. On the other hand, Value Added Tax is tax charged on the supply of goods and services. They are both governed by entirely different laws and regulations. Withholding Tax is principally governed by the Companies Income Tax Act (CITA), CITA Withholding Tax Regulations, Personal Income Tax Act (PITA) & PITA Withholding Tax Regulations, while VAT is governed by the VAT Act.

There are instances in which some entities like oil and gas companies, some Telcos (specifically MTN & Airtel) and Deposit Money Banks are statutorily required to withhold both Withholding Tax and VAT from invoices issued by suppliers before making net payments to them. In such situations, some suppliers would typically misunderstand and bemoan such multiple tax deductions.  However, it should be noted that while the Withholding Tax deduction would eventually be credited against the final income tax payable by the supplier, the VAT charged on the supplier’s invoice would be remitted to a separate Federal Government VAT Account on behalf of the supplier.

Who really benefits from withholding taxes?

When an entity’s invoice suffers Withholding Tax deduction, credits would typically be issued to that entity which it would then apply against its eventual income tax payment when filing its Corporate Income Tax returns for the year. What this means, is that Withholding Tax, and should not constitute a different source of revenue for the government, knowing that it is merely part of an entity’s income tax that has been deducted in advance.

Withholding Tax deduction is typically applied directly on each of the supplier’s sales invoices, whilst the eventual income tax payable by the supplier is computed as 20-30% of its Taxable Profit for the year (i.e. Revenue less all expenses plus/minus all relevant tax adjustments, less capital allowances claimable).  Now, where the total Withholding Tax deduction suffered on an entity’s sales invoices, all year round, is higher than its Income Tax payable for the year, it would give rise to an excess Withholding Tax credit situation. This would usually occur where the sales invoices are not properly structured to show the ‘profit component’ separate from the cost/reimbursement components, in which case, Withholding Tax would have to be applied on the entire invoice amount, rather than just the specific profit component. Since Withholding Tax is an advance payment of income tax, it should be applied on a base that constitutes the profit component of each of the sales invoices, and not the entire invoice amounts (which translate to the revenue reported for the year).

A lot of low-margin businesses are caught in this “Excess Withholding Tax Credits” web, which creates an unfavourable cash-flow situation for them.  The plight of these businesses is further worsened by the consistently deteriorating value of the Naira, which means that the real value of the Withholding Tax credits when they are eventually utilised at a future date would even be further eroded. This constitutes a huge dis-benefit to these taxpayers.

In a case where an entity continues to have excess Withholding Tax credits, the whole essence of the Withholding Tax system would be defeated, since Withholding Tax is actually meant to be an advance payment of income tax rather than an excess payment above the income tax payable for the year. It is important to get professional help from well-experienced tax advisors, if this happens to be your peculiar situation at the moment.

Based on hindsight, what’s the projected revenue the country stands to get from the receipt of withholding taxes?

Improved compliance with Withholding Tax should actually bring about an increase in the number of taxpayers in the tax net. While increased Withholding Tax payment should not actually translate into increased revenue for the government, it can potentially improve collection of major taxes like income tax- corporate, personal and VAT.

Part of the amendments introduced by the New Withholding Regulations is that where a non-registered entity issues a sales invoice, the Withholding Tax rate to be applied should be double the rate ordinarily applicable. This would potentially drive a lot of businesses currently operating outside the tax net to get registered quickly for tax compliance purposes, since they would not want to suffer the attendant cash-flow implications.

The new Regulations now also requires that where an entity makes tax deductions from the invoice of a supplier and remits to the relevant tax authority, it should issue the supplier a receipt containing all relevant information of the supplier (name, address, Tax Identification Number, National Identification Number in the case of an individual or RC number in the case of a company, nature of transactions, gross amount payable, amount deducted and month of the transaction). The supplier can use this receipt to claim the income tax credit from its relevant tax authority (whether the entity that made the tax deduction has remitted the amount deducted, or not). The relevant tax authority will impose applicable penalty and interest charges where the tax amounts deducted are not remitted timely.

Would this not add to multiple taxation, which has rendered almost most businesses prostate?

The New Withholding Regulations have directly listed a number of laudable exemptions from deductions at source, which include: Interest and fees paid to a Nigerian bank by way of direct debit of the funds domiciled with the bank, Supply of goods/materials by the manufacturer, Imported goods by non-resident supplier without Income tax presence in Nigeria, Insurance Premium, Payment relating to income/profit that is tax-exempt, Reimbursable expenses, Supply of Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG), Premium Motor Spirits (PMS), Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO), Dual Purpose Kerosene (DPK) and JET-A1, etc.

The direct exemption of these transactions from deductions at source would further strengthen the cash-flows of the affected businesses (that are mostly characterised by low-margins).  However, this should not be misinterpreted as exemption from income tax obligations. The reduction of the withholding rates for other low-margin businesses like retail and construction are also commendable.

Furthermore, the new Regulations also specifically states that the reduced Withholding Tax rates, as contained in a Double Tax Treaty between Nigerian and any other country, shall apply to an eligible recipient to the extent that such reduced rates are contained in the relevant Treaty or Protocol duly ratified by the National Assembly. This means the reduced Withholding Tax rates would now be automatically enjoyed by eligible non-residents without them having to write formally to the Federal Inland Revenue Service as previously required.

Under the new regime of withholding taxes, what’s the possibility of compliance given the penchant by unscrupulous businessmen to cut corners and commit tax avoidance?

The new Withholding Regulations contain some punitive provisions that aim to directly tackle non-compliance.  For instance, The Regulations provide that where an entity that is not registered for tax issues an invoice for supply of goods or services, the rate of deduction that should be applied should be twice the normal applicable rate.

The new Regulations also require that an entity that makes tax deductions should issue a receipt to the supplier. The supplier would then be able to claim the tax credit from the relevant tax authority (whether the entity that made the deduction has remitted, or not).  In this instance, the Tax Authority would be required to hold accountable the entity that has deducted and failed to remit the deductions. The tax authority will also impose additional penalty and interest charges.

The new Regulations further state where an entity fails to make deductions at source from a supplier’s invoice, the entity shall only be liable to payment of just an administrative penalty and one-off annual interest charge (not including the Principal Withholding Tax amount not deducted). This is understandable, since it is expected that the supplier from whom tax deductions were not made, would eventually declare its entire income and file its income tax returns for the relevant year. Therefore, seeking to collect the principal Withholding amount from the entity that failed to deduct at source, would only be tantamount to double taxation. However, where an entity has made the Withholding Tax deduction, and failed to remit, the new regulations require payment of the principal amount deducted, in addition to the administrative penalty and interest charges.

The Regulations also specifically states that Withholding Tax deductions should not constitute a separate tax or an extra cost. What this means is that, where an entity has paid the full invoice amount to a supplier without deducting Withholding Tax, and then decides to bear the Withholding Tax burden from its own cash-flows, that extra Withholding Tax payment paid, will not be admissible as valid business expenses for income tax purposes. The less onerous approach for an affected taxpayer in this situation would be to either “seek to make the omitted Withholding Tax deductions from future payments to the supplier” or “just make provisions for payment of penalty and interest resulting from the non-deduction.”

Can digital products fall under withholding taxes too?

The application of Withholding Tax deductions on digital supplies will depend on the nature of the transaction (whether B2B or B2C). Typically, Business-to-customer (B2C) type of digital supplies would usually not require detailed contracting between both parties before they are made, while most Business-to-Business (B2B) type digital supplies would require detailed contracting that would be tailored to the specific needs of the service recipient.

Following the definition of “Across-the-counter transactions” in the new Withholding Regulations, it then means that B2C-type digital supplies would enjoy exemption from Withholding Tax deductions while B2B supplies involving contracts between both parties will be subject to Withholding Tax deductions.  Where the B2B supplies are from a non-resident entity, the Withholding Tax deducted shall be the final tax, except where the non-resident is involved in other transactions that trigger income tax presence in Nigeria.

In this interview with ROLAND OGBONNAIYA of Independent Newspaper, our Managing Partner, Eben Joels, discusses tax reforms in Nigeria, President Bola Tinubu’s one-year administration, and what the federal government must do to put the country on a path of progressive growth and socio-economic development

Tax reform is widely discussed in Nigeria. What do you think the government should prioritise in terms of tax reform?

If President Bola Tinubu remains in office for another eight years, his tax reform efforts in Nigeria should prioritise broadening the tax base and improving tax collection efficiency while lowering the tax rate. Broadening the tax base should entail implementing a tax system that requires every Nigerian to file a tax return with the government. I plan to propose a nominal federal income tax for individuals and require states to share data with the Federal Inland Revenue Service. This will increase the efficiency of the state’s Internal Revenue Services. I will eliminate all other taxes disguised as levies for specific purposes, such as the Education Tax, Police Trust Fund, NITDA levy, and so on. All of these levels have resulted in our corporate tax rate being among the highest in the world. For example, Russia recently raised its corporate tax rate to 25%. That is a country with a wartime economy. However, ours is approximately 34%. These special causes taxes I mentioned are primarily used to offset the administrative costs of the bureaucracy they fund, or they are mostly stolen. I would rather have a lower tax rate and a broader tax base.

There are other radical tax proposals. For example, given that Nigeria is a republic, I am not sure why the President and Governors are exempt from paying taxes. This is absurd, given that even in a monarchy like the United Kingdom, where the King and Prince of Wales are tax-exempt, they choose to voluntarily pay taxes to the state. If the President of the world’s largest economy, the United States, is not tax-exempt, I see no reason for a relatively poor country like ours to exempt certain offices from taxes.

Finally, I hope the President is brave enough to implement an inheritance tax system in Nigeria. Most advanced countries impose a high tax on estates, sometimes exceeding 40%, when they are passed down. This tax is one way for these capitalist countries to ensure that wealth is redistributed in some way. The tax applies only to the very wealthy. In the United Kingdom, the threshold is estates worth over GBP325,000. The system provides substantial relief to anyone who chooses to donate to a charitable non-profit. This is another way to expand the charitable non-profit sector. Consider this: anyone inheriting assets worth N5 billion or more must pay 40% to the state, or 20% if they donate a certain amount to charity. There are several advantages. However, I hope that such a system reduces the incentive to steal large sums of money and leave them to your heirs.

Diageo, the owner of Guinness PLC, is exiting Nigeria and selling its 58% stake in the company to Singapore-based Tolaram. What are your thoughts on this, and what does it mean for the immediate future?

Diageo’s decision to exit Nigeria and sell its stake in Guinness PLC to Tolaram suggests that it sees better opportunities elsewhere or believes that the challenges in the Nigerian market outweigh the potential benefits. This move could indicate a strategic shift in Diageo’s global portfolio or a reassessment of its investment priorities. Diageo has devised a more profitable way to generate revenue in Nigeria without having to deal with the harsh operating environment for businesses.

Tolaram Group will likely see this acquisition as an opportunity to strengthen its presence in Nigeria. They already have operations in Nigeria, primarily through subsidiaries in various industries, such as Dufil Prima Foods Plc, which manufactures popular Indomie instant noodles, and the Lekki Deep Sea Port project. The acquisition of Diageo’s stake in Guinness PLC demonstrates that they recognise the value of the Nigerian market and are willing to invest in it. Tolaram may bring a new perspective and strategy to the table, which could lead to changes in how Guinness PLC operates in Nigeria. It may also indicate increased competition or consolidation in the Nigerian beverage industry. While Diageo’s exit raises concern about the Nigerian market’s attractiveness to multinational corporations, Tolaram’s investment indicates continued interest and opportunities for growth in the region.

Kimberly-Clark, an American multinational and baby product manufacturer, Huggies, GlaxoSmithKline Consumer Nigeria Plc, Sanofi-Aventis Nigeria Limited, and Procter & Gamble are among the multinationals that have recently ceased operations in Nigeria, either completely or partially. Some International Oil Companies (IoCs), including Shell, ExxonMobil, and ENI, are rumoured to be actively selling assets to exit Nigeria. Should we be concerned about multinationals’ exit from Nigeria?

The departure of multinational corporations from any country, particularly those as large as those you mentioned, should normally raise concerns. These exits can have an impact on employment, economic growth, and overall stability. These multinational corporations are among the few places where you can find best practices in employee recruitment, training, and compensation. They are among the few companies where graft is not tolerated. Many Nigerian-owned businesses do not adhere to best practices. However, it is critical to understand the reasons for these exits. They are influenced by a variety of factors, including economic challenges, regulatory issues, and security concerns, which lead to companies making strategic business decisions to exit the market. Addressing these underlying issues may attract and retain multinational investments. The government should prioritise improving the business environment, increasing security, providing regulatory clarity, and promoting economic diversification to mitigate the negative effects of multinational exits and encourage future investments.

Some of the clauses in the new bank recapitalisation plan have sparked heated debate. Do you think the Central Bank of Nigeria has good intentions for the banking sector?

Overall, whether the CBN has good intentions for the banking sector is determined by the balance it strikes between strengthening financial stability, promoting competitiveness, and ensuring that the needs of the economy, businesses, and consumers are adequately met. Open dialogue and collaboration among the CBN, banks, regulators, and other stakeholders are critical for navigating these challenges and achieving positive outcomes for the banking sector and the broader economy. Overall, I am hopeful. The previous round of capitalization fueled the capital market and boosted the economy. I hope this yields the same result.

Despite CBN efforts to reduce non-performing loans, many banks still have a high percentage on their books. What can be done to make banks solvent and reduce their debt burden?

To address the persistent issue of high non-performing loans (NPLs) in Nigerian banks, a multifaceted approach is required. To begin, banks should prioritise proactive risk management practices, including thorough credit assessments and stringent monitoring mechanisms to detect potential defaults early on. This includes restructuring loans for distressed borrowers and implementing strong recovery strategies to effectively mitigate losses. Simultaneously, regulatory bodies such as the Central Bank of Nigeria (CBN) should strengthen supervision and enforcement of prudential regulations, ensuring that banks have sufficient capital to absorb potential losses and remain resilient in the face of economic volatility. Furthermore, improving credit information systems and encouraging economic diversification away from volatile sectors can reduce systemic risks and improve bank stability, resulting in a lower debt burden and a healthier banking sector. Most importantly, the CBN should require regular stress testing. It is recommended that impairment indicators be reported regularly.

Do you think Heritage Bank’s licence revocation was timely? Some believe it could spark a run on other banks, causing panic.

The timing of Heritage Bank’s licence revocation by the Central Bank of Nigeria (CBN) is a critical decision with far-reaching implications. While the CBN’s reasons for taking such action are likely to be specific, such as concerns about the bank’s financial stability or regulatory compliance, the timing must take into account the broader impact on the banking sector’s stability. The revocation of a bank’s licence can raise concerns among depositors and investors, potentially leading to a run on other banks and causing panic in the financial system. As a result, the CBN must carefully manage communication and ensure transparency to mitigate any spillover effects and restore trust in the banking sector. To avoid widespread panic and systemic disruptions, the CBN should continue to reassure affected depositors of its commitment to maintaining financial stability.

The Central Bank of Nigeria (CBN) has dissolved the boards and management of Union Bank, Keystone Bank, and Polaris Bank. What distinguishes these banks’ cases from that of Heritage Bank?

The CBN appointed new management teams to stabilise the banks and protect stakeholders’ interests. In contrast, Heritage Bank did not face a similar intervention from the CBN; instead, its licence was revoked. I suspect this is due to Heritage Bank’s poor financial health and governance, which may render it unsalvageable.

The Naira has faced the most difficult challenges since it became legal tender in Nigeria four decades ago. The value has been completely eroded by the unprecedented drop in the foreign exchange market. Do you think the CBN has done enough to hedge the Naira against the dollar so far with its recovery strategy? And will these efforts be sustainable?

The Central Bank of Nigeria (CBN) has implemented several measures to hedge the Naira against the dollar, including foreign exchange market interventions, monetary policy rate adjustments, and the implementation of various forex management policies. Despite these efforts, the Naira has continued to depreciate significantly, indicating that current strategies may be insufficient to address the underlying issues affecting the currency’s value. Structural economic challenges, such as reliance on oil exports, limited foreign reserves, and a large import bill, particularly the continued importation of petroleum products, continue to put pressure on the Naira.

Stabilising the Naira will necessitate a multifaceted strategy that extends beyond short-term interventions. To reduce reliance on foreign exchange, the CBN must prioritise diversification of the economy, increased domestic production, and an improved business environment. In addition, policy consistency and open communication are critical for restoring investor and market confidence.

Access to credit remains a major concern for businesses, particularly SMEs, due to the high-risk quotient. What can be done to reduce the burden on businesses so that they can easily access credit at low interest rates?

The government and financial institutions must implement several strategies. First, the CBN can improve its existing credit intervention programmes, such as the Anchor Borrowers’ Programme and the Micro, Small, and Medium Enterprises Development Fund (MSMEDF), by increasing funding and streamlining application processes. These programmes can be expanded to include additional sectors and lower interest rates. Furthermore, financial institutions should be encouraged to create tailored financial products that meet the specific needs of SMEs, such as flexible repayment terms and lower collateral requirements.

Furthermore, strengthening Nigeria’s credit infrastructure is critical. Establishing and maintaining a comprehensive credit registry system to track businesses’ credit history can help lenders reduce perceived risks. Strengthening credit guarantee schemes can also provide additional security to banks, encouraging them to lend more to SMEs. For example, I do not know of any credit insurance companies in Nigeria. On a broader scale, fostering a stable macroeconomic environment with low inflation and consistent policies will help to reduce the overall risk profile, allowing businesses to obtain credit at lower interest rates.

Nigerian graduates often complain about a lack of opportunities and the need to know a highly-placed person to get a job. What can we do as a country to promote job growth among young people?

To increase job opportunities for Nigerian youth, an enabling environment that encourages entrepreneurship and supports small and medium-sized businesses (SMEs) is required. We live in a society where we worship powerful men without considering their source of wealth. We define success as having a lot of cash in your bank account, regardless of whether it came from a criminal enterprise. As a result, many young people today are focused on making quick money. It is not so much about learning how to sell. As a result, we create a large number of unemployed individuals. People with the incorrect values.

I remain convinced that there is always room for merit. For example, we are a top destination for the best-graduating students from most local universities, and you do not need to know anyone to work with us. You only need to be competent and have the right mindset, which is one of continuous learning, as well as the right values.

The nearly 40% inflation rate has had a significant impact on people’s standard of living due to the excruciating cost of goods and services. What steps can be taken to mitigate this?

A multifaceted strategy is required. Tighter monetary policies to control the excessive money supply have proven ineffective. Raising interest rates and increasing bank reserve requirements have also proven ineffective. I believe the government should focus on stabilising the exchange rate by increasing foreign reserves and decreasing reliance on imports. This is the time to strengthen the agricultural sector by providing subsidies and support programmes to improve local food production, allowing us to enjoy lower food prices.

On the fiscal policy front, Nigeria’s government should improve public spending efficiency and reduce waste. Investing in infrastructure, particularly transport and energy, can reduce the cost of doing business as well as the prices of goods and services. Implementing social safety nets and targeted subsidies for essential goods can help to alleviate low-income households’ immediate financial burden. Encouraging competition in critical sectors such as telecommunications and energy can also reduce prices through market forces. Fostering an environment that encourages local manufacturing will result in more jobs and higher wages.

Among the challenges confronting businesses in Nigeria is the proliferation of taxes and other levies across the subnational level, rendering the entire ideal and concept of ease of doing business a mirage. What concrete measures can be implemented to ease business operations and increase productivity and efficiency within the country’s business ecosystem?

To address the issue of a plethora of taxes and levies that impede Nigerian businesses, comprehensive tax reform is required. The government should simplify the tax system by combining various taxes and levies into a single, simpler tax regime. This can be accomplished by implementing a unified tax policy at the federal, state, and local levels, which eliminates overlapping and redundant taxes. Establishing a centralised tax collection system would reduce administrative burdens for businesses, making compliance simpler and more efficient. Additionally, providing clear guidelines and ensuring transparency in tax policies can assist businesses in better understanding their tax obligations and planning accordingly.

Furthermore, the government can improve the ease of doing business by streamlining regulatory frameworks and reducing bureaucratic red tape. Nigeria can boost productivity, attract investment, and, ultimately, drive economic growth by making its environment more business-friendly.

Nigeria’s infrastructure is in shambles, and the country is constantly dealing with power outages and other intractable issues. How much money does the government need to invest in infrastructure to put the country on a path of progressive growth and socioeconomic development?

The government must make substantial investments in infrastructure. According to estimates, Nigeria will need to invest around $3 trillion in infrastructure over the next 30 years to bridge existing gaps and support its growing population. Immediate priorities should include significant investments in the power sector to address the chronic power outages that stifle business operations and everyday life. Investment in renewable energy sources, national grid upgrades, and increased electricity access have the potential to transform the energy landscape, promoting industrial growth and improving people’s quality of life.

In addition to power, the government should prioritise investments in transportation, healthcare, and education infrastructures. Modernising and expanding the road, rail, and port networks will improve connectivity, lower transportation costs, and increase trade efficiency. Similarly, improving healthcare facilities and educational institutions is critical to developing a healthy and skilled workforce. Public-private partnerships (PPPs) can help mobilise capital and ensure efficient project execution. By committing to comprehensive infrastructure development, Nigeria can create a more conducive environment for economic activity, attract foreign investment, and achieve long-term social progress.

The administration led by President Bola Tinubu has been in place for one year. In your opinion, what has he done right or wrong, and what are the low-hanging fruits he can easily pick to make things right?

President Bola Tinubu’s administration has taken some significant steps in his first year in office, including prioritising economic reforms. He needs to be more aggressive in tackling corruption. His efforts to increase foreign investment through better business policies have been met with cautious optimism. The administration’s emphasis on infrastructure projects, such as road construction and increased power generation, seeks to address critical issues affecting economic growth. However, there have been concerns about the speed of these initiatives and their immediate impact on the lives of ordinary Nigerians. The administration has also struggled to effectively manage the country’s security situation, as ongoing conflicts and insecurity persist in several regions.

President Tinubu can concentrate on low-hanging fruit, such as improving the agricultural sector through targeted subsidies and support programmes to increase food production. They can also concentrate on simplifying the tax system to alleviate the burden on small and medium-sized businesses (SMEs). They can address power shortages with quick-win projects, such as deploying renewable energy solutions in underserved communities. By focusing on these attainable goals, President Tinubu can boost public trust and lay a solid foundation for long-term development.

The organised labour in Nigeria recently called a strike and reduced their minimum wage demand to N250,000 per month, while the federal government offered N60,000. What do you think the minimum wage should be?

Setting an appropriate minimum wage in Nigeria necessitates balancing workers’ needs with the economic realities of businesses and the government. Given the significant difference between the organised labour’s demand of N250,000 per month and the Federal Government’s offer of N60,000, a compromise must be found. A reasonable minimum wage should take into account current inflation rates, the cost of living, and the need to keep businesses running without causing undue financial strain. A new minimum wage is ineffective unless it is accompanied by policies that promote economic growth and productivity, which can support higher wages in the long run. Implementing inflation-reducing measures, such as stabilising the exchange rate and increasing domestic production, can help to sustain wage increases. Improving social services such as healthcare and education can also help to reduce workers’ overall financial burden. Nigeria can create a more equitable and sustainable economic environment for its workforce by implementing a comprehensive approach that includes a fair minimum wage and supportive economic policies.

Nigeria’s economy, which was said to be Africa’s largest in 2022, is expected to fall to fourth place in 2024. What caused this, and how can it be reversed?

A variety of factors can contribute to the slip. Persistent issues like political instability, insecurity, and corruption have hampered economic growth. High inflation, a depreciating currency, and inadequate infrastructure have all contributed to a difficult business climate. These factors, combined with the slow implementation of economic reforms, have harmed investor confidence and stifled growth across a variety of industries.

To reverse this trend, Nigeria’s economy must diversify away from oil dependency by investing in key sectors such as agriculture, technology, and manufacturing. Implementing policies that promote economic stability, reduce corruption, and improve governance is critical. Improving the business environment through infrastructure, particularly in power and transportation, will attract both domestic and foreign investment. Improving education and vocational training can result in a more skilled workforce, which promotes innovation and productivity. By focusing on these areas, Nigeria can create a more resilient economy capable of sustaining growth and regaining its position as Africa’s largest economy.

Source: Independent Newspaper

Private equity is ownership or interest in entities that aren’t publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges.

The definition of Private Equity (PE) on a well-explained background is based on two aspects, each related to the two-man characteristics of the PE fundamentals:

•    PE is a source of financing, It is an alternative to other sources of liquidity, (such as a loan or an initial public offering (IPO)) for the company receiving the financing.
•    PE is an investment made by a financial institution; Private Equity Investor (PEI) in the equity of a non-listed company (i.e. not a public company).

Venture Capital is a very specific case of PE. It is the investment in the very early stages of a company’s life.

Tax Incentive and Private Equity Growth

The expansion of private equity is fueled by economic policies that include tax incentives. It is critical to comprehend the effects of tax incentives in Nigeria, where private equity firms are fast emerging as significant economic actors. In sequence, the Nigeria Startup Act, 2022 was passed by the National Assembly and signed into law by the president on October 19, 2022. The legislation establishes the institutional and legal foundation for the growth and operation of startups and private businesses in Nigeria.

Furthermore, the aforementioned legislation included particular clauses designed to address recognized legal, regulatory, tax, and administrative bottlenecks that have impeded the functioning of venture-backed companies (VBC) in Nigeria. The law also provides certain tax incentives which include:

• Pioneer Status Incentive

Labelled Startups operating in eligible industries under the Pioneer Status Incentives (‘PSI’) Scheme may apply through the Secretariat to the Nigerian Investment Promotion Commission (‘NIPC’) for grant of tax reliefs and incentives under the PSI. If granted, this would entitle the Labelled Startup to a tax holiday for an initial period of three years, which may be extended for an additional two years.

The effective date for the PSI reliefs will be the date of issuance of the startup label.

A labelled startup shall enjoy full deduction of any expenses on research and development which are wholly incurred in Nigeria and the restrictions placed by the Companies Income Tax Act (CITA) shall not apply to a labelled startup.

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• Exemption from Contribution to ITF

Section 25(5) of the act exempts a labelled startup from contributions to ITF in respect of in-house training provided to its employees for the duration of the startup label.

•    Other Stakeholder-related Incentives

Angel investors, Private Equity funds, accelerators, and venture capitalists are entitled to an investment tax credit equivalent to 30% of their investment in a labelled startup. The credit ‘shall’ be applied on any gains on investment, which are subject to tax. Interestingly, the Act specifically amends only the Companies Income Tax Act in this regard, leading to a presumption that angel investors who invest without using a company may not be eligible to enjoy this incentive.

The Act also exempts angel investors, venture capitalists, private equity funds, accelerators or incubators from capital gains tax when they dispose of their investment in a Labelled Startup provided that the assets have been held in Nigeria for a minimum of 24 months.

Since this is a specific and a later-in-time provision, the ₦100m threshold imposed by the Finance Act, 2021 will not apply. However, where the investment is sold within 2 years, the capital gains tax payable shall be reduced by the amount of the investment tax credit.

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Incentives for Venture Capital Companies

The fiscal incentives as outlined under the Capital Gains Tax Act, the Industrial Development (Income Tax Relief) Act and the Companies Income Tax Act as amended improve on those earlier prescribed by the Venture Capital (Incentives) Act, which targets venture companies and venture projects.

Venture companies that invest in venture projects must be recognized by the Federal Inland Revenue Service (FIRS) as venture companies or venture projects, and must invest a minimum of 25% of the total equity required for the venture project to be eligible for the following:

• Accelerated capital allowance for equity investment by a venture company in a venture project, with the following deductions: first year – 30%; second year – 30%; third year – 20%; fourth year – 10%; and fifth year – 10%.
• Reduction of withholding tax on dividends declared by venture projects to venture companies for the first five years, from 10% to 5%.
• Export incentives such as export expansion grants, if the venture project exports its products.
• Gains realized by venture companies from a disposal of its equity interest in the venture project will enjoy capital gains tax exemption of 25-100% where the disposal recurs between 5-15 years of the investment.
• Exemption from company income tax for three years, which can be extended for an additional final period of two years.

Read More:The Future of Nigeria’s Technology Industry: A Look at the Nigeria Startups Act

Benefits of these incentives on Private Equity in Nigeria

Developing countries such as Nigeria deserve special attention because the circumstances in which investment takes place in developing countries are typically strenuous when compared to developed countries.

In contrast to the US and other developed economies, where leveraged buyouts are the primary PE deal type, management buyouts and restructuring—which include launching green or brownfield investments—are the most common PE transaction types in Nigeria. A major participant in the majority of private equity transactions in Nigeria, Actis, is most known for its US$134 million investment in Diamond Bank Nigeria Plc

Private equity funds may benefit from the aforementioned tax credits and incentives by ways and means of;

• Investment Tax Credits:

For Angel Investors, Private Equity Funds, and Venture Capitalists: These investors are entitled to a tax credit equivalent to 30% of their investment in a labelled startup, which can be applied against gains on investment subject to tax. This incentive encourages more investments into startups by reducing the effective tax rate on gains, making investments more attractive and potentially increasing the available capital for startups.

• Enhanced Investment Returns

Venture companies investing in venture projects benefit from accelerated capital allowances, which provide substantial deductions in the initial years (30% in the first and second years, tapering down over five years). This accelerates the recovery of investment costs, improving cash flow and investment returns.

• Encouragement for Innovation and Growth

Private equity investments can help small and medium-sized enterprises (SMEs) grow, leading to increased employment and economic activity. Encouraging the establishment and growth of new businesses and startups can further stimulate innovation.

Conclusion

In summary, the strategic application of tax incentives is crucial for fostering the growth of private equity in Nigeria. The Nigerian government has introduced several legislative measures, such as the Nigeria Startup Act, to create a conducive environment for private equity investments. These measures include tax holidays, exemptions from certain statutory contributions, investment tax credits, and incentives specific to venture capital companies. Such incentives are designed to encourage investment, promote economic development, and support the growth of startups and private companies.

Private equity firms and investors should leverage these opportunities to maximize returns. At Stransact, we specialize in enhancing every transaction. Let us help you navigate the tax landscape and drive your business growth. Contact us to learn how we can solve your tax challenges and propel your business forward.