Corporate Tax 2025 - Trends and Developments

Introduction

The Nigerian fiscal landscape has witnessed interesting trends and developments in recent times. One key development is the proposed overhaul of Nigeria's fiscal regime.

In November 2024, President Bola Tinubu, GCFR, presented the federal government's budget proposals themed "Renewed Hope" at the joint sessions of the National Assembly, Nigeria's federal legislative arm, in Abuja. The proposed 2025 annual National Budget is pegged at NGN49.74 trillion, representing a 41.9% increase from 2024 with a fiscal deficit of NGN13.39 trillion, signalling the intention of the federal government of Nigeria (FGN) to increase tax revenue to achieve its ambitious spending plans aimed at promoting economic development, maintaining macroeconomic stability and incentivising an investment-friendly economy.

This publication examines pivotal regulatory changes, including adjustments to withholding tax (WHT) rates, enhanced tax registration protocols, and the contentious windfall tax on banks. It further discusses VAT modifications that incentivise renewable energy, tax incentives for oil and gas investments, and the introduction of the first-ever Guidelines for Advance Pricing Agreements (APAs) by the Federal Inland Revenue Service (FIRS). We also consider some key proposals of the Tax Reform Bills, which culminate from the work of the Presidential Committee of Fiscal Policy and Tax Reforms (the "Committee") inaugurated in July 2023.

Below are the highlights of these developments and more.

Key Trends and Developments

Review of the applicable withholding tax rates

In 2024, the Minister of Finance and Coordinating Minister of the Economy (the "Minister") issued the Deduction of Tax at Source (Withholding) Regulations 2024 (the "Regulations") with a commencement date of 30 September 2024. Its implementation began on 1 January 2025 because of the 90-day window for implementation of tax reforms. With the implementation of the Regulations, certain transactions now benefit from either an exemption or a reduced WHT rate. For instance, sales of goods by Nigerian businesses are now subject to WHT at a rate of 2%. This, however, does not apply to goods manufactured or materials supplied directly by the manufacturer or producer, across-the-counter sales and other relevant specific exemptions.

As part of an effort to ease the tax burden on small enterprises in Nigeria, small companies (presently companies with annual turnover below NGN25 million) and unincorporated entities of similar attributes are not required to deduct tax at source under certain circumstances. These circumstances are when: (i) the supplier/recipient has a valid tax identification number (TIN), and (ii) the value of the transaction is NGN2 million or less in the relevant month.

Also, "across-the-counter" transactions, telephone charges, internet data, and airline tickets, among others, are now exempt from WHT in Nigeria to help manage cash flow constraints.

Notwithstanding the foregoing, the FGN is positioning to tax the informal sector and previously undertaxed or untaxed sectors, such as lottery winnings and payments to entertainers and sports professionals, by including such payments in the Regulations as being liable to WHT. These areas, particularly entertainment and sports, have grown significantly in Nigeria, generating considerable economic activity and associated revenue. The government's recent move to impose WHT on transactions in these sectors aims to capture a larger share of the revenue generated by these sectors, which, until now, may have been operating with limited regulatory oversight from a tax perspective.

We published an overview of the Regulations, which can be accessed here.

Increased focus on tax registration

The tax authorities seem to be intensifying their enforcement of tax registration, primarily targeting entities without a TIN for tax administration purposes. As a result, the FIRS' stamp duties portal has been updated to capture a variety of transactions and entities, and accordingly, non-Nigerian counterparties to agreements relating to transactions in Nigeria are required to provide their TIN as a prerequisite for the stamping of their documents in Nigeria.

This development is required to strengthen Nigeria's tax administration, ensuring that businesses, including foreign entities, are properly registered and taxed. It reflects a growing emphasis on transparency and accountability in Nigeria's business environment. By requiring all parties involved in Nigerian business activities to have a TIN, the tax authorities are widening the tax base and reducing informal or unregistered transactions that often evade tax obligations.

Another key area where this trend significantly impacts is the WHT regime. Vendors must now provide a TIN when issuing an invoice, as failure to comply results in a penalty twice the stipulated WHT rate. This penalty is a strong deterrent, encouraging businesses to prioritise their tax registration processes to avoid incurring additional costs.

Proposed windfall tax on Nigerian banks

The Nigerian government proposed a windfall tax on realised profits made by Nigerian banks from foreign exchange transactions due to the devaluation of the Naira. Initially set at 50%, the Senate increased the tax rate to 70%, with the rationale of increasing federal revenue. As of today, there is limited information on the status of the proposed tax, but we know that stakeholders' engagement has been ongoing.

It is worth noting that the proposal has been met with concerns about potential adverse ripple effects. Legal commentators and economists have argued that the windfall tax could reduce banks' net earnings, weaken their capital base, and result in higher service fees and interest rates for customers, as banks may pass the additional tax burden onto their customers.

Value-Added Tax (Modification) Order 2024 (the "Order")

The Minister issued the Order on 1 September 2024. The Order, which amends and expands the Value-Added Tax Exemption List (VAT Exempt List) under Part I and II of the First Schedule to the Value-Added Tax Act ("VAT Act"), has an effective date of 1 September 2024 for its implementation but provides for a retrospective commencement date of 1 October 2023 for the provisions relating to automotive gas oil. The Order primarily sets the tone for Nigeria's energy transition strategy.

It reaffirms the FGN's efforts to fast-track Nigeria's energy transition initiatives by providing incentives to promote foreign and local investments in more sustainable energy alternatives. The Order follows the "Fiscal Incentives for the Presidential Gas for Growth Initiative" (the "Circular") issued by the Federal Ministry of Finance in December 2023, which directed the Federal Inland Revenue Service (FIRS) and the Nigeria Customs Service (NCS) to apply a 0% VAT rate on feed gas for all processed gas, CNG, imported LPG, CNG and LPG equipment component, conversion and installation services as well as equipment and infrastructure (including conversion kits) related to the expansion of CNG and LPG. The Circular raises validity concerns, especially in light of the VAT Act, which requires the Minister to make amendments to the VAT Act through a Gazetted Order. The Order expands on and preserves most of the incentives provided by the Circular and resolves any legal validity challenges that may have arisen.

Some of the items that have been included under the VAT-exempt list include:

• equipment and infrastructure related to the expansion of CNG;
• equipment and infrastructure related to LPG, including conversion kits;
• domestic liquified natural gas (LNG) processing facilities and equipment;
• electric vehicles;
• parts, semi-knock-down units for the assembly of electric vehicles;
• biogas and biofuel equipment and accessories for clean cooking and transportation;
• CNG and LPG conversion and installation services; and
• manufacturing, assembly and sale of electric vehicles.

The Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order, 2024 ("Gas Incentives Order")

On 6 March, 2024, President Bola Ahmed Tinubu signed the Gas Incentives Order, with the objective of specifying incentives applicable to non-associated gas (NAG) and promoting investments in NAG greenfield development. The Gas Incentives Order provides for a Gas Tax Credit (GTC) for NAG greenfield developments in onshore and shallow water locations with first gas production on or before 1 January 2029 at the rate of USD1.00 per thousand cubic feet or 30% of the fiscal gas price (whichever is lower) if hydrocarbon liquids (HCL) content does not exceed 30 barrels per million standard cubic feet (SCF). If HCL exceeds 30 barrels per million SCF but does not exceed 100 barrels per million SCF, a GTC at the rate of USD0.50 per thousand cubic feet or 30% of the fiscal gas price is applicable. For other greenfield NAG projects with first commercial production after 1 January 2029, a gas tax allowance (GTA) is provided at a rate of USD0.50 per thousand SCF or 30% of the fiscal gas price (whichever is lower), provided that HCL content does not exceed 100 barrels per million SCF. The GTC for NAG operations applies for a maximum of ten years, after which it becomes a GTA claimable at the outlined rates.

We published more details about the Gas Incentives Order which can be accessed here.

Guidelines on advance pricing agreements (APAs)

On 27 November 2024, the FIRS issued Nigeria's first-ever Guidelines on Advance Pricing Agreements (the "APA Guidelines") to provide guidance on the procedure and conditions for APAs in Nigeria, as well as the administration of executed APAs to enable taxpayers and the FIRS to determine, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer price of future transactions between taxpayers and related parties that accords with the arm's length principle over a maximum period of three years. The terms agreed upon in an APA may also apply to controlled transactions carried out before the APA comes into force for a rollback period of not more than three years.

The APA Guidelines recognise unilateral, bilateral and multilateral APAs that cover all controlled transactions (including transfers of tangible or intangible property or services) between (i) two or more connected persons; (ii) a permanent establishment, fixed base, or any taxable presence and its head office; or (iii) two permanent establishments, fixed bases, or other taxable presence of the same person.

It sets a threshold for APA applications as (i) the equivalent of USD10 million for each covered controlled transaction (single transaction) for each year or (ii) the equivalent of USD50 million in the case of a group of covered controlled transactions (group of transactions) for each year covered in the APA.

The APA Guidelines were issued further to Regulation 9 of the Income Tax (Transfer Pricing) Regulations 2018, which provides the legal basis for a taxpayer to request an APA and suspends the operation of APAs in Nigeria pending when the FIRS publishes relevant notices and guidelines on APA, as it has now done. Since the FIRS has issued the APA Guidelines, we expect taxpayers to adopt APAs and agree with the FIRS on the price of controlled transactions to avoid any potential disputes between such taxpayers and the FIRS.

The Nigerian Tax Reform Bills

In October 2024, President Bola Ahmed Tinubu proposed four bills to the National Assembly for their consideration. The four bills are the (i) Nigeria Tax Bill; (ii) Nigeria Revenue Service (Establishment) Bill; (iii) Nigeria Tax Administration Bill; and (iv) Joint Revenue Board (Establishment) Bill (together "the Tax Reform Bills"). As stated earlier, the Tax Reform Bills are the outcome of the work of the Committee mandated to recommend changes to improve the Nigerian fiscal landscape, streamline and consolidate the tax laws of the nation and promote consistency in the administration and operation of the tax laws.

The key highlights of the Tax Reform Bills include the:

• replacement of the FIRS with the Nigerian Revenue Service and the introduction of an overt collaborative framework between the tax authorities within the federal, state and local governments;
• gradual reduction of the CIT rate from 30% to 27.5% (in the 2025 Year of Assessment (YOA)) and 25% (in the 2026 YOA);
• proposed top-up tax where, in any YOA, the effective tax rate of a company is less than 15%; such a company is expected to recompute and pay the top-up tax, which will make its effective tax rate equal to 15%, and this provision applies to (i) a company that is a constituent entity of a multinational enterprise group, and (ii) any other company with an aggregate turnover of NGN20,000,000,000 and above in the relevant YOA;
• increase to income bands for personal income tax (PIT) purposes and increase in the PIT rates;
• removal of VAT on essential items, and an increase of VAT rates on non-essential commodities from 7.5% to: 10% (in 2025), 12.5% (from 2026 to 2029) and 15% (from 2030 onwards);
• introduction of a controlled foreign company (CFC) rule that targets undistributed profits of a foreign company controlled by a Nigerian company;
• change of certain previously VAT-exempt items to zero-rate, the implication being that companies providing those goods and services may be eligible for input VAT refunds from the FIRS instead of expensing the input VAT (or VAT on purchases) through their profit and loss accounts;
• taxation of capital gains (as income tax) to apply where the gains are derived from the indirect transfer of ownership of companies or assets in Nigeria and where such a transfer results in a change in the ownership structure of the group membership of any Nigerian company;
• introduction of economic development tax credits as a replacement for the Pioneer Status Incentive, which presently grants a maximum of five years tax holiday;
• apparent exclusion of instruments relating to the transfer of shares in a Nigerian company from the stamp duties exemption list, signalling a clarification that such instruments, including the share purchase agreement and share transfer forms, are liable to stamp duties; and
• clarification that when a business restructuring like a merger occurs, certain tax assets such as unabsorbed losses, unutilised capital allowances, and WHT credits can be acquired and used by the surviving entity post-merger, subject to certain conditions.

Outlook for 2025

Driving growth in renewable energy

With the exemption of the supply of electric vehicles, parts and semi-knock-down units for assembling electric vehicles, biogas and biofuel equipment, accessories for clean cooking and transportation and the manufacturing, assembly and sale of electric vehicles from VAT, we expect increased investment in Nigeria's renewable energy sector. This tax trend reflects a strong commitment to sustainable energy solutions and positions renewable energy businesses to benefit from reduced tax burdens as they contribute to cleaner, more sustainable energy sources in Nigeria.

Increased oil and gas activities

As Nigeria gradually diversifies its economy, oil and gas activities will remain its primary source of revenue. With a budget deficit of over NGN18 trillion, we expect the FGN to encourage more investment in oil and gas activities, including deep offshore areas. The incentives regime, especially for gas production, should see Nigeria attract more investment in the subsector, leading to more revenue for the government and additional tax revenue. We expect global oil prices to reduce from the USD70 per barrel benchmarked by the FGN in its 2025 budget; hence, production volumes will need to increase from the targeted 2 million barrels per day to meet Nigeria's projected revenue for 2025. Nigeria's quota from the Organization of Petroleum Exporting Countries (OPEC) (presently 1.5 million barrels per day) may impede this move.

More multinational companies to be taxed in Nigeria

A combination of Nigeria's Significant Economic Presence (SEP) regime and the proposed minimum top-up tax will see more multinational companies paying taxes in Nigeria, especially given the gradual implementation of Pillar 2 globally. There is also increased transparency and collaboration among competent authorities, which means the exchange of information (much needed for tax administration) will be at an all-time high.

The artificial intelligence (AI) revolution and tax income for Nigeria

The rise of paid AI tools and foreign-owned digital platforms adopted by Nigerian residents (individuals and corporates) presents an emerging tax opportunity. Nigeria could strengthen its taxation of foreign digital services to capture additional revenue. Nigeria already has a regime for taxing foreign companies doing business through digital models in Nigeria (the SEP) and would be looking more closely at driving compliance by these companies.

A clearer taxation regime for solid minerals and other mining activities

With mining activities contributing significantly to revenue, we expect new incentives for local beneficiation, clearer tax regimes and policies to boost sustainable mining practices.

Conclusion

Nigeria's recent tax trends and developments mark a shift towards transparency and global alignment, offering opportunities for growth and innovation while fostering a more favourable business environment. We expect that passing the Tax Reform Bills into law, with the necessary modifications, would introduce significant changes that would modify fiscal obligations, including tax rates, deductions, and reporting requirements.

We understand that the Presidency aims for the Tax Reform Bills to be enacted by Q1 2025, with a commencement date in Q2 or Q3 2025 (after the 90-day window for implementation based on the National Tax Policy). We can see that the National Assembly is under some pressure to pass the proposed Tax Reform Bills into law, as the Tax Reform Bills would play a central role in positioning the FGN strategically to achieve its fiscal objectives.

Originally published in Chambers & Partners

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