There is a general consensus that the Finance Act 2019 (the Act), is a welcome legislation which addresses some of the major issues identified in our tax laws over the years. It also returns the tradition of accompanying the annual Appropriation Act, with a Finance Act that provides a platform for meeting revenue targets in the Appropriation Act. Commentaries have however, focused on only the changes to tax laws and how they impact the tax system, taxpayers and the tax authorities.

The broader issue of the impact of the Act on Nigeria's investment environment and the Ease of Doing Business has received little attention and analysis. However, this issue should also be on the front burner. In 2019, the World Bank ranked Nigeria 131st out of 190 Countries on its ease of doing business index and 159th on the specific area of ease of paying taxes. These are important indices that influence growth and development of national economies and deliberate steps need to be taken to continuously improve Nigeria's ranking annually.

We have set out below an overview of efforts made so far by Government to improve the ease of doing business and a brief analysis of some provisions of the Finance Act and the potential impact on the ease of doing business in Nigeria.

Ease of Doing Business in Nigeria

In July 2016, President Muhammadu Buhari established the Presidential Enabling Business Environment Council (PEBEC) to implement reforms in the Nigerian business environment in order to make the country a progressively easier place to establish and conduct business operations.

Within this period, the PEBEC has been credited with reforms that led to the improvement in Nigeria's ease of doing business ranking from its 169th position in 2016 to the current 131st position on the World Bank Ease of Business Index. Challenges however remain especially with respect to the ease of paying taxes where Nigeria currently ranks 159 out of 190 countries which is actually a decline from its 157th position in 2018.

This has been attributed to issues such as multiple taxation, cumbersome tax compliance processes, non-automation of core tax processes and obsolete provisions in our tax laws.

It is expected, that some of these issues will be addressed by the implementation of the Finance Act and that this will improve Nigeria's tax system and its impact on businesses. We have discussed in brief below some of the provisions of the Act and their potential impact on the ease of doing business.

Finance Act, 2019: Relevant Provisions related to Ease of Doing Business

  • Mitigation of Double Taxation Risks
  • Under the old commencement and cessation rules, new and exiting businesses in Nigeria faced the risk of paying income tax twice or more on the same income, during the first few years of operation for new businesses and for the last two years for a business being wound up. Under the amendments introduced by the Finance Act, new businesses will now be taxed on their actual accounting periods during commencement and the same applies to companies being wound up during their cessation periods. This will ultimately reduce the tax exposure of the companies and allow shareholders benefit from profits earned during commencement and cessation.
  • Another major issue resolved by the Finance Act, is the taxation of dividends distributed under Section 19 of the Companies Income Tax Act (CITA), when such companies are not in a taxable position for the year of distribution, even where the profits from which the dividends are distributed have been previously taxed. This has been a major sticking point for local and foreign investors, but with the amendment of the Section by the Finance Act, dividends from retained earnings, franked investment income, pioneer profits, exempt profits and distributions from Real Estate Investment companies are now all exempted from what was previously termed "Excess Dividend Tax". This is a major relief to shareholders as it eliminates the double taxation occasioned by the old provisions and now incentivizes distribution of dividends from retained earnings.
  • Companies Income Tax (CIT) and Value Added Tax (VAT) Exemption for Small Companies Exemption for Small Companies
  • Small companies (i.e. those with not more than a gross turnover of ₦25 million in a year) are now fully exempt from CIT and minimum tax payments. In addition, the tax rate for medium-sized companies (i.e. those with a turnover of between ₦25million and ₦100million) has been reduced to 20%. The new provision also exempts the profits of small companies earned from dividends of small manufacturing companies in their first five years of operation. This will have a significant impact on start-ups and other small companies and will be of benefit to small investors and shareholders.
  • The introduction of a VAT compliance threshold of ₦25 million in annual taxable supplies should also have a positive impact on start-ups and other small companies as it reduces the compliance burden in the early years of business. These category of companies are also exempted from applicable penalties in the VAT Act for non-compliance.
  • There are, of course, questions as to how this exemption will impact the claim of input VAT paid by such companies as they will not charge VAT on their sales and so will ultimately bear the VAT which they have paid on their goods. It is expected that the Federal Inland Revenue Service will issue guidelines and directives on this and other issues that are not clearly addressed by the Finance Act.
  • Incentives for Agricultural Sector
  • Companies engaged in agricultural production are now eligible to an initial tax free period of five years which may be renewed for an additional three years, subject to satisfactory performance of the agricultural production. This is a significant incentive for companies investing in the agricultural sector and if properly harnessed should see investments pour into small, medium and large companies in the sector.
  • Taxation of Digital Economy
  • Digital services which are completely rendered from offshore to a Nigerian resident may now be taxed in Nigeria, if it is determined that the service provider (foreign company) has a significant economic presence in Nigeria. In our view, this may be determined by the Minister of Finance on a case by case basis. While this may create room for discretion, it should allow the companies to engage with the Ministry of Finance in order to properly structure their business operations in Nigeria. This provision in the Finance Act tries to follow the global approach for taxing such businesses and is evidence that the Nigerian tax landscape is being aligned to reflect global best practices in emerging sectors of the economy.
  • Thin Capitalisation and Interest on Foreign Loans
  • Thin capitalisation has been introduced into our tax laws for the first time. This limits deductible interest paid by Nigerian companies on loans from foreign lenders to a maximum of 30% of earnings before interest, tax, depreciation and amortization (EBITDA). This is aimed at moderating the debt to equity ratio of companies and ensuring that investors have the right mix of investment portfolio spread between debt and equity. There is however a drawback for companies that are highly leveraged on debt as there is the risk that excess interest payments cannot be offset against available profits. Further, the Act restricts the deduction of any excess interest expense which is not fully utilized to a maximum period of 5 years from the year in which it was first computed. The risk here is that leveraged companies will ultimately have to absorb such interest expense, where they have been unable to offset within 5 years.
  • Another amendment that impacts the debt portfolio of companies is the reduction in exemption of interest on foreign loans (with a tenor of 7 years and above and a moratorium of 2 years) from a maximum of 100% to 70%. This is seen as capable of affecting the appetite of foreign lenders in granting loans to Nigerian companies and may discourage long term loan investments.
  • Equalisation of Insurance Companies
  • Insurance companies can now carry forward losses beyond four years, like all other companies. Additionally, the somewhat punitive provisions that restrict allowable deductions on unexpired risks and other deductible gains and outgoings, as well as provisions which require an insurance company to have no less than an amount equal to 20% of gross incomes as total profit for tax purposes in a year, have been deleted. This is a welcome development and a reprieve for the sector, especially in the light of the increased capitalization requirements for insurance companies. It is hoped that these amendments will encourage investments into the sector.


The Nigerian Government has made conscious efforts to improve the business environment by designing more efficient systems and improving processes. This has now been followed by a holistic amendment of tax laws in the Finance Act, 2019. It is hoped that the implementation of the Act will be done in a manner that allows companies enjoy the maximum benefits of the changes and be showcased as evidence of Government's further commitment to improving the ease of doing business in Nigeria.

More importantly, it is hoped that the Ministry of Finance will issue the required guidelines and regulations to provide clarity and certainty on any grey areas, in order to aid in the implementation of the Finance Act. This is to ensure that the Act is ultimately understood and implemented as a pro-business and investment legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.