The Financial Technology (Fintech) sector in Nigeria has experienced significant growth in the last few years, even in the face of dwindling growth in other sectors. In this regard, Fintech companies and its landscape in Nigeria have become the cynosure of tax and other regulatory agencies in Nigeria, as the growth and significant investment in the Fintech ecosystem continues to skyrocket. Data gathered by the Nigeria Inter-Bank Settlement System (NIBSS) shows that the volume of financial transactions processed through mobile devices increased by 155.8 percent from ₦719.4 billion in August 2021 to ₦1.8 trillion in August 2022 and the total value of transactions performed electronically through NIBSS from January to August 2022 is worth ₦238.7 trillion1 .
This development is not restricted to mobile transfers, as Point of Sales (POS) transactions also followed the same trend as the volume in August 2022 amounted to ₦98.4million, a 30.2 percent increase from what was recorded in the same period of 2021 at ₦75.6 million2 .
The Fintech ecosystem in Nigeria is largely comprised of businesses focused on mobile payments, payment processing, mobile lending and personal finance. According to Frost and Sullivan, an American business consulting firm, Nigeria's Fintech revenue is expected to reach $543.3million in 2022, a growth from $153.1million in 20173 . Nigerian Fintech start-ups have also witnessed a high level of investment inflow and have reportedly received a total of about $903.6million, which is 501% above the inflow in 20214 .
The rapid expansion of the Fintech industry has given rise to close scrutiny by regulatory agencies culminating in the enactment of different laws and regulations for the industry. This article focuses on the contemporary tax and regulatory issues in the Fintech scene in Nigeria and also proffers recommendations that may aid the smooth operation of Fintech companies in Nigeria and contribute positively to the ease of doing business in Nigeria.
Highlights of Some Tax Issues Inherent under the Nigerian Fintech Space
Fintech companies are fast becoming one of the heavily taxed industries, only behind companies in the telecommunication industry in Nigeria. Based on the projection made by the Budget Office of the Federation in its 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper, the government is expected to generate a total of ₦483.73bn in three years from electronic payment boom by way of the Electronic Money Transfer Levy5 , apart from the other subsisting taxes paid by Fintech companies.
Whilst the Fintech space continues to grow rapidly, discourse on taxation of Fintechs and the digital economy has gained prominence not just in Nigeria but globally. This has led to more scrutiny by tax authorities resulting in additional compliance obligations and issues for Fintech companies. Below are some of the tax issues faced by the Nigerian Fintech Companies and possible way forward:
National Information Technology Development Levy –When Does this Liability Crystalize for Fintech Companies?
One of the existing earmarked taxes in force in Nigeria is the National Information Technology Development (NITD) Levy chargeable at the rate of 1% and is payable on profit before tax by companies with an annual turnover of ₦100,000,000 (One Hundred Million Naira) and above. Companies required to pay the levy are GSM service providers and all telecommunications companies, cyber companies, internet providers, pensions managers and pension-related companies, banks and other financial institutions, and insurance companies.
Previously,the question of whether Fintech companies are liable to the NITD Levy did not have a clear-cut answer, as there was no reference to Fintech companies under the repealed Banks and Other Financial Institution Act (BOFIA) 2004. This is because Fintech companies were not envisaged under the BOFIA 2004 and therefore not categorized as financial institutions under the Act. However, the BOFIA 2020 clearly defines "other financial institutions" to include entities that carry on financial businesses electronically, virtually, or digitally. Thus, the operations of digital financial service providers/Fintech Companies in Nigeria are now governed by the BOFIA 2020 and regulated by the CBN.
Recently, Fintech companies have been receiving NITD Levy assessments from regulatory authorities for prior years i.e., before 2020, with the consequences of possible disruption of businesses if they fail to comply. This is an issue currently faced by Fintech companies in Nigeria. However, it is arguable that Fintech companies were not liable to pay NITD Levy prior to 2020, since they were not recognized as "other financial institutions" under BOFIA 2004.
Payment Service Providers Acting as Pass-Through on Transactions – Possible Value Added Tax (VAT) and Companies Income Tax (CIT) Implications
Fintech companies involved in providing payment services often operate as intermediaries between merchants/customers and traditional banks.
Given the nature of these transactions, a Payment Service Provider typically acts as pass-through on transactions, thus creating some un-intended VAT and CIT issues for the Fintech company. These issues arise largely in respect of the reporting and treatment of each transaction in the books of the Payment Service Provider. For example, Mr. A seeks to pay for a flight operated by Johnny Airlines which costs ₦50, 000 from his bank account using an online Payment Service Provider (ABC Pay), who goes on to charge ₦1,000 as commission. Typically, ABC Pay receives the entire ₦51,000 in its bank account and goes ahead to pay Johnny Airlines its ₦50,000 Behind the scene, the commission is shared between the Payment Service Provider and the bank that facilitated the transaction.
Given the volume of transactions completed by Fintech companies, they are often faced, with issues relating to alleged mis-representation of their turnover/income for VAT or CIT purposes during audits from tax authorities. For example, tax authorities may have a wrong notion that turnover/income in the financial statement has been understated when compared to the inflows in the Fintech company's bank account. This may lead to assessing the Fintech companies to additional VAT or CIT on the wrong basis of understated turnover. These issues are generally resolved through the reconciliation of inflows per bank statements to the audited accounts in order to exclude non-turnover inflows arising from the pass-through transactions. Proper book-keeping practices can help Fintech companies a lot in this area, as this will ensure that each transaction is properly recorded and substantiated. However, the role of Fintech companies in facilitating payment transactions increases their risks of additional assessments, where transactions are not properly explained and in instances where records and relevant documentation are not properly kept.
Request for WHT on Commission Charged by POS Agents from Certified Payment Terminal Service Providers (PTSP) and Payment Solution Service Providers (PSSP)
In recent times, some State Tax Authorities (STAs) have been approaching Payment Terminal Service Providers (PTSP) and Payment Solution Service Providers (PSSP) to provide the list of their POS agents and also account for WHT on commissions charged by the different roadside POS agents.
These Fintech companies (PTSP and PSSP) operate mainly as distributors of POS to wholesaler merchants, who thereafter sell the same to their registered agents. There is no established relationship between the PSSP and the agents. More so, the commission earned on each POS transaction is charged directly by the POS agent and borne by the individual customer. Such typical transaction between a roadside POS agent and an individual customer could be deemed as an "over the counter" transaction, on which WHT should not apply.
The POS agents fall largely within the informal sector and should be appropriately taxed by the relevant STAs, without pushing the responsibility for accounting for taxes from these individuals to Fintech companies.
Highlights of Some Regulatory Issues Faced by Fintech Companies
The boom of Fintech in Nigeria has introduced wide range of threats to the financial space such as cybercrimes, phishing, data and internet theft, internet fraud etc. Consequently, this has necessitated the birth of significant regulatory and legal developments in the framework of Fintech in Nigeria. However, the existing legal and regulatory framework have created some recurring regulatory challenges faced by Fintech companies in Nigeria. Some of these challenges are:
Absence of a Unified Regulatory Framework
Currently, there is no unified legislation regulating the Fintech ecosystem in Nigeria, as there are several existing regulations and legislations which render the operations in the sphere more complex. As such, companies in the Fintech ecosystem run the risk of sanctions or penalties where they fail to comply with one or more of the various regulatory compliance requirements.
Similar to the numerous legislation regulating Fintech, there are different authorities seeking to regulate Fintech services in Nigeria. The bodies regulating Fintech services will depend on the type of transaction, as the regulatory framework is tackled on a product-to-product basis6 . Although, the CBN has primary regulatory oversight over Fintech services and products, other regulatory bodies include: The National Communication Commission (NCC), Nigerian Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), National Information Technology Development Agency (NITDA), Corporate Affairs Commission (CAC), Federal Competition and Consumer Protection Commission (FCCPC) etc.
The CBN can adopt a one-stop shop scheme for Fintech companies. This entails bringing together relevant government agencies to one location to provide fast-tracked services to Fintech companies. This will help simplify the business entry process by removing administrative and regulatory bottlenecks pertaining to obtaining the relevant licenses.
A uniform regulation addressing the use of Fintech should be encouraged to further aid the development of the industry.
Conflict between Existing Laws and Regulations
Given the existence of numerous laws and regulations seeking to regulate Fintech companies, potential conflicts between these laws may arise. For instance, the FCCPC recently published the Limited Interim Regulatory/Registration Framework for Digital Lending in August 2022, as part of its efforts to bridle the immoderate actions of digital lenders in Nigeria. The aim of the Framework is to ensure that all digital lending companies are governed by a single regulatory regime in view of consumers' rights.
However, the intention of the FCCPC to regulate institutions licensed by the CBN conflicts with the provision of Section 65 of BOFIA 2020. Specifically, Section 65 of BOFIA preserves the power of the CBN and restricts the Federal Competition and Consumer Protection Act, 2019 (FCCPA) from applying to the services of banks and other financial institutions. These conflicting laws/regulations create uncertainty for Fintech companies and it is expected that the various regulatory agencies will align and cooperate with each other to ensure seamless oversight.
Fragmentation of Regulation under various Governmental Agencies
Regulation of the Fintech landscape is fragmented between various state agencies and principally the CBN. As a result of this, there are high chances of regulatory arbitrage and as mentioned earlier, power may overlap. New regulatory requirements keep emerging daily with additional burdens on the players in the Fintech space.
To address this concern, the CBN can adopt a one-stop shop scheme for Fintech companies. This entails bringing together relevant government agencies to one location to provide fast-tracked services to Fintech companies. This will help simplify the business entry process by removing administrative and regulatory bottlenecks pertaining to obtaining the relevant licenses. The services that can be provided by the proposed Centre will include granting of relevant operational approvals and licenses and authorization within the shortest possible time and provision of general information on the legal and regulatory framework of the Fintech ecosystem in Nigeria to aid existing and prospective businesses in making informed business decisions. We note that the Nigerian Start-Up Bill was signed by the President this week, which seeks to provide a one stop solution for start-ups, but this may not apply to already existing companies in the Fintech sector that do not qualify as start-ups.
Conclusion
Fintechs, which were created to replace traditional financial methods or to augment them, have brought about significant change, disrupting many business operations and models, especially in the financial services industry. The success of these companies has also brought about increased tax and other regulatory scrutiny on Fintech companies as an unintended consequence.
Therefore, the importance of a solid, stand-alone, and flexible legal framework for Fintechs in Nigeria is highly recommended, as the presence of such will boost investors' confidence in the industry and increase the ease of doing business. The adoption of a one-stop-shop scheme for Fintech companies and the continuous implementation of the sandbox framework put in place by the CBN and relevant bodies cannot be overemphasized. Fintech companies are also advised to seek clarification from tax professionals on relevant tax issues encountered by them to manage avoidable tax exposure.
Footnotes
1. https://nibss-plc.com.ng/news/4st8z91actz2h3jw19d832xjcd
2. https://nibss-plc.com.ng/news/4vr7p01acrgf7yqgqj5xcyvr49
3. https://thefintechtimes.com/nigerias-fintech-landscape-in-2022
4. https://www.mondaq.com/nigeria/fin-tech/1187088/fintech-2022
5. https://nibss-plc.com.ng/news/4cz8qd0fnhg5c28qcm0tbeshce
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.
