The Act aims to curb tax evasion, base erosion, and profit shifting by implementing stringent measures to prevent aggressive tax planning and abusive tax avoidance schemes. As an audit firm seeking to educate and empower prospective customers, this article provides an overview of the anti-avoidance measures introduced by the Nigeria Finance Act 2020. Understanding these measures is essential for businesses to ensure compliance with the law, manage tax risks effectively, and maintain their reputation in the evolving Nigerian tax landscape.
- Introduction of General Anti-Avoidance Rules (GAAR): The Finance Act 2020 introduced General Anti-Avoidance Rules (GAAR) to counteract tax arrangements that lack commercial substance or are undertaken primarily for tax avoidance purposes. GAAR empowers tax authorities to disregard or recharacterize transactions if they determine that the primary purpose was to obtain a tax benefit. Businesses must ensure that their transactions have a genuine commercial purpose to avoid potential challenges under GAAR.
- Thin Capitalization Rules: To prevent excessive interest deductions and profit shifting, the Act introduced Thin Capitalization Rules. Under these rules, interest expenses on loans from related parties or foreign affiliates are limited to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). Businesses must carefully manage their debt-to-equity ratios to comply with these rules and avoid disallowance of interest deductions.
- Controlled Foreign Company (CFC) Rules: The Finance Act 2020 implemented Controlled Foreign Company (CFC) rules to prevent the shifting of profits to low-tax jurisdictions. These rules empower tax authorities to attribute the income of foreign subsidiaries or affiliates of Nigerian companies back to the Nigerian parent company if certain conditions are met. Businesses with offshore subsidiaries must assess the potential impact of CFC rules on their group structures and tax planning.
- Amendments to Transfer Pricing Regulations: The Act introduced changes to transfer pricing regulations, adopting the arm’s length principle to ensure related-party transactions are conducted at fair market value. Tax authorities have the authority to adjust prices and recharacterize transactions that do not adhere to arm’s length standards. Businesses engaged in related-party transactions must maintain comprehensive transfer pricing documentation to demonstrate compliance.
- Withholding Tax on Dividends and Interest: The Finance Act 2020 introduced withholding tax on dividends paid to foreign entities without a physical presence in Nigeria and on interest payments on foreign loans. This measure aims to prevent the erosion of the Nigerian tax base by taxing income flowing out of the country. Businesses making such payments must withhold the applicable tax and remit it to the tax authorities.
- Implementation of the Beneficial Ownership Register: The Act introduced measures to establish and maintain a Beneficial Ownership Register, requiring companies to disclose information about their ultimate beneficial owners. This measure enhances transparency and helps prevent tax evasion and money laundering through complex ownership structures.
The anti-avoidance measures introduced by the Nigeria Finance Act 2020 underscore the government’s commitment to curbing tax evasion, base erosion, and profit shifting. Businesses must be aware of these measures, assess their potential impact on their tax positions, and prioritize compliance with the law. As an audit firm, we are dedicated to assisting our prospective customers in understanding and navigating these anti-avoidance measures, providing them with the knowledge and guidance needed to comply with the regulations, mitigate tax risks, and maintain their integrity in the evolving Nigerian tax environment. By adhering to the law and implementing robust tax planning strategies, businesses can thrive in a fair and transparent tax system while contributing to the growth and development of the Nigerian economy.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.