By: ThinkBusiness Africa
As Nigeria’s ambitious new tax framework takes effect, global professional service firm KPMG, has raised urgent alarms regarding “inherent errors” and “inconsistencies” that could inadvertently trigger double taxation for businesses and individuals. While the federal government aims to simplify tax administration and boost revenue, the current wording of the legislation may create significant financial hurdles for the private sector, KPMG said in a report.
A primary concern centers on Section 6(2) of the Nigeria Tax Act (NTA) regarding Controlled Foreign Companies (CFCs). The Act stipulates that undistributed foreign profits must be “construed as distributed” and included in the taxable profits of a Nigerian company, implying a standard 30% income tax rate.
Experts at KPMG point out a critical disparity: while dividends distributed by local Nigerian companies are treated as “franked investment income” (avoiding further tax), foreign dividends do not appear to receive the same protection. This creates a “double taxation” scenario where foreign-sourced income is taxed at a much higher effective rate than local income, potentially discouraging Nigerian companies from expanding internationally.
Operational risks also extend to how companies manage foreign exchange. Under Section 20(4), businesses are only permitted to claim tax deductions for foreign currency expenses based on the official Central Bank of Nigeria (CBN) rate.
In a market where many businesses are forced to source currency at higher parallel rates due to supply shortages, this provision means companies cannot deduct the actual cost of their operations. KPMG warns this effectively taxes “phantom profits,” as businesses are denied deductions for legitimate expenses incurred above the official rate.
In Section 3 of the NTA, which lists individuals, families, and companies as taxable entities but omits “communities”. Ironically, communities are included in the Act’s broader definition of a “person,” creating a legal contradiction. Experts recommend the law be amended to explicitly include or exempt communities to avoid confusion.
A key sensitive issue involves the taxation of individuals. While the reforms aim to protect low-income earners, the new Section 30 limits deductible items and sets a rent relief cap of just N500,000.
“Finding the right balance is critical,” the KPMG report notes, warning that “oppressive” tax provisions for high-income earners and investors could trigger capital flight and a sell-off in the stock market. Some analysts suggest that if these rules remain unchanged, Nigeria could see wealthy individuals relocating to lower-tax jurisdictions, ultimately stifling entrepreneurship and job creation.
Last December, the proposed increase of Capital Gains Tax (CGT) from 10% to 30%, caused a huge selloff in the Nigerian stock exchange market as investors sought to lock-in profit before implementation begins in January.
the Nigerian Stock Exchange (NGX), All Share Index fell 5% on a single day crashing from N94.5 trillion to N89.8 trillion, leading to a seven day losing streak.
The National Assembly recently released “certified” versions of the Acts to resolve earlier discrepancies, but stakeholders insist that the text still contains “lacunae” that must be reconsidered.
“Finding the right balance is critical,” the KPMG analysis concludes. Experts warn that if these provisions remain “oppressive,” they could lead to capital flight as wealthy individuals and corporations relocate to more tax-friendly jurisdictions, ultimately stifling the very economic growth the reforms were meant to foster.
