Tax law - Afrikan Heroes

South Africa Abolishes Section 12J Tax Breaks for Investors

March 1, 2021

The South African government has announced that the Section 12J tax breaks for investors, which offered rebates to South Africans if they made investments through approved venture-capital companies, has been abolished. It could be recalled that Section 12J was introduced in 2008 to encourage investments in startups and SMEs, riskier investments that nonetheless could help to create jobs and stimulate economic growth. It encouraged a myriad of VC firms to have launched such funds, including Kalon Venture Partners, Knife Capital and E4E Africa, with funds still being announced as recently as this month.

The Scheme was set to expire on June 30 of this year, and though it had been expected to be renewed, South Africa’s Treasury announced in its Budget 2021 statement that its objectives had not been “sufficiently” achieved.

Rather, the regulations had provided a significant tax deduction to wealthy taxpayers, as rather than investing in small businesses and riskier ventures, the majority of the S12J investments were “low risk” in sectors such as property that offered more guaranteed returns. More than ZAR11 billion (US$754 million) was invested in 360 S12J venture companies, but only 37 per cent of these companies added new jobs after receiving funding. VC firms that have been making investments in startups via such vehicles, however, expressed disappointment, though there was an acceptance that the incentives as they stood were not working as well as they should.

“I believe Treasury has taken a very short-term view rather than a five-year time horizon which would have been very beneficial for the fiscus,” said Clive Butkow, chief executive officer (CEO) of Kalon Venture Partners.

Keet van Zyl, partner at Knife Capital, said the intention of the Section 12J incentive was always to overcome one of the main challenges to the economic growth of South African SMEs – access to equity finance – by making the VC asset class accessible for retail investors.

“Unfortunately, only a handful of VCCs have investment mandates to legitimately claim that they invest in SMEs. The likes of Knife Capital’s KNF Ventures, Kalon Venture Partners, Sanari Capital, Kingson and Anuva Investments lead the charge. If there were more of these VCCs out there focused on SMEs this would have been a permanent incentive for the benefit of the ecosystem driving innovation, job creation and economic growth,” he said.

“While a bitter pill to swallow, I can understand the reasoning behind the move. I would have wished for an extension of the June 2021 sunset clause with refinement of the ‘qualifying investee’ definition to stamp out abuse and encourage and force VCCs to stick to the spirit and intent of the tax incentive. Why would you not continue to back the 37 per cent of SME Qualifying Companies that created jobs post investment?”

Scale-up mentor Guy Harris said removing the tax breaks without replacing them with something more effective showed a lack of foresight, and demonstrated the “ongoing dominance of big business and big government” of the South African economy.

“When the tax engineers started exploiting there should have been refinement then rather than complaining about loopholes being validly used but contrary to objectives,” he said.

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry

Businesses In Nigeria With Turnover of Less Than N25 Million Will Not Be Taxed Under A New Finance Law

November 22, 2019

Nigeria ’s parliament has finally passed a new finance bill that will increase Value Added Tax in the country from its current 5% to 7.5%. Of course, there is no gain saying the fact that President Mohammed Buhari will quickly sign the Bill into law since it originated from the President’s office and would form the backbone of the country’s budget financing next year. One sect of people who escaped the government’s tax net this time are companies whose yearly profits do not exceed N25 million ($69,000). However, for large companies with yearly turnover of N100 million and above, added to the 30 percent flat-rate corporate tax and other range of taxes and levies already in place is now an increased Value-Added Tax 7.5%, in place of the former 5%.

Below are some of the important changes you should know about:

Changes In The Companies Corporate Tax Rate

Under Nigeria ‘s new Finance law:

Small businesses with annual turnover of less than N25m will now be exempted from Companies Income Tax. However, to benefit from such incentive, such small businesses must first register for taxation in Nigeria and must continue to file tax returns during the period their profits are below the tax N25mn threshold.
A lower Corporate Income Tax rate of 20% ( as against 30%) will however apply to medium-sized companies with turnover between N25m and N100m, to benefit from such incentive, they must first register for taxation in Nigeria and must continue to file tax returns during the period their profits are between the N25m and N100m threshold.
The law now allows a minimum tax rate of 0.5% for every turnover and this provision will only apply to small companies (less than 25m turnover), thus allowing non-resident companies in Nigeria to pay minimum tax.
For companies or businesses that pay their tax dues early, a 2% deduction bonus on tax payable is given in the case of medium-sized companies between N25m and N100m and 1% deduction on payable tax is given for large companies from N100m and above.

Introduction of New Taxable Businesses In Nigeria

The finance law also extends the scope of taxable businesses in Nigeria to include any digital media agency that transmits, emits or receives signals, sounds, images or data of any kind in Nigeria, including ecommerce companies, app store, online adverts, cloud computing services online payment platforms and so on, as long as the company has significant economic presence in Nigeria and profit can be attributable to such platforms.
Also taxable in Nigeria under the new finance law would be outsourcing of foreign technical, management, consultancy or professional services to a person or company resident in Nigeria where the company has significant economic presence in Nigeria and profit can be attributable to such platforms.

Taxation On Dividends of Companies

Under the new law, the following categories of dividends are exempt from tax:

Dividends which are paid out of the retained earnings of a company, provided that the dividends are paid out of profits that have been subjected to tax under the relevant laws.
Dividends that are paid out of profits that are exempted from income tax by the Act or any relevant Act.
Profits or income of a company that are regarded as franked invesment income under the Act.
Distributions made by a Real Estate Investment Company to its shareholders from rental income and dividend income received from such shareholders.

Ease of Doing Business

The law also made substantial changes to the mode of doing business in Nigeria. Under the finance law:

Nigerian banks are to request for Tax Identification Number (TIN) before opening bank accounts for individuals, while existing account holders (accounts opened before September 30, 2019) must provide their TIN to continue operating their accounts.
Email correspondences are now recognised for purposes of communicating with Nigerian tax authorities.
Also, stamp duty on bank transfer made in Nigeria will now apply only on amount starting from N10,000, and above. However, transfers between the same owner’s accounts in the same bank are to be exempted from stamp duty.

Other notable introductions and amendments include:

That the remittance of VAT will now to be on cash basis, that is, the difference between output VAT collected and input VAT paid in the preceding month.
The meaning of supply and definition of goods and services has been expanded to cover intangible items other than land, among others.
Introduction of thin capitalisation of 30% of Earnings before interest, tax, depreciation and amortization (EBITDA)for interest deductibility. Any excess deduction can be carried forward for 5 years.
Deemed tax presence for non-residents with respect to imported technical and management services now taxable at a final WHT rate of 10%.
Insurance companies can now carry forward tax losses indefinitely, deduct reserve for unexpired risks on time apportionment bases while special minimum tax for insurance has been abolished.
Dividend distributed from petroleum profits now to attract 10% withholding tax.
Compensation for loss of employment below N10m to be exempted from Capital Gains Tax.
VAT registration threshold of N25 million turnover in a calendar year to be introduced
Any expense incurred to earn exempt income now specifically disallowed as a deduction against other taxable income
Specific requirement for VAT deregistration for discontinuing operations

To download the new Finance Act, click here.

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world

Nigeria reforms tax

October 20, 2019

NIGERIA’S President Muhammadu Buhari has sent a Finance Bill to parliament to change obsolete tax laws and grow revenue, Zainab Ahmed, Minister of Finance, Budget and National Planning disclosed yesterday at the Governor’s Talk moderated by Abebe Selassie, IMF’s Head of African Department.

Zainab Ahmed, Minister of Finance, Budget and National Planning

The Bill, when passed by parliament, is expected to boost domestic revenue mobilization. This will be achieved through a suit of policies including increasing VAT from 5 percent to 7.5 percent, reintroducing excise duties commodities such as carbonated drinks and reforming outdated oil and gas laws.

Nigeria, she said, is diversifying its revenue sources after suffering a recession which blew a huge hole in government purse in the wake of crude oil-price crash in 2014. According to her, the country’s infrastructure gap needs huge financing and the master plan to deal with the challenge, requires $3 trillion over 30 years. Nigeria has low effective tax collection and voluntary tax compliance rates. “We operated a defective social contract for long where government didn’t bother to collect taxes and citizens didn’t demand answers to poor service delivery,” she revealed.

The minister attributed this to past governments’ excessive dependence on revenue from hydrocarbons. To improve revenue collection, some agencies of government such as the Nigerian Customs are deploying technologies including blockchain technology to block leakages.

On the vaunted negative effects of the increase in VAT, Mrs Ahmed assures that the Bill has made provision for exemptions on goods and service that are mostly consumed by the masses such as food, transport, health and education. Additionally, the government is contemplating ring-fencing the 2.5 percent increment, so that revenues accruing from it would be appropriated exclusively for education, health and human capital development purposes.

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry.