Introduction
Before the two Finance Acts 2020[1] (FA1 2020 and FA2 2020)’s amendments to the Companies Income Tax Act[2] (CITA) and the Value Added Tax Act[3] (VATA) in January and December 2020 respectively, size-based company categorisation was not totally a low key affair in the now repealed Companies and Allied Matters Act,[4] (CAMA 2004), or even in the CITA. However, it was totally off the radar in the VATA.[5] In between the two Finance Acts, CAMA 2020 was enacted in August 2020, with further detailed size-based provisions on company classifications.
FA1 2020’s newly introduced (threshold) distinctions between “small”, “medium-sized” and “large” companies has significant preferential tax treatment and compliance obligations.[6] Subsequently, CAMA 2020 (CAMA)made copious new provisions for “small” (private) companies. FA2 2020 followed suit with its own amendments to the original FA1 amendments.[7]
This article discusses the policy rationale for size-based companies’ categorisation, compares the relative treatment (historic and current) under Nigerian legislation and provides perspective on issues arising as a result of recent legislative changes, against policy considerations such as improving Nigeria’s ease of doing business, especially for start-ups.
A. CAMA Categorisations
As is to be expected, categorisations is not new under the CAMA, and happens under different guises. For example, by nature or character – depending on objectives, a company can be private[8] or public,[9] limited by shares[10] or by guarantee (i.e. not for profit),[11] or even unlimited.[12] Each form has start-up and ongoing (maintenance) compliance requirements;[13] and registration of a company confirms the incidences of its status.[14] There are consequences for non-compliance with the statutory requirements of the relevant corporate form, exemplified for private companies by section 23 CAMA.[15]
However, our primary focus here is on size: CAMA provides for small and other companies. What are the policy reasons for small companies (SCs) size categorisation and the presumably lighter compliance burden? Is there a presumed policy for more scrutiny on large companies (LCs) because they will impact the public more: given higher number investors and employees, wider ecosystem (suppliers/vendors, alliance partners), potentially more significant tax contributions, greater social impact in terms of corporate social responsibility (CSR), etc?[16]
B. CAMA 2004 and 2020: Much Ado About Size?
Section 394 CAMA 2020 defines SCs in terms of “qualifying conditions” for the relevant year(s).[17] These are that: it is a private company with not more than N120 million turnover or such amount as the CAC may fix from time to time; its net assets value is not more than N60 million or such amount that the CAC may determine from time to time; all its members are Nigerians and none of them represents the public sector; and the directors between themselves hold at least 51% of its equity share capital.[18] Going by section 394(3), these requirements conjunctive, and not disjunctive.[19] Turnover threshold correlates more to actual operations of the company’s business rather than share capital; and has apparently been the preferred measure of size[20]– because a company with minimal share capital can record significant turnover.[21]
Section 395, especially 395(1) and (2) also provides in terms of small parent companies (SPCs): “if the group headed by it qualifies as a small group” and “A group qualifies as small in relation to the parent company’s first financial year if the qualifying conditions are met in that year.”[22]
By section 237(1), SCs (and companies having a single shareholder (CH1S)), are exempted from having an annual general meeting (AGM) every year, and thereby relieved from consequences of not holding AGM. According to section 240, SCs (and CH1S) are not obliged to hold their statutory meetings and AGMs in Nigeria. SCs are also exempted from section 271(1)’s prescription of at least two directors for every company, having a company secretary (section 330(1)), section 393(1) entitles SCs to deliver their financial statements in modified (less detailed) form in terms of CAMA’s Sixth Schedule, and related provisions like section 396. Similarly, section 402(1)(b) enshrines exemption from audit requirement for SCs;[23] section 405 relieves SCs’ CEOs and CFOs from CSR certifications requirements for financial reports.
Section 418(1) reflects carve-out for SCs, in respect of contents of Annual Returns (ARs) by companies limited by shares, whilst section 419 and Eight Schedule specifies contents of SCs’ ARs. However section 423(2) specifies in addition to the certificates accompanying ARs by all private companies in 423(1), another signed certificate by SCs confirming its compliance status with the SC “qualifying conditions”.[24] Similarly, section 424(2) provides that “A [SC] is exempted from the requirements imposed by section 422 [on documents to be annexed to AR] provided that it complies with the provision of section 394 of this Act.
By section 425(1), “If a company required to comply with any of the provisions of sections 417-423 fails to do so, the company and every director or officer of the company are liable to a penalty as may be prescribed by the Commission.” Incidentally, following the CAMA’s ‘lighter’ regulatory touch on SCs, the CAC in exercising its delegated powers to prescribe penalties for non-compliance with CAMA provisions,[25] stipulates, vide The Companies Regulations 2021, lighter penalties for SCs, vis a vis other companies.[26]
C. CITA and VATA Categorisations
It has been shown above that size classifications under Nigerian corporate law predated CAMA 2004, raising the question: was there SC categorisation in tax laws pre-FAs 2020? An answer to this question will entail review of only the CITA and VATA, firstly because these are the only two legislation that FAs 2020 effected size classifications in, and secondly, because such classification are largely irrelevant in other substantive tax legislation.[27] An exception though may be the Venture Capital (Incentives) Act,[28] (VCA). Section 2(e) VCA provides that “For the purposes of the incentives specified in this Act, the [FIRS] shall certify that a venture capital project fulfils or is capable of fulfilling one or more of the objectives set out in this Act, that is – (e) the promotion of the growth of small and medium scale enterprises with emphasis on local raw materials development and utilisation”.[29]
CITA: Pre- FAs 2020
Also Read: ‘Rendezvous’: Implications of Tax Provisions of Nigeria’s Finance Act (No.2) 2020 for Non-Residents
Section 23(1)(o) CITA, an amendment introduced in 1996, listed amongst profits exempted from tax under CITA, “dividend received from [SCs] in the manufacturing sector in the first five years of their operation”.[30]Equally, section 19 Industrial Development (Income Tax) Relief Act[31] excludes pioneer companies from “small companies’ relief” thus: “A pioneer company shall not be entitled to any relief under section 28 of the principal Act [CITA].” Incidentally, but not by an insignificant omission, the phrase “small companies” was not defined in the pre-FAs 2020 CITA!
Some of the scenarios where size (by turnover), impacted tax treatment under the CITA was exemplified by the erstwhile section 33 provisions on minimum tax (MT). Section 33(2)(a) and (b) specified that the applicable MT shall be a function of whether the turnover of the company is below or above N500,000 (and the company has been in business for at least four calendar years). If the turnover is N500,000 and below, the MT was to be the higher of: 0.5% of gross profit; 0.5% of net assets; 0.25% per cent of paid-up capital; or 0.25% of turnover of the company for the year. However, if the turnover was higher than N500,000, there would an additional 50% of the rate used for the lower threshold, on the amount by which the turnover is in excess of N500,000. The foregoing meant that the amount of MT paid by companies subject to MT provisions was dependent on their turnover: the ‘smaller’ (lower turnover companies), got preferential treatment, with ‘big’ companies paying more.[32]
Section 52(2) CITA, an amendment provision introduced in 1996[33] provided that: “Every company whose turnover is [N1 million] and above shall file self-assessment return within six months of its accounting period provided that a company whose turnover is below [N1 million] shall file a self-assessment return as from 1998 year of assessment.” This showed that previously, the entitlement of “smaller companies” by turnover to file returns based on self-assessment came later in time than their “big” counterparts.[34]
By section 7(2) National Information Technology Development Agency Act[35] (NITDA Act), the NITDA Levy of 1% of profit before tax (PBT) was only payable by designated companies/ enterprises with minimum annual turnover of N100 million. Thus, companies below the turnover threshold were not subject to NITDA Levy.[36]
VATA: pre- FAs 2020
Like most other tax legislation, the pre-FAs VATA was size agnostic, whether in terms of compliance obligations and enforcement provisions, including penalties for breach.
D. FA1 and FA2 2020: Size Matters
FA1 and FA2 have introduced key amendments for CIT and VAT purposes; some have been highlighted earlier on in this article.[37] It is worth noting though that the CIT exempt status of SCs is subject to inter alia, a key proviso in section 23(1)(o)(i): “such company shall, without prejudice to this exemption, comply with the tax registration and tax return filing stipulations of this Act and be subject to the provisions as regards the time of filing, penalties for breach of statutory duties and all other provisions of this Act in all respects during this period which its profits are below the tax paying threshold”.[38]
There is also the “section 23(1A) [CITA] [amendment] clarification that tax exempt status does not relieve WHT compliance (deduction and remittance) on rent, interest and dividend payment by such exempt companies to third parties. This provision was previously 23(1)(n) CITA but was deleted and reinserted as 23(1A) by section 9 FA1 2020.”[39]
Also, “by the new section 23(1)(o)(ii) CITA (vide section 9 FA1 2020) dividends received from small manufacturing companies in the first five years of their operations are also tax exempt.”[40] Further, “Small companies are also exempt from the 2% of assessable profit as Tertiary Education Trust Tax: section 34 FA2 2020 (amending section 1(2) TETFund Act).”[41]
By section 18 FA1 2020’s new section 77(5A) CITA, MSCs and LCs are respectively entitled to 2% and 1% early filing bonus of their tax amount paid, which shall be available as a credit against future taxes. To qualify for such bonus, the relevant company must have paid its CIT “90 days before the due date as provided under section 55 [CITA]”.[42]
The tax exempt status of SCs is further reflected in the new MT provisions (of section 33 CITA vide section 14 FA1 2020), being “0.5% of the gross turnover of the company, less franked investment income”, further reduced by section 13 FA2 2020 (amending section 33(2) CITA), to 0.25% for tax returns for any year of assessment falling due between 1 January 2020 and 31 December 2021, both dates inclusive. By FA1 2020’snew section 33(3)(b) CITA, SCs joined the exempt list from the application of MT provisions. Thus, unless otherwise qualified for exemption under section 33, MSCs and LCs are liable to pay MT.
Given the criticality of the informal and SMEs sector to Nigeria’s economic development and well-being, the policy arguments for having such size based preferential tax treatment are very convincing; and it is to the present administration’s credit that recent tax amendments have focused on further intervention in this area.[43] These will positively impact Nigeria’s ease of doing business ratings.[44] Size based tax breaks/incentives cum lighter regulatory burden means that resources can be focused on growing or sustaining the business, helping to accelerate growth towards potential future significant tax contributions by start-ups, SCs – the tax breaks could help them become MSCs and LCs.[45] Sometimes the opportunity costs of lower compliance costs can mean the difference between life and death of start-ups or SCs.
The FA1 and FA2 2020 tax amendments provides good mechanism for drawing the informal economy into the tax net, a key objective of the National Tax Policy 2017 (NTP). This is moreso that the formal sector have often expressed concerns about ‘unfair’ treatment – that they are overtaxed because of excessive scrutiny from the Revenue when a greater chunk of the informal sector could be contributing their quota to the public fisc.[46]
E. Questions: Charting Forward Paths
Are there inconsistencies between CAMA and tax legislation? Of course, the answer is in the affirmative. Could they have been avoided, especially as CAMA was subsequent to the FA1 2020 amendments, for example by relying on FA1 2020’s definition of SCs? How do we resolve stark inconsistencies?
Also Read: Addendum – ‘Withholding Tax: The A-Z of Grossing-Up’
Understandably, CAMA’s benchmarks for categorising SCs must extend beyond turnover; whilst for CITA andVATA, turnover and supply transactions amount thresholds respectively suffice. Clearly, the basic underpinning is that one cannot use CAMA provisions (focused on companies’ administration and corporate compliance), to answer tax compliance issues and vice versa, but can always be a guide where there are gaps, etc? The focus of the two regulators CAC and FIRS are different, albeit they have recently cooperated more intensively, as part of the initiatives to improve the ease of doing business in Nigeria.[47].[48] In other words, the inconsistencies in size prescriptions are not fatal.[49]
Conclusion
Some of these issues may become of great practical significance as CAC begins implementation of the CAMA, and FIRS also undertakes its oversight functions pursuant to the new provisions. If there are no issues with grant of sectoral tax incentives, then by the same token, there is no reason to argue with size based tax incentives. Ultimately, issues as to different company size categorisations under CAMA and tax legislation may actually be “much ado about nothing”. This is reinforced by the fact that further to this author’s review of Nigerian Caselaw, there does not appear to have been any tax or corporate litigation till date, predicated on companies’ size. Hopefully, it will thus be a case of “all’s well that ends well.”
DISCLAIMER: Thank you for reading this article. Although we hope you find it informative, please note that same is not legal advice and must not be construed as such. However, if you have any enquiries, please contact the author, Afolabi Elebiju at: a.elebiju@lelawlegal.com or: info@lelawlegal.com.
