Learning to navigate the Nigerian business terrain is a necessity for every startup. Regardless of the industry, the ability to scale regulatory hurdles and avoid industry-specific bottlenecks could be the difference between success and failure.
As a result, there have been calls on the government for the enactment of a Startup Act, as obtainable in countries like Tunisia and Senegal, that would create an enabling environment for entrepreneurs with innovative (usually tech-enabled) ideas to start and scale their startups in a favourable fiscal and regulatory environment.
Currently, all firms registered and resident in Nigeria, after an 18-month tax-exempt period, irrespective of profits, have to pay a 30% company income tax (CIT) from their worldwide profits to the federal government annually. Non-residents only have to pay tax from annual profits made in Nigeria.
The Federal Inland Revenue Service (FIRS) can make allowances in cases where companies have no assessable profits, make less profit than is expected, or when the actual profit cannot be ascertained.
To attract investments into the ICT sector, the federal government, through the establishment of the Nigerian Investment Promotion Commission (NIPC) released guidelines for pioneer status incentives, which include, among other things:
- A three-year tax holiday from the initial stage
- Ten per cent withholding tax would not be deducted from dividends paid to company shareholders
While Nigeria awaits her own Startup Act, the new finance bill, — 7.5% Value Added Tax (VAT) increase and Tax Identification Number (TIN) issues aside — once passed into law, may bring with it some added benefits.
Zainab Ahmed, Minister of Finance, Budget, and National Planning, has pointed out that one of the provisions in the Finance Bill 2019 is that firms with an annual turnover of less than ₦25 million ($68,500) do not have to pay CIT as required by the federal government.
For medium-sized firms with an annual turnover ranging between ₦25 million ($68,500) and ₦100 million ($274,000), a lower CIT of 20% will be paid, while larger companies with an annual turnover exceeding ₦100 million will pay the standard 30% CIT.
The Minister insists that being tax-exempt, small businesses would invest more in themselves, become more productive, get more employees, and grow to become medium-sized businesses, at which point they would begin to pay taxes, albeit at a lower rate than larger companies.
Seeing as most startups in Nigeria would likely fall within either category, this could be a welcome initiative for startup founders as well as investors.
However, one question that should be answered is: Upon the expiration of the three-year tax holiday provided for ICT companies by the NIPC, will companies still have tax-exempt status if they fail to make yearly turnovers of up to ₦25 million ($68,500)?
The Finance Bill has been passed by the National Assembly and will be signed into law within the course of the year once it has been assented to by President Muhammadu Buhari.
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NEW REPORT: Nigerian startups raised $28.35m in Q2 2020; only about 4.5% of that came from local investors. Find out more in the full report.