The possible downsides of Nigeria’s progressive Company Act for SMEs, startups

by | Aug 13, 2020

On Friday, August 6, 2020, Nigeria’s President, Muhammadu Buhari signed the amendment to the country’s Company and Allied Matters Act (CAMA). On paper, this is a move that seemingly brings lots of business-friendly provisions for small businesses and startups.

In March 2020, the Nigerian Senate passed the amended bill titled, ‘The Companies And Allied Matters Act (CAMA), 2004 (Repeal And Re-Enactment) Bill, 2020’ and the President’s signature gives room for its implementation.

The amendment to Nigeria’s CAMA Act of 1990 has been in the works for a while, dating back to former president, Goodluck Jonathan’s regime. In 2018, the Senate passed the CAMA amendment, but the President refused to sign it.

According to Femi Adesina, Special Adviser to the President on Media and Publicity, the new legislation, with special provisions for small businesses, is geared towards enhancing the ease of doing business in Nigeria.

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The CAMA Act is another important piece of legislation coming a few months after Buhari signed the Finance Act into law in January 2020.

However, a few of the CAMA Act’s provisions might place startups in an awkward position if implemented as is.

It’s much easier to form a company

The amended Act allows one person above the age of 18 to become a shareholder of a company, thus removing the previous requirement for two persons to form a company.

The authorised share capital has been replaced with minimum share capital. This means companies don’t have to allocate or pay for shares that are not needed when they are incorporated.

It is important to note that the minimum share capital for private companies has been increased from ₦10,000 ($25.8) to ₦100,000 ($258), while for public companies, it went from ₦500,000 (~$1300) to ₦2 million ($5180)

Interestingly, the amended Act exempts small companies or any company with a single shareholder from having annual general meetings. They also do not need to have their financial records audited.

It is important to note that small companies are defined as companies with an annual turnover of ₦120 million or less, and assets worth ₦65 million or less. However, the Corporate Affairs Commission (CAC) could change this figure at any time.

LLPs and LPs

The amended Company Act makes provisions for two or more persons, one of whom must be resident in Nigeria, to form a company under a Limited Liability Partnership (LLP), as a separate legal entity. It also excludes one partner from liability for the wrongful acts of another.

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The major difference between the LLP and the Limited Partnership (LP) is that the latter requires one partner to be liable for all the firm’s obligations.

The benefits

It is a well-known fact in the business world that incorporating a company comes with a number of benefits. Probably the most important benefit is the separation of a business owner from the company’s liabilities, thus allowing it to enjoy the government’s incentives.

Incorporating in Nigeria comes with many tax incentives across several industries such as ICT, manufacturing, and others. Some of these include a five to a seven-year tax holiday and tax-deductible research and development (R&D) expenses, among several others.

In Nigeria’s amended Finance Act, startups/SMEs with an annual turnover of ₦25 million ($68,900) or less no longer have to pay Company Income Tax (CIT). Those with turnovers between  ₦25 million and ₦100 million would only be charged a 20% CIT, instead of the standard 30%.

Though the Act increased VAT from 5% to 7.5%, it exempts small startups and businesses from registering for VAT and from filing monthly VAT returns for their goods and services.

It is important to note that these incentives could only be enjoyed by fully incorporated SMEs and startups. Consequently, the reduction in incorporation requirements for Nigerian startups could benefit most businesses.

Timi Olagunju, tech lawyer and policy expert, believes the CAMA Act 2020 is a long-overdue provision for small businesses and startups in Nigeria, and the effect could be noticeable.

“We might start seeing a litany of one-man businesses turning out as companies to reap the benefits of incorporating,” he says.

Enyioma Madubuike, Lead Partner at Lawrathon and Techpoint Africa Columnist, agrees with this assertion, explaining that small up-and-coming startups can leverage the new requirements to attract investments.

“Investors will always show more confidence in an incorporated venture, rather than a one-man business,” he adds.

Unclear provisions

On the other hand, Olagunju points out that the amended Act might not allow startups to easily pivot. Most times when startups struggle in a particular industry, they can pivot to another, but the Act gives no room for this.

“It’s just like a person having the right to change how they look or their gender. The amended law still doesn’t allow that kind of change for a company. So if an e-commerce company wants to pivot to payments, it might have to re-incorporate its registration as a retail company, to a financial services company,” he explains.

For example, startups playing in the mobility/logistics space rarely identify as transport/courier companies, and can decide to pivot at any time if the sector becomes unfavourable. Startups like OPay deployed verticals in different sectors without having to incorporate separate entities.

According to Olagunju, startups can exploit a loophole and register as technology companies. That way, they can render a range of services using technology.

The Nigerian government’s endgame

The CAMA Act 2020 looks geared towards increasing tax compliance in the long-run, as more businesses are registered and incorporated. From all indications, the Nigerian government wants to increase revenues from taxes as oil revenues dwindle.

According to a PricewaterhouseCoopers (PwC) survey, SMEs make up 96% of Nigeria’s businesses. The Nigerian National Bureau of Statistics (NBS) states that the informal sector accounts for 99% of MSMEs, but only 10% are registered with the Corporate Affairs Commission (CAC) — mostly as business names.

As a result, most of them can escape the eye of the law, and, as this piece shows, most SMEs and startups in Nigeria do not pay tax. Nigeria currently has a tax-to-GDP ratio of 7%, much lower than the average in other African countries which stands at 17.2%.

Considering the Finance Act targets a tax-to-GDP ratio of 15% by 2023, the decision to ease the incorporation process for small businesses makes economic sense.

A bigger conflict

While beneficial to small businesses/startups, the CAMA Act might reduce revenue streams for most Nigerian states. A move that could have serious implications for a commercial hub like Lagos.

In January 2020, Madubuike explored the possibilities of a tax turf war between Nigeria’s federal and state governments. He explained that Nigeria’s laws provide that incorporated entities pay tax to the federal government while non-incorporated entities, like enterprises and partnerships, pay to the state government.

“Because of this, state tax offices with strong revenue drives will often push small businesses to register as enterprises, in a bid to push state internally generated revenue. This causes some rivalry between federal tax services and state tax services. With the passing of the Finance Act, the rivalry is about to get intense,” he said.

With the CAMA Act making the incorporation requirements much easier, more people will prefer to register their businesses as corporations rather than enterprises.

But the conflict does not end there. Since businesses can now register as partnerships at the federal level, this could lead to another drop in revenue for a state like Lagos.

In 2009, the Lagos State Government introduced the LLP into its Partnership Laws.  At that time, the federal government had no provisions to protect partnerships from liability.

According to Madubuike, the Lagos State LLP Law took advantage of that gap at the federal level and it incentivised several businesses to register as LLPs.

Since there is now a provision at the federal level, what happens to all registered LLPs in Lagos? What tax structure will be put in place next?

Who bears the cost?

The drive for more federal revenue could lead to less internally generated revenue for Nigerian states. This is especially true in the commercial hub of Lagos where most small businesses and startups are domiciled.

On one hand, this could mean that the federal and state governments battle for the share of tax revenues by offering competitive incentives. But this might be a losing battle for the state.

Going by the past regulations in Lagos, SMEs and startups might bear the cost of this conflict.

“We might end up having a situation similar to what we had with ride-hailing companies starting from the Okada ban to the current one with the likes of Uber and Bolt,” says Madubuike.

Madubuike points out that with ride-hailing companies being incorporated entities, they paid tax to the federal government. He explains that Lagos had little incentive to see commercial motorcycle startups survive, and for taxi-hailing companies, it introduced a service tax and other stringent requirements.

The tech lawyer believes that such conflicts are welcome when they lead to competitive incentives, but things could worsen if either party employs bullying tactics.

Could this lead to double taxation at the federal and state levels? Will SMEs and startups face heavy-handed levies from the state? Or will businesses face new forms of levies from state governments? These questions might need to be addressed to reap the full benefits of the CAMA Act of 2020.

Besides being caught in a regulatory tussle, startups and SMEs still face a host of infrastructural challenges: epileptic power supply, less than decent roads, poor Internet connection, and security.

Olagunju opines that Nigerian tech companies might soon need to band together and form a union which they will leverage to try and influence policies that could affect them.

Senior Reporter at | Website

Writer and Narrator.  Tech, business and policy analysis is my daily bread.

Looking to chat? Catch up with me, @eruskkii, on Twitter or send a mail to emmanuel@techpoint.africa


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