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Opinion

Navigating Tax Implications In Nigerian Mergers And Acquisitions -By Oyetola Muyiwa Atoyebi & Cyril Samuel Dandison

Introduction

Navigating the intricate terrain of mergers and acquisitions (M&A) within Nigeria demands a keen comprehension of the associated tax implications. The success of these strategic business maneuvers is significantly influenced by the prevailing legal and regulatory framework, with tax laws and overseeing agencies playing a pivotal role in determining their outcomes. This study delves into the repercussions of non-compliance with tax regulations during M&A activities. By examining the interplay of legal obligations, regulatory oversight, and the potential pitfalls of inadequate tax adherence, this analysis aims to shed light on the critical importance of tax compliance in driving successful mergers and acquisitions in the Nigerian business landscape.

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Merger and Acquisition

In the realm of business, the terms “merger” and “acquisition” are often used interchangeably, yet they bear distinct meanings. A merger constitutes a strategic arrangement involving the amalgamation of two or more extant companies, intending to establish a larger entity driven by economic or strategic motivations.[1]

Conversely, an acquisition transpires when one entity, the acquirer, assumes control over another, the target, achieved by procuring a substantial stake in the share capital or the entirety of the assets and liabilities of the target. Typically, the acquired company dissolves, its operations becoming assimilated into those of the acquiring entity. Nonetheless, there are instances where the acquisition grants the acquirer indirect control over the operations of the acquired business.[2]

From the definitions above, it is evident that the demarcation between mergers and acquisitions is subtle. Mergers involve the amalgamation of two entities into a single unit, with one relinquishing its identity. Conversely, acquisitions empower one entity to secure controlling interests in another, with the acquired entity retaining its distinct identity as a subsidiary of the acquiring entity.[3]

Within the legal framework of Nigeria, the Federal Competition and Consumer Protection Act (FCCPA) stands as the preeminent legislation governing M&A activities, signifying a concerted effort to align the country’s competition and merger control practices with global standards. Prior to the enactment of the FCCPA, the Investment and Securities Act (ISA), the regulations of the Securities and Exchange Commission (SEC Rules), and the Companies and Allied Matters Act (CAMA) regulated the review and assessment of M&A undertakings.[4]

TAX ADMINISTRATION IN NIGERIA

Tax administration is fundamentally the execution of a nation’s diverse tax laws to fulfil its intended goals. Each level of government in Nigeria employs dedicated mechanisms established to carry out tax administration functions. The various types of tax in Nigeria include;

1. Companies Income Tax (CIT): Companies Income Tax is levied on the profits of incorporated companies from all sources. Administered by the Federal Inland Revenue Service (FIRS), it is regulated by the Companies Income Tax Act (CITA) of 2004 (as amended). The tax rate is 30% of the company’s total profit after accounting for all relevant expenses incurred in generating taxable profit.[5]

2. Personal Income Tax (PIT): Personal Income Tax is imposed on individuals, corporate sole entities, communities, families, trustees, or executors of any settlement. It encompasses taxation of sole traders, partnerships, and estates. Regulated by the Personal Income Tax Act of 2004 (as amended), the tax authority responsible may vary from FIRS to various State Boards of Internal Revenue.[6]

3. Value Added Tax (VAT): VAT is a 7.5% tax charged on specified goods and services, primarily borne by the final consumer. Administered by FIRS, it is regulated by the VAT Act LFN 2004 as amended. Recently, the Federal Government approved a 50% increase in VAT, raising it from 5% to 7.5%, effective from 2020.[7]

4.Capital Gains Tax (CGT): CGT is levied on the disposal of assets. It applies when capital sums are derived from the sale, lease, transfer, or any disposition of properties classified as chargeable assets. Regulated by the Capital Gains Tax Act of 2004 (as amended), it is typically charged at a flat rate of 10% on chargeable assets.[8]

5.Withholding Tax (WHT): WHT is an advance tax deduction on income or disbursement due to a taxable entity, which is subsequently remitted to the relevant government authority. Rates range from 2.5% to 10% for companies and 5% to 10% for individuals, depending on the nature of the transaction.

6.Stamp Duties: Stamp Duties, regulated by the Stamp Duties Act of 2004 (as amended), apply to both individuals and corporate bodies. Individuals pay to their respective State Governments, while corporate bodies pay to the Federal Government. Rates can be flat charges or ad valorem charges.[9]

7.Custom and Excise Duties: These duties are imposed on certain imported and exported goods at Nigeria’s ports of entry. Administered by the Nigerian Customs Service under the Customs and Excise Management Act, they are aimed at generating revenue and regulating the consumption of specific products.[10]

8. Education Tax (EDT): EDT is imposed on all registered companies in Nigeria, with a rate of 3% on assessable profit as stated by the Finance Act 2023.it is administered by FIRS and distributed between Universities, Polytechnics, and Colleges of Education.[11]

9. Petroleum Profit Tax (PPT): PPT is levied on the income of companies engaged in petroleum operations (Upstream). Governed by the Petroleum Profits Tax Act, companies liable to PPT are not subject to Companies Income Tax on the same income.[12]

TAXATION UNDER MERGER AND ACQUISITIONS

Before the consummation of a business merger or acquisition, it is imperative to adhere to the stipulations of Section 29(12) of the Companies Income Tax Act (CITA). This provision mandates the notification of the Board that is, the Federal Inland Revenue Service, and the acquisition of their guidance and clearance regarding potential tax liabilities under the Capital Gains Tax (CGT) Act.[13]

Regarding Capital Gains Tax (CGT), it is explicitly stated that the sale of shares is exempted from this tax by the Finance Act 2023. Similarly, in the event of shares being acquired as part of a business sale through a Merger and Acquisition (M&A) process, such transactions are exempted from CGT.[14]

In relation to transaction taxes such as Value Added Tax (VAT), Withholding Tax (WHT), and Stamp Duties, pertinent legislation and amendments govern the applicable tax implications. For instance, VAT does not apply to the sale or transfer of an asset to a Nigerian company for business considerations, provided the companies are related and the asset is not resold within 365 days after the restructuring. Conversely, intangible assets, including intellectual property rights and contractual rights, are now subject to VAT following the resolution provided by the Finance Act 2023.[15]

In the case of Withholding Tax, it is important to note that it does not apply to the purchase consideration of a business. However, WHT will be deducted from legal fees, professional fees, etc., related to the M&A at the applicable rate and remitted to the relevant tax authority.[16]

The Stamp Duty Act mandates that all contractual agreements incurred during the M&A process are liable to stamp duty at the prevailing rate. Notably, certain exemptions apply under Sections 104 and 105 of the Stamp Duty Act, on property and share transfers between related parties, contingent upon business reconstruction or amalgamation.[17]

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