Navigating Tax and Regulatory Hurdles in Nigeria’s Fintech Sector

The rapid growth and innovation within the Nigerian Fintech industry have transformed the financial landscape and presented unique and complex tax challenges. As Fintech companies continue to disrupt traditional financial services and expand their operations, navigating the evolving taxation landscape has become critical. The growth and competition within the payment gateway industry, as exemplified by companies like Flutterwave, Paystack, Remita, Interswitch, and others, are truly remarkable to witness. As reported by the Central Bank of Nigeria (CBN), E-payment transactions in 2022 reached an impressive volume of 22 billion, equivalent to a total transaction value of ₦1.55 quadrillion. Data from the Nigeria Inter-Bank Settlement Systems (NIBSS) shows that electronic transactions amounting to ₦38.9 trillion were conducted through the NIBSS Instant Payment platform (NIP) as of November 2022 (+50.2% vs November 2021: ₦25.9 trillion). This is a testament to the robust expansion of the Fintech sector in Nigeria, attracting policymakers in terms of supporting their growth and boosting tax collections from the sector. We will delve into the problems and obstacles at hand, while also exploring potential solutions for the way forward.

1. Tax and Regulatory Challenges Faced by Fintech Industries

• Revenue Identification

A common tax challenge encountered by tax agencies during audits of payment gateway businesses such as flutterwave, Interswitch, and others is arriving at the actual income earned by the business that should be subject to tax. During audits, tax authorities often contend that the entire reported revenue of the business should be subject to taxation. This dynamic leads to a frustrating back-and-forth exchange between taxpayers and tax collectors, as they endeavor to elucidate the nuances of their revenue model to the tax authorities.

To further provide clarity on this I will have to give a brief explanation of how a payment gateway works. A payment gateway operates as an infrastructure company, offering software via a Software as a Service (SaaS) distribution model. In simple terms, it acts as the intermediary between the client and the merchant. Its primary function is to facilitate the seamless transfer of data among the key participants in transaction processing: the (1) customer, (2) merchant, (3) acquiring bank, (4) issuing bank, and (5) card network. Each transaction that successfully traverses the payment gateway infrastructure incurs a transaction processing fee, typically represented as a percentage of the transaction value, which can be quite intricate to calculate. Moreover, in their pursuit of attracting various investors and stakeholders, payment gateway businesses frequently report the total transaction volume processed as their revenue. Consequently, subjecting their entire revenue to taxation would be totally wrong and could be detrimental to their business.

Furthermore, given the substantial transaction volume processed by these companies, they frequently encounter challenges related to perceived misrepresentation of their turnover or income for Value Added Tax (VAT) or Corporate Income Tax (CIT) assessment during tax audits. For instance, tax authorities might erroneously believe that the turnover or income stated in the financial statements is lower than the actual inflows in the company bank account. Consequently, this misperception can lead to tax authorities imposing additional VAT or CIT based on the incorrect assumption of understated turnover.

• Electronic Money Transfer Levy (EMTL) taxation concerns on wallet accounts

 Section 89(A) of the Stamp Duties Act (“SDA” or “the Act”) as amended by the Finance Act 2020 imposes a singular one-off Electronic Money Transfer (EMT) Levy of ₦50 on electronic receipts or the electronic transfer for money deposited in any deposit money bank or financial institution, where the sum transferred is ₦10,000 or more. Further to the provisions of the SDA above, the Minister of Finance signed the Electronic Money Transfer Levy Regulations, 2022 (“the Regulations”) to provide guidance for the imposition, administration, collection, and remittance of the EMT levy in Nigeria. It has a commencement date of June 15 2022 which clearly states that EMT Levy is applicable on all electronic receipts or electronic transfers of money deposited with aBank in any type of account unless exempted by the SDA. The regulation defined account to include any type of account and wallet in a Bank.

This is a significant concern as it appears to result in a form of double taxation, given that a wallet essentially functions as an electronic wallet connected to a bank account. It is of utmost importance to promptly identify the accountable entity for EMT levy obligations in order to prevent the issue of double taxation between banks and Fintech platforms.

• Conducting audits on fintech companies beyond the statutory audit years

The NITD Agency (NITDA) Act, specifies companies with turnover of at least ₦ 100 million are required to contribute 1% of their profit before tax (PBT) to the Nigerian IT Development Fund, which will be managed by NITDA. Companies liable to this levy are telecommunication companies, cyber companies and internet providers, Pension Managers and Pension Related Companies, Banks and other Financial Institutions and Insurance Companies. Nonetheless, the previously enacted Banks and Other Financial Institutions Act (BOFIA) in 2004 did not make any reference to Fintech companies as financial institutions. However, the BOFIA 2020 provides clear and comprehensive definitions, explicitly encompassing “other financial institutions” as entities engaged in electronic financial activities. Consequently, this new framework implies that the operations of digital financial service providers and Fintech companies in Nigeria are now subject to the regulations outlined in the BOFIA 2020.

It is worth noting that Fintech companies have been receiving NITD (Nigerian Information Technology Development) Levy assessments from regulatory authorities for periods predating 2020, which may not align with the legal framework. In accordance with this new legislative context, assessments should ideally pertain to the year 2020 and subsequent years.

• Cryptocurrency ban

Through a circular dated February 5, 2021, The Central Bank of Nigeria (CBN) directed all banks to desist from transacting in and with entities dealing in cryptocurrency. The CBN also directed banks to close accounts of persons or entities involved in cryptocurrency transactions within their systems. Nevertheless, on May 11, 2022 the Nigerian Securities and Exchange Commission (SEC) introduced a regulatory framework for digital assets titled “Rules on Issuance, Offering Platforms, and Custody of Digital Assets” (the “Rules”). Furthermore, on May 28 2023, His Excellency, former President Muhammadu Buhari, GCFR, signed the Finance Bill,2023 into law as Finance Act, 2023. The Act introduced the Inclusion of digital assets as chargeable assets for capital gains purposes, this means that chargeable gains derived from the disposal of digital assets such as cryptocurrencies, non-fungible tokens (NFTs), and other tokenised assets will be subject to a 10.0% Capital Gain Tax (CGT). However, there remains a noticeable disconnect between the various regulations approach and the ongoing ban imposed by the CBN. It is worth noting that the CBN’s ban lacks a formal legal basis and was issued in the form of a circular.

Moreover, Binance, the world’s largest cryptocurrency exchange by transaction volume, announced in 2022 that it had incorporated 12 Nigerian banks into its Peer-to-Peer (P2P) platform. This move aimed to enhance the stability of P2P transactions and minimize disruptions. These banks included Access Bank, Ecobank, Fidelity Bank, First Bank of Nigeria, FCMB, GTBank, Keystone Bank, Stanbic Bank, Standard Chartered Bank, Sterling Bank, Zenith Bank, and Union Bank of Nigeria. Despite the prevailing ban on cryptocurrencies, this action was undertaken without the banks facing any repercussions, highlighting the complexities within the regulatory landscape.

2. Exploring solutions to these challenges

Tax collection agencies should regularly conduct stakeholder meetings with Fintech companies, allowing both parties to clarify any areas of ambiguity. Additionally, tax authorities should provide thorough training for their staff, ensuring they grasp the intricacies of the Fintech industry to foster a more productive working relationship with these companies.

However, the responsibility doesn’t rest solely on tax agencies. Notably, Fintech firms should be open to collaborating with tax authorities by developing internal tax policy documents and procedures. These documents can aid tax collectors in comprehending the Fintech business model more effectively. Fintech companies should also diligently carry out Know Your Customer (KYC) verification processes for all their customers and other platform users. This proactive approach enables tax agencies to monitor and collect taxes due from individuals and entities involved in Fintech activities while enhancing efforts to combat anti-money laundering (AML) and tax evasion.

The current administration is urged to prioritize the development of consistent policies and legislation aimed at eliminating ambiguity and impediments to business operations. It is essential to create an environment conducive to startups and Fintech firms, particularly those still in their breakeven phase, by introducing policies that offer tax incentives. Many of these companies are yet to reach the stage of maximizing profits, and such incentives can alleviate their financial burdens. Additionally, these measures can serve as a strong encouragement for both local and foreign investors to invest in these industries, as such investments can yield benefits for both the companies and the nation, driving economic growth and innovation.

The present administration should provide clear guidance regarding its stance on cryptocurrency operations in Nigeria. The existing regulatory ambiguity and disparities among various regulations have had a notable impact on numerous Fintech businesses in the country. It is imperative for the government to establish a well-defined regulatory framework to provide clarity and ensure the stability of the Fintech sector. Additionally, there is an opportunity for the current administration to harness significant tax revenue by regulating the cryptocurrency industry. As the government grapples with revenue generation, effective regulation can serve as a means to tap into the potential tax contributions from this burgeoning sector, fostering both financial stability and growth in the country.

In conclusion, addressing the tax and regulatory challenges within Nigeria’s vibrant Fintech industry is not just a matter of compliance but a crucial step in harnessing the sector’s full potential. A clear, well-defined regulatory framework, alongside proactive collaboration between Fintech firms and tax authorities, can pave the way for a thriving, innovation-driven landscape. By working together to clarify tax obligations, introduce meaningful incentives for startups, and attract investments, both Fintech companies and the Nigerian economy can benefit immensely. As Nigeria continues to embrace digital transformation, resolving these challenges and charting a path forward will be pivotal in ensuring the sustained growth and global competitiveness of its Fintech sector.