Tax Implications of Cross-Border Mergers and Acquisitions in Nigeria

Tax Implications of Cross-Border Mergers and Acquisitions in Nigeria. Cross-border mergers and acquisitions (M&A) involving Nigerian entities are governed by a complex web of tax regulations. Understanding these implications is crucial for stakeholders to ensure compliance, optimize tax efficiency, and minimize liabilities.

This detailed narrative provides an analysis of the tax considerations, common structures, and case studies specific to Nigeria.

Key Tax Considerations in Cross-Border M&A in Nigeria

1. Companies Income Tax (CIT):

– Tax Residency: Determining the tax residency of the merged or acquired entity is essential. Nigerian tax law considers a company resident if it is incorporated in Nigeria or has its management and control in Nigeria.

– Double Taxation Agreements (DTAs): Nigeria has DTAs with several countries, which can help mitigate the risk of double taxation on income earned from cross-border transactions.

2. Withholding Taxes:

– Dividends, Interest, and Royalties: Payments made to foreign entities may attract withholding taxes. The rates can be reduced under applicable DTAs.

– Tax Credits: Nigerian companies can claim foreign tax credits for taxes paid abroad, subject to certain conditions.

3. Capital Gains Tax (CGT):

– Asset vs. Share Purchase: The choice between asset and share purchases can significantly impact CGT liabilities. Asset purchases might lead to higher CGT due to the realization of capital gains.

– Reorganization Reliefs: Nigerian tax laws provide reliefs for corporate reorganizations, such as mergers and acquisitions, which can defer or exempt CGT under certain conditions.

4. Value-Added Tax (VAT):

– VAT on Transfers: M&A transactions involving the transfer of assets may attract VAT. It is crucial to determine if the transaction qualifies as a transfer of a going concern, which might be VAT-exempt.

5. Stamp Duties:

– Share and Property Transfers: The transfer of shares or real estate in Nigeria is subject to stamp duties. Proper assessment and compliance with stamp duty requirements are necessary to avoid penalties.

6. Loss Utilization:

– Tax Losses: Post-merger, the utilization of tax losses carried forward may be restricted, especially if there is a significant change in the ownership structure of the Nigerian entity.

The Impact of International Tax Policies on Multinational Corporations (MNCs)in Nigeria

Common Structures in Cross-Border M&A in Nigeria

1. Share Purchase:

  • The acquiring company purchases the shares of the Nigerian target company. This structure can be advantageous for preserving tax attributes like tax losses and avoiding VAT on asset transfers.

2. Asset Purchase:

  • The acquiring company purchases specific assets of the Nigerian target company. This structure allows selective acquisition of assets and liabilities but can trigger VAT and higher CGT.

3. Joint Ventures and Strategic Alliances:

  • Foreign entities may enter into joint ventures with Nigerian companies, allowing for shared control and benefits from local knowledge and regulatory compliance.

4. Reverse Mergers:

  • A foreign company merges into a Nigerian entity to benefit from Nigeria’s tax treaties and favorable tax policies.

Tax Implications of Cross-Border Mergers and Acquisitions in Nigeria: Case Studies

1. Access Bank and Diamond Bank Merger (2019):

  • Background: Access Bank’s acquisition of Diamond Bank was one of the largest mergers in Nigeria’s banking sector.

  • Tax Implications: The merger was structured to leverage reorganization reliefs under Nigerian tax laws, minimizing CGT and optimizing the use of tax losses. The use of a share swap mechanism also reduced the immediate tax burden.

  • Lesson: Proper structuring of M&A transactions can optimize tax benefits and ensure compliance with Nigerian tax regulations.

2. MTN Nigeria and Visafone Acquisition (2016):

  • Background: MTN Nigeria acquired Visafone Communications to enhance its data and broadband services.

  • Tax Implications: The acquisition was structured as a share purchase, allowing MTN to benefit from Visafone’s tax attributes and avoid VAT on asset transfers. However, MTN had to manage the integration of Visafone’s tax liabilities and compliance issues.

  • Lesson: Acquisitions in Nigeria can be optimized by choosing the appropriate transaction structure and thoroughly assessing the target’s tax liabilities and compliance status.

3. Dangote Cement and Sephaku Cement Joint Venture (2013):

  • Background: Dangote Cement entered into a joint venture with Sephaku Cement, a South African company, to expand its footprint in Africa.

  • Tax Implications: The joint venture structure allowed both companies to benefit from tax incentives in Nigeria and South Africa, such as reduced withholding taxes under the DTA between the two countries. The joint venture also facilitated the sharing of tax liabilities and benefits.

  • Lesson: Joint ventures can be an effective structure for cross-border M&A, offering tax benefits and risk-sharing opportunities.

Conclusion

Cross-border M&A transactions involving Nigerian entities require a comprehensive understanding of the local tax landscape. Key considerations include corporate income tax, withholding taxes, capital gains tax, VAT, stamp duties, and loss utilization.

Proper structuring of the transaction and leveraging tax treaties can optimize tax outcomes and ensure compliance. The case studies illustrate practical applications and lessons learned, providing valuable insights for stakeholders involved in cross-border M&A in Nigeria.

By navigating the complexities of Nigerian tax laws and strategically structuring transactions, companies can achieve their M&A objectives while minimizing tax liabilities and maximizing tax benefits.


About The Author:

Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Before this, Olatunji worked as Director- Tax and regulatory Services at Nolands Nigeria Professional Services, Senior Manager – Tax, Regulatory and advisory Services at Saffron Professional Services, Tax and Fiscal Reporting Accountant of Schlumberger Nigeria Limited, and as an Audit Trainee in Ernst & Young.

His experience covers the full range of services in internal audit and control, transfer pricing, arbitration, tax advisory and regulatory services, audit support, forensics investigation, and due diligence.


Disclaimer: The information contained herein is general and is not intended, and should not be taken, as a legal, accounting or tax advice provided. This information remains strictly the opinion of Olatunji Abdulrazaq.

Olatunji Abdulrazaq CNA, ACTI

Founder, Taxmobile.Online