Compliance is Serious Business!

Issues of compliance have been a recurring theme in the startup space recently and we thought it is a good time to discuss compliance and all that it entails.

Starting a business is relatively an easy task. Pretty much easier than gaining traction and keeping it successful over a long time. The sheer will and creativity of the founder(s) and team members of a startup, albeit a core startup success ingredient, is not enough. As a startup business journey progresses, the startup has to ensure that certain regulatory, corporate governance, industry etc. ethics and requirements are met. This is where business compliance comes into play. It is important to mention that compliance should not be an after-thought - a business should be compliant from the get-go and throughout the life of the business.

Ensuring compliance with regulatory, legal and governance laws can be the difference between building a successful business and seeing it collapse under the weight of legal liability.

​Compliance

Incorporation

There are laws that guide the activities and operations of every company coming into existence. The incorporation of a company refers to the legal process that is used to form a corporate entity or a company. An incorporated company is a separate legal entity on its own, recognized by the law. There are certain pre-incorporation, incorporation and post-incorporation compliance requirements that businesses must meet to become and continue to be operational in different terrains.

In Nigeria, it is a statutory requirement that all registered companies must file their annual returns yearly to the CAC, to enable the commission to have up-to-date records of the company. A corporation established in the State of Delaware must also file an annual report listing all of the corporation’s directors and pay an annual franchise tax. Limited Partnerships, Limited Liability Companies and General Partnerships formed in Delaware do not need to file an annual report but nonetheless have statutory and reporting obligations.

Tax Compliance

Generally, every company incorporated in Nigeria is required to register with the Federal Inland Revenue Services (FIRS) for the filing and remittance of its Companies Income Tax which is charged at 0% from companies with an annual turnover of less than 25 (twenty-five) million Naira, 20% from companies with an annual turnover of more than 25 (twenty-five) million Naira but less than 100 (one hundred) million Naira, and 30% from companies with an annual turnover of over 100 (one hundred) million Naira; Value Added Tax (VAT); Withholding tax on profits and dividends paid to investors; and any other tax that applies to the specific industry.

Interestingly, if a startup is within an industry that provides technological solutions or is one in an industry eligible as listed by the Nigerian Investment Promotion Commission (NIPC), it will be entitled to a 3 (three) year tax holiday from the date of incorporation. This also means that to enjoy this tax holiday, the startup needs to be registered with the NIPC.

Data Protection

Most startups have access to the personal information/data of most of their users which is used to provide their respective services to their users. Because of the sensitivity of some of these pieces of information, there are regulations guiding how to handle them. The general requirement is to maintain a level of confidentiality when dealing with the personal information of data subjects. Thus, the Nigeria Data Protection Regulation as issued by the National Information Technology Development Agency (NITDA) prescribes the obligations of data controllers and data processors as it relates to the use and transfer of data. The Constitution, the Cybercrimes Act and various other legislations and regulations also provide for how data should be protected. It is expected that every startup will comply with these provisions.

‍Corporate Governance

Compliance with relevant corporate governance practices can boost the reputation of a startup which can, in turn, attract investors. Depending on the industry: financial services, information technology, there are regulations that make provisions for how the governance of a company should be structured. However, the Nigerian Code of Corporate Governance has provisions that essentially seek to improve the governance practices of both public and private companies in Nigeria.

‍Regulatory Licensing

For startups providing financial solutions services like processing of payments, online money lending, and online saving services, the Central Bank of Nigeria (“CBN”) is the principal regulatory body that these entities are to comply with. The CBN, from time to time, issues regulations that companies providing the services mentioned above must comply with. The CBN is also empowered to issue licences to companies providing these services. There are several licences and permits that must be obtained depending on the services the financial technology startup is set to provide. Some of these licences also prescribe the share capital required before these services can be provided.

For instance, a Payment Terminal Service Provider (PTSP) Licence permits activities such as; POS terminal deployment and services, POS terminal ownership, merchant/agent training and support, and the minimum share capital requirement for obtaining the PTSP license is N100,000,000 (one hundred million naira). To apply for these licenses, the provisions of guidelines or regulations issued by the CBN must be followed. For a PTSP licence, provisions for the application of a licence can be found in the CBN Regulation for Payment Solution Service Provider. For other kinds of activities, there are guidelines and regulations that prescribe the provisions to be complied with.

‍AML/CFT and KYC

It is only essential that after a startup is compliant with regulatory, corporate, and industry requirements etc. it does not allow its services to be an enabler of fraud, money laundering, cybercrime and other related crimes. Particularly, a Fintech startup must comply with the provisions of the CBN Anti Money Laundering, Combating the Financing of Terrorism and Countering Proliferation Financing of Weapons of Mass Destruction in Financial Institutions regulation. Essentially, this is one of the reasons the KYC is crucial to the onboarding of a new customer into a startup’s system. The CBN has guidelines on KYC requirements and these must be complied with by fintech startups.

Compliance Relating to Employees

Every business needs the right people to scale. As an employer, there are several obligations required by law that one must comply with. Apart from having a fair employment contract stipulating fair employment conditions for employees, an employer is required by law to remit certain taxes on their behalf. These taxes include:

PAYE Obligations

An employer is required to register with the relevant state tax authority for the purpose of deducting and remitting personal income tax (PIT) from the income of its employees and pay the same to the relevant State tax authority in accordance with the Pay As You Earn (PAYE) Regulations under the Personal Income Tax Act (as amended). This PAYE tax is required to be rendered on or before the 10th day of the month following the payment of salary.

Pension Fund Contribution

Following a General Notice issued by the National Pension Commission (the agency administering the Pension Reform Act [PRA]) in September 2014 on “Compliance with the provisions of the PRA”, the PRA applies to employers with 3 or more employees.

Under the scheme, employers are required to deduct at least 8% of the sum of each employee’s monthly emoluments and pay the same into the employee's retirement savings account (RSA) on or before the 7th working day of the next month. Employers are required to contribute at least 10% of the employee’s monthly emoluments and pay the same into the employee’s RSA.

National Health Insurance Scheme (NHIS)

The NHIS was established under the NHIS Act by which employers with 10 or more employees are required to participate in a social health insurance programme. Under this programme, the health care of employees is paid for from funds created by pooling contributions of employees and employers. Under the NHIS, the employer contributes at least 10% and the employee contributes 5% of the employee’s basic salary. The employer is required to register itself and its employees under the NHIS and remit the contributions to a designated health maintenance organisation.

‍National Housing Fund (NHF)

National Housing Fund Act requires every employer who has in its employment an employee earning a basic salary of at least N3,000, to deduct 2.5% of the monthly salary of that employee as the employee’s contribution to the NHF.

Generally, each regulation prescribes penalties for failure to comply.

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