The Nation Newspaper

Category: Taxation

What constitutes ‘trade’ for tax purposes
This article clarifies the FIRS’ position on what constitutes ‘trade’ or business for tax purposes. In accordance with the Companies Income Tax Act (CITA), and the Personal Income Tax Act (PITA), any trade is subject to tax under CITA and PITA, even if that trade is carried out by friendly societies, co-operative societies, charitable and ecclesiastical organizations, or trade unions.

CITA states that “any trade or business for whatever period of time such trade or business may have been carried on” shall be subject to Companies Income Tax (Sec 9(1)(a)). The profits of certain institutions are exempt from tax under CITA, but only in so far as such profits are not derived from ‘trade or business’ (Sec. 19(1) (a, b, c, e)). This means that the profits of any organization that are derived from ‘trade’ shall be subject to Companies Income Tax. This raises the question, what exactly constitutes ‘trade’?

A definition of the word ‘trade’ cannot be found in Nigerian tax legislation although an attempt was made in PITA. The interpretation Section of the Fifth Schedule of PITA defines “trade or business” to mean “trade or business or that part of a trade or business the profits of which are assessable under this Act”.

However, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word (see Section 2). In line with these rulings, ‘trade’ can be regarded as “the business of buying and selling or bartering goods or services”. Furthermore, the one-off nature of an activity in no way invalidates that activity as constituting trade. This interpretation matches the approach in other jurisdictions, namely the UK and USA (see Section 3).

Case Law in Nigeria

Although no explicit definition of ‘trade’ exists in the law, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word. The most important case is that of Arbico Ltd v. FBIR, {1996} 2 All NLR 303. The plaintiff in the dispute, Arbico, had acquired a plot of land, erected a building, and sold the property at a profit. The company was subsequently assessed for tax on the proceeds of the sale of property The Company objected to the assessment on the basis that the transaction was a one-off and therefore did not constitute ‘trade’. The case was ultimately settled in the Supreme Court. In the ruling the Court laid down two important axioms:
- Firstly, that the word ‘trade’ should be interpreted in its widest sense, in accordance with its common everyday meaning;
- Secondly, that an isolated one-off transaction can still constitute a “trade”.
In line with the ruling of the Supreme Court, the following definition seems to capture the common meaning of the word ‘trade’. Trade is “the business of buying and selling or barter in goods or services”(taken from Black’s Law Dictionary, Eighth Ed. (2004)).

Treatment in Other Tax Jurisdictions

In considering what constitutes ‘trade’ for tax purposes it is useful to consider how the issue is addressed in other jurisdictions.

In the UK, as in Nigeria, there is no statutory definition of the word ‘trade’. Her Majesty’s Revenue and Customs (HMRC) relies on case law to formulate a working definition. HMRC states that “Usually, trading involves the provision of goods or services to customers on a commercial basis”. As in Nigerian case law, “Simply because a venture is a one-off or occasional does not mean that it will not be treated as trading for tax purposes”. It is interesting to note that although the HMRC definition employs the notion of ‘commercial basis’, HMRC explicitly states that whether or not the profits of an activity are ultimately used for charitable purposes is not relevant for the determination of whether or not that activity constitutes a trade.

In the USA, the Internal Revenue Service (IRS) employs a similar approach to HMRC. IRS regards ‘trade’ as including “any activity carried on for the production of income from selling goods or performing services”. It is interesting to note how IRS treats the trading activities of an organisation that also carries out tax exempt activities. IRS states that “an activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may, or may not, be related to the exempt purposes of the organizations. In other words, a single organisation can undertake both exempt activities and trading activities. This implies that an organisation cannot argue that none of its activities constitute ‘trade’ just because it undertakes some exempt activities.

Badges of Trade

In 1955 in England, the Royal Commission on the Taxation of Profits and Income in reaction to whether a statutory definition of trade was necessary, said that “each case must be decided to its own circumstance (1955 Cmnd.9474 para.116) and suggested badges of trade” which they considered to be the major relevant considerations that will facilitate in determining whether any profit is a taxable trading profit or not. Badges of trade refer to certain indicators that may be used in determining the factual question as whether an activity is trade or not. Case law has expanded it to 9. The badges of trade are:
- Profit seeking motive. An intention to make a profit supports trading, but by itself is not conclusive.
- The number of transaction. Systematic and repeated transactions will support ‘trade’. An isolated transaction may also constitute a trade.
- Existence of similar trading transactions or interests. Transactions that are similar to those of an existing trade may themselves be trading.
- Changes to the asset. Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?
- The way the sale was carried out. Was the asset sold in a way that was typical of trading organizations? Alternatively, did it have to be sold to raise cash for an emergency?
- The source of finance. Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?
- Interval of time between purchase and sale. Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.
- Method of acquisition. An asset that is acquired by inheritance, or as gift, is less likely to be the subject of trade.
These ‘badges’ will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade. The weight to be attached to each badge will depend on the precise circumstances.

FIRS Position

A definition of the word ‘trade’ cannot be found in Nigerian tax law. However, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word. In line with these rulings, ‘trade’ can be regarded as “the business of buying and selling or bartering goods or services”. Where one or more of the criteria on the badges of trade apply, FIRS will treat such transaction as trade. Furthermore, the one-off nature of an activity in no way invalidates that activity as constituting a trade. This interpretation matches the approach in other jurisdictions, namely the UK and USA. The following decided cases are relevant in this regard:
1. In the case of Marlin Vs Lowry (1955)3 All ER 48; 11 TC 297), a person without previous knowledge of linen trade bought a surplus stock of aeroplane linen from government which he sold to the public in small lots. He engaged employees for the re-packaging and embarked on sales” promotion through extensive adverts and campaigns. It was held that he was trading.
2. In Murray Vs I.R. Comrs (1951, 32 TC 238), where a timber merchant who bought standing timbers in two plantations and could not cut them due to labour cost, sold the rights to cut the timbers to meet his indebtedness. He was assessed to tax on the profit from the transaction. He contended that the sale was a capital transaction since it was not in the normal course of his business but it was held that the transaction was part of his normal trading as a timber merchant.
iii. In Burge Vs Pyne (1969, All ER 467), a club proprietor providing facilities for bar, dancing, cabaret, fruit machines and gambling, appealed against the inclusion of his winnings in his assessment. The appeal was dismissed on the ground that the winnings formed part of his regular income from the trade of running the club.

From the foregoing and in accordance with the provisions of CITA, any friendly society, cooperative societies, charitable and ecclesiastical organizations or trade unions that carry out trade as defined and described above would be liable to tax on income derived from such trade.
July 27, 2015
How to obtain, update and validate your Taxpayer Identification Number (Tin)
The Taxpayer Identification Number (TIN) is a unique number allocated and issued to identify a person (Individual or Company) as a duly registered Taxpayer in Nigeria. It is for use by that Taxpayer ALONE. Registration for tax purposes is a legal obligation of every person who is required to pay tax in Nigeria.

The following necessary details for obtaining and updating TIN should be presented to the Tax Office nearest to the address of the Taxpayer.

Requirement for obtaining Tin

For a Company, Enterprise or Business registered with the Corporate Affairs Commission (CAC)
- Duly complete Application form for TIN;
- EITHER Certificate of Incorporation (for a Company) OR Business Name Registration Certificate (for an Enterprise & Business) showing clearly the Registration Number in each case;
- Documents containing the following information:
1. Address of Company, Enterprise or Business;
2. Principal location of business;
iii. Date of Commencement of business.

For an Individual who (or whose business) is not registered with the CAC:
- Duly complete Application form for TIN
- Any of the following valid (current) identification documents:
– International Passport;

– National Identity Card;

– Staff Identity Card (employed persons);

– National Driver’s License.

The following RULES are important:

(i) All information marked * on the application form MUST be provided;

(ii) The characters of the NAME i.e. letters and other symbols constituting the name MUST NOT exceed two hundred (200);

(iii) The characters of the ADDRESS also MUST NOT exceed two hundred (200);

(iv) Email address must be UNIQUE and ACTIVE;

(v) Mobile Telephone Number MUST be eleven (11) digits e.g. (08763201210).

Updating TIN

Updating TIN under the ‘National Single Window’ System is a requirement for taxpayers with incomplete records with Federal Inland Revenue Service (FIRS).

TIN may be updated at the Tax Office where it was initially generated by providing the following additional information:
- Email Address;
- Phone Number.
After updating, the system indicates that “The TIN has been successfully updated”.

The Joint Tax Board TIN (JTB TIN)

It is important for a person to note the following information about the JTB TIN:

(i) The JTB TIN is designed to subsequently replace the current TIN and is already in use within FIRS and several other States of Nigeria;

(ii) The major difference is that the JTB TIN has ten (10) digits, it is uniform and general across Nigeria. It is UNIQUE for every registered taxpayer in Nigeria and not limited to FIRS Taxpayers alone;

(iii) The JTB TIN is presently being issued out at the point of registration and also updated by FIRS and the States which have so far adopted it;

(iv) Every Taxpayer in Nigeria will ultimately be required to possess and use ONLY the JTB TIN.

Validating TIN

TIN validation is the process of confirming that the updated TIN meets the necessary conditions for transacting business with other Organizations such as Nigerian Customs Service (NCS),

Central Bank of Nigeria (CBN), National Agency for Food and Drug Administration and Control (NAFDAC), etc.

A Taxpayer can validate his/her TIN directly on the FIRS Trade Portal i.e. www.trade.gov.ng/firs by following the simple procedure and rules below:

(i) Enter the TIN and the same email address that was provided to the Tax Office when updating;

(ii) NEXT, enter the security word (captcha) and click on “Validate”;

(iii) If the validation is successful, the following confirmation notice shall be displayed:

“Register with NCS – Done”

(iv) THEN, an automatic email notification from “Nigeria Single Window” with a log-in password and instruction on how to complete the registration process would be sent to the Taxpayer’s email address;

(v) Upon completing the validation exercise, an email will automatically be sent to the email address provided confirming successful validation. A Taxpayer should therefore check the email including spam folder.

Authenticating TIN

This is for the Taxpayer to re-confirm his/her updated and validated TIN.

A Taxpayer experiencing difficulty in validating TIN (receiving Error Messages) should seek professional assistance from the Tax Office or send email to: tspd@firs.gov.ng

or taxpayer.service@firs.gov.ng
July 20, 2015
E-Taxpay Payment … Promoting transparency in Tax Payment System

Electronic-Taxpay is an online self-service tax payment system which gives taxpayers the opportunity to pay their taxes through their banks’ online payment portals. It is an initiative of FIRS in collaboration with Nigerian Interbank Settlement System (NIBSS). It is meant to facilitate payments of taxes from the comfort of taxpayers’ offices or homes. Taxpayers can pay using the electronic channels provided by their banks such as the banks’ internet banking platform, branches and mobile banking platforms.

Conditions to be met by taxpayer before using e-Taxpay platform

• Register and obtain your Taxpayer Identification Number (TIN)

• Have an account with any bank of your choice and subscribe to the internet banking function of your bank.

• Have ufficient funds in the account to cover the tax liability/transaction.

Steps to take to make payment through e-Taxpay platform

Having registered and received a TIN, an active internet banking account and sufficient funds, then;

• Decide the channel to use;

• If you decide on internet banking channel, log on to your bank’s internet banking platform e.g. GTBank Online Banking, FirstOnline, etc;

• In the case of GTBank Online Banking, select the “Payment” option in the menu;

• Then select “NIBSS E-Bills payments” under the “Payment” option;

• Select the account to debit from, to continue;

• Once inside the NIBSS E-Bills payments, select “New Request” to start a new payment. This will take you to the NIBSS platform;

• Then select “FIRS e-Taxpay” from the displayed list services that the NIBSS platform provides, in order to start the tax payment in particular;

• You then enter your TIN (FIRS/JTB-TIN) or the TIN of the taxpayer you want to pay for;

• Click “verify” to validate that the TIN belongs to the taxpayer making the payment;

• A pop-up will appear with the TIN details. If ok, then go to the next stage;

• Select the tax type (e.g. Company Income Tax, Pre-Operation Levy, Value Added Tax, etc.);

• Enter the amount to be debited (tax sum being paid);

• Accept service charge for the bank (if applicable);

• Confirm that all the information provided are correct and valid;

• Submit the request.

After a successful transaction, the system will generate an ‘e-acknowledgement’ which can be printed online, or sent to a specified e-mail address. The ‘e-acknowledgement’ is a confirmation of the transaction of payment of tax to FIRS which would be presented to FIRS field office for the issuance of statutory FIRS receipt to the taxpayer. A TAXPAYER SHOULD PLEASE ENSURE THE ‘e-acknowledgement’ IS SUBMITTED TO THE TAX OFFICE OF DOMICILE TO GET A GOVERNMENT TAX RECEIPT FOR THE PAYMENT MADE.

Real time notifications: The platform also notifies the taxpayer and FIRS through SMS alert and real time email. FIRS can view payment transactions and reports online, in real time.

Tax types that can be paid using the e-Taxpay channel:

e-Taxpay can be used to pay all tax types and levies collected by FIRS. They include:

• Petroleum Profit Tax (PPT)

• Education Tax (ET)

• Companies Income Tax (CIT)

•Value Added Tax (VAT)

• Personal Income Tax (PAYE for residents of FCT and non-Residents)

• Withholding Tax (WHT). This requires a schedule to be uploaded on the platform;

• National Information Technology Development Fund Levy (NITDEF)

• Capital Gains Tax (CGT)

• Pre-Operation Levy (POL)

• Stamp Duties (SD) and late filing penalty.

Documentation required when the taxpayer wants to pay tax:

• Compute tax payable

• Fill the relevant self-assessment forms

• Prepare the relevant schedules

• Make the payment (CIT/PAYE/WHT/VAT)..

Benefits of using e-Taxpay

• Promotes transparency in tax payment system;

• Boosts taxpayer confidence and trust in the tax system;

• Promotes voluntary compliance by taxpayers;

• Convenience, time and cost saving for the taxpayers as they can do it themselves within the confine of their offices without going to the banking hall.

• The platform is safe and secure.

Security of the e-Taxpay Platform

The e-Taxpay service is safe and secure. The e-Taxpay platform leverages on the security measures provided by the service channels of the banks in addition to that of NIBSS and FIRS.

After a successful transaction, the system will generate an ‘e-acknowledgement’ which can be printed online, or sent to a specified e-mail address. The ‘e-acknowledgement’ is a confirmation of the transaction of payment of tax to FIRS which would be presented to FIRS field office for the issuance of statutory FIRS receipt to the taxpayer

June 29, 2015
Presumptive tax: equalising the distribution of tax burden (11)

Presumptive taxation offers two additional benefits to both governments and taxpayers: it allows the government to tax its citizens in a more equitable fashion while rewarding efficient businesses with financial incentives. It is generally accepted that wages and salaries paid by corporations and governments are taxed more effectively than income earned by the self-employed due to the introduction of withholding taxes at source. Simplified presumptive taxation schemes increase the probability that the self-employed are also taxed effectively.

At the same time, many presumptive taxation regimes entice SMEs into the tax net by discarding high tax rates and providing incentives rewarding efficiency. For example, methods such as taxing based on average ratios (profits to sales) and average income allow businesses to retain some profits without being taxed. Moreover, many developmental economists advocate a presumptive tax on the potential use of land (assuming it has been used as productively as possible) to encourage landowners to utilize land productively.

Various methods of estimating income and assessing tax liability have been developed by countries that have employed the presumptive income taxation. Some of these methods include standard assessment, estimated assessment, value of land, net wealth and asset value, visible signs of wealth, and minimum taxes amongst others.

Standard Assessment

Standard assessments assign lump-sum taxes to taxpayers on the basis of occupation or business activity. Standard assessments have been shown to broaden the tax base with limited disincentives. Although this method is viewed as less equitable than estimated assessments, it is also less open to corruption.

In the early 1960s, Ghana introduced a simple standard assessment system that fixed lump-sum payments for different economic activities. The payments were established by determining the average taxable income of a few taxpayers selected at random from each class of self-employed taxpayers.

It is important to understand that standard assessments can be a poor revenue-mobilizing method of taxation unless the fixed payments are indexed to inflation (or increased regularly) and taxpayers are moved to categories as their taxable incomes increase over time. Furthermore, standard assessments do not take taxpayer-specific conditions, such as family size or losses in a particular year into account. As a result, it can be regressive by imposing equal tax on individuals in the same category even when they earn different incomes.

Estimated Assessment

In this assessment method, each taxpayer’s income is individually estimated based on indicators or proxies of wealth specific to a given profession or economic activity. Key indicators can range from location of property to numbers of skilled employees to seating capacity. France’s Forfait and Israel’s Tahshiv methods both utilized estimated assessments and are recognized as among the most highly developed presumptive tax regimes of their time.

Israel’s Tahshiv method employed objective factors to estimate the income of taxpayers unable to keep records. The Tahshiv for each sector was prepared, often over several years, after extensive research and many visits to a sample of businesses. The average profitability of a particular sector and its relationship to specific factors and indexes were discussed with representatives of the sector before the official Tahshiv was issued. Examples of indicators employed included number of employees, location, seating capacity (for restaurants, cafes, barber shops, etc.), skill level of workers (for carpenter’s workshop or garages), nature of equipment used (for truck and taxi drivers), and water consumption (for ice-producing companies).

The estimated assessment method of presumptive taxation employs a variety of techniques to derive taxpayer income, both simple and complex. Simple methods are based on single factors such as a taxpayer’s total assets, net wealth or value of business assets, gross receipts of business, and visible signs of wealth. Complex methods use factors and indices of profitability, which vary by economic activity.

Net Wealth and Asset Value

Factors such as net wealth and value of assets enable income estimation through the comparison of beginning of year with end of year net worth. As one can imagine, it is difficult to determine the amount at the beginning and end of the year with any precision, much less account for expenditures during year. Tax authorities in developing nations such as Argentina, Chile, and Colombia employ this method as a basis for presuming income during audits. However, they are faced with various technical problems when doing so. For example, since it is easy to identify owners of some assets versus others (agricultural land vs. foreign currency) equity issues arise. Moreover, valuation of assets is a problem and presumptions based on net wealth often encourage taxpayers to increase liabilities.

Visible Signs of Wealth

Taxes on visible signs of wealth serve as an equity issue. It serves to ensure that wealthy citizens pay an appropriate amount of tax, even if they report all actual income. The taxes apply only to individuals and usually include main and secondary residences, the number of domestic servants, cars, yachts, private planes and race horses. In European countries such as France, Italy, and Spain (until 1978) signs of wealth qualified and how much income to attach was detailed in income tax ordinances. In practice, this method has proven to be difficult to apply. If the applicable tax law is general, it is hard to know which signs of wealth to choose, and what amount to assign. If the opposite is true, the laws are often inflexible and unfair. As a result, taxes on signs of wealth are applied cautiously and when there are no other means to assess income. They are often helpful in determining income on illegal activity such as racketeering or drug trafficking.

Minimum Taxes

Alternative minimum taxes come in many forms. Some schemes specify a tax burden or minimum tax irrespective of the taxpayer’s level of income or economic activity. Others levy the tax as a relatively low percentage of turnover or assets. Francophone Africa pioneered the establishment of minimum corporate income taxes by introducing fixed lump-sum amounts that were uniform for all corporations regardless of size or volume. Due to its regressive nature, this minimum tax was replaced in many countries by a tax based on a percentage of gross receipts. In countries with both types of minimum taxes, corporations pay the larger of the two. In others, the minimum tax is also applied to individuals. The practice of minimum taxes has spread beyond Africa to become the prevalent form of presumptive taxation in Latin America.

CHALLENGES OF PRESUMPTIVE TAXATION

Presumptive Tax Regime is no doubt gaining popularity, especially in developing nations. However, there are challenges and obstacles that tend to compromise its effectiveness. Governments that recognize the limitations of presumptive taxation often times include provisions in their tax codes that allow taxpayers the opportunity for a redress. Listed below are some of the challenges that affect the smooth administration of presumptive taxation.

Crude Implementation

Despite its streamlined requirements, presumptive taxation is not always effective because governments do not have sound tax administration systems in place at the federal, state or local levels to implement schemes as envisioned by policymakers. Countries in early stages of economic development tend to employ crude methods of estimating income because they lack sufficiently qualified resources to analyze the profitability of various economic activities and to define the indexes for effectively calculating presumptive incomes. As a result, small businesses in particular are routinely taxed unfairly and inefficiently.

Systemic Corruption

Arguably, presumptive taxation can help reduce corruption in tax administration. However, the success of presumptive taxation in reducing corruption will depend both on the structure of the scheme and the overall administrative environment and capacity of the tax administration institution. A presumptive taxation scheme can increase the discretionary power of tax officials and in a worst case scenario increase corrupt practices. A carefully designed presumptive taxation scheme can help reduce corruption, but can never be a substitute for the much needed capacity building and administrative reforms within the tax administration.

Undermines Tax Base

The primary goal of most governments that introduce presumptive taxation is to broaden the country’s tax base by preparing citizens and businesses in the informal sector to enter the formal tax net. However, presumptive taxation has proven to undermine this goal as taxpayers remain in presumptive taxation regimes indefinitely or regress from formal taxation programs to presumptive taxation schemes. This phenomenon tends to occur when sophisticated taxpayers earn above average income and recognize that standard assessments levy a lower tax burden. The result is that they either under report income or simply pretend not to keep accurate records of income, as is prevalent in Israel, in order to remain in the presumptive regime and enjoy its benefits.

Overall, presumptive taxation is a form of assessing tax liabilities using indirect methods such as income reconstruction or by applying base-line taxation across the entire tax base. Presumptive methods of taxation are thought to be effective in reducing tax avoidance as well as equalizing the distribution of the tax burden. It is safe to say then, that the essence of Presumptive Tax as adopted by the FIRS is to suppress the burden of VAT on the informal sector especially micro and small businesses.

June 15, 2015
Value Added Tax (vat) in Nigeria (i)

The idea of introducing VAT in Nigeria came from the study group set up by the Federal Government in 1991 to review the entire tax system. VAT was proposed and a committee was set up to carry out feasibility studies on its implementation. In January, 1993, the then government agreed to introduce VAT by the middle of the year. It was later shifted to 1st September, 1993by which time the relevant legislation would have been made and proper ground work done. The actual implementation however, did not commence until January 1994 after the promulgation of the Value Added Tax Decree No. 102 of 1993. According to the decree, a ‘VATable’ organization is an existing manufacturer, distributor, importer or supplier of goods and services.

VAT as Replacement for Sales Tax.

The rationale behind replacing Sales Tax with VAT was informed by a number of factors and considerations, notable among these are:

The base of the Sales Tax in Nigeria as operated under Decree No. 7 of 1986 is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments. The narrow base of the tax negates the fundamental principle of consumption tax which by nature is expected to cut across all consumable goods and services. VAT base is broader and includes most professional services and banking transactions which are high profit-generating sectors.

Only locally manufactured goods were targeted by the Sales Tax Decree of 1986, although this might not have been the intention of the law. VAT is neutral in this regard. Under VAT; a consideration part of the tax to be realized is from imported goods. This means that under the new VAT; locally manufactured goods will not be placed at a disadvantage relative to imports.

Since VAT is based on the general consumption behaviour of the people, the expected high yield from it will boost the revenue collectible by governments with the minimum resistance from taxpayers.

Definition

VAT is a consumption tax payable on the goods and service consumed by any person,

whether government agencies, business organizations or individuals. The target of VAT

is consumption of goods and services and unless an item is specifically exempted

by law, the consumer is liable to the tax.

It can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is levied at the rate of 5%.

The Nigerian VAT System has the Following Features:

It is a Multi-Stage Tax System

Under this principle, VAT is imposed at every stage of the production chain from the manufacturer to the consumer (see below example).

Credit Mechanism

In order to eliminate the cascading effect of taxation at every stage of production, a credit mechanism system is installed to allow VAT paid on imports or purchases of raw materials (input taxes) to be deducted from the VAT charged on sales (output taxes) and therefore, the tax to be paid by a taxable firm is the difference between output tax and input tax. This credit mechanism acts as a safeguard against the negative impact of the tax so that VAT is made neutral to price determination (VAT is not an element in the price). The credit mechanism also helps VAT to promote export drive in view of its neutral characteristic to international trade. In export trade, the total input taxes incurred on production is refundable.

Tax Invoice System

The VAT system is invoice based and not cash based.

Understanding the Nigerian VAT System

There are some key facts which will help us understand the implementation of

VAT in Nigeria. Among these are:

(i)      VAT is a tax on consumption. The tax is borne by the final consumer of goods and services because it is included in the price paid.

(ii)     The tax is at a flat rate of 5%.

(iii)    The tax is collected on behalf of the government by businesses and organizations which have registered with the Federal Inland Revenue Service (FIRS) for VAT purposes.

(iv)    A business or organization which has registered for VAT is classified as a “registered person”. Such persons will pay 5% VAT on goods and services purchases but can claim credit for this tax (called input tax) when sold.

(v)     5% VAT (called output tax) is included in the price of all goods and services supplied/sold by registered persons.

(vi)    The “registered person” has to make regular VAT returns and either pays to, or receives from the FIRS, the difference of the input tax and the output tax.

(vii) VAT returns (and payments) are normally made monthly to the FIRS tax offices on or before 30th day of the month following that in which the supply was made.

(viii) To claim a credit for input tax, a registered person must hold a “Tax Invoice”.

(ix)    Records and accounts have to be kept.

Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.

Illustration 1:

If a product moves from Raw Materials Producer (A) to Manufacturer (B) at N1,000.00 then to wholesale (C) at N1,500.00, then to Retailer (D) at N2,000.00; and finally to the consumer who pays N2,500 to the Retailer, VAT payable to government at 5% rate of VAT on the product is as follows:

May 25, 2015
Distinguishing Withholding Tax From Value Added Tax

There is a need to draw attention to the fundamental difference between Withholding Tax (WHT) and Value Added Tax (VAT) so as to facilitate clear understanding of the mechanics of the tax concepts.

WHT is an advance payment of income tax and the purpose is to bring the prospective taxpayer into the tax-net, thereby widening the income tax base. In other words, the WHT system is aimed at tracking down taxpayers and the incomes which may otherwise not be reported by them.

When the income on which WHT is deducted at source is finally brought to the notice of the tax authority and the appropriate tax computed, due credit is given for the WHT deducted at source on the presentation of the original WHT receipts through the issuance of credit notes. The taxpayer will be required to pay only the balance due after matching the actual tax liability against the credit for the WHT suffered at source. WHT is therefore nothing more than a collection machinery to curb tax evasion. It is not a separate tax on its own. It is a part of the income tax – whether personal or corporate income tax.

In contrast, VAT is a different type of tax. VAT is a consumption tax payable on the goods and services consumed by any person, whether government agencies, business organisations or individuals. The target of VAT is the final consumer of goods and services and unless an item is specifically exempted by law, the consumer is liable to the tax. Exemption from this is not aimed at agencies, companies or individuals but rather at the goods and services.

Therefore, all agencies of government, religious and other organisations and similar persons that are normally exempted from income tax are expected to pay VAT on the goods and services consumed by them except where the goods and services are specifically exempted by law.

THE PRIMARY MARKET

(a)        How to Impose WHT

It is usual for issuing companies to pay fees to issuing houses, stock brokerage firms, reporting accountants and solicitors in respect of new and rights issues, as well as debenture stocks. Such fees should be subject to withholding tax at source in accordance with Section 63 of the Companies Income Tax Cap 60 LFN 1990, and the relevant extra-ordinary Gazette. The issuing companies are hereby mandated to deduct theWHT tax there-from and pay over to the Federal Inland Revenue Service (FIRS) within 30 days as stipulated in the tax law. The net is then paid over to the issuing house that handled the issue. The applicable rate for commissions/fees is ten percent (10%) for limited liability companies, and five percent (5%) for individuals and partnerships.

(b)        How to Impose VAT

Every consumer pays VAT on services rendered to it. As consumers of the services rendered by both the issuing houses and other parties to the issue, the issuing companies are liable to the payment of VAT for the services rendered. The issuing houses and other parties to the issue should charge VAT at 5% on their invoices for services rendered. Since the issuing houses handle the transactions connected with new and rights issues, they are to act as agents for the collection and remission of VAT to FIRS.

(c)        Listing by the Nigeria Stock Exchange (NSE)

As a pre-requisite for listing new securities by the NSE, the evidence of settlement of WHT and VAT on the new and rights issues must be attached. The listing fees are themselves liable to WHT and VAT.

(d)        Renewal of Operators’ Licences

Before an operator’s licence is renewed by a regulatory authority, evidence of WHT and VAT on issues handled in the previous year must be produced.

THE SECONDARY MARKET

(a) How to Impose WHT

• In the case of a purchase, the stockbroker is expected to charge the investor for the following:-

• the cost of the shares purchased,

• commission based on gross value of shares purchased on behalf of that investor, – the Securities and Exchange Commission (SEC) fee (which is currently 1% of total consideration and is not subject to WHT and VAT being part of gross income earned by SEC)

• deduct WHT on the commission at 10% and pay over to the relevant tax authority, i.e. State Board of Internal Revenue (SBIR) or FIRS.

• In the case of a sale, the stockbroker is expected to deduct from the investor’s gross consideration the following:-

• his commission,

• the other fees payable to other third parties, as approved by the SEC.

• Thereafter, the net sale should be paid over to the investor.

• Both the stockbroker’s commission and other fees paid to other third parties are subject to WHT. The stockbroker is to pay over tax withheld from the commission and other fees to the relevant tax authority.

(b) How to Impose VAT

In both purchase and sale transactions, the consumer of the services rendered is the investor. It is therefore the investor that is subject to this tax. The VAT on these transactions should be paid over to FIRS.

COLLECTION ARRANGEMENT

In respect of the collection of the taxes herewith discussed, the usual collection arrangement will prevail. Reference to the relevant FIRS information circular (9502 of 20th February 1995, 9501 of 13th January 1995) may be advisable.

However, in summary, the following collection arrangement should be observed:-

(a) WHT

• The rate at which tax is to be withheld on commission and fees is 10% when these payments are made to limited liability companies; and 5% for individuals and partnerships.

• The currency in which the tax is to be paid is the currency the transaction was carried out and in which the tax was deducted.

• payments of wht should be made in bank drafts and payable to:

• ‘‘The Federal Government of Nigeria- FIRS – Withholding Tax Account’’

• Payments should be accompanied by the relevant forms (CMF1, CMF2, CMF3, CMF4, or CMF5).

• Any default in the implementation of the tax carries heavy penalties.

• Failure to deduct WHT and failure to remit taxes withheld are punishable on conviction by a fine of 200% of the tax not withheld or remitted.

(b) VAT

• The rate for VATis 5%.

• Payments of VATshould be made in bank draft and payable to:

• ‘‘The Federal Government of Nigeria – FIRS – VAT Account’’

• The payments should be accompanied by the VAT FORM 022 which is readily available online and all FIRS offices throughout Nigeria.

DUAL ROLE OF ISSUING HOUSES

It is necessary to clarify that the new policy of government imposes dual roles on the issuing houses as agencies which handle new and rights issues:

ibas agent of government for the deduction and remittance of WHT and as agent of government for the collection and remittance of VAT even in respect of their own respective transactions which ordinarily should have been paid over to the operator who charged the VAT on his invoice. (For more details see pare. 4 of Information Circular no. 9502 of 29th February, 1995).

May 18, 2015
Administration of withholding tax (11)
The organizations making the payments are required to withhold tax from such payments and pay over the withheld amounts to their respective relevant Tax Authorities within 30days of receipt of payment or credit by the person or entity suffering the Tax.

The relevant tax authorities to receive the WHT tax transactions made by companies is FIRS and for individuals and unincorporated bodies subject to Rules of Residence is SIRS or FIRS.

PERSON LIABLE TO DEDUCT WITHHOLDING TAX

The payer of withholding tax in respect of any of the activities covered under the withholding tax regime shall include company (Corporate or non-corporate), Government Ministries and Department, Parastatals, Statutory bodies, Institutions and other established organization approved for the operations of Pay As you Earn System.

WHO IS TAXABLE

• All Persons, Companies etc. who’s Incomes are liable to income tax, are subject to Withholding Tax.

• However, exempt entities like Educational Institutions, Government Ministries, Parastatals and other Agencies of Government, are Agents for the collection of WHT. They are required to deduct WHT on any payment made to a taxable body and remit same to the relevant tax authority.

WITHHOLDING TAX IMPLICATION ON FOREIGN TRANSACTIONS

Non Resident Companies/Enterprises

The Revenue practice is that non-resident companies are not empowered to deduct any type of WHT. These categories of enterprises are practically outside the regulatory monitoring and control of the FIRS. It will be impracticable for Revenue office to inspect the accounting books of these companies in order to confirm due deduction and remittance of WHT.

Double Taxation Agreement (DTA)

Transactions that are ordinarily not liable to tax in Nigeria are not liable to WHT in Nigeria. Thus contracts and supplies of goods and services performed entirely outside Nigeria by non-resident individuals are not liable to WHT. Nigeria has treaty agreements with about eight (8) countries and these countries are granted a reduced rate of WHT deduction, usually at 75% of the generally applicable WHT rate. 7.5%. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan, and Romania.

PERMANENT ESTABLISHMENT (PE) PRINCIPLE EXISTS UNDER NIGERIA TAXATION

The rules construe a PE where:

• The company has a ‘‘fixed base’’ in Nigeria.

• The company operates in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf,

• The company is executing a turnkey project in Nigeria, or

• The operation between the company and its Nigeria affiliate does not appear to be at arm’s length.

• ‘‘Fixed base’’ implies some degree of permanence and will include:

• Facilities, such as a factory, office, branch, mine, oil or gas well

• Activities, such as building, construction, assembly or installation

• Provision of services in connection with the activities listed above.

PRINCIPLES OF PERMANENT ESTABLISHMENT

• The rules construe a Permanent Establishment where:

• The company has a ‘‘fixed base’’ in Nigeria.

• The company operate in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf,

• The company is executing a turnkey project in Nigeria, or

• The operation between the company and its Nigeria affiliate does not appear to be at arm’s length.

‘‘Fixed base’’ implies some degree of permanence and will include: Facilities, such as a factory, office, branch, mine, oil or gas well Activities, such as building, construction, assembly or installation Provision of services in connection with the activities listed above.

OTHER TYPES OF INCOME NOT LIABLE TO WHT

• Companies operating within the Free Trade Zones/Export Processing Zones

• Insurance premium

• Turnover/Income from Dealership or Distributive trade

• Telephone Bills are not subject to WHT

APPLICATION OF WITHHOLDING TAX

Sections of CITA and PITA that provides for the deduction of withholding tax at the applicable rates below.

Types of payment                                            Applicable rates

                                                                             Companies    Individual

Dividends, Interest, Rent                                10%                         10%

Directors Fees                                   10%                         10%

Royalties                                                            15%                  15%

Commission, Consultation,           10%                         5%

Technical, Service Fees

Management fees                                             10%                         5%

Construction/Building Contracts 5%                           5%

Contracts, other than outright sales

and purchase of goods in the

ordinary course of business           5%                           5%

Returns & Remittance

Tax Returns are filed monthly with evidence of remittance and a detailed schedule of taxable transactions.

Submitted schedule should show the following details:

Name of supplier    Address Nature of   Invoice     payment   Amount   Rate @ Y% Tax

                                                             Service      Date           Date

• Returns for corporate suppliers should be filed within 21 days from end of month of transactions.

·            Returns for non –corporate suppliers should be filed within 30 days from end of month of transaction.

• In practice, tax returns are filed in the same month they occur.

• Tax deducted should be remitted to the revenue in exchange for a receipt of payment.

• Tax is payable in the currency of the qualifying transaction.

Following payment and filing of returns, the revenue processes credit notes for the suppliers on whose income tax was deducted.

• Credit notes can be used in applying for tax credit against current and future tax liabilities (i.e. where it is not final tax)

• Remittances are due to either federal or state tax authorities.

Remittances due to Federal Inland Revenue Service (FIRS):

• Corporate entities,

• Non-resident individuals,

• Members of the armed forces and police,

• Resident of Abuja,

• Foreign officers.

Remittances due to state internal revenue service (SIRS):

• All other individuals / partnerships resident in the state.
- PAYMENT ON CURRENCY
Section 64B of CITA empowers the tax authority that withheld tax must be remitted to the tax authority in the currency in which the deduction was made. This means that transactions made in foreign currency are to be remitted in the same currency and that the tax so withheld is to be remitted in the same currency. Simultaneously penalty for default would also be calculated in the same currency.
- HOW TO CLAIM WITHHOLDING TAX CREDIT (CREDIT NOTES)
A taxpayer from whom tax has been withheld is expected to gain withholding tax credit notes from the relevant tax authority via the deducting organization. All withheld taxes are forwarded to the tax authority, which in turn records the credit against the tax payer’s account, with a schedule containing details of the contract or service, on which basis the tax authority issues a credit note. Assessed tax and related charges are usually entered as debits in the taxpayer’s tax account, while he is expected to pay only the difference between his assessed tax and withholding tax credit at the time of filing their own returns.

• It is this credit note that a taxpayer uses as a set off against tax assessed within that year or if unutilized within that year can be applied based on the taxpayer request to transfer the credit balance in that year to offset or reduce debit balance of another year.

• In cases where there is an excess charge of WHT on a taxpayer, the 2007 amendments to CITA (Section 63 (7)) have even further empowered FIRS to refund proven excess withholding tax to any taxpayer within 90 days of filing a claim.

OFFENCES AND PENALTIES

OFFENCES

• Failure to withhold tax or

• Failure to remit or late remittance of the tax withheld

• Non remittance of the tax withheld within the time limit stipulated by the Revenue.

PENALTIES

a. For Companies

A fine of 200 percent of the tax not withheld or withheld but not remitted, plus interest at the prevailing commercial rate.

b. For Individuals & other Organizations

A fine of the higher of N5,000 or 10% of the amount of tax due, plus the amount of tax deductible , or withheld but not remitted, plus interest at the prevailing commercial rate.
- Interest on Savings Account of less than N50, 000 paid by a Bank, is not subject to WHT.
The WHT system has come to stay since it is a veritable source of revenue to Government. It enhances the collection efforts of Tax Authorities and it ensures that revenue is generated in advance. It is therefore imperative that the system should continue to be improved upon in the light of modern tax administration procedure. Usually an advance payment of tax provides information that an income source has been identified through a third party. Such information being provided by the payer should be readily available for use in accessing a potential taxpayer. Field officers should always be ready to follow up on such information.
May 11, 2015
Basics of withholding tax (1)

Withholding Tax is an advance payment of income tax. In principle, WHT is a payment on account of the ultimate income tax liability of the taxpayer or company. Withholding tax is not a separate tax on its own and does not confer an exemption from the filing of annual tax returns by the company which had suffered WHT. The tax is normally to be deducted at source when a payment is to be made to the beneficiary.

APPLICABLE TAX LAW

Withholding Tax (WHT) is not a distinct tax type and therefore has no legislation of its own. It is only a mechanism for the collection of other taxes. Consequently, its application is provided for in the enabling law of other tax types i.e. Section 81 of Company Income Tax Act, Section 54 of Petroleum Profit Tax Act, Section 73 of Personal Income Tax Act and Section 13 of Value Added Tax Act.

TAX COVERAGE AND INCOME SUBJECT TO WITHHOLDING TAX

The WHT provisions seek to collect taxes that may otherwise have been lost through evasion and/or avoidance. The aim is to ensure that taxpayers are correctly taxed but it must be understood that transactions that are ordinarily not liable to tax in Nigeria are also not liable to WHT; thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident taxpayers will not be liable to WHT. The residence of the taxpayer is generally not relevant for the purpose of determining liability to tax or the application of WHT, but it is important to consider whether the provider/supplier of the goods or services is liable to Nigerian tax.

The rate of tax applicable to the various goods and services is provided in later parts of this paper. The introduction of the WHT regime came about in order to address the problem of tax evasion. Although, there is the overriding objective of full disclosure, transparency, predictability and fairness; in the light of these objectives and bearing in mind that the tax is intended as an advance payment of tax, its operation should always be scrutinized to ensure that taxpayers are not overtaxed and Government does not lose revenue.

Rents:

This includes rental income on both real and personal property. As a general rule, income on a property (rent, hire or lease payments or rights (royalties) situated in Nigeria is liable to tax in Nigeria, the place of payment notwithstanding. Where a person rents or hires property/services from another, WHT at the rate of 10% will apply. But where a person provides services to another for e.g. air/land transport service, using its own equipment/facilities, the transaction becomes a contract of services rather than rental or hire.

Interest:

This is income from investments of every kind. WHT is applicable to income from government securities and income from bonds or treasury bills. Interest on loans paid by a Nigerian company is often not subject to WHT.

Dividends:

This refers to income from shares. The income is subject to tax whether it is received by a Nigeria company or a non-resident company. The tax imposed is regarded as final tax, but corporate bodies are allowed to recoup WHT deduction where the dividend is to be redistributed as Franked Investment Income (FII). The Petroleum Profit Tax Act (PPTA) however exempts dividends payable by oil producing companies on petroleum operations from WHT imposition.

Royalty:

This refers to unearned income which accrues to the owner from past endeavors. Permission must be obtained before it can be used. It is payment of any kind as a consideration for the use of or the right to use any patent, trade mark or right/

Consultancy/Professional/Management/Technical Services-These are specialized services rendered by persons with the required knowledge and skills. The mere fact that services are provided by a company which has consultancy as part of its name does not by itself render such service as consultancy. The real content of the services being provided must be examined and if it amounts to a consultancy service, then the appropriate rate would apply; the same treatment applies to Professional/Management services. For instance, if an engineering company is carrying out a construction activity, the proper classification for the services would be ‘‘construction’’ as opposed to Professional/Technical services. Similarly, the use of industrial machinery/equipment to provide a service does not render it to be ‘Technical’ because the industry position requires that only arrangements thatinvolve a transfer of technology should be classified as technical.

All types of contract activities and arrangements, other than outright sale and purchase of goods and property’s classification is wide enough to capture every transaction, other than outright purchase/sale of goods and property. The revenue holds the view that majority of the activities carried on in the oil industry are done by way of contractions, and should properly fall under this category. The issue of contracts and transactions, not being conducted in the ordinary course of business has over the years been subjected to series of reviews and amendments, aimed at improving the WHT system in order to achieve efficiency as well as minimize the cost of doing business. The aim of withholding tax is not to compound the problems of producers, manufacturers and those engaged in any forms of activities, other than services. The definition of manufacturing activate as contained in the FIRS information circular No. 2002 appears to have further generated more controversy than expected. The following classification will assist in the understanding of circumstances where WHT will apply in relation to any production activity.

WHERE THERE IS A DUAL RELATIONSHIP BETWEEN PARTIES IN A BUSINESS TRANSACTION

An example of this contract is where a manufacturer/ producer require raw materials from a supplier for its production. This is a dual relationship between both parties and the transaction will not be liable to WHT. E.g. a farmer supplies groundnut to a manufacturer of groundnut oil; a manufacturer of glass supplies bottles to a bottling company or soft drink manufacturer or an oil marking company supplies diesel directly to a user.

WHERE THERE IS A TRIPARTITE RELATIONSHIP BETWEEN PARTIES IN A TRANSACTION.

In a tripartite contract relationship involving a manufacturer, supplier and agent, there could be either two options, depending on the level of financial arrangement. For example, where Manufacturer A, engages Agent C to procure or source for raw materials from Supplier, B, for his production line, there is a tripartite arrangement here. There is nothing preventing Manufacturer, A from dealing directly with supplier B in order to achieve a dual contract relationship.

(a) If Agent C is mobilized by Manufacturer B with fund to source for materials for its operation, there will be need to segregate the service cost from the entire contraction, and only the service component will be liable to WHT.

(b) If the Agent, C, entirely finances the sourcing of the raw materials for Manufacturer A, the entire contract value will be liable to WHT at the time of payment.

WHERE A MANUFACTURER DELIVERS ITS NORMAL PRODUCTS TO ITS DISTRIBUTORS AND DEALERS FOR SALE

In this situation, the income accruing to the manufacturer will not be liable to withholding tax (WHT) as it is regarded as transaction in the ordinary course of business, but the commission earned by the distributors/dealers will be subjected to WHT.

Agency Transactions & Arrangements

Agency arrangement implies a contract between a principal and agent. The reward payable for services rendered by the agent is commission, which is subject to WHT of 10%.

However, if the principal is a non-resident, any sales proceeds from the arrangement will attract5% WHT, where any of the conditions in Section 26(1) (b) of CITA holds.

May 4, 2015
Tax on the go, anywhere, anytime

The tax system since medieval times has undergone reforms, these reforms focused on taxpayers are meant to increase service delivery and customer satisfaction. The FIRS is not left behind as reforms have been undertaken with a view to make our operations friendlier, convenient and conform toglobal best practices. In order to simplify the payment method, FIRS has designed a new payment platform called e-taxPay.

What is e-tax Pay?

E-tax Pay is an online self-service tax payment system whereby the taxpayers are given an opportunity to pay their taxes through their banks’ online payment portal. It is an initiative put in place by FIRS in collaboration with Nigerian Interbank Settlement System (NIBSS) and approved collecting banks. This isto assist taxpayers pay their taxes with maximum ease. Taxpayers can do it themselves using the electronic service channels provided by their bankers.(These service channels will include the banks internet banking, ATM and other mobile banking platforms.)

Conditions to meet before using e-tax pay platform

• You must have registered and obtained Taxpayer Identification Number (TIN)

• You must have an account with the bank

• You must have sufficient funds in the account to cover the tax liability/transaction

Steps to take to make payment through e-tax pay platform

Having satisfied the condition of obtaining a registered TIN, an existing account and sufficient funds, then;

• Select the service (e-tax Pay) from the list of services displayed on the bank self-service channel or request for this service from the bank branch

• Provide all the required information including the taxpayer‘s TIN.

• Select the tax type (e.g. Company Income Tax, Pre-operation Levy, Value Added Tax, etc.)

• Enter the amount to be debited from the account provided

• Confirm that all the information provided are correct and valid

• Submit the request.

When this process is completed the platform will notify FIRS online real time. Also FIRS has online access to the tax portal to view transactions real time to know taxpayers that have made tax payments.

Taxes that can be paid using the e-taxpay channel

You can use the e-taxpay channel to pay all taxes/levies collected by the FIRS. They include:

• Petroleum Profit Tax

• Education Tax

• Companies Income Tax

• VAT

• Personal Income Tax/PAYE (Residents of FCT and non-Residents)

• Withholding Tax

• National Information Technology Levy

• Capital Gains Tax

• Pre-operation Levy

• Late filing penalty.

• Stamp duties

Documentation required when you want to pay tax.

• Prepare the relevant tax returns

• Compute tax payable or prepare remittance schedule (CIT/PAYE/WHT/VAT)

• Fill the relevant self-assessment forms

Benefits of using e-tax Pay

• Promotes transparency and boost the taxpayer’s confidence and trust in the tax system

• Promotes voluntary compliance

• It is convenient, saves time and compliance cost;as taxpayers can do it themselves within the confine of their offices without going to the banking hall.

• E-taxpay solution streamlines the process flow in tax remittance, with all banks collecting for FIRS using their various channels.

• Banks integration to the NIBSS e-taxpay is a veritable avenue for enabling all forms of tax payments/collections particularly from the bank accounts of payers to the designated bank accounts of FIRS.

• This solution harmonizes online tax assessment with e-taxpay platform; which gives convenience of assessment and remittance.

• NIBSS collection platform has been integrated to the system(s) of FIRS for data acquisition and online real-time notification of transactions.

• The security of payment is intact as the platform leverages on the robust security infrastructure of banks.

• It makes account reconciliation easy for FIRS.

• It enhances effective budgeting and forecasting due to the availability of adequate information on details of tax revenue realized over a period of time.

Security of the e-tax Pay Platform

The e-tax pay service is safe and secure. Theplatform leverages on the security measures provided by the service channels of the banks. The system through NIBSS validates taxpayer’s information against FIRS records and automatically notifies FIRS.

… fast track your tax payment, use the e-tax Pay.

April 27, 2015
Tax relief for pioneer companies
The Nigerian Government has over the years put in place many different and overlapping incentive schemes to attract both local and foreign investment. Tax exemption is generally regarded as an industrial investment device; many developing countries like Nigeria offer it as one of their major incentives. Basically, tax incentives are designed to encourage investments in certain preferred sectors of the economy and sometimes geared towards attracting inflow of foreign exchange to complement domestic supplies for rapid economic development.

Tax exemption otherwise known as tax holiday is one of the most widespread tax incentives. Tax exemption simply means a period of exemption from payment of taxes imposed by the government and this may be complete or partial. The granting of pioneer status, for instance, gives a company a preferred position in getting established, usually through exemption of income tax payment.

A pioneer company is a company that engaged in manufacturing, processing, mining, servicing and agricultural industries whose products have been declared pioneer products on satisfying certain condition as determined by the Industrial Development Coordinating Committee (IDCC) of the Government under the Industrial Development (Income Tax Relief) Act Cap 179 LFN 1990. The pioneer tax holiday is for an initial period of three years or subject to further extension of two years or five years (once and for all without further extension).
- Enabling Act
Act Chapter 179 laws of the federation of Nigeria (LFN) 1990 but first enacted by Decree No22 of 1971 and commenced on 1/4/1970.

Commencement Date 1st April, 1970

• “An Act to repeal and re-enact, with major changes, the industries Development (Income Tax Relief) Act and to make provision for tax relief for certain industries that may be issued with pioneer certificates by the minister and other matters ancilatory there to”.

Conditions:

• Industry is not being carried out on a suitable scale as required and there are prospects for further development in the industry or its product.

• If it is in the public interest to encourage the industry or its product.

• Application may be made for the inclusion of a product on the pioneer list

Mode of Application

• All application to be addressed to the Minister.

• State the status of the company.

• Give details of qualifying capital expenditure to be incurred.

• Give sources of qualifying capital expenditure and estimated cost.

• Specify location of Assets.

• Date of production of pioneer products.

• Any by product not being a pioneer product.

TERMS OF PIONEER CERTIFICATE

• Must be in terms of the application to which it relates.

• Specify permissible by-products to be produced.

• Specify period within which company must be incorporated and conditions to be endorsed

• Pioneer status will only be issued from a date when company was incorporated and shall be effective from a date not earlier than the date on which the application was submitted to the minister or date of incorporation, which ever is the later.

• Any other condition will be specified by the minister

• The minimum Tax relief period not exceeding five years to be stated 3(6)(a-b)

Amending of Pioneer Certificate to Add New Product

Section 4 (1) – (3) allowed a company during its pioneer period to make application in writing to the Minister to add a new product.

RETROSPECTIVE PIONEER OPERATION

• Where a pioneer certificate is to be operative from a retrospective date, all acts shall be treated as not having been closed or not having happened and all taxes paid (if any shall be repaid as soon as may after the expiration of three months from the production day.

PRODUCTION DATE

• No later than one month when the company is going into commercial production (marketable quantity), the company shall apply in writing for the certification of its production date.

• Not later than one month after the production date or any extended period granted by the FIRS, the company shall make application in writing to the FIRS for the certification of the amount incurred as qualifying capital expenditure prior to the production date.

Cancellation of Pioneer Certificate

i)       A Company may apply for cancellation

ii)      If a company contravened any provision of the Act or failed to meet conditions set.

Tax Relief Period

i)       Commencing from the production date, it shall continue for three years (but can be extended):-

ii)      for another one period of two years (if the standard and rate of expansion are satisfactory), local raw material utilization expansion, training and development of Nigerians, Government Policy Priority)

iii)    Five years (once and for all).

TRANSITION FROM PIONEER STATUS

Conditions of Old Trade or Business of a Pioneer Company

• The old trade shall be deemed to ceased permanently at the end of the tax relief period.

• The pioneer company deemed to have set up a new trade on the day next following the end of its relief period.

• All capital expenditures incurred and used by a pioneer company shall be deemed have been incurred on that day next following the end of its tax relief period.

• Where it incurs a Net loss, that loss shall be deemed to have been incurred on the date on which its new trade commences i.e. it will be allowed to deduct all the losses brought forward from the pioneer period

• The company must submit to the FIRS a list of its assets for certification.

• At the end; the FIRS will issue a certificate of qualifying expenditure.

• The Board is expected to issue the company for each year, the amount of income as ascertained and loss as arrived at (if applicable).

Treatment of Capital Allowances and Losses

• A capital expenditure incurred shall be deemed to have been incurred on that day next following the end of the pioneer period. I.e. regardless of the number of years granted a pioneer company, all capital expenditures incurred in line with the provision of the second schedule within the periods shall be deemed to have been incurred after the Tax relief period.

• For losses incurred within the pioneer period, the cumulative amount will be deemed for computing total profits to have been incurred on the day, next following the pioneer period i.e. it will be allowed as a deduction in the new business.

DOCUMENTATION REQUIRED BY FIRS

• Memorandum and Articles of Association

• Certificate of Incorporation

• Answer to standard questionnaire

• Pioneer Certificate issued

• The period approved

• Production date

• Products and by-products

• For a going concern, the Audited accounts ended before the production date to be furnished (regardless of the number of months).

Rendition of Returns

• The conditions governing the submission of tax returns in CITA are applicable to a pioneer company.

• One year from commencement of production date.

• Period of one year successively.

• Last year of the relief period.

• Example: Kano Money Lender Ltd was granted a pioneer status commencing from 1st July, 1999. The company has 31/12 as its accounting date. The period granted was for five years.

• At the expiration of the pioneer period, it submitted accounts for the years ended 31st December, 2004 and 2005 you are given these additional data
April 20, 2015