The Nation Newspaper

Category: Taxation

Distinguishing withholding tax from VAT

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. It 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 10 per cent for limited liability companies, and five per cent for individuals and partnerships.

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 five per cent 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.

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.

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 one per cent 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 per cent 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.

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 February 20, 1995, 9501 of January 13, 1995) may be advisable.

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 per cent when these payments are made to limited liability companies; and five per cent 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 per cent of the tax not withheld or remitted.

VAT

•The rate for VAT is five per cent.

•Payments of VAT should 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 the government imposes dual roles on the issuing houses as agencies which handle new and rights issues:

ib) as 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 para. 4 of Information Circular no. 9502 of February 29, 1995).

December 23, 2013
Addressing tax evasion and compliance

Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. From the above definition it is seen that taxes are contributions to a common pool by the people for the use of the people. Governments all over the world need taxes in order to sustain their relevance and to provide for the needs of its citizenry.

Features of a good tax system

A tax system is expected to be fair and non-discriminatory. For a tax system to meet these requirements, it must have the following attributes.

1. Neutral – A neutral tax must be unbiased across economic activities, and not overly penalise work in favour of leisure, nor tax income used for saving and investment more heavily than income used for consumption.

2. Visibility – A very large segment of the population must be keenly awarethat government costs money, government spending should be held at levels at which its benefits match its costs. This is a critical factor in most developing countries, including Nigeria) where the citizenry believe that tax revenues are not beingexpeditiously administered.

3. Fairness – This is often stated as making the rich pay higher share of their income in taxes than the poor. There should be some amount of income exempt from tax to shelter the poorest citizens.

4. Simplicity–A tax system should be easy for the government to administer and enforce, and be easy and inexpensive for taxpayers to comply with. The elimination of multiple layers of tax would also create a system that is much simpler and easier to administer, enforce and comply with. These are critical issues in Nigeria tax systems that require urgent attention. Our tax laws are old and complex, given room for varied interpretations and applications.

5. Convenience: A good tax system should be convenient in terms for time and mode of payment to the taxpayer.

6. Administrative efficiency: The process of levying and collecting taxes must be administratively efficient, transparent and economical without any distortion.

7. Productive: A tax system should be such that brings in sufficient revenue to the Government. Since tax payment involves the outflow of money from taxpayers, some Taxpayers have adopted many strategies to evade tax. Tax evasion is defined as “the wilful attempt to defeat or circumvent the tax law in order to legally reduce one’s tax liability”. Tax evasion is punishable by both civil and criminal penalties.

Tax avoidance on the order hand, is defined as “the act of taking advantage of legally available tax planning opportunities in order to minimise one’s tax liability.While tax evasion is criminal tax avoidance is legal. This was aptly supported by the celebrated case of Ayrshir Pullman Motor Services & D.U. Ritche V.CIR (1929). The fact of the case and the judgment is as follows:

The taxpayer changed the structure of its business from sole proprietorship to partnership with five of his children to minimise tax. He appealed to the Court of Session against an assessment which failed to recognise the change. Allowing the appeal, Lord Clyde held:

No man in this country is under the smallest obligation, moral or other, to so arrange his legal relations to his business or property as to enable Revenue to put the largest possible shovel into his stores. TheInland Revenue is not slow… and quite rightly to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer in like manner is entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue.

Tax compliance tools

In order to encourage taxpayers to continue to comply, and bring non-compliant taxpayers into the tax net, to increase the tax base and revenue, governments all over the world have put in place some compliance strategies backed by appropriate legislations.

Section 26(1) of the Federal Inland Revenue Service Establishment Act (FIRSEA) 26(1) gives the Service to call for returns, books, documents and information.

FIRSEA 27: Gives additional power to the Service to call for further returns and payment of tax due.

FIRSEA 28: Requires every bank upon demand by the Service to provide quarterly returns specifying:

(a) In the cases of an individual, all transactions involving N5 million and above

(b) In the case of a body corporate, all transactions involving N10million and above, the names and address of all customers of the bank connected with the transactions and deliver the returns to the Service.

(c) Section 28 (3): Provides sanction to any bank that contravenes above provisions.

FIRSEA 29: Gives power to access lands, buildings, books and documents.

FIRSEA 32: Gives power of addition for non-payment of tax and enforcement of payment.

FIRSEA 33: Tax Investigation; this section empowers the Service to employ special purpose Tax officers to assist any relevant law enforcement agency in the investigation of any offence under this Act.

FIRSEA 47: Gives the Service powers to prosecute any of the offences under this Act subject to the powers of the Attorney–General of the Federation.

The role of tax audit

In addition to all the tax provisions mentioned above, FIRSEA S:26(4) and S.60(4) CITA went further to state:

•Nothing in any other provision of this Act shall be constructed as precluding the Service from verifying by tax audit or investigation into any matter relating to any return or entry in any book, document, accounts including those stored, on a computer, in digital, magnetic, optical or electronic media as may, from time to time, be specified in any guideline by the Service.”

All the above provisions, among others, are compliance tools meant to ensure that a taxpayer does not pay less or more than what he is required to pay by law. This objective is achieved through tax audit.

The purposes of tax audit are to:

•To educate taxpayers

•Maintain self assessment system

•Collect taxes as imposed by the laws through the encouragement of voluntary compliance

•Maintain public confidence in the integrity of tax system.

•Provide deterrent effects on other taxpayers not yet audited, as they may quickly file their returns to avoid sanctions.

Most taxpayers will be willing to pay their taxes as and when due, if government is transparent and accountable. It is the common experience in the developing countries that governments have not demonstrated enough commitment towards providing the citizenry with required facilities and infrastructure that would encourage an average taxpayer to be voluntarily compliant. Roads, electricity, education and health facilities are in short supply, facilities that are already in place are not properly maintained. There is growing apathy among the taxpayers about the commitment of government to use the taxes paid to provide for their needs. These are the issues that need to be addressed in order to improve the level of compliance. Both the government and the taxpayers must resolve to work in collaboration and meet mid-way for the society to develop and enjoy peace and security.

A government must have the trust of its citizens.

The government that cannot be trusted may not have moral the courage and determination to maximise its tax potential. Total tax revenue, which is the tax rate multiplied by the tax base, can be increased when government is physically present in every nook and cranny of the country by means of provision of social amenities.

The citizenry is getting impatient and agitated. The time for the government to do the right thing is now. Tomorrow may be too late.

November 18, 2013
Tax relief for pioneer companies

The Federal 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: April 1, 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 utilisation 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 July 1, 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 December 31, 2004 and 2005 you are given these additional data

November 11, 2013
Modernising tax administration with SIGITAS

With the government’s spending rising, it is important for revenue administrators to devise ingenious means of improving tax collection. One sure way of doing so is automation of the tax collection process.

Recently, the Federal InlandRevenue Service (FIRS) announced ongoing efforts to automate tax collection by 2014 with the Integrated Tax Administration System (ITAS) to be implemented on a tailored made solution known as the Standard Integrated Government Tax Administration System (SIGITAS). The primary goal of this project is to re-engineer the tax administration service delivery, eliminate gaps and redundancies in the current administrative assessment processes by leveraging technology in line with global best practices ultimately leading to simpler taxpayer compliance.

The objective is to transform the tax administration systems. Optimise its contribution to national development. Broadly speaking, automation of the tax administration process will engender transparency and efficiency with little human interface. The most vital aspect of SIGITAS will be to widen the tax net, deepen compliance, create a friendlier environment for taxation as well as curb leakages in tax administration. Also, the introduction of SIGITAS will standardise processes which mean reduced turnaround times for service offerings to taxpayers.

A major highlight of the deployment of SIGITAS is the automation of unified communications and enterprise collaboration, document management portal, as well as the automated Value added tax collection system. ITAS is also primed to support taxpayers in complying with regulations by reducing the administrative burden on them and providing easy access to information as and when due. It is expected that by the time ITAS is deployed taxpayers will be able to view their tax history of filing and assessment with the FIRS.

In other jurisdictions where SIGITAS had been introduced such as Mali and Rwanda, taxpayers are able to use the platform as a one stop shop- with easy integration of all tax types- registering a tax ID, data of transactions etc. SIGITAS also has the capacity to handle a robust framework for tax roll, assessment, collection, audit, objection appeals, document handling, reporting, external system integration, system administration and accounting for each user.Instructively SIGITAS offers a platform for taxpayers and tax authorities to interact in a more transparent and confidential manner, while also providing valuable information for the taxpayer.

The deployment of SIGITAS should be encouraged by all stakeholders for many reasons. It will among other reasons reduce the country’s over-dependence on oil revenue with an expected surge in non oil taxes raising revenue figures needed for the development of social infrastructure. Also it is expected that the ITAS will signal a re-orientation of the FIRS personnel in terms of skills and capacity in the business analysis function to meet the objectives of the institution as well as strengthen the governance and transparency with fair and equal treatment of taxpayers. And to suit Nigeria’s ethnic diversity, it can be configured to be multilingual and offers a water tight security protection.

But for SIGITAS to be successful there is need for synergy and integration with other similar projects across revenue generating institution such as the recently deployed Taxpayer Identification Number (TIN) for clearing of all imports into the country. This essentially brings importers into the loop of both the FIRS and Nigeria Customs Service simultaneously. This has impacted positively on the revenue collection profile into the federation account. So also for the Taxpayer Identification Number (TIN) integration currently ongoing nationwide which is being supervised by the Joint Tax Board (JTB). The FIRS also needs to build momentum in the synergy with the Corporate Affairs Commission so as to integrate their processes especially in the area of database building which makes it easier to reach the untaxed or “hard to tax”.

A successful ITAS project will be one that is able to create value for all stakeholders by simplifying taxpayer compliance processes, keeps pace with technological innovations, lowers cost of collection with seamless data and exchange of information synergy with key stakeholders (MDAs, banks etc) and support regulatory demands in a simplified manner. It willalso effectively encourage self-assessment filing of tax as against administrative assessment.

In summary, ITAS appears to be the answer to shoring up non oil tax in the face of dwindling oil revenues. A robust technology driven tax administration will definitely be able to achieve more if it fully optimizes the latent power it holds. The future of Nigeria’s social and economic development depends on a transparent and fair tax collection system that must keep improving to meet with social and infrastructural challenges.

November 4, 2013
Administration of withholding tax (11)

The organisations making the payments are required to withhold tax from such payments and pay over the withheld amounts to their respective relevant Tax Authorities within 30 days 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 (WHT)

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 organisation approved for the operations of Pay As you Earn (PAYE) 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 anytype 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 countries and these countries are granted a reduced rate of WHT deduction, usually at 75per cent of the generally applicable WHT rate. 7.5per cent. 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 authorised 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,

•Nonresident 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 organisation. 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 unutilised 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 per cent of the tax not withheld or withheld but not remitted, plus interest at the prevailing commercial rate.

b. For individuals and other organisations

A fine of the higher of N5,000 or 10 per cent 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.

October 28, 2013
Administration of withholding tax (1)

Withholding Tax (WHT) 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 and does not confer an exemption from the filing of yearly tax returns by the company which had suffered WHT. The tax is deducted at source when a payment is 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 optimised 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 per cent 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: Refer 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: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 specialised 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. This 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 minimise 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 dual relationship between both parties and the transaction will not be liable to WHT. For example, 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 direct to a user.

Where thre 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 with supplier B to achieve a dual contract relationship.

(a) If agent C is mobilised 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 agent C finances the sourcing of the raw materials for manufacturer A, the 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 WHT as it is regarded as transaction in the ordinary course of business, but theCommission 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 per cent.

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

October 21, 2013
How about tax amnesty?

Innovation is driving revenue collection globally in the face of slow growth rate in trade and investment. More and more tax administrators are coming up with diverse products to raise government revenues to meet daunting challenges. In Nigeria and much of the frontier markets voluntary tax compliance is still a mirage and special efforts needs to be employed to curb it.

Whereas in developed nations taxpayers remit voluntarily, allowing the tax administrators time and space to develop new tax types such as carbon tax, green gastax amongstothers, but one innovation that stands out from this pack, even in developed countries, remains tax amnesty. In Nigeria, amnesty as become a cliché, so to speak in view of the conflicts in the Niger Delta and the Northeast.

Amnesty as we know, is a legal forgiveness from certain infractions. Tax amnesty is defined as a waiver or reduction and sometimes removal of penalties in back taxes to encourage defaulting taxpayers to pay what they owe within a specified window. Indeed like on criminal matters, majority of eligible taxpayers in Nigeria rarely remit their taxes and it is crucialwe find a common ground to achieve the objective of the government to raise funds from taxes through some ingenious means that works with our cultural and economiclandscape. The objective of tax amnesty is to forgive or negotiate the tax liabilities of individual and corporate tax payers in line with laid down statutes. An amnesty must necessarily have a legal or legislative backing for it to take effect with a cut off date. Amnesty will not knock off the penalties for deliberate tax infractions, but will seek a possible relaxation of some of these penalties to encourage the expansion of the tax net, albeit temporary.And one key demand will be an agreement between the taxpayer and the tax administrator to file future returns on time in the future.

A major challengewhich the Federal Inland Revenue Service (FIRS) and various State Boards of Internal Revenue (SBIR) contend with is the issue of mounting tax arrears. In some cases the companies have collapsed while the going concerns are not complying as and when due. While the tool of enforcement should not be replaced with amnesty completely, it is however a tool that can be deployed to increase revenue collection. Amnesty or some of form relief will certainly encourage defaulting taxpayers to negotiate their tax debt obligations with respective collecting agencies, which will then enable them to start on a clean slate. It implies that a taxpayer who has enjoyed the magnanimity of amnesty will not be qualified more than once and stiffer penalty can then apply to such a taxpayer in the future in the event of a default. It must also be taken into account that not all defaulting taxpayers do it deliberately. This may be due to inadequate education on when and how to file tax returns, even though the FIRS as made tremendous progress in this regard.

Australia, Belgium, Germany, Greece, Italy, Portugal, Russia and closer home South Africa are some countries that have designed tax amnesty programmes and successfully implemented them. In 2003 via the Exchange Control Amnesty and Amendment of Taxation Laws Act, the South African Revenue Service (SARS) successfully implemented their first amnesty program. The second was the Voluntary Disclosure Programme (VDP) implemented to cover all taxes in 2011. In September 2010 the Greece parliament in compliance with the EU bailout plan,hurriedly sanctioned a tax amnesty program to raise between 2billion- 3billion from a backlog of unpaid taxes in the heat of the economic meltdown that hit them. It is vital to point out that it is not only local taxpayers that amnesty can be extended to, but it is even more important and attractive to repatriation of illegal offshore investments.

On June 26, last year, IRS Commissioner,Doug Shulman said the IRS offshore voluntary disclosure programs has so far collected more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures under the first two amnesty programs implemented by the IRS.

It has not been all bliss for various tax amnesty programs. In December last year, the Spanish Finance Minister, Cristabol Montoro declared that only 1.2billion euro was raised against a projection of 2.5billion euro. Meaning that amnesty in itself is not foolproof as a wholesome solution to compliance. But it does help to close the arrears gap.

Though some will argue that Amnesty effectively legitimises evasion, which might be reasonably correct on the surface of it, however in the case of Nigeria, that might not readily be so in the sense that the capacity to enforce or prosecute defaulters as contained in the fourth and fifth schedule and section 4 of the FIRS Establishment 2007 specify appropriate penalties for tax offenders. In February 2013, the Missouri State Parliament approved a tax amnesty programme projected to raise as much as $75million to boost state revenue. Under the proposed law, taxpayers will get a waiver on back taxes interests and penalties if they pay past due obligations between August 1 and October 31 tied to compliance to state tax laws for another eight years, failure of which waived interests and penalties would become debts again. And such participants would not be qualified for amnesty programs of such nature in the future.

Certainly tax amnesty programs help in clawing back needed funds to fund infrastructural development but has to be carefully designed with our unique environment in mind. The impact will be far reaching if the FIRS and SBIRSs working under the auspices of the Joint Tax Board (JTB) collaborate for this purpose. However executive and legislative approval will be vital to the success of any program of this nature that improves compliances levels among defaulting taxpayers. Let’s try tax amnesty for size.

September 30, 2013
Change in accounting date: Tax implication

Different and sometimes challenging business decisions can force companies to change their accounting dates. Sometimes regulatory pronouncements such as that issued to banks post consolidation to have a uniform year end was anevent which saw all banks in one fell swoop change their different accounting dates to December. While some companies have adopted calendar years, some others use fiscal years, which method is adopted is subject to tax implications. Whereas in the US the Internal Revenue Service (IRS) must give permission for companies to change their accounting dates especially to tackle tax avoidance, and may take as much as 10 years to effect another change in some cases,it is not yet so in Nigeria, an area which should be addressed.

However, a lot of companies still do not know that there are tax implications to change of dates in their accounting period beyond the approval they get from their shareholders to do so. The FIRS being aware of different methods applied by tax consultants and tax officers in the treatment of changes in accounting dates, with each method yielding different results in under-assessment or incorrect assessments levied on taxpayersissued a circular in February 2006 as a guide to officers who have responsibility for filing and assessment duties, and those who may be required, as a matter of duty to carry out preliminary reviews on tax returns submitted by companies as well as officers vested with audit responsibilities, who from time to time will come across cases of change in accounting dates in the course of their audit assignment.

Changes in Accounting Dates

There are a number of reasons why a business may wish to change its accounting date and these reasons may include:

i) The need to synchronise the accounting date of a subsidiary with that of the holding company.

ii) The convenience of stock taking at a particular period of the year.

iii) A business may take over the operation of another and as a result wish to change the accounting date of the company taken over to that of its own.

Where a change in accounting date takes place, be it a sole trader, partnership or a limited liability company, the provisions of section 29(4) of the CAP 21 LFN of 2004 will apply. The Act provides that the Tax Authorities have the power to decide the basis of computing the tax liability for the year in which the change occurs and the two following years of assessment.

As should be expected, the tax official will base his decision on the best advantage to the tax authority. It is important to note that the three relevant years to be considered are:

i) The assessment year in which the accounting date becomes different from the date of the earlier years. This is known as the year when the change occurred.

ii) The next two years of assessment following that in which the change occurred.

In practice, calculations are made on both the old and new dates. The greater of these two aggregates will be the likely choice of the revenue authority.

Years involved in Tax Computations

Whenever a request for a change of accounting date has been approved, the company making the change shall be assessed to tax through a special process of determining the basis of assessment. This process requires computations for three relevant years. Where the year of cessation is involved (ultimate year) in these three relevant years, the request for a change shall not be approved. However, where the year immediately before the year of cessation (penultimate year) is involved in these three relevant years, the request may be approved by the FIRS, depending on other evidences before it.

Assessment Procedure on Change of

Accounting Date

For an on-going business, current assessment is based on preceding year basis. But whenever there is a change of accounting date, a normal accounting period may not have ended in the year of change. This is so because when there is a change of accounting date, it is either that an account is prepared for more than twelve months to the new accounting date or even less than twelve months to the new accounting year end. The FIRS will often adopt the following procedures to determine the assessments for the three relevant years:

i) Identifying the first year in which the business has failed to make up the accounts to its usual accounting date.

ii) Identifying the two years immediately following the year of failure.

iii) Computing assessable profit for the three relevant years based on the old accounting date (on preceding year basis).

iv) Computing assessable profit for the three relevant years based on the new accounting date (on preceding year basis).

v) Adding up the assessable profits for the three years in (iii) and (iv) above separately.

vi) Selecting the higher of the two profits added up in (v) above.

Illustrations

Example 1

Julius Blake Nigeria Limited has been in business for many years. It has for a long time prepared its annual accounts up to April 30. In 1996, it decided to change its accounting date to 31st October. Available figures showed its adjusted profits as follows:

N (No. of Months)

Year ended 30/4/1995 450,000 12

Period ended 31/10/1996 830,000 18

Year ended 31/10/1997 590,000 12

Year ended 31/10/1998 600,000 12

You are required to compute the correct assessments for all the relevant years in the light of the change in accounting date.

Solution

Julius Blake Nigeria Limited

Computation of Assessment

Note: The last account submitted before the change was April 30, 1995. Therefore, the year of change is 1996. The three relevant years are therefore 1996, 1997 and 1998.

a) Original Assessments (Based on old Accounting date of April 30)

Year of Assessment Basis Period Assessment

1996 P:Y.B(1/5/94-30/4/95) N450,000

1997 1/5/95 – 30/4/9512/

18 x 830,000 N553,333

1998 1/5/96 – 30/4/97

(6/18 x 830,000) +

(6/12 x 590,000) N571,667

b) Assessment Based on October 31

Year of Assessment.Basis Period Assessment

1996 1/11/94 – 31/10/95 (1/11/94-30/4/95) + (1/5/95-31/10/95) (6/12 x 450,000) + 6/ 18 x 830,000) N501,667

1997 P.Y.B. to 31/10/961/11/95 – 31/10/96 12/18 x 830,000 N553,333

1998 P.Y.B. to 31/10/97 N590,000

c) Summary of Assessments

Year Old date of new date of

April 30 October 31

N N

1996 450,000 501,667

1997 553,333 553,333

1998 571,667 590,000

1,575,000 1,645,000

Conclusion

The revenue will choose to raise assessments on the basis of the new accounting date as it results in greater assessment.

September 23, 2013
Essentials of Capital Gains Tax (CGT)

Capital Gain may be defined as gains arising from increases in the market value of capital assets to a person or corporate body, who does not habitually offer them for sale and in whose hands they do not constitute stock-in-Trade. Therefore, it is a tax chargeable at the rate of 10 per cent on capital gains arising from the disposal of capital assets. Capital gains mainly represent the excess of disposal proceeds realised over the cost of the particular asset.

Administration of Capital Gains Tax

The CGT is under the management of the Board of The Federal Inland Revenue Service (FIRS) and it is administered by the FIRS in respect of corporate bodies and individuals resident in the Federal Capital Territory including members of armed forces, police and foreign serving officers. The tax is also administered by the State Internal Revenue Service in respect of individuals based on the rules of residence. Under the provisions of the Act, tax liability will arise on Actual Year Basis (AYB) when a chargeable asset is disposed. An aggrieved taxpayer or the respective tax authority can appeal against the decision of the tax authority to a conventional court or to the Tax Appeal Tribunal (TAT) as the case may be.

Some Highlights of the Provisions of the CGT ACT

• CGT is chargeable at 10 per cent on capital gains from the sale of capital assets.

• Capital loss on disposal of any asset is not deductible from capital gains on disposal of any other asset even if both are of the same type.

• Where consideration is payable by installments over18 months, the chargeable gain shall be apportioned to the affected assessment years in proportion to the amount of the installments payable in each of the years.

• Chargeable gains are assessed on current year basis,

• Roll-over relief is available to any company acquiring a new asset to be used for the purposes of the trade in replacement of an old one.

• Gains arising from disposal of shares and stocks are currently exempted from CGT.

Chargeable Persons and Chargeable Assets

Chargeable Persons

A chargeable person is one who deals in a chargeable asset.

A chargeable person may be:

• A limited liability company,

• An individual

A limited liability company will remit its tax liability to FIRS while an individual will remit to the SIRS, with the exception of individuals resident in the FCT.

Chargeable Assets

Examples of chargeable assets are:

• Options, debts and incorporeal properties. Incorporeal properties are assets that have values but are not tangible, e.g. goodwill, copyrights and patent rights.

• Disposal of currencies other than Nigerian currency.

• All qualifying capital expenditure under CITA, PITA, • Chattels sold for more than N1, 000 in any tax year.

Persons / Institutions Exempted

By law, any ecclesiastical, charitable, or educational institution of a public character, statutory or registered Friendly Society and co-operative society registered under the co-operative Societies Act are exempted. Same also applies to Local Government Council, purchasing Authority Company and corporation established for fostering economic development of any part of Nigeria. Also included in the the exemption list are, Trade Union registered under the Trade Unions Act, provided, The gain is not derived from the disposal of any assets acquired in connection with any trading or business activity carried on by such Institution or Society. The gain or profit is applied solely for the purpose of the Institution or Society.

Other items on the list are the main or only private residence of an individual (including the gardens), Chattels disposed for not more than N1000 in a Year of Assessment, motor cars suitable for private use or a mechanically propelled road vehicle constructed or adopted for the carriage of passengers, life assurance policy, benefits from superannuation funds approved by the Joint Tax Board, gifts, government securities, including treasury bonds, savings certificates and premium bonds, Nigerian currency, disposal of Stocks and Shares (effective 1/1/98), disposal of Investments in Statutory Provident Fund, or Retirement Benefits Scheme, acquisition of the Shares of a Company either merged with, or taken over or absorbed by another Company, as a result of which the acquired Company loses its identity as a Limited Liability Company, provided no cash payment is made in respect of the Shares acquired, gains accruing to Diplomatic bodies and gains from disposal of Securities in a Unit Trust provided the proceeds are re-invested.

The Principle of Disposal

For the purpose of CGT, disposal arises where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition or any other disposition of assets. The disposal is deemed to have taken place even where no asset was acquired by the person paying such capital sums. Thus, specifically, disposal is deemed to have taken place where:

i. Any capital sum is derived by way of a compensation for loss of office or employment.

ii. Receipt of capital sum under a policy of insurance;

iii. On receipt of capital sum in return for forfeiture or surrender of rights or for refraining from exercising such rights

iv. Any capital sum is received as consideration for use or exploitation of an asset.

v. Any capital sum is received in connection with or arises by virtue of any trade, business, profession or vocation.

Non-Allowable Expenses for the Purpose of CGT

• Any allowable expenses under the provision of PITA, CITA and PPTA.

• Any insurance premium or other payments made under a policy of insurance against the risks of any kind of damage or injury to, loss or depreciation of any asset.

Computation Of Capital Gains Tax

• In the computation of capital gains that will be charged to CGT, the following steps should be followed:

• Identify the sales proceeds on the disposal of the chargeable asset

• Deduct allowable expenses from the sales proceed to obtain Net Sales Proceed.

• Deduct cost of acquisition and other capital costs from the Net Sales Proceed to obtain the Capital Gains

• Compute the capital gains tax liability by applying the applicable rate of 10 per cent on the Capital Gains obtained above.

The above steps can be placed in a better format as follows: N N

• Sales Proceeds xx

• Less: Allowable Expenses (xx)

• Net Sales Proceed xx

• Deduct: Cost of Acquisition (xx)

• Capital Gains/(Losses) xx

Capital Gains Tax @ 10 per cent

Connected Persons

Where in a transaction, one person has control over the other, a connected person transaction is said to have taken place. In such a situation, where transaction is not done at arm’s length, market value is used. Connected persons for this purpose include:

1. An individual wife or husband;

2. A trustee in settlement is deemed connected with the settler as well as any person connected with the settler;

3. Partners of a firm are deemed connected with one another as well as with the spouse of each partner; 4. A company is connected with another person if that person has control of it or if that person and persons connected with him together have control of it.

Roll Over Relief

• This arises where a sole trader, partnership or limited liability company carrying on a trade, dispose of one eligible business asset and replaces it with a new asset of the same class as that sold. The seller will be entitled to deduct the capital gain arising on disposal from the cost of the new asset thereby postponing the payment of CGT on such a gain.

• Roll over relief can be full, partial or no roll over relief.

• The effect of this roll-over relief is to reduce the cost of acquisition of a new asset with resultant increase in the capital gain arising on eventual disposal.

Classes Of Assets Eligible For Roll-over Relief:

Class I:

a) Any building or part of a building and any permanent and semi-permanent structure in the nature of a building, occupied and used only for trading;

b) Any land occupied and used only for trading.

c) Fixed plant and machinery which does not form part of the building

Class II – ships

Class III – Aircraft

Class IV – Goodwill.

However, the consideration arising on the disposal must be re-invested within Twelve months before or after the disposal before the rollover relief can be granted.

Some Special Circumstances in CGT

1. Assets acquired by gift and later sold: the imputed cost is:

i. The amount at which the asset was last disposed in a transaction at arm’s length if known, or if that is not known

ii. The market value of the asset at the date of transfer.

2. Assets devolving on death and later sold, Shall for CGT purposes be deemed to be disposed of by him at the date of his death and acquired by the personal representative or other persons on whom the assets devolve for a consideration equal to:

i. Where ascertained, price of the asset as at date of purchase; or

ii. Where unascertained, market value of the asset as at that date.

September 11, 2013
Taxing the assumed income:The presumptive tax phenomenon

The term presumptive taxation covers some procedures under which the exact income (direct or indirect) is not itself measured but is inferred from some simple indicators which are more easily measured than the base itself.

Presumptive income taxation is employed primarily in economies where ‘hard-to-tax’ taxpayers comprise the majority of the population and administrative resources are scarce. In these countries, most taxpayers lack the financial transparency that allows for effective taxation by the government. The result is that tax administrators estimate or presume the appropriate income on which taxes should be levied.

In developed countries, the transition from presumptive to actual income-based taxation compares to the shift from agricultural to industrial economies. Economic advancements replaced self-employment in farming and small-scale trade with concentrated employment in fewer and larger entities such as governments and large corporations. Whereas tax liability was formerly derived from indices such as estimated crop yield of agricultural produce, it gradually became a factor of actual income received from salary and wages. Movements toward more ‘modern’ forms of tax administration emerged as businesses became more sophisticated and financial transparency increased.

However, in developing countries, presumptive taxation may still be the most appropriate method of tax administration for specific groups of taxpayers. The economic transition from agriculture to industry has not occurred to the same degree as in industrialised nations. Nonetheless, most tax laws are written based on well-defined measures of income and well documented transparent accounting records. The reality is that most taxpayers do not possess the administrative resources to maintain accurate books or navigate complex tax codes.

As a result, tax evasion is rampant and authorities exert considerable effort locating and taxing Small and Scale Medium Enterprises (SMEs), including individuals.

Presumptive taxation can be used for any tax that is normally based on simple accounting records-income tax, turnover tax, and value-added tax (VAT) or sales tax-although it is most commonly used for the income tax. A number of different types of presumptive methods exist in different countries.

Presumptive methods can be rebuttable or irrefutable. Rebuttable methods include administrative approaches to reconstructing the taxpayer’s income, and may or may not be specifically described in the statute. If the taxpayer disagrees with the result reached, the taxpayer can appeal by proving that his or her actual income, calculated under the normal tax accounting rules, was less than that calculated under the presumptive method.

By contrast, irrefutable presumptive assessments are usually specified in the statute or in delegated legislation because they are legally binding. They must be defined precisely. Depending on the situation, irrefutable presumptions might be subject to legal challenge as unconstitutional. In some countries, the constitutional court (or Supreme Court) has been quite active in applying the principle of equality in taxation. Whilst in some other countries, tax law provisions that are seen as denying equal access to justice are particularly vulnerable to constitutional challenge.

Presumptive Taxation is undoubtedly a ‘win-win’ technique given that it is an optimal method of curbing widespread non-compliance without employing excessive government resources because it addresses the concerns of both taxpayer and tax authority. Presumptive taxation provides taxpayers with a simplified option for tax compliance without requiring full financial transparency.

Without a doubt, SMEs employ the majority of taxpayers in any developing country. Yet, many SMEs remain in the informal sector because they lack sufficient resources, administrative infrastructure and accounting sophistication to comply with government tax regulations. The result is that many employers are ineligible to receive the benefits the formal sector offers, which inescapably compromises their financial viability. Small businesses are aware of the advantages that legitimate enterprises enjoy, and most would be willing to pay taxes but for the complexity in the filing process.

Presumptive taxation also 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.

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 assessments assign lump-sum taxes to taxpayers on the basis of occupation or business activity. Standard assessments have 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. However, estimated assessment is employed as an alternative to standard assessments when taxpayers do not file or are audited.

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.

Under the estimated 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 utilised estimated assessments and are recognised 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).

Traditionally, the value of land is a known method applied in presumptive taxation. Agricultural output comprises the bulk of GDP in many emerging economies. Yet, with little bookkeeping proficiency and a propensity to cultivate leased land, farmers have few records and can be difficult to trace, epitomizing the ‘hard-to-tax’ taxpayer. As a result, governments that tax agricultural output have adopted laws that assess income based on potential output of land or crop yield, as well as soil quality and productivity ratings. In Nigeria, farming is largely localised and domiciled with illiterate farmers. Thus, the only way to bring them into the tax net is through a simplified presumptive means such as estimating the value of their land.

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. Thus, 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.

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. Here are some of the challenges, albeit obstacles that affect the smooth administration of presumptive taxation.

Countries in early stages of economic development tend to employ crude methods of estimating income because they lack the required human capacity to analyse 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 inefficient.

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.

Overall, presumptive taxation is a form of assessing tax liabilities using 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 equalising the distribution of the tax burden.

May 27, 2013