The Nigerian Tax Laws have provisions for the Taxation of contract Expenditure including those of Government, Ministry, Department and Agencies. The withholding tax (WHT) provision was introduced into the tax system in 1997 with limited coverage to rent, dividends and directors fees. Tax deduction at source has since been expanded to include:
– All aspects of building, construction and related services.
– All types of contract and agency arrangement, other than outright sale and purchase of goods and property in the ordinary course of business.
– Consultancy, technical and professional services.
– Management services.
– Commissions
– Interest and Royalty.
The introduction of 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.
Despite the huge Tax Revenue from award of contract and related source deductions, there is a growing interest in the usage of direct labour system in project procurement in Nigeria especially in the public sector. Direct Labour system is one of the several options of procurement used for project delivery process. This type of system is regarded as in-house because procuring entity, as different from contractor’s staff carry out the project delivery process and activities. One of the reasons for the preference for direct labour procurement is the Tax effect. Government Ministries, Department and Agency consume the services of contractors and hence are to be charged VAT by contractors who execute contract for them.
This paper is intended to highlight how Government Expenditures are taxed in Nigeria and the extent to which direct labour procurement can be a Tax evasion scheme. This paper will not in any way address Tax issues relating to Corporate and Individual Expenditures.
The Public Procurement Act 2007 And Award Of Contract
By the provisions of the Public Procurement Act 2007, the following should be noted about award of contract and Public Procurement:-
i. Procuring Entities should outsource those services that are either not part of their core business activity or for which there is a fluctuating requirement in terms of specialist skills or Equipment, or where the open market provides a more efficient and commercial alternative.
ii. The approval and maintenance of monetary and prior review thresholds is important for the faithful implementation of the PPA. The thresholds establish relevant approving authorities and methodologies. “Monetary Thresholds” is defined in the interpretative section of the Act to mean the value limit in Naira set by the Bureau outside of which an approving authority may not award a procurement contract.
iii. Procurement to be executed:-
a. by open competitive bidding, except as otherwise exempted;
b. In a manner which is transparent, timely, and equitable for ensuring accountability and conformity with the Public Procurement Act and regulations deriving therefrom;
c. With the aim of achieving value for money and fitness for purpose;
d. In a manner which promotes competition, economy and efficiency; and
e. In accordance with the laid down procedures and timelines.
iv. Where the Bureau has set prior review thresholds, no funds shall be disbursed from the Treasury/federation Account/ or any bank account of any procuring entity for any procurement falling above the set thresholds unless the cheque, warrant or other form of request for payment is accompanied by a “Certificate of ‘No Objection’ to Award of Contract” duly issued by the Bureau.
v. Subject to the monetary and prior review thresholds for procurements, the Parastatal Tenders’ Board of a government agency, Parastatal, or corporation or in the case of a ministry or extra-ministerial entity, the Ministerial Tenders’ Board shall be the Approving Authority for the conduct of public procurement.
vi. The following procedure shall be observed by ministries, extra ministerial offices, and other arms of government in implementing their procurement plans, viz;
a. Advertise and solicit for bids in accordance with guidelines prescribed by the Bureau from time to time;
b. Invite two (2) credible persons as observers in every procurement process, one from a private sector professional organization relevant to the procurement and the other from non-government organization working in transparency, accountability and/or anti-corruption areas;
c. Receive, evaluate and make a selection of the bids in accordance with prescribed guidelines;
d. Obtain the approval of the tenders board for the award of contract to successful bidder.
e. Obtain “certificate of ‘No objection’ to award contract” from the Bureau where contract is outside the threshold.
vii. All bidders in addition to requirements contained in any solicitation documents shall:
a. Possess the necessary:
– Professional and technical qualifications to carry out particular procurement
– Financial capability;
– Equipment and other relevant infrastructure;
– Shall have adequate personnel to perform the obligations of the procurement contracts.
b. Possess the legal capacity to enter into the procurement contract
c. Not be in receivership, the subject of any form of insolvency or bankruptcy proceedings or the subject of any form of winding up petition or proceedings
d. Must have fulfilled all its obligations to pay taxes, pensions and social security contributions.
viii. Procurement Approval Threshold (2012)
ix. Reduction or Contract splitting is an offence in the Public Procurement Act.
x. The Accounting Officer of every procuring entity shall be the person charged with the line supervision of the conduct of all procurement process; in the case of Ministries, the Permanent Secretary and in the case of Extra Ministerial Departments and Corporations, the Director General or Officer of Coordinate responsibility.
xi. Procurement by Accounting Officers must be on the
basis of approved quotation or Tender. Selection must be made from at least three quotations.
xii. Section 19 of the Public Procurement Act 2007 specifies conditions for “Force Account” i.e Direct Labour, which should be executed within three months, to include
– The procuring entity has ascertained that a schedule of rates, cost – plus or target contract would not be feasible, as quantities of work to be carried out cannot be defined in advance;
– Works are small and scattered or in remote locations with no local contractors and demobilization costs for outside contractors would be too high;
– Works must be carried out without disrupting existing operations;
– The risk of unavailable work interruptions is better borne by procuring entity than by a contractor;
– No contractor is interested in conducting the work at a reasonable price;
– It has been demonstrated that Force Account (Direct Labour) is the only practical method for constructing and maintaining works under special circumstances; or
– Where national security would be compromised if any other method was used.
BLIBLIOGRAGHY
1. Financial Regulations (Revised to January 2009); Federal Republic of Nigeria.
2. Public Procurement Act 2007: Federal Republic of Nigeria.
3. Companies Income Tax Act, Cap C. 21, LFN 2004
4. Value Added Tax Act, Cap V.1 LFN 2004.
5. Federal Inland Revenue Service Information circular No: 9801 (1998)
6. Federal Inland Revenue Service Information circular No: 9502 (1995)
7. Federal Inland Revenue Service Information circular No: 2006/02 (2006)
