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Tag: Tax

Tax relief for pioneer firms
he 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 incentive. Tax exemption simply means a period of exemption from payment of taxes imposed by the government and this may be complete or partial. The grant of pioneer status, therefore, gives a company a preferred position in getting established, usually through exemption from income tax.

A pioneer company is a company that engaged manufacturing, processing, mining, servicing and agricultural industries whose products have been declared pioneer products on satisfying certain conditions in as determined by 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 (ones 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 country 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 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 Board, the company shall make application in writing to the Board for the certification of the amount incurred as qualifying capital expenditure prior to the production date.

Cancellation of Pioneer Certificate

i) Company may apply for cancellation

ii) If 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 Board a list of its assets for certification.

• At the end; the Board 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 Article 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 account 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.

• 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 expiration of the pioneer period, it submitted Accounts for the years ended 31st December, 2004 and 2005 you are given these additional data:

The data:

2004 (N)               2005 (N)

i)Net Profits                                       16,980,155              9,758,273

ii)Depreciation                                  32,157,000              46,102,328

iii)Capital Allowance b/f                               172,314,886               —

iv)Investment Allowance                               10,378,700             8,033,243

v)Initial Allowance                          75,414,556              58,020,388

vi)Annual allowance                       37,975,662              60,659,786

You are required to compute basis period and the relevant taxes payable by this company.

Solution:

• The account is for twelve months and therefore are prorate for six months for the first year

2004                                                                                        N

1st Year 1/7/2004 – 31/12/2004

Net Profit                                                                              16,980,655

Add Depreciation                                                                32,157,000

Assessable Profits                                                                49,137,155

49,137,155 x 6/12    =24,568,577.50

Less Investment allowance                                10,378,700

14,189,877.50

Less Capital allowance                                    285,705,104

Unrelieved Capital Allowance                      271,515,226.50 c/f

Income Tax                                                                        Nil

EDT N24,568,577.5 @ 2% =                              491,371.55

2005

• 1/7/2004 – 30/6/2005

• First twelve months: 6/12 x 49,137,155 + 6/12 x 55,860,601

(24,568,577.50) + (27,930,300.50)                                                                                                                         =                52,498,878

Assessable profit                                                                              52,498,878

Less Investment allowance                                             8,033,243

44,465,635

Less Capital allowance b/f                             271,515,226.50

for the year                                                          118,680,174.00

390,195,400.50

Unrelieved Capital Allowance c/f                   345,729,765.50

Income Tax                                                             NIL

EDT N52,498,878 @ 2%        =              1,049,978.56

2006

• 1/1/2005 – 31/12/2005                                                N

Net Profits                                                            9,758,273

Add. Depreciation                                               46,102,328

Assessable profit                                 55,860,601.00

Less: C. A. b/f                                      345,729,765.50

For the year 60,659,786                     406,389,551.50

Unrelieved Capital Allowance c/f                                                                                350,528,950.50

Income Tax NIL

EDT N55,860,601 @ 2%                                                                                       1,117,212.02
August 11, 2014
Seizure of tax evaders’ properties legal

Following the decision of the Court of Appeal in the case of Independent Television/Radio v. Edo State Board of Internal Revenue, that tax authorities have the legal powers to seal off business premises and confiscate the properties of tax evaders after giving them sufficient notice of their tax obligations and opportunity to pay, a Lagos lawyer and legal adviser to West African Union of Tax Institute, Chukwuemeka Eze, examines the decision. He concludes that the fear of the taxman remains the beginning of wisdom.

Are you one of those who ignore tax payment notices from the Federal Inland Revenue Service or State Boards of Internal Revenue? If you fall into this category, you encounter very serious problem henceforth. This is because the Court of Appeal, Benin Division on May 28, 2014 in the case of Independent Television/Radio v. Edo State Board of Internal Revenue has declared that section 104 of the Personal Income Tax Act (PITA) (as amended), which authorises tax authorities to seize properties of income tax defaulters, is constitutional. The section also allows tax authorities to apply to a judge of a High Court ex parte (that is, without putting the tax defaulter on notice) for an order to levy warrant of distrain against an income tax defaulter. Upon the judge granting the order, the tax authority proceeds to confiscate or seize the property of the tax defaulter. It will hold or take charge of the property for 14 days before disposing same by another order of court.

Provisions in other tax laws similar to that of section 104 of PITA (as amended) which allows for distrain of properties are as follows:

a)   Section 86(1) of the Companies Income Tax Act:

Without prejudice to any other power conferred on the board for the enforcement of payment of tax due from a company, an assessment has become final and conclusive and a demand note has, in accordance with the provisions of this Part of this Act, been served upon the company or upon the person in whose name the company is chargeable, then, if payment of the tax is not made within the time limited by the demand note, theb Board may in the prescribed form, for the purpose of enforcing payment of tax due:

(a) distrain the taxpayer by his goods or other chattels, bond or other securities;

(b) distrain upon any land, premises, or place in respect of which the taxpayer is the owner and, subject to the following provisions of this section, recover the amount of tax due by sale of anything so distrained.

b)   Section 3(1)(b) of the Petroleum Profits Tax Act:

Whenever the board shall consider it necessary with respect to any tax due, the Board may acquire, hold and dispose of any property taken as security for or in satisfaction of any tax or any judgment debt due in respect of any tax and shall account for any such property and proceeds of sale thereof in a manner to be prescribed as aforesaid.

c)   Section 33(1) of the Federal Inland Revenue Service (Establishment) of 2007:

Without prejudice to any other power conferred on the Board for the enforcement of payment of tax due from a company, where an assessment has become final and conclusive and a demand notice has, in accordance with the provisions of the relevant tax laws in the First Schedule to this Act, been served upon the taxable person or upon the person in whose name the taxable person is chargeable, then, if payment of the tax is not made within the time limited by the demand notice, the Board may in the prescribed form, for the purpose of enforcing payment of the tax due:-

(a)    distrain the taxpayer by his goods or other chattels, bonds or other securities;

(b)    distrain upon any land, premises, or place in respect of which the taxpayer is the owner and, subject to the following provisions of this section, recover the amount of tax due by sale of anything so distrained.

d)   Section 43(1) of the Capital Gains Tax Act:

Capital gains tax shall be under the care and management of the Board and the provisions of the Income Tax Acts in the Schedule of this Act shall apply in relation to capital gains tax as they apply in relation to income tax chargeable under those Acts subject to any necessary modifications.

e)   Section 16 of the Casino Taxation Act:

(2) If the licensee neglects or refuses to pay the sum charged upon demand made, a principal inspector of taxes shall for non-payment thereof distrain upon the premises in respect of which the tax is charged, without any further authority for the purpose than a warrant under this section issued for the purpose by the Board.

(3) The sum included in the demand shall be deemed to be a debt by the licensee as judgment debtor owing to the board as judgment creditor and payable under a judgment of a High Court in the Federation, and for the purpose of levying distraint under the foregoing subsection, the chairman of the board or, in his absence, his deputy, shall have the powers of registrar and sheriff of such a court; but any seizure and sale by way of distress may be enforced under the following provisions of this section by a principal inspector of taxes acting under a warrant signed by the chairman of the board or his deputy.

(4) For the purpose of levying any such distraint, any inspector duly authorised by a warrant for that purpose, may break open in the daytime any premises, calling to his assistance any constable, and any such constable shall, when so required, aid and assist the inspector in the execution of the warrant and in levying the distress.

August 5, 2014
Why tax religious bodies?

Freedom prospers when religion is vibrant and the rule of law under God is acknowledged – John Adams.

Taxing religious bodies which was one of the subjects discussed at the National Confab in Abuja has brought several arguments to the fore. I don’t understand why the government should impose or think of imposing tax on religious bodies. As it is, religious bodies are exempted from paying tax. Rather, public servants, government officials and parastatals are subjected to paying tax.

Some have argued that religious bodies should be taxed, but one is compelled to ask if the tax collected from the citizens are not enough or they want to use that as a means of exploiting the citizens. Besides, I would suggest that religious bodies should not be taxed. The Chibok girls abduction saga is still there to be solved. Challenges of insurgency, poverty, power failure, corruption and electoral malpractices in the country are yet unfixed. Why then should they focus on taxing religious institutions?

I feel this taxation issue is just a means to exploit the masses because some of the members of these religious organisations do pay tax. So, there’s no justification why churches or mosques should be taxed. The delegates may say religious bodies are making money, but it shouldn’t be classified as all religious bodies. The money made by these religious bodies, especially true ones, is meant for the welfare of their members and to carry out projects. The fact that some of these religious bodies make money doesn’t mean they should be taxed. The money received as salary by ministers in the country alone is more than what they say religious bodies make.

Even if some religious leaders exude flamboyant lifestyles, with a general belief that they are living large while their members are suffering, government shouldn’t forget that these religious leaders also carry out certain projects that improve the lives of their followers. Churches and Mosques give out materials to their members. It was even through religious bodies that schools in the country evolved back in the 90’s. There is no religious leader that will want to see his or her member suffer, except for those who are fake.

If taxation is imposed on religious bodies it will lead to more harm and deceit in the country. The government should focus on terrorism and shouldn’t involve itself with this. If the tax is imposed, what about those religious institutions that are small with few denomination, will they also be taxed?

If some of the religious leaders are living well, it’s because God has blessed them, and it’s not the church members’ offering or tithes they spend that sustains them but donations, voluntary gifts and contributions from willing members.

The way God blesses religious leaders is not something one can tell its source because most of them are into full time ministry. If a census should be carried out on religious institutions, you will find out that the leaders majorly pay the highest amount.

The government shouldn’t impose this policy on religious bodies. They should think about the future of the country, after all these religious bodies pray for the betterment of the country. The religious bodies and its members should rise up to condemn such policies.

Inimfon, 400-Level Mass Comm., REDEEMER’S

July 31, 2014
Ondo CJ withdraws tax circular

The Ondo State Chief Judge, Justice Olasehinde Kumuyi, and the Nigerian Bar Association (NBA)have agreed on the need to stop the implementation of the tax circular.

This is coming two months after lawyers started boycotting courts over the circular.

The circular insisted on production of tax clearance as a compulsory pre-condition for bail of accused persons standing trial.

The decision was reached at the end of the meeting called by the CJ at Judges’ Recreation Centre, Alagbaka, Akure with leaders of the NBA in the state.

Members of the Bar also agreed to suspend the two months old boycott of Courts.

July 28, 2014
Infrastructure Bank 2013 profit before tax hits N875m

The Infrastructure Bank Plc, recorded a profit before tax (PBT) of N875 million in 2013 compared with N82 million achieved in 2012.

This is an increase of N793 million, according to the Chairman of the bank, Alhaji Lamis Dikko.

Speaking at the bank’s 3rd Annual General Meeting (AGM) in Lagos, Dikko said that the bank’s total expenses in 2013 stood at N757million as against the N586 million recorded in 2012.

He attributed the growth to the bank’s strength of transaction advisory offering; ‘one-off capital cost’ and well-managed operational cost.

According to him, the bank remained optimistic on the economic outlook, adding that all the indicators projected continuous growth trend of the past decade.

Dikko also said that Nigeria had continued to attract high level of foreign Direct Investment (FDI) in spite of the nation’s security challenges.

He was optimistic that the Federal Government’s reforms and investment in the energy, agriculture and manufacturing sector would lead to significant job creation in the country.

He also added that the key enabler for the growth was the provision of improved and increased infrastructure.

Dikko said that the mandate to act as an advisor and fund arranger to the Federal Government showcased the bank’s potential in serving as a partner of choice for both the public and private sectors.

Also speaking, the bank’s Managing Director, Mr. Adekunle Oyinloye, said its profit impacted positively in its current earnings per share of 54 kobo in 2013, compared with 20 kobo recorded in 2012.

Oyinloye said that a key highlight of the year under review was the increase momentum in the transaction advisory and fund arranging business that represented tangible evidence of the bank competitive advantages.

He also said that the continued demand for infrastructure assets nationwide and the need for the delivery though alternative financing method through its project opportunities, supports the belief that the current trend was sustainable.

“The micro economy environment remains stable and promising.”

July 19, 2014
Basis period for assessable profits
According to the Nigerian Tax Laws it is mandatory for companies deriving income from Nigeria to pay various forms of taxes. The laws equally provide for how the taxes are to be computed on the company’s profits and when they should be paid. The focus of this article is on how to determine the basis period for assessable profits to be subjected to tax.

Assessable Profit

The accounting profit arrived at in the trading, profit & loss account is not usually the same as “tax profit”. This is because in ascertaining the accounting profit some expenses which are not allowed for tax purposes may have been reported and some income included in the accounting profit are tax-free.

In simple terms, assessable profit is simply computed as adjusted profit less losses (unrelieved c/f) before taking into consideration capital allowances, balancing allowance and or balancing charge. This is also a profit in which education tax is treated at 2%. It should be noted that treatment of this profit depends on the tax type as companies income tax treatment differs from petroleum profit tax treatment.

Adjusted profit is computed as below:

Net Profit (as per account)                                              ****

Add:   disallowable expenses taxable income (not reported)

Less: allowable expenses (not reported) non-taxable income (reported)

Apportionment of Assessable Profit

Section 29 (6) allows for the apportionment and aggregation of profits in order to arrive at the profit of a year of assessment. Any apportionment shall be made in proportion to the number of months in the respective periods.

In practice, this is usually obtainable under the abnormal situations. i.e. under Commencement of new business, Change of date or cessation of business.

Meaning of Basis Period

Basis period is simply time within which an assessment is raised/computed on a taxpayer for the purpose of establishing the correct amount of tax liability in a particular period. Basis period can also be seen as the basis upon which tax liabilities would be computed. Every business has its accounting year end (accounting period) as it suits the company’s operations except for few industries in Nigeria where the permanent year end is determined by the applicable authority. e.g Banks . More so a company’s accounting date may not correspond with the government fiscal year; which is 1st January to 31st December. Based on the above, it can be said that for the sake of equity; which is one of the qualities of the Nigerian tax system, the Nigerian government through the TaxAuthorities provides for the basis upon which taxes would be computed on a common ground.

Types of Basis Period

A Careful study of the provisions in the Nigerian tax laws (CITA,PPTA,CGTA,PITA etc.) show that we basically have two (2) types of basis period applicable to every company liable to tax. They are:

• Preceding Year Basis

• Actual Year Basis

Preceding year Basis Period

Section 29 (1) of the Companies Income Tax Act, C21 LFN 2004 (as amended) provides that; ….the profit of any company for each year of assessment from such source of its profits (hereinafter referred to as the “assessable profits”) shall be the profits of the year immediately preceding the year of assessment from each such source.

This simply means that the profit to be subjected to tax in a particular year will not be that earned that same year but the profit of the immediate past year. Assessable Profits are computed on the amount of the profits of the year ended on that day in the year preceding the year of assessment.

Note that for companies, profit is being ascertained on an annual basis. This means that every basis period determined on preceding year basis must be up to 12 months ending on a company’s permanent year end.

Under normal circumstance, the basis period is the same as the accounting period. What differs are the “accounting year” and “tax year”

Example:

Determine the tax year and basis period for company that has just filed 2013 financial statement, having 30th September as its permanent year end. The company has been in operation for over five years.

Suggested Solution:

• Tax Year: 2014

• Basis Period: 1/10/2012 – 30/9/2013

Actual Year Basis Period

This simply means that the months in the basis period of a year of assessment shall be within the same year. However, unlike preceding year basis period, the year of account will coincide with the year of assessment.

Considering the earlier example, the year of assessment will not be 2014 but 2013 and the basis period will be 1/1/2013 – 31/12/2013.

Taxes that are assessed on actual year basis include: Petroleum Income Tax, Capital Gains Tax, Personal Income Tax etc.

Normal Basis Period

A basis period is considered to be normal if the following conditions are fulfilled:

• The number of months in the basis period must be exactly twelve (12) because year of assessment literally means twelve months

• The basis period must have commenced the day after the end of the previous one. There must be continuity

• There must be only one permanent year end.

Example:

Consider a company whose permanent year end is October 30 every year. What will be the basis period for assessable profits for 2012 to 2014 years of assessment?

Suggested Solution:

Tax Year                             Basis Period

2012                                     1/11/2010 – 30/10/2011

2013                                     1/11/2011 – 30/10/2012

2014                                     1/11/2012 – 30/10/2013

It is worthy of note that it is only a business in continuous operation (say over 3 years) and that has neither changed permanent year end nor cease operations that will have a normal basis period.

Abnormal Basis Period

Any basis period that does not fulfill the conditions stated under the normal basis period is said to be abnormal. An abnormal basis period can be obtained under the following circumstances:

• Commencement of a new business

• Change in the accounting date

• Cessation of a business

The above requires special treatments as adequately provided for in the relevant tax laws

Commencement of a New Business

Section 29 (3)(a-e) provides that;

The assessable profits of any company from any trade or business for the year of assessment in which it commenced to carry on trade or business (or in the case of a company other than a Nigerian Company, for the year of assessment in which it commenced to carry on the trade or business in Nigeria) and for two following years of assessment (which years are in this subsection respectively referred to as “the first year” “the second year” and “the third year” shall be ascertained in accordance with the following provisions:

(a) First Year: the assessable profits shall be the profits of that year(i.e. from date of commencement up to the end of the same year)

(b) Second Year: the amounts of the profits of one year (i.e. 12 months) from the date of commencement of the business.

(c) Third Year: Shall be computed in accordance with Section 29 (1) as earlier highlighted. This means the basis period will be on a preceding year basis except otherwise provided.

(d) For the third year, it may not be possible to obtain a realistic basis period as the period might begin in a month earlier than the month of commencement. This arises where the month of commencement is after the month chosen as the permanent year end. In such situation, the repetitive rule will be applied.

Example:

OWOGOKE Limited commenced business on 1st October, 2002 and makes up its account annually to 31st May. Its assessable profits were as follows:

N

Period ended 31st May, 2003                          240,000

Year ended 31st May, 2004                              516,000

OWOGOKE Ltd – Computation of Assess. Profits

YOA       Basis Period                      Assess Profit (N)

2002     1/10/02 – 31/12/02           (3/8 * 240,000)                                                                                                                    90,000

2003     1/10/02 – 30/9/03           (240,000 + 4/12*516,000)                                                                                                       412,000

2004        1/6/2002-31/12/3                                               ^^^^^

Noticeably, the basis period for 2004 YOA begins in a month earlier than the date of commencement. The general practice is to repeat the basis period for the second year.

According to the aforementioned section, a new business is entitled, on giving notice in writing within two years after the end of the second year to the Board to require that the assessable profits both for the second year and third year (but not for one or other only of those years) shall be the actual profits of the respective years of assessment (i.e. profits of 1st January to 31st December of the second and third years of assessment). This is same as actual year basis discussed earlier.

In other words, the taxpayer reserves the right to be assessed to tax in the second and third year on actual year basis instead of the rule highlighted under the commencement of business.

Naturally, the taxpayer will exercise this right only where it may result in a lower tax liability.

DORO-DAPO Limited commenced business on November 1, 1999 and decided to prepare its accounts to April 30 annually. Its adjusted profits were as follows:

Period ended 30th April, 2000                        420,000

Year ended 30th April, 2001                           480,000

Year ended 30th April, 2002                           600,000

Compute the assessable profits for the first 3 years of assessments and decide whether or not Doro-Dapo should exercise its right of election.

SuggestCed Solution

DORO-DAPO Limited

Computation of Assessable Profits

a. Original Assessment (without Election)

YOA       Basis Period                      Assess Profit(N)

1999 1/11/99 – 31/12/99             (2/6 * 420,000)                                                                                                                        140,000

2000   1/11/99 – 30/10/00                              (420,000 + 6/12*480,000)                                                                                                                     660,000

2001     1/11/99 – 30/10/00                           (Repeated) 660,000

1,320,000
1. Revised Assessment (on election)
NOTE: Only the assessable profits of the second and third year will change if the right of election is exercised.

2000   1/1/00 – 31/12/00    (4/6 *420,000 + 8/12*480,000)                                                                                                                            600,000

2001 1/11/99 – 30/10/00   (4/12 *480,000 + 8/12 * 600,000)                                                                                                                       560,000                                                                                                                 1,160,000

Decision

It is to the advantage of Doro-Dapo Ltd to exercise its right of election to be assessed on the profits of 2000 and 2001 years of assessment since this result in tax savings of N160,000 (1,320,000 – 1,160,000)

Summary of Assessable Profits

YOA                    Assessable Profits (N)

1999                     140,000

2000                     560,000

2001                     560,000

Note: Based on the requirement of the law, the right of election must be exercised on or before 31st December, 2002 (i.e. within two years after the end of the second year – 2000)

31st December, 2002 is 26 months from the date of commencement. Can we now infer, as against the requirement of the law,that the first set of returns can hold till 31st December, 2002?

Revocation of the Notice of Election

The law equally gives a taxpayer the opportunity to revoke his earlier request for an election by giving notice in writing to the FIRS within twelve months after the end of the third year of assessment.

Example

KILOBADE Limited commenced business on 1st March 2001. it makes up accounts annually to 31st August and its profits as agreed for tax purposes, were:

Period ended 31st August, 2001     300,000

Year ended 31st August, 2002         720,000

Year ended 31st August, 2003         900,000

Solution

KILOBADE Limited

Computation of Assessable Profits

Original Assessment (without Election)

YOA       Basis Period      Assess Profit(N)

2001 1/3/01 – 31/12/01                 (300,000 + 4/12 * 720,000)                                                                                                               540,000

2002   1/3/01 – 28/2/02 (300,000 + 6/12*720,000)                                                                                                                    660,000

2003     1/9/01 – 31/8/02               720,000

1,380,000

Revised Assessment (on election)

2002   1/1/02 – 31/12/02                 (8/12 *720,000 + 4/12*900,000)                                                                                                                          780,000

2003     1/1/03 – 31/12/03 (8/12 *900,000 + 4/12 * 960,000)                                                                                                                  920,000

1,700,000

Decision

The total assessable profits for the second and third YOA under commencement rule is N1,380,00 which is lower than N1,700,000 under election. Therefore, it is in the interest of KILOBADE Ltd not to exercise its right to avoid payment of higher tax.

However, if an application for election had already been made, the company should renounce it in writing before the expiration of 12 months from the end of the third year of assessment (i.e. on or before 31st December, 2004).

Summary of Assessable Profits

YOA                    Assessable Profits (N)

2001                     540,000

2002                     660,000

2003                        720,000
July 7, 2014
Tax implication of mergers and acquisitions

Tax implication of mergers and acquisitions

Merger is defined as ‘‘any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate’’. Simply put, a merger is a combination or integration of existing companies to form a single company.

Acquisition on the other hand, is known as take-over. It is the take-over of by one company of sufficient share in another company to give the acquiring company control over that other company.

Statutory requirement under Companies Income Tax Act (CITA)

The CITA in Section 29(12) Cap (21, LFN, 2004) provides that ‘‘no merger, take-over, transfer or restructuring of the trade or business carried on by a company shall take place without having obtained the Service’s direction under sub-section 9 of this section and clearance with any tax that may be due and payable under the Capital Gains Tax Act’’. The implication of this provision is that the approval of the Federal Inland Revenue Service is a condition for the completion of the process in a merger or acquisition bid. Therefore, no merger or acquisition bids would be fully consummated without the companies involved having obtained consent from the FIRS.

Procedure for obtaining the Service’s Approval

From the start, the merging companies are required to submit to the FIRS, copies of the scheme of merger and scheme of arrangement on the consolidation request for its study and proper evaluation in order to ensure that taxes which may result from the companies’ transactions are correctly assessed and collected. Herein lies the relevance of the Service’s powers under section 29(9) (i) to require either of the companies directly affected by any direction which is under the consideration of the Service to guarantee or give security to its satisfaction for payment in full of all tax due or to become due by the company which is selling or transferring such asset or business.

Tax issues in mergers and acquisitions

A merger may result in any of the following situations:

· Formation of a new company.

· Continuation of the consolidated business by one of the merging parties, in its name or under a new name.

· Cessation of business by the other merging parties.

In acquisition, there is only an acquiring company (ies) and the company being acquired.

Emergence of a new company

Rendition of annual returns

Where a new company emerges from a merger process, then, the new company is expected to file its returns, in line with the provisions of Section 55(3)(b) of CITA. The section provides that “every new company shall file with the Service, its audited accounts and returns within 18 months from the date of its incorporation or not later than six months after the end of its first accounting period as defined in section 29(3) of this Act, whichever is earlier’’.

It should however be understood that a mere change of name does not make an existing business entity a new company. Such companies will continue to be treated as old businesses as a on-going concern.

Basis of assessment

Commencement rule as provided under Section 29(3) will apply to the new company, except where any of the under-listed circumstances arise:

(I) Where the merging parties are connected parties, the Service may direct that commencement rule be set aside, in which case, the new company will file its returns as an on-going concern and its assessment will be determined on preceding year basis.

(II) Where the new business is a reconstituted company, taking over the trade or business formerly run by its foreign parent company.

Claim of allowances

Companies Income Tax Act (CITA) did not categorically address the value at which assets may be transferred for the purpose of capital allowances claims. However, International Accounting Standard 22 prescribes that in merger accounting, the assets, liabilities and reserves must be recorded at their carrying balances, implying that merger process does not permit the recording of assets at their fair value in the event of consolidation. The new company will therefore not be entitled to any investment allowance claim or initial allowance on the transferred assets; it will only be entitled to claim annual allowance on the Tax Written Down Values (TWDV) of the transferred assets.

Unabsorbed losses and unutilised capital allowances brought forward

The new company may also not be permitted to inherit the unabsorbed losses and capital allowances of the absorbed companies, except under the following circumstance:

(i) where a reconstituted company is carrying on the same business previously carried on by this company and it is proved that the losses have not been allowed against any assessable profits or income of that company for any such year; in that case the amount of unabsorbed losses shall be deemed to be a loss incurred by the re-constituted company in its trade or business during the year of assessment in which the business commenced.

Taxes and deductibility of related expenses

(i) Stamp Duties

Duty payment will arise on the share capital of the new company, subject to the provisions of Section 104 of the Stamp Duties Act, in relation to capital and duty relief.

(ii) Consolidated Expenses

Fees paid to statutory bodies such as SEC, NSE, CBN, Land Authorities etc, including professionals like accountants, stockbrokers, issuing houses, and solicitors are regarded as capital in nature and will therefore not be allowed as deductible expenses by virtue of Section 27(a) of CITA.

(iii) Taxation of consolidation fees:

Fees paid to professionals for services rendered in connection with consolidation will be subject to VAT and WHT at the rates of five per cent and 10 per cent.

4.3.1 Tax indemnification

Section 29(9)(i) of CITA provides that the Service may require the new company to guarantee or give security for payment in full, for any tax due or that may become due by any of the ceased companies.

4.3.2 Approval for Pension Scheme

The new company will need to obtain a Joint Tax Board (JTB) approval for its staff pension scheme.

Status of a surviving company in relation to taxation

It is a possibility that one of the merging companies survives and its old name or a new name to inherit the assets, liabilities, reserves and entire operations of the merging parties. Where this happens, the following points must be noted:

(i) The surviving company must file its returns in line with the provisions of section 55(3)(a) of CITA.

(ii) Commencement rules under section 29(3) of CITA will not apply to the surviving company, as it will be regarded as an existing company.

(iii) The surviving company will not be allowed to claim investment allowance on the assets which were transferred to it and will also not claim initial allowance on such assets.

(iv) The surviving company may, however, claim yearly allowance only on the tax Written down Values (TWDV) of the assets transferred to it.

(v) The surviving company may not inherit the unabsorbed losses and capital allowances of the merging companies, except it is proved that the new business is a reconstituted company.

(vi) All fees payable on merger bids or consolidation will be liable to VAT and WHT just like it is applicable on the emergence of a new company. Stamp duties will be paid on the increase in share capital and the company will have to obtain its own staff pension scheme approval from the JTB.

Ceased Businesses

The merger or consolidation exercise may also result in cessation of business for any of the merging parties. In this case, cessation rule as applicable under section 29(4) of CITA will apply to any of the merging companies which have now ceased business permanently, except if any of the following circumstances occur:

(i) Where the merging companies are connected. Here, the Service may direct, in line with its discretionary powers, under section 29(9) of CITA that the cessation rule may not apply.

(ii) Where a reconstituted company is formed to take over the trade or business formerly run by its foreign parent company. (See Section 29(10) of CITA.

Capital Gains Tax Shares or Cash Received

Section 32A of Capital Gains Tax Act (CGTA) Cap 121LFN 2004 provides that a person shall not be chargeable to tax under the Act, in respect of any gains arising from the 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 has lost its identity. However, where shareholders are either wholly or partly paid in cash for surrendering their shares in the ceased business, the gains arising from the cash payment will be subject to CGT.

Effect of taxations on consolidation acquiring/acquired companies

The tax implications of consolidation on an acquiring company or acquired companies are similar to those of mergers. Acquisition expenses are non-deductible while fees paid to professional bodies are equally subject to WHT and VAT.

June 2, 2014
Making tax ‘work’ for all

Not many do it willingly, but a lot of progress in modern economies depends on paying taxes. In this report, Joe Agbro Jr. writes on Nigeria’s tax evaders and how to balance the necessary act of taxation.

“All for one and one for all’ was the motto which the trio of the Guard of Musketeer lived by in the 19th century novel, The Three Musketeers,by Alexander Dumas. While the musketeers stretched those words to matters of life and death, their motto may also best describe the bedrock of taxation in human society. That taxis for everyone – to build schools, roads, hospitals, and all other things members of the general public stand to enjoy – are for a common good.

Sadly, many developing countries, Nigeria inclusive, have not benefitted from taxation.

Last month, Finance Minister and Co-ordinating Minister for the Economy, Dr.NgoziOkonjo-Iweala, citing a report conducted by McKinsey & Company, a tax auditing firm, revealed that only 35 per cent of Nigerians pay taxes. It also showed that only a quarter of the number of SMEs are in the tax system, and ’30 per cent of companies operating under the pioneer status incentives abuse their tax exempts.’

According to her, over 65 per cent of companies operating in the country did not file returns for the past two years. What the minister said is not particularly new.

Between evasion and avoidance

Compliance remains the greatest problem of tax collection in Nigeria. Every taxable business and individual is expected to file monthly returns to determine how much to pay as tax. Not all do. For some who do, there is a connivance with tax professionals or accountants to ‘cook’ up their books to lessen their tax burden. This is referred to as tax avoidance, which while it is ethically immoral, is legal. However, when it involves not filing returns and just pretending as if there is no obligation to pay taxes, this is known as tax evasion.

“Tax compliance problems in Nigeria are entrenched in the fabric of tax evasion and avoidance,” said Chief Mark Dike, the president of the Chartered Institute of Taxation of Nigeria (CITN), recently. “The consequence of this is that the main purpose of raising revenue, regulating consumer demand, boosting investment and savings, checking or halting economic depression, inflation and deflation, ensuring equitable distribution of income and wealth, ensuring appropriate allocation of national resources are almost always invariably weakened.”

He also expressed that it is not only corporate organisations that are guilty.

“Under the Personal Income Tax Act, individuals lay claim to reliefs that they should not,” Dike said. “There are today many eligible taxpayers who have not bothered themselves to register with the Federal Inland Revenue Service (FIRS) or the various states Internal Revenue Service. We have found out that many taxpayers who register do so as a hedge against withholding tax deduction.”

ActionAid, a non-government agency seeking to eliminate global poverty, estimates that developing countries lose about $138 billion annually to tax exemption.

“The amount could have been enough to put every primary school-aged child in school, meet all the health-related Millennium Development Goals, and leave enough money for the agriculture investment needed to end hunger,” ActionAid noted in its campaign.

According to the organisation, these companies involve in ‘treaty shopping’ – a legal but immoral system of shifting their profits – between different tax jurisdictions in different countries so as to pay the lowest tax rates, based on signed treaty agreements.

While figures of what Nigeria loses to tax evasion is not known, experts generally agree the sum involved is high. Financial Derivatives, a financial consulting firm, said last year that the country lost close to N85.2 billion through tax evasion in the automobile industry in four years. And following the rebasing of the Nigerian economy currently at $510 billion, the country’s tax-to-GDP ratio crashed from 20 per cent to 12 percent, a situation which Okonjo-Iweala described as ‘threatening’ to the economy. Comparatively, South Africa has 27 per cent tax to GDP ratio, while in Ghana, it is 15 per cent. The target for tax authorities in the country is how to increase the share of tax contribution to the GDP.

Plugging the loopholes

Recently, LedumMitee, the chairman of the Nigerian Extractive Industries Transparency Initiative (NEITI), hankered on the matter, threatening to expose tax defaulters in the sector. The move, which he said is based on a global EITI agreement, would make companies accountable, and will be in collaboration with the Corporate Affairs Commission (CAC). According to Mitee, “the revised EITI standards require, for instance, disclosure of production figure, disclosure of ownership of the licence-holders and disclosure of beneficiary ownership.”

Also, AlikoDangote, President of the Dangote Group, alleged at a recent FIRS workshop that the companies who were supposed to be paying 85 per cent of the Petroleum Profit Tax recovered their payments through the dubious means “of raising their project cost.” He also said the companies should be ‘named and shamed.’

Though FIRS has continued to make gains overall, the country is buckling under huge tax deficits. FIRS made N455bn in 2000 and N5.007 trillion in 2012. It projects to make N6.060 trillion in 2014.

Decrying the current corporate practice recently, the Country Director, ActionAid Nigeria, Dr Hussein Abdul, slammed multinationals in the oil and gas and telecommunications sectors and urged that Nigeria put in place a solid accounting policy to check fraudulent financial flows.

“Nigeria does not know how much crude it exports,” he said. “The information we get is based on what the multinationals tell us.”

Abdul also decried the various tax breaks and concessions, saying these were being manipulated by companies in order to avoid paying their fair tax or no tax at all.

“Tax is not even a good incentive to draw foreign investment. For instance, a company will come to Nigeria, and is given tax concessions and holiday, maybe five years. Then the company runs for five years, enjoys the holiday and after that period, the company gets sold to another body, who changes its name, reapply for holiday, gets it, it expires, sells it again.”

Such scenarios ensure the country does not collect any tax, whereas the business operates. Some of the reasons for this poor tax culture are loopholes in the tax laws, corruption, and inefficient enforcement. In many countries, taxes steep as income rises.

However, some countries are ‘soft’ on taxes allowing lower tax rate or no tax at all. Such countries known as tax havens are prime destinations for tax evaders. A 2012 report by James Henry, a former chief economist at consultants Mckinsey and Company, for the Tax Justice Network, estimated conservatively that $21 trillion is hidden in tax havens.

Companies take advantage of such tax havens’ low tax rates, secrecy and extensive treaty networks. In Mauritius, there is a corporation tax of 15%, but tax credits for global business companies mean an effective rate of 3%. And there is no capital gains tax and no withholding tax on dividends. In Seychelles, there is no tax on income or profits for international companies, no capital gains tax, and the government does not tax interest payments from abroad. In Dubai too, there is no tax on income or profits of companies registered there.

ActionAid had in the past accused Deloitte, a global consultancy firm of advising firms on how to reduce their tax by investing in Mauritius.

According to the report published in the Observer, a UK newspaper “the Deloitte document explains that, if the foreign company made its investment through a holding company in Mauritius, it could limit the withholding tax it would have to pay to just 8%, while capital gains tax would be reduced to zero.

“The document explains that Mauritius could tax the holding company’s profits at 15%, but that this does not happen in practice.”

Mauritius currently has 14 double taxation treaties in place with African countries and still negotiating with more has become attractive for investors. ActionAid argued that the terms of the treaties could be detrimental to economy of Africa.

A Deloitte spokeswoman said it was wrong to describe applying double tax treaties as tax avoidance: “The absence of such treaties could result in a reduction of investment, and less profit subject to normal business taxes in the countries concerned.”

And Mauritius’s vice prime minister Charles Xavier-Luc Duval says the country is not a tax haven. “There is no secrecy,” Duval said. “You can’t open a bank account here without giving your full details. We are happy to exchange tax information with all our partners.”

ActionAid had kicked against a recently signed Double Taxation Treaty signed between Nigeria and Mauritius because, according to its research, the costs involved in signing the treaty outweighed the benefits. It further advised ‘Nigeria not to ratify the treaty unless certain changes are made to retain Nigeria’s taxing rights as contained in the domestic tax legislation including the imposition of withholding tax on technical and management fees and other areas of the treaty that could undermine our tax revenue base.’

According to ActionAid, countries such as South Africa and Rwanda have modified clauses in their treaties with Mauritius.The organisation has also protested the involvement of Barclays Bank for facilitating transactions with companies using tax havens.

Lagos example

At a forum organised by Growth and Employment in States (GEMS3) to reconcile tax complaints of Lagosians with officials responsible with tax collections in local governments of the state, it showed that Lagos did not achieve success overnight. And it still had its shares of complaints, but it has shown that it was possible to increase internally generated revenues.

In 2006, Lagos began shoring up its internally generated revenue. Hence, from accruing N3.6bn monthly in 2006, the state currently generates in excess of N20bn monthly.

Much of the success can be attributed to Mr Babatunde Fowler, Executive Chairman of Lagos Internal Revenue Service (LIRS). According to Fowler, a former banker, the state achieved this feat because it sought synergy between the public and private sectors.

To do that, Fowler said LIRS employed and trained its staff on best practices. It also introduced information technology into tax collection, the use of e-TCC to block revenue leakage, encouraged direct bank lodgements in banks which generated automated revenue receipts, continuous enumeration of tax payers, and a self-assessment scheme whereby individuals could determine how much was required of them as tax.

With these measures in place, Lagos not only embraced the organised private sector in its tax drive, it also targeted the informal sector, including traders and artisans. These efforts resulted in Lagos being an exemplary state in terms of internally generated revenue in the country.

“Tax evasion is massive in Nigeria,” said Bola Shodipo, the special adviser on taxation and revenue to the Lagos State government. “But Lagos has become a role model for taxation in Nigeria. They can come and learn from us.”

Tax authorities across the country know there is need for urgent actions to boost tax revenues. At a forum organised by Medium Tax Office in Lagos last Monday tagged: ‘Tax Returns: Stakeholders’ Collaboration for Voluntary Tax Compliance and Taxpayers’ Rights and Obligations’, the acting Executive Chairman of the FIRS, Alhaji Kabir Mashi, represented by Peter Olayemi, Director, Medium Tax Department, FIRS, had warned: “It is no longer business as usual for individuals and companies who circumvent tax laws, henceforth culprits will face the full weight of the law.”

The FIRS boss also hinted at leveraging on technology before the end of the year in the collection of tax revenue across the country after a pilot phase in the Federal Capital Territory, Abuja.

It seems that following the success-story of Lagos, many states are now looking inwards how they get can spike up their IGR. Recently, it was reported that the Ondo State Board of Internal Revenue (OSBIR) hounded two higher educational institutions – Federal University of Technology, Akure (FUTA) and Adeyemi College of Education (ACE) – in the state for evading taxes to the tune of N2.454 billion.

These examples show a tax renaissance in the country. It is, however, still a bumpy ride because as Okonjo-Iweala said, it is suicidal for a country’s tax-to-GDP ratio to be less than 15 per cent. However, that can only be achievable by reducing tax evasion.

June 1, 2014
Lagos Councils advised on revenue generation

Local Government Council and Local Council Development Association in Lagos State have been urged to think outside the box to create more sources of generating fund for their councils.

Lagos Manager of Growth and Employment in State (GEMS3), Mrs Yemisi Joel-Osebor gave the advice at a tax complaint workshop organised for Revenue Chairmen and Council Managers of local government in Lagos State by Office of The Special Adviser to the Governor on Taxation and Revenue in partnership with Ministry of Local Government and Chieftaincy Affairs, Lagos.

According to her, Councils should not fix their means of revenue on a particular source of income ” but should find other ways of generating revenue to fast-track developmental processes for the council.”

Explaining why the workshop was specifically for Revenue Chairmen and Council Manager of local government, Joel-Osebor revealed that the councils get complaints on personal income tax, land use, and other local government taxes.

Speakers with experience in tax matters from the Lagos State government and Nigerian Employer Consultative Association (NECA) – a coalition of all employer associations in Nigeria for both multinational and small businesses in Nigeria – also addressed the participants.

“The reason why we brought them is to share with Revenue Chairmen and Council Manager (the) complaints they been receiving from their members who are tax payers that they get harass often, charged unlawfully and all sorts,” Joel-Osebor said.

“NECA have been keeping all these records and it will be good to come and share them from those people that are accused of.”

On how they should get more revenue for the council, Joel-Osebor said that they should create an enabling business environment, let tax payers know what to pay and how to pay, they should not charge the people unlawfully.

She added that GEMS 3 has given councils the exact copy of the tax they must charge which was signed by the governor.

” It is important to know what to charge and what not to charge,” she noted.

Speaking on the same vein, a retired director in the Ministry of Local Government, Fatai Oluwole, attributed corruption as the major impediment against development in local government administration.

Oluwole said the logal government should engage the use of consultants and deploy information technology to collect revenue to be able to curb corruption as well as setting up a complaints department.

May 29, 2014
Withholding Tax (WHT) administration
Withholding Tax (WHT) is an advance payment of income tax. In principle, it is a payment for the ultimate income tax liability of the taxpayer or company. It is not a separate tax and does not confer an exemption from the filing of yearly tax returns by the company which suffered WHT. The tax is 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 (VAT) Act.

Tax coverage and income subject to WHT

It seeks to collect taxes that may have been lost through evasion and/or avoidance. It 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 not relevant for 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 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 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 contracts and arrangements, other than 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 to achieve efficiency as well as minimise the cost of doing business.

The aim of WHT is not to compound the problems of producers, manufacturers and those engaged in any activity, 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. 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 direct 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 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 the agent, C, 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 maufacturer 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 the commission earned by the distributors/dealers will be subjected to WHT.

Agency transactions and arrangements

Agency arrangement implies a contract between a principal and agent. The reward for services 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 fie per cent WHT, where any of the conditions in Section 26(1) (b) of CITA holds.

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 WHT

The payer of WHT for any activity under this tax 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 System (PAYE).

Who is taxable?

• All persons, companies etc. who’s incomes are liable to income tax, are subject to Withholding Tax.

• However, exempt entities, such as 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.

WHT 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 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 75 per cent of the generally applicable WHT rate. 7.5 per cent. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan and Romania.

Permanent Establishment (PE) principle under Nigeria’s 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 PE

• The rules construe a Permanent Establishment where:

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

• The company operate 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 based on the above-listed activities.

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 WHT

Sections of CITA and PITA that provide 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 of 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 WHT 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 & 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.
May 26, 2014