Tag: Tax

The government has over the years put in place different and overlapping incentive schemes to attract both local and foreign investment. Tax exemption is regarded as an industrial investment device; developing countries, such as 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 firm that is 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, whichever 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 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 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 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

•Last year of the relief period.

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

•At expiration of the pioneer period, it submitted Accounts for the years ended December 31, 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

For the development and growth of any society, the provision of basic infrastructure is necessary. This explains why government shows great concern on how funds can be made available to achieve their set goals for the society. Government needs funds to be able to execute its social obligations to the public. These social obligations include but are not limited to the provision of infrastructure and social services. Meeting the needs of the society calls for huge funds which an individual or community could not contribute alone. One of the main methods through which funds are acquired for the government is through taxation. Citizens are expected to discharge their civic responsibility by paying their taxes to contribute to the development and administration of the society at large.

Tax evasion and avoidance remains the greatest problems plaguing tax administration in Nigeria. Apart from salaried employees, most citizens in Nigeria pay inadequate taxes or no taxes at all and this has led to a substantial loss of government revenue. The reasons for such behaviour could be attributed to several factors; the insufficiencies and complexities of tax legislation coupled with taxpayers taking advantage of loopholes in the tax law, high rates of taxation and a lack of sense of civic responsibility amongst the taxpayers.

Tax evasion and avoidance have been a menace which seem to have defied solution had bedevilled the Nigerian tax system right from colonial times. While some have blamed the situation on the tax authorities for not living up to expectation with regards to tax administration, others attribute it to the unpatriotic attitude of the taxpayers.

This disturbing aversion to taxation has some historical antecedents. Traditionally, there has always been a hostile response to the payment of tax by the people who viewed tax collectors as a nuisance to the society. And the few that paid tax, did so with the greatest reluctance. Even in the Holy Bible, instances abound where the Jews treated the tax collectors with disdain and contempt.

This negative attitude continues in modern times and with taxpayers perfecting various methods of frustrating the tax authorities. To say the least, this negative attitude to taxation is unpatriotic in view of the well recognised role which taxation plays in the economy. In fact, it is undeniable today that every government depends to a large extent on taxation not only for its socio-economic development but also as a means of ameliorating the existing inequalities of wealth in the society.

Definition of tax evasion and avoidance

Tax evasion as defined by the Canadian Department of National Revenue is “the omission or commission of an act knowingly with intent to deceive so that the tax reported by the taxpayer is less than the tax payable under the law, or a conspiracy to commit such an offence. This may be accomplished by the deliberate omission of revenue, fraudulent claiming of expenses or allowances, and the deliberate misrepresentation, concealment or withholding of material facts.”

Tax practitioners have described tax avoidance as a situation where the taxpayer arranges his financial affairs in a way that would make him pay the least possible amount of tax without infringing the legal rules. It is a term used to denote those various devices which have been adopted with the aim of saving tax and thus sheltering the taxpayers’ income from greater liability which would have been otherwise incurred.

Tax evasion is the wilful and deliberate violation of the law in order to escape payment of tax which is imposed by law of the tax jurisdiction, while tax avoidance is the active means by which the taxpayer seeks to reduce or remove altogether his liability to tax without actually breaking the law.

While the law regards tax avoidance as a legitimate game, tax evasion is seen as immoral and illegal.

These ‘twin devils’ have created a great gulf between actual and potential revenue. The government has perennially complained of the widespread incidence of tax avoidance and evasion in the country as companies and other taxable persons employ various tax avoidance devices to escape or minimise their taxes or deliberately employ fraudulent ways and means of evading tax altogether, sometimes with the active connivance of tax officials.

Tax evasion schemes

The problem of evasion is much more glaring under the direct assessment method under which the self-employed are taxed than with the indirect assessment method under which employees are taxed. It is believed that the self-employed pay less than 10 per cent of their personal income tax to the government yearly, while employees pay the remaining 90 per cent.

Even civil servants and the other salaried workers are equally guilty of this nefarious practice in the manner in which they abuse the personal allowances and relief statutorily provided by the law. Thus, almost every potential Nigerian civil servant, in their claim for personal allowances and reliefs, would claim falsely that he is married with four children.

Tax evasion has continued to remain an endemic problem in this country. Tax evasion “… has become so widespread that there now exists a cash economy of widespread proportion which the tax man has no control”.

Tax evasion may be perpetrated in several ways, some of which comprise the following:

i. False claims for children, wife, capital allowances, dependent relatives, life assurance premiums etc;

ii. Understating or false declaration of income receipt from trade, business, professional, vocation or employment;

iii. Omission to state gross amount of dividends, rents etc. received in Nigeria from outside sources.

iv. False claims of contribution to a pension scheme.

v. Reduction of tax liabilities through fraudulent tax returns.

vi.Giving incorrect information in relation to any matter or thing suffering the liability to tax of any taxable person.

Types of tax evasion

Customs duties

A typical area of tax evasion in Nigeria is the attempt to evade customs duties. Typically importers try to evade customs duties by either under–invoicing or changing the product description to attract lower rates of duty. A lot of goods are brought into the country through unauthorised routes. This is intended to evade the payment of customs duties.

Personal Income Tax:

Unscrupulous employers may try to evade paying employment taxes. Most often this is done by intentionally failing to remit to the tax authorities the employment taxes it collected from its employees. After a certain amount of time, the employer will then dissolve the company or claim bankruptcy, leaving the employment taxes unpaid. Other methods are paying the employees in cash; filing false payroll tax returns, or failing to file payroll tax returns.

VAT Evasion

One of the simplest ways to evade VAT in Nigeria is to inflate the claims to deduct VAT paid at earlier stages or outright fabrication of fake invoices for purchases never made.

Curbing tax evasion

The federal and various states governments have commendably deployed several measures aimed at curtailing or minimising tax evasion in Nigeria. Most of these measures are contained in various legislation empowering the government department, ministries, agencies or any commercial bank with whom any company has any dealing with respect to any kind of transaction or business to demand from such a person a tax clearance certificate of three years immediately preceding the current year of assessment. In a similar manner, the government introduction of provisional tax within 30 days by corporate entities or the declaration of interim dividends constitute a commendable anti-evasion endeavour. In some states, similar anti-evasion measures have been adopted.

In other instances, tax evasion measures take the form of legislation which compels performing musicians to pay tax to the government before being allowed to play. Stiff penalties were imposed for failure to comply with such directives.

Our tax laws are replete with punitive momentary measures as well as criminal sanctions aimed at solving this problem. One of such many provisions is section 66 of the Companies Income Tax Act which conferred on the Federal Inland Revenue Service (FIRS) the power to seize and sell defaulting taxpayers’ goods, chattels as well as their premises in extreme cases in order to recover the amount of tax owned by such taxpayers. Others are found in the FIRS ACT of 2007 which stipulates the following offences and penalties as follows:

i. Section 40 – FAILURE TO DEDUCT OR REMIT TAX

The penalty on conviction is pay tax withheld or not remitted. In addition to a penalty of 10 per cent of the tax withheld or not remitted per annum plus interest at the prevailing CBN rate and imprisonment for a period not exceeding three years.

ii. SECTION 41 – OBSTRUCTION, HINDERING, MOLESTING OR ASSAULTING AUTHORISED PERSON

Penalty – N200,000 or three years imprisonment or both.

iii. FALSE DECLARATION

Penalty as in section 41.

iv. SECTION 43 – COUNTERFEITING DOCUMENTS, FALSIFICATION, ALTERATION.

Penalty as in section 41.

The FIRS, the foremost government agency empowered to collect taxes on behalf of the government, has risen up to the challenge by introducing several measures to help minimise tax evasion. Prominent among these are:

The introduction of TIN

The Tax Identification Number (TIN) is a unique sequential fourteen digit number generated electronically as part of the registration process and assigned to a taxpayer, company, enterprise or individual for identification. This number eases tracking of taxpayers and access to their tax history and records. This is done in collaboration with the state Boards of Internal Revenue to enhance exchange of information. This has led to the discovery of fake tax clearance certificates and other ploys to evade tax by taxpayers.

The Personal Income Tax Act (PITA) Amended 2011

The thrust of the amendment is aimed at reducing the tax burden of taxpayers in order to increase their disposable income, especially low income earners. It is also aimed at shifting the tax focus from direct to indirect tax and ensuring equitable income redistribution. This amendment simplifies tax computation to encourage voluntary compliance thereby widening the tax base of revenue authorities. Consequently this will result in more revenue for the government to provide critical infrastructure and basic amenities to its citizens.

The Integrated Tax Administration System

This is geared towards simplification of processes and systems for ease of use by the taxpayers. It will engender the adoption of best practices in FIRS in the areas of business process, taxpayer identification and the automation of core tax processes with a comprehensive taxpayer database as an enabler. It will enhance and simplify the administration of taxation, provide requisite support to critical tax administration functions such as returns and payment processing, revenue and taxpayer accounting, audit and investigation, tax policy and research forecasting etc, in a manner that would otherwise be difficult or tedious in a manual system.

Presumptive Tax

Presumptive taxation is a form of tax regime fashioned out to bring taxpayers operating in the informal sector into the tax net. It is predicated on a taxpayer’s presumed, not actual income, which may not be easy to determine because records are not. This method of taxation is thought to be effective in reducing tax avoidance as well as equalising the distribution of the tax burden.

FIRS believes that the implementation of a workable presumptive tax regime will engender easy access to the large pool of taxpayers in the informal sector and bring them into the tax system. This will enable the government not only to grow the tax base across the three tiers of government, but more importantly, improve tax collection from non-oil tax revenue. If this is done successfully, it will be contribute to the overall development of the tax system and the economy.

The government has also tightened the laws on tax evasion and severe punishment for tax officials that collude with individuals and organisations to fleece the treasury. Greater efforts should be made by the various governments to spread the tax burden beyond the few captured by the Pay-As-You-Earn system and ensure that all taxable adults are captured in the Personal Income Tax regime. The waivers on Company Income Tax should be streamlined to plug the leakages and their rampant abuse.

Furthermore, it is recommended that tax officials should be constantly trained and re-trained on the job, a deliberate and a more aggressive public enlightenment campaign embarked upon by government, t FIRS and other state revenue boards.

• Government should ensure that taxation is a fiscal policy instrument and not just as an instrument of revenue generation. Besides, tax rates reflect economic realities.

• Government should strive to boost the economy and reduce the level of poverty among its citizens because where the majority of the people are poor, tax evasion becomes inevitable. Government should systematically develop the social and infrastructural sectors to enable the people, especially the self-employed, increase their capacity in the area of production. Also, a welfare programme should be instituted particularly for the vulnerable (such as young school leavers and the aged) so as to mitigate the burden of those working.

• Members of religious bodies should encourage their members to pay tax to enable the government to bring about developments to the people.

It has become self-evident that the problem of tax avoidance and evasion is hydra-headed. And that though the problem is not peculiar to the tax system, its impact here appears more drastic. Thus, there is an urgent need to improve our tax administration and maximise tax revenue necessary for developments. This is where a crop of honest and capable tax administration officials is of utmost relevance. Though it is quite appreciated that there are penalties and sanctioning provisions, they are far from being adequate and effective.

Furthermore, tax is indispensable in the running of any government, military or civilian, democracy or autocracy. Admittedly, government is the biggest employer r in developing economies. Unarguably, it is the higher spender, therefore it needs money to provide essential services for its citizens.

Tax evasion is unpatriotic economic sabotage. Lamentably, this economic epidemic continues to spread from one person to another, community to community, state to state, and sector to sector unabated, hence the need for all hands to be on deck in the sustained fight against tax evasion.