It has been a busy time for Nigeria’s Federal Inland Revenue Service (FIRS); not necessarily because of the increase in its 2021 Value Added Tax (VAT) collections (for the first time, it grossed +N1trillion in VAT collections in the first half of a year), more because of the many fights it’s embroiled in. One major fight is the bid by some States, led by Rivers and Lagos States, to take control of the collection and appropriation of VAT within their territories. Armed with the August 9, 2021 decision of Nigeria’s Federal High Court (FHC) sitting at Port Harcourt in Attorney General for Rivers State v. FIRS & Another, the States claim to their VAT revenue is that the Federal VAT Act 1993 (as amended) is unconstitutional. It would appear that Rivers State enacted its VAT Law No. 4 of 2021 on August 19, 2021 on the strength of the decision while Lagos State has promised that its VAT Law is in the offing. Earlier on December 11, 2020, same FHC sitting at Port Harcourt in Emmanuel Ukala v. FIRS & Another had held that the FIRS had no authority or jurisdiction to audit or investigate the Plaintiffs for VAT among other Federal taxes and that the appropriate tax authority is the Rivers State Board of Internal Revenue. Yet earlier, same FHC, this time, sitting in Lagos State had in October 2019, in Registered Trustees of Hotel Owners and Managers Association of Lagos v. Attorney General of the Federation & Another declared the charging provisions of the VAT Act (specifically Sections 1,2,4,5 and 12 thereof) unconstitutional.
Read MoreFirst Thoughts: To Give or Not to give unto Caesar
Sometime last week, I came across a meme on social media. It was basically a screenshot of a WhatsApp conversation where the first person said “Hello, my name is Caesar” and the response of the other person was “Caesar, abeg wetin be your own no dey my hand o!” If you’re a student of the Bible or did some CRK at some point in school, you would remember the part where the Pharisees in a bid to test Jesus Christ asked him if it was right to pay taxes unto Caesar. Jesus responded with the line “Give unto Caesar what is Caesar’s and unto God what is God’s” and that is how that powerful quote came about.
The concept of federalism in Nigeria has been one interesting subject over the years and myriads of conversations have been birthed from it. The clamour for restructuring over the years now is an offshoot of the challenges with the system of federalism practiced in Nigeria. The recent ruling in Rivers State’s E.C Ukala v FIRS case shook the Nigerian table tremendously and until now, the reactions have continued to pour in from all quarters with both kudos and knocks alike.
In a nutshell, Value Added Tax (VAT) according to the VAT Act and subsequent amendments, and even portions of the Finance Act, 2019 have been stipulated to be remitted to the Federal Inland Revenue Service (FIRS) and in turn, all VAT collections from all the states in Nigeria are shared amongst the 36 states and the Federal Capital Territory (FCT). For me, this is a fundamental flaw. The sharing formula has not exactly helped matters and we find out that this is major disincentive for hardworking states, knowing fully well that the wealth they work for would be distributed to some states who do not need to even move a finger. Ironically, the value added taxes collected on alcoholic beverages are also redistributed and some states in Nigeria practicing Sharia Law and banning the sale and consumption of these beverages within their jurisdiction still benefit from this redistribution.
The landmark judgement was music to my ears and while we watch patiently as the relevant consultations continue and most likely a major appeal from the FIRS to the ruling, I believe more Nigerian states would be encouraged to begin to fight for what they believe is rightfully theirs. Hopefully this serves a wakeup call to all and sundry that there is no food for lazy man. Every state should strive for its own autonomy, improve its internally generated revenue (IGR) earning capacities and not continue to depend largely on the federal allocations (FAAC). It is only then that we can achieve the equitable distribution of wealth we all clamour for. The burden on the centre needs to be relieved before things fall apart and the centre can no longer hold.
In this Issue, we discuss:
- Capital gains: What you need to know
- E.C Ukala v FIRS; The Rivers State VAT Ruling: Implications on Businesses.
- 7 things to know about Withholding tax (“WHT”) on Interest Expense
- Tax Audit and Tax liability: what you should know
- The Central Bank of Nigeria (CBN) says the country’s inflation rate may drop to 13 percent this year and single digit by 2022. Hassan Mahmud, Director of Monetary Policy Department, CBN, said this on Friday in Lagos at the virtual mid-year Economic Review and Outlook 2021, organised by the Chartered Institute of Bankers of Nigeria (CIBN)’s Centre for Financial Studies, in collaboration with B. Adedipe Associates. Read more HERE.
- The Federal Inland Revenue Service (FIRS) says its revenue projections for the year 2022 financial year is N10.1 trillion. This was disclosed by its Chairman, Muhammad Nami while appearing before the House of Representatives Committee on Finance on Wednesday, in Abuja, during a public hearing by the committee on the 2022-2024 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP). Read more HERE.
- Nigeria will receive $3.35 billion as its share of the International Monetary Fund (IMF) $650bn Special Drawing Rights (SDRs) to help boost the liquidity of member countries. Kristalina Georgieva, managing director of the IMF, announced the deployment in a statement on Monday. SDR is an international reserve asset created by the United Nations specialised agency to supplement its member countries’ official reserves. Read more HERE.
- The Bankers’ committee announced plans to begin the sale of foreign exchange to customers through the platform of the Nigerian Inter-bank Settlement System Plc (NIBSS). The committee is a forum of chief executives of Nigerian banks and the directors of the different departments of the Central Bank of Nigeria (CBN), with the CBN governor as chairman. Read More HERE
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Till Next Time
GB (g.sile@taxaide.com.ng)
When it comes to the obligation to deduct and remit WHT to the relevant tax authority as it relates to interest expense on loans, there seem to be some sort of confusion or negligence. As a way of keeping our audience informed, we have itemized below 8 points to note as it relates to the deductibility of WHT on interest expense in Nigeria:
Read MoreThe tax on capital gains directly affects investment decisions, the mobility and flow of risk capital… the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy”. John F. Kennedy
Capital Gains Tax (CGT) is a tax on the profit obtained from disposal or exchange of certain kinds of assets. In Nigeria, Capital Gains Tax is charged at a flat rate of 10% of chargeable gains. It is governed by Capital Gains Tax Act, Cap CI LFN 2004 (as amended). All chargeable assets are subject to Capital Gains Tax when disposed at a gain, except those specifically exempted by the Act. This includes disposal on decorations awarded for valour and gallant conduct, life insurance policy, Nigerian government securities, stock and shares, etc.
Read MoreWelcome to another Tax Thursday!
If you have been following our publications, today’s topic is something you are already familiar with. However, if you are a new reader, you can check up on our previous posts, link will be attached at the end of this write-up. On today’s edition, we will be talking about tax audit and tax liability.
What is Tax Audit?
Read MoreFirst Thoughts: Between Self Determination and Freedom of Choice
As much as I do not particularly like to get political or join issues with the current realities on the nation’s administrative and political landscape, I have to admit I have been quite fascinated by the occurrences of the last few weeks. Two public figures have been at the center of the storm and interestingly, they come from two major parts of the country.
Read MoreThe meaning of tax compliance in its most basic form is generally defined as the degree to which taxpayers comply with the tax laws.
There is the question whether ‘compliance’ refers to deliberate or obligatory conduct. In the event that taxpayers ‘agree’ simply because of critical dangers or provocation or both, this would not give off an impression of being a proper compliance regardless of whether 100% of the tax were raised in accordance with the ‘tax gap’ idea of noncompliance. All things being equal, it very well may be contended that effective tax administration expects taxpayers to comply willingly, without the requirement for enquiries, investigations, or the danger of utilization of legal or administrative sanctions. A more suitable definition of tax compliance might therefore be the taxpayers’ ability and willingness to comply with tax laws which are determined by ethics, legal environment and other situational factors at a particular time and place.
Read MoreTHE FIRS
The Federal Inland Revenue Service (FIRS) is an establishment of the Federal Government of Nigeria, saddled with the responsibility to administer taxes and collect the taxes due from all registered companies (either domiciled in Nigeria or offshore) that generate revenue from Nigeria. That said, all registered companies are obliged to file all relevant tax returns and remit all taxes (Corporate Income Taxes and Transactional Taxes) to the Federal Government of Nigeria through the FIRS.
Read MoreThe initiative by the FIRS to ensure Taxpayers file their annual returns on FIRS’ TaxPro-Max barely a month to the deadline for CIT filing, which was due on June 30, 2021, leaves a bittersweet taste on the lips of taxpayers despite having the intention to provide taxpayers with a seamless return filing and tax remittance process. The TaxPro-Max website was designed with the sole purpose of tax filings (value added tax, withholding tax, withholding vat and companies’ income tax), remittances, and a database for evidencing Taxpayers’ Withholding Tax (WHT) credit position
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Read More
The State Internal Revenue Service (SIRS) is an establishment of the relevant State Government across Nigeria (including FCT) which is saddled with the responsibility of collecting income and employment taxes as well as enforcing tax laws at the state levels. All employers of labour are obliged to deduct, remit and file Personal Income Taxes (PAYE) in the case of employment taxes and also file transactional and consumption taxes such as Withholding tax (WHT) and Hotel Occupancy and Restaurant Consumption (HORC) to the Government through the SIRS. The due date for remittances of PAYE is the 10th of every month following the month of deduction. While the due date for filing of Annual Tax Returns(PAYE) is January 31st of every year.
IRS Tax Audit
- What is SIRS Tax Audit?
1.1 State Internal Revenue Service (SIRS) tax audit is a review or an examination of a taxpayer’s records to ensure information reported by the Taxpayers are in compliance with relevant tax laws and provisions as well as verifying income tax returns filed with the SIRS for the assessment year.
2. Why SIRS Tax Audit?
2.1 To verify if the correct taxes have been deducted from individuals in paid employment by their employers and have been remitted to the State Government where they reside.
2.2 To ascertain those self-employed individuals, partners in partnerships and executive directors of limited liability companies have remitted taxes due from their taxable earnings to the relevant state tax authority.
2.3 To ensure that all expatriate employees’ resident in individual states have paid their taxes to the State Government (If applicable);
2.4 To verify if the employers of labour and, the registrars of companies have complied with the Withholding Tax provisions under the relevant laws and regulations.
3. Types of Assessments.
3.1 Original Assessment: The first or main assessment of a particular year of assessment is called the original/Initial assessment. Where a taxpayer has filed its returns, the individual state tax authority (SIRS) may make an assessment based on the profits declared by the tax payer if the returns are unsatisfactory. Also, the SIRS may raise a best of judgement assessment where no returns have been delivered or where they have been rejected.
3.2 Revised/Amended Assessment: This can be issued as a replacement of the original assessment. Where a compromise is reached between the taxpayer and State Tax Authority on the current amount of tax payable, the assessment will be amended accordingly, and a notice of amended assessment will be served on the taxpayer. Where an objection has been made by the taxpayer and the tax authority fails to agree on tax payable, the company will be given a notice of refusal to amend the assessment.
3.3 Final and Conclusive Assessment: An assessment becomes final and conclusive on the following grounds:
(a). When a taxpayer fails to appeal to the disputed assessment within 30 days of service of notice of assessment;
(b). When a taxpayer fails to appeal to the Tax Appeal Tribunal (TAT) within 30 days of receipt of refusal to amend the assessment from the tax authority;
(c ). When a tax payer does not file notice of appeal within 30 days of receipt of the judgement of the Tax Appeal Tribunal
(d). When a tax payer does not get a favorable judgment from the court of higher jurisdiction
4. Objection Process
4.1 Within 30 days, objections to disputed assessments must be made from the date of service of notice of assessment. The objection must be based on the followings:
4.1.1 The assessment is not based on the taxpayer’s returns but on the tax authority’s best of judgement;
4.1.2The assessment is considered excessive (higher than expectation) by the taxpayer.
5. Factors that determine SIRS Tax Audit
5.1 The home: Where a person physically resides and maintains a family. In this case, the individual is deemed to enjoy some economic and infrastructural benefits like water, electricity, roads, hospitals, sanitation etc. Payment of tax in this case is therefore seen as a compensation for the use of these facilities;
5.2 The concept of the relevant day: The relevant day for the determination of residence shows exactly when the jurisdiction of the relevant tax authority becomes established during the year. In this case, 1st January is the relevant day. That is why workers fill the personal emolument forms as at 1st January of every year. However, where the person changes his employment mid-year or sometimes within the year, then 1st January no longer exist as the relevant day but the new date when the person takes up the employment. In this case, for the remaining period within the year, then new place of residence (employment) assumes jurisdiction with respect to PAYE;
5.3 Place of Performance of Service:
Where the task of the employment are wholly or partially carried on in Nigeria as at 1st day of January, then such employee is deemed to be resident in Nigeria and the tax must be paid to the respective State tax authority of residence.
6. The documents submitted for a state tax audit include:
(For a PAYE Audit)
- Employee’s Payroll (Expatriate (if applicable), and Nationals);
- Copy of Employer’s Annual Declaration Form (Form H1) filed for the years.
- Audited Financial Statements;
- Breakdown of staff cost per Audited Financial Statement
- Schedule of Salary Payment Instruction to bank
- Sample of staff employment letters
- Sample of Staff Pay slips
- Evidence of tax paid for the year (PAYE and WHT)
- Schedule and evidence of employee’s pension remittance
- Schedule and evidence of employee’s NHF remittance
- Schedule and evidence of employee’s Life Assurance (RSA Statement preferably);
- Schedule of Benefit-in-kinds/quarterly bonuses/allowances paid to staff
- Contract Agreements with Vendors/Suppliers/Contractors
- Breakdown of Operating Expenses (OPEX);
- Payment Vouchers, third party invoices and receipts.
- Schedules of WHT (Monthly)
(For an Expatriate Audit)
- Contract/Terms of Employment
- Expatriates’ Resident Rent Agreements
- Company’s Expatriate Quota Grant/Permit
- Registration/Renewal of Combined Expatriates Residence Permit & Alien Card (CERPAC)
- Monthly Expatriates Returns to Immigration
- Evidence of Salary Payment in Nigeria and Outside (Home Country)
All the above-mentioned documents are the most salient information taxpayers will provide to the respective State Tax Authority during the course of the audit.
For more enquiries, please contact: Angela Apeh (a.apeh@localhost, +234 902 206 6961), Adekunle Adekojo (a.adekojo@localhost, +234 70 618 2513), Deborah Balogun (d.balogun@localhost, +234 903 206 9093) or Ayodeji Mustapha (a.mustapha@localhost, +234 808 885 3534),
