The FIRS at a stakeholder forum today expressed concern that nonresident companies do not file full tax returns as required by law to include audited financial statements, tax and capital allowances computation. These are required in addition to a duly completed self-assessment form to be attested to by a director or secretary of the company and evidence of full or part payment of the tax due.
Historically, the FIRS has accepted a deemed profit tax computation and a statement of turnover derived from Nigeria as sufficient for tax returns purposes by nonresident companies. However, effective immediately, the position of the FIRS is that any tax returns that do not meet the full requirements of the law will be considered as invalid and unacceptable attracting penalties accordingly.
Failure to file returns within 6 months of the end of an accounting year attracts a fine of NGN 25,000 (circa USD 156) for the first month and NGN 5,000 (circa USD 31) for each subsequent month. In addition, the responsible personnel may on conviction be fined up to NGN 100,000 (USD 625) and/or a jail term of up to 2 years. Every company is required to designate a representative who is knowledgeable in tax matters to answer every query relating to the company's tax matters.
This new position of the FIRS, which is coming as a result of transfer pricing implementation, is meant to provide the FIRS with useful information to ensure full tax compliance and address potential transfer pricing issues. This however raises a number of questions:
- Whether it will be more efficient to request for the additional information on a case by case basis during desk review or tax audits as the cost may outweigh the benefits in many cases
- Should there not be sufficient advance notice to allow a change over given that the FIRS had accepted this established practice to date? In fact, an attempt to file tax returns based on actual profits in the past was resisted by the FIRS.
- Does this mean that going forward tax should be paid on actual profit or still on deemed profit?
- How will the FIRS verify costs relating to a Nigerian PE including head office charges and deal with capital allowances on assets not wholly attributable to the PE?
- Would it be sufficient to provide the nonresident company's financial statements or audited accounts of the PE? What if the foreign accounts are in a different language, would there be an extension of time to allow for a translation?
- Should there be a threshold where turnover information could be considered adequate (say based on amount and/or where the duration of a project is less than one year)?
We are in discussion with the FIRS to get clarifications on the various issues arising from this new directive and I will keep you informed accordingly.