The uncertainty regarding the commencement date of the new pension law signed by President Goodluck Jonathan on 1 July 2014 has now been laid to rest with the gazetting of the law. Based on the gazetted copy dated 2 July 2014 (see below), the commencement date of the new law is 1 July 2014.
By implication, affected employers would have to implement the law immediately and true-up any shortfalls in their contributions for July 2014 to bring their compliance up to date.
All other grey areas in the new law remain unresolved (see article on "the good, the bad and the ugly" for details).
On 18 July 2014 the Tax Appeal Tribunal (Tribunal) in the case of Oando PLC v the Federal Inland Revenue Service (FIRS) decided in favour of the FIRS regarding the application of Section 19 of the Companies Income Tax Act on “excess dividends” tax.
In essence, under Section 19 any dividend paid in the instances set out in the section will be treated as taxable profits subject to tax at the rate of 30%. If applied without measure, this invariably means an effective corporate income tax rate of 60% where previously taxed retained earnings are distributed, and at least 30% in all other cases including exempt income and gains taxable exclusively under the Capital Gains Tax legislation.
The decision creates more uncertainty on the issue of excess dividends tax more so since the Tribunal did not apply certain deductions and inferences from an earlier decision of the Federal High Court between the same parties and on almost identical facts.
For details please see below my article published in the Guardian today on pg 26 and our tax alert.
… for a government seeking to simplify the tax system and improve tax compliance, it is conventional wisdom that the harder we make tax compliance, the more we provide the incentive for non-compliance and outright evasion.
Read my article published by the Guardian Newspaper (uploaded below) to find out about matters arising from the current deemed profit basis of taxation, proposed changes by the tax authorities and the way forward.
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.
Are you wondering what additional cost you may have to incur to comply with the 2014 Pension Reform Act? If yes, here is a simple model to help you simulate the impact and give you an idea of the likely financial implications.
Here is the concluding part of my article in today's BusinessDay and other newspapers.
Commencement date - The Pension Reform Act 2014 (Act) was signed into law by the President on 1 July 2014. The Act does not specify a commencement date. The Interpretation Act provides that where no date of commencement is contained in an Act, the commencement day shall be the day the Act is passed or signed into law. Unless a commencement date is inserted before the Act is gazetted, the commencement date will be 1 July 2014. This does not give room for transition arrangement and proper planning by affected employers.
Gaps in coverage – Only employers with a minimum of 15 employees are required to contribute to the new Scheme. The Act provides that in the case of private organisations with less than 3 employees participation in the Scheme would be governed by guidelines issued by the National Pension Commission (PenCom). However, the Act is silent on the applicability of the Scheme to private organisations with more than 3 but less than 15 employees. Also what happens to employers with 5 to 14 employees regarding their past contributions under the old Act?
Sole contribution by employers – The new Act provides that an employer can take full responsibility of the contribution but in that case, the contribution shall not be less than 20% of the employee’s monthly emolument. This does not make sense given that the combined contribution by both parties is 18%. Employers will therefore be discouraged from taking full responsibility.