Tax & Business Matters - Nigeria

LIRS Introduces Enterprise Tax Administration System

The Lagos State Internal Revenue Service (LIRS) has launched a new eTax system, a digital, end-to-end, multi-channel solution for tax filing and payments. The system has capabilities for tax registration, tax calculation, filing of returns, payment and processing of treasury receipts.

See attached notice for further information.

Download Lirs-public-notice-on-enterprise-tax-administration-system-2

 

The FIRS has published Regulations on Common Reporting Standard

The Federal Inland Revenue Service (FIRS) has issued the Income Tax (Common Reporting Standard) Regulations, 2019 (CRS Regulations).

This follows Nigeria’s signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and the Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information, signed by Nigeria on 17 August 2017.

Fundamentally, the CRS Regulations and the various agreements signed by the FIRS will allow it to receive specified information on the bank accounts held by Nigerian tax residents in up to 105 countries. In exchange, the FIRS will be obligated to provide similar information to these other countries.   

The CRS Regulations have an effective date of 1 July 2019 and require qualifying Nigerian Financial Institutions to submit an electronic information return (i.e. a return that reports specified financial account information of certain persons) to the FIRS on an annual basis. 

The information is to be provided in respect of "reportable accounts", which subject to certain exemptions, are the Nigerian accounts of persons who are resident for tax purposes in a foreign country with which Nigeria has signed the relevant exchange of information agreement.

Other relevant provisions include:

1. First reporting year: starting from 2019 calendar year
2. Filing deadline for information return: 31 May of the year following the calendar year to which the returns relate
3. Penalties for non-compliance:

• Failure to comply with duty or obligation imposed by the CRS Regulations: ₦10 million in the first instance in addition to ₦1 million/month
• Failure by Financial Institution to file information return: ₦10 million in the first instance in addition to ₦1 million/month
• Furnishing false or incorrect information: ₦5 million
• Failure by Financial Institution or any person to comply with the FIRS’ requirement in the exercise of its powers: ₦1 million in the first instance in addition to ₦100,000/month
• Failure by Financial Institution to keep records in accordance with the Regulations: ₦1 million in the first instance in addition to ₦100,000/month

 

Below is a copy of the Regulations and our Alert on the subject.

Download PwC Tax Alert_FIRS Issues CRS Regulations_Sep2019

Download FIRS Common Reporting Standards Regulations 2019

Download Guidelines on AEOI - 2019.02

We live in taxing times! But should government increase VAT rate?

At the current rate of 5%, Nigeria’s record VAT collection of N1.1 trillion in 2018 amounts to 0.9% of GDP compared to about 3.8% for commonwealth and ECOWAS countries.

The federal government has now approved a rate increase to 7.5% subject to consultation and amendment to the law. It is important to note that s38 of the VAT Act empowers the finance minister to amend the rate of VAT by an order published in the Gazette. All things being equal, a 2.5% increase in rate will mean an additional N550 billion annually (FG N82.5 billion, States N275 billion and LGs N192.5 billion) at the level of 2018 collection.

What are the likely implications of a rate increase?

While an increase of 2.5% may appear small, it is in fact a 50% increase in VAT cost to many businesses and consumers. The negative impact will include increase in prices leading to higher inflation, less disposable income for already poor households resulting in lower consumption and a decline in GDP growth rate. Also because input VAT on capital expenditure is not allowed as a credit in Nigeria, the cost of real investments will go up and more people will evade the tax as compliant entities become less competitive.

On the positive side, additional VAT revenue will help reduce budget deficits, reduce government debt and fund social services especially at sub national level.

What should government do to limit the negative impact of a rate increase?

A fundamental principle of taxation is that people should pay according to their abilities. The question is, can everyone afford a 7.5% VAT rate, the answer is NO. But are there people who should pay 7.5% or more, the answer is YES.

In order to limit the impact of an increase government should implement counter or palliative measures to protect businesses and the poor.

1. Exempt or zero rate essential consumptions (foods, education, primary healthcare, etc). Exemption should not be limited to only unprocessed food items. In other words, a VAT increase should not “affect the price of bread”.
2. Create a VAT registration threshold to eliminate VAT compliance burden for small businesses (in other countries you don’t have to worry about charging VAT if you are a small business such as annual turnover of less than equivalents of N13m in Ghana, N17m in Kenya and up to N23m in South Africa).
3. Allow businesses to account for VAT on cash basis rather than on invoice which creates a cash flow problem (especially because borrowing rate is high). This will also limit the impact on cost of production and investment.
4. Make the VAT refund system work so that business in a refund position are paid promptly, Rwanda pays VAT refund within 30 days.
5. Lead by example, ensure that government and all MDAs fully comply by remitting VAT collected from their contractors.
6. Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure to act as palliatives and catalyst for growth.
7. Implement the new minimum wage to reduce the contractionary effect of a rate increase in a low growth economy.
8. To ensure a level playing field, ensure that every business above the threshold is compliant, and limit arbitrary waivers to expand the VAT base.

Ultimately, whether the rate increase will have an overall positive or negative impact on the people will depend on how it is implemented.

Companies operating in Nigeria to pay a new Police Fund Levy

The Nigerian Police Trust Fund Act (the “Act”) was passed by the National Assembly in April 2019, and signed into law by the President on 2 July 2019.

The Act establishes a Fund and imposes a new tax on the net profits of companies operating businesses in Nigeria at the rate of 0.005%. This and other sources of funds are expected to help fund capacity building and procurement of security equipment for the Nigerian Police.

Our alert below contain further details:

Download PwC Tax Alert_Companies operating in Nigeria to pay a new police fund tax_Sep2019

TAT says it is illegal to impose tax based on Taxes and Levies Act without a primary taxing law; and an assessment that does not follow due process is invalid

The Tax Appeal Tribunal (TAT or Tribunal), in Polaris Bank v. Abia State Board of Internal Revenue has made pronouncements on a number of different tax matters including:

1. that the Taxes and Levies (Approved List for Collection) Act is not a primary tax legislation, it merely allocates taxing rights between the three levels of government. Therefore it cannot be used as a basis to impose a tax without an enabling tax law;
2. the tax authority cannot conduct a back-duty assessment for a period beyond 6 years, regardless of whether it is called an audit or investigation unless there is fraud, willful default or neglect; and
3. an assessment is not valid unless the tax authority follows the procedure established in the tax laws including observing the statutory timeframe for objection and payment of undisputed tax liability.

Read our alert below for more:

Download PwC Tax Alert_TAT on Tax and Levies Act period for backduty assessment etc_Sep2019

Judgement Download Polaris Bank v. ABIR

 

NOTAP Automates Registration of Agreements

The National Office for Technology Acquisition and Promotion (NOTAP) has announced the introduction of an automated platform for the registration of technology transfer agreements, commencing from 2 September 2019.

Highlights

• The automated registration will apply to all applications for registration of technology transfer agreements (new and renewal applications).
• Applicants can submit applications on the following websites https://techreg.notap.gov.ng/VendorReg/ or https://www.notap.gov.ng/

Read our alert for more:

Download PwC Regulatory Alert_NOTAP Automates Registration Process_Sep2019

Tax 101 - How the proposed VAT on online transactions will affect you

The Federal Inland Revenue (FIRS) said it will ask banks and other service providers involved in online payment settlement to collect VAT on online transactions effective from January 2020.

What is VAT?

VAT stands for Value Added Tax. It is the tax you pay when you buy things (goods) like food, phones, soaps, generators, cars etc or when you pay for a service (like transportation, phone airtime, cinema shows, sewing your cloth, making your hair, etc).

Don't let the name deceive you, there is VAT whether you think value has been added or not. The rate is 5%. This means for a price of N1,000 you will pay an extra N50 as VAT to government making your total bill N1,050. If the item is for your use or consumption then that is where the VAT story ends. But if you resell the item or use it to produce something else which you will sell at say N1,500 then you need to charge VAT of N75 so the buyer pays N1,575. Since you paid VAT of N50 (input VAT) when you bought the item then you are entitled to deduct it from the VAT of N75 you've just charged (output VAT) and only pay the difference of N25 (N75 - N50) to FIRS. 

Some sellers already include VAT in their listed prices and will sort out the VAT element with government (we call this VAT inclusive price) like in the case of recharge cards. 

Does that mean there is VAT on everything?

No. The VAT law has a list of goods and services that are not liable to VAT. Examples include educational materials like books, basic food items like raw yam, cassava, beans (once the food is cooked you may have to pay VAT), baby foods, fruits and vegetables, medical treatment, school education, etc. Also some transactions that are NOT subject to VAT because they don't qualify as goods or services. Examples include land, company shares, borrowing etc

Who should pay VAT?

The seller or service provider is required to charge VAT for the customer to pay. The law mandates any person who is selling goods or rendering services to register with FIRS and charge VAT on their sales. Failure to register or charge VAT attracts fines. In many countries a small business is exempted from charging VAT until it grows to a certain level (equivalents of about N13m sales in Ghana, N17m in Kenya and up to N23m in South Africa) but this is not the case in Nigeria. 

Can I avoid VAT if I don't order anything online?

VAT applies equally to goods and services ordered online or offline. It does not matter whether you pay cash or through electronic means. We can classify online transactions into 4 categories:

1. online sale of goods by local businesses (like buying a bag on Jumia) 
2. local services provided or ordered online (like Pay TV subscription to watch DSTV) - VAT is already being collected on categories 1 & 2 since the sellers are in Nigeria regardless of whether the transactions are done online or offline. If VAT is not being paid it is not an online problem, it is people choosing not to comply and FIRS not doing their job.
3. online sale of goods by foreign sellers (like ordering a phone from Amazon) - On this category, VAT is already being collected by Customs at the point of importation except where the value of the item is small and legally exempt.
4. foreign services provided or ordered online - The challenge for Nigeria is this category. Examples include when you subscribe to Netflix or you pay for an advert to promote your post on Facebook or Instagram.  

Why should you care? 

Government wants to ensure that online transactions don't escape VAT but as demonstrated above only category 4 is really an issue and it constitutes a small percentage of online transactions in Nigeria. 

So the question is how will the proposed measure by the FIRS address this problem? How do we ensure that categories 1-3 don't suffer double VAT? If VAT is taken by the payment agent how will online sellers offset their input VAT? How will the payment agents know if a transaction is exempt from VAT so they don't charge VAT wrongly? 

My two kobo

While it is necessary for government to do something regarding taxation of the digital economy, we need to consider the possible impacts including intended and unintended consequences.

Overall objective should be to ensure a level playing field between online and offline transactions, to prevent non-taxation as well as avoid double taxation or excessive compliance obligations. This becomes even more critical in the event of an increase in VAT rate as being proposed by government.

Nigeria should key into the ongoing global efforts to address the challenges of the digital economy in a collaborative manner given that the digital economy puzzle for us is really category 4 transactions involving foreign companies that are not within Nigeria's jurisdiction.

The future is online so government should encourage players in this space not scare them away. In fact online is easier to track for tax purposes because it leaves a trail, so one more reason to tread carefully or we may be warming up to score a spectacular own goal.