Tax & Business Matters - Nigeria

The Transfer Pricing filing season is here again – 10 things that can help you avoid the stiff penalties

If you are a taxpayer with a 31 December year-end, the deadline for filing your TP returns and having your TP documentation in place is 30 June 2022. If you don’t get things right, you could face relatively stiff penalties. You can however avoid these if you are: aware of the requirements of the law; and mindful of some of the practical challenges that come up during the filing process.

Here are Things to keep in mind as we get into the filing season:

• You need to register on the TP Filing Platform 
• TP disclosure forms should be filed annually

Find out more in our tax alert below:

Download The Transfer Pricing filing season is here again – 10 things that can help you avoid the stiff penalties

FIRS seeks to increase withholding tax on payments to beneficiaries of treaty countries from 7.5% to 10%

The Federal Inland Revenue Service (FIRS) has issued public notices regarding major changes to the tax treaty benefits and procedures to claim such benefits.

Context

Many of the treaties for the avoidance of double taxation between Nigeria and other countries were concluded at the time when the WHT under Nigeria’s domestic law was 15% while the treaties provide for a reduction of 2.5% resulting in a maximum rate of 12.5%.

However, the domestic WHT rate was reduced to 10% and consequently the Federal Government via its Budget Statement in 1999 reduced the treaty WHT rate to 7.5%.

While the FIRS has honoured this reduced rate since 1999, it has now taken the view that since the pronouncement was not promulgated into law and published in the Official Gazette of the Federal Government, and no Protocols were executed between Nigeria and the treaty partners to effect the reduction, the 7.5% rate will no longer apply.

Key changes

• Effective 1 July 2022, the WHT rate on dividend, interest and royalties paid to residents of treaty countries will be the rate in the domestic law or the treaty, whichever is lower
• This effectively means that the WHT rate of 7.5% will increase to 10% with respect to dividend, interest and royalty
• Royalty excludes rental income on immovable property, such as land, for the purpose of reduced treaty WHT rate
• Countries affected include Italy, United Kingdom, Belgium, Pakistan, Czech Republic, Slovak Republic, France, Netherlands, Romania, Canada and the Philippines
• This effectively means there is no difference in the WHT rate for treaty and non-treaty countries except in respect of relatively recent treaties concluded with South Africa, China, Singapore, Sweden and Spain which contain the lower WHT rate
• Any claim for tax credit in respect of profits taxable in Nigeria must be made not later than two years after the end of the year of assessment in which the foreign tax was paid
• The circular also includes conditions for a company to claim the commonwealth tax relief.

Procedures for Claiming Treaty Benefits in Nigeria

Where a taxpayer has met all the criteria for eligibility for tax treaty benefits, such person may apply for treaty benefits in line with the following procedures:

1. Completion of Certificate of Residence
2. Submission of Formal Application to the Relevant Tax Authority
3. Submission of Claim for Tax Credit

Conclusion

Nigerian government needs revenue to balance the budget given its rising debt profile and high ratio of debt service cost to revenue. It is therefore not surprising that FIRS is exploring various avenues to increase domestic revenue mobilisation. This may also be connected to the global 2-Pillars deal to which Nigeria has declined to sign, hence ramping up taxes collectible under domestic legislation including implementation of unilateral measures.

Below is our Tax Alert on the topic, and copies of the circulars: 

Download PwC Tax Alert - FIRS reverses the practice of granting 7.5% WHT rate to treaty partners on passive income

Download FIRS CIRCULAR ON CLAIM OF TAX TREATY BENEFITS_REVISED

Download FIRS PUBLIC NOTICE ON TREATY WHT RATES

Still on Certificate of Acceptance and eligibility to claim capital allowances

Businesses incur various expenses for business purposes including operating expenses such as salaries, rent and electricity as well as capital expenditure such as building, plant & machinery, motor vehicles, and small equipment such as laptops, phones, etc. While operating expenses can be deducted in full for tax purposes in the relevant tax year, tax deduction for capital expenditure is granted by way of capital allowances over a period longer than one year. To obtain a tax deduction for any expense, the taxpayer must provide adequate evidence that the cost was incurred in the relevant period and for the purpose of the business.

• Section 2 of the Industrial Inspectorate Act (IIA) enacted in 1970 requires the Inspectorate Division of the Federal Ministry of Industries to determine the investment valuation of any new or existing undertaking i.e. capital employed, valuation of buildings, plants and other machinery. This is to enable the Division to obtain necessary information on economic trends in the country.
• Section 3 of the IIA mandates any person proposing to start a new undertaking involving the expenditure of not less than N20,000 (subsequently amended to N500,000) or additional capital expenditure in respect of an existing undertaking, to notify the Division which shall verify the expenditure and if satisfied issue and forward to the company a certificate of acceptance.
• Section 4 requires any dispute regarding the valuation of investment stated in the certificate of acceptance to be resolved through arbitration while section 5 mandates the FIRS, Customs, Immigration, Prisons Service and any department of government (federal and state) to accept without disputing the value stated in the certificate where it is required in the exercise of such agencies’ functions under any law.
• Section 11 defines an “undertaking” as trade or business involved in the production of goods or services for sale that requires the use of industrial machinery and other equipment, plants, buildings and other permanent or temporary fixtures on land.
• The second schedule of the Companies Income Tax Act (CITA) specifies the eligibility conditions for capital allowances including ownership of the asset; usage for purposes of the business at the end of the relevant period; and a claim for the allowance to be made by the company. Neither CITA nor the FIRS Establishment Act mentions certificate of acceptance as a condition for capital allowance.

Implications:

1. Certificate of acceptance is only required for industrial machinery and other equipment, plants, buildings and fixtures on land, where the value is at least N500,000
2. The primary objective is to provide necessary information to the government on economic trends in the country
3. Certificate of Acceptance is not a condition for the claim of capital allowance. Penalty for failure to obtain the certificate, where applicable, is a fine on conviction as prescribed under section 3(4) of the IIA.
4. If a taxpayer presents a certificate of acceptance as evidence of its assets, the FIRS is bound to accept the value without question
5. FIRS may request for the certificate as part of evidence to determine the value of any assets specified under the IIA. Where the certificate is not provided, it is within the powers of the FIRS to refuse to grant capital allowance unless the taxpayer is otherwise able to substantiate the value and ownership of the asset as stipulated under the second schedule of CITA.

Conclusion:

Certificate of acceptance is no longer relevant in achieving the objective for which it was designed in 1970. The requirement should therefore be expunged from the law. In the meantime, FIRS may request for the certificate as corroborative evidence of the value of relevant assets but not solely as the basis for granting capital allowance on such qualifying capital expenditure.

FIRS demands Certificate of Acceptance for eligibility to claim capital allowance on assets

Nigeria's Federal Inland Revenue Service (FIRS) has issued a Public Notice directing all companies that enjoyed capital allowances on their assets between 2016 and 2021 years of assessment, to submit their Certificates of Acceptance no later than 31 October 2022. 

Below are the key points in the Public Notice:

1. Any company that incurred Qualifying Capital Expenditure (QCE) of N500,000 and above, must obtain the Certificate of Acceptance in respect of the QCE from the Industrial Inspectorate Division of the Federal Ministry of Industries, Trade and Investment.  
2. All companies which enjoyed capital allowances on QCE between 2016 and 2021 years of assessment, are to submit their Certificate of Acceptance to the FIRS no later than 31 October 2022.
3. Any company that fails to submit the relevant Certificate of Acceptance will have its capital allowances for the period withdrawn by the FIRS, resulting in additional tax assessment to the defaulting company.

Our comments:

Based on the provisions of the Companies Income Tax Act (CITA), Certificate of Acceptance is not a precondition for claiming capital allowances on assets. The purpose and the applicable penalties for non compliance are contained in the Industrial Inspectorate Act. Given that FIRS can verify the ownership, control and beneficial usage of assets for business purposes through alternative procedures. Therefore, insisting on Certificates of Acceptance will only serve to increase the cost of compliance and unduly expose taxpayers to additional tax assessments with attendant dispute resolution through the Tribunal and Court system.

Download FIRS Public Notice on Submission of Certificates of Acceptance