On 28 May 2021, the Tax Appeal Tribunal (TAT) South-South Zone, sitting in Benin, delivered a judgment in a matter between Ecobank Nig. Ltd (“the Bank”) v Delta State Board of Internal Revenue (“the Revenue”). The matter bordered on the legality or otherwise of the Revenue carrying out tax audit or investigation on tax payers beyond six (6) years, without establishing a case of fraud, wilful default or neglect, on the part of the taxpayer.
Highlights of the Case
The Revenue via a demand notice dated 28 October 2019, issued a Best of Judgment (BOJ) assessment on the Bank, as additional PAYE tax liability for an 11-year period, spanning 2000 to 2010. The Bank objected on the ground that no case of fraud, wilful default nor neglect has been established against it by the Revenue, and as such, cannot carry out an audit or investigation beyond the statutorily recognised six-year period. The Bank further buttressed that since equity aids the vigilant and not the indolent, waiting twenty (20) years to raise an additional assessment was a clear case of acquiescence on the part of the Revenue.
In its response, the Revenue maintained that it reserved the right to conduct a tax investigation beyond the six-year period, further to the provisions of Section 55(1) of PITA, if it is discovered that a taxpayer is fraudulent, or has neglected or wilfully defaulted on his tax obligations. The Revenue argued that a discovery has been made through her Intelligence and Enforcement Unit, that the Bank had wilfully defaulted and neglected to disclose the income of its employees according to the law, hence the need to carry out the tax investigation.
TAT’s Decision
Upon hearing the arguments of both parties, the TAT held that:
According to section 55(1) of PITA the Revenue has the right to conduct an audit or investigation and raise an additional assessment, where it discovers that the taxpayer was not properly assessed to tax.
It is lawful for the Revenue to raise BOJ assessment where a taxpayer fails to submit returns and/or where there is a disagreement between the taxpayer and the tax authority, according to Sections 54(3) and 58(3) of PITA.
It is however lackadaisical of the Revenue to wait 20 years after the relevant year, to issue additional assessments, despite having carried out tax audit previously on the same years.
Section 332 of Companies and Allied Matters Act 1990 (now Section 375(2) of CAMA 2020), mandates companies to keep their accounting records for only six years, after which it becomes discretionary for companies to keep such records.
Statutory limitation of six (6) years provided in section 54(5) of PITA applies only to PAYE tax, and does not stop the tax authority from going beyond six (6) years with respect to other taxes such as WHT, VAT Act, Stamp Duty and other taxes as prescribed by the applicable laws.
Assuming without conceding that Section 55(2) supersedes Sections 54(5), 81 & 82 of PITA, the onus is on the Revenue to prove that the taxpayer has committed fraud, wilfully defaulted or neglected its tax obligations, before raising additional tax assessments beyond the 6 year limitation period.
The allegation of wilful default against the Bank by the Revenue is an afterthought as it was not contained in any prior notice by the Revenue and as such, cannot be upheld by the Tribunal.
The Revenue’s demand notice to the Bank is caught by the statutory limitation period of six (6) years and the proviso to Section 55(2) of PITA, which allows for investigation beyond this period, has not been triggered in this case.
The BOJ assessment being additional PAYE liability for 2000 – 2010 is null and void.
The Revenue is restrained from carrying out any further audit or investigation on the company in respect of these years.
Our Comments
There have been diverse judgments on the interpretation and application of Section 55(2) of PITA. Worthy of note is the recent case of Polaris Bank v. Abia State Board of Internal Revenue where the decision of the Tribunal which was initially granted in favour of Polaris Bank, was upturned by the Federal High Court.
The TAT in this case has reiterated that there has to be an end to raising additional tax assessments on tax payers in respect of the same tax years. This is not intended to go on in perpetuity. To trigger a tax investigation, the tax authority must have established that there was fraud, willful default or neglect committed by the taxpayer. This has to be established with proof and not based on speculations or assumptions.
Finally, since equity will not aide the indolent, the tax authority should ensure that tax audit exercises are carried out within the prescribed period. Only when there is evidence of fraud, willful default or neglect on the part of the taxpayers, can there be a tax investigation. We do align with the reasoning of the TAT in this case and until this judgment is appealed, it remains binding on both taxpayers and tax authorities.
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AS FIRS STEPS-UP TRANSFER PRICING COMPLIANCE DRIVE, HOW READY ARE YOU?
May 28, 2021
Since the introduction of Transfer Pricing (TP) Regulation 2012 in Nigeria and its amendment via the Income Tax (Transfer Pricing) Regulation in 2018, Nigeria has only conducted a few TP audits. However, starting from the last quarter of 2020 till date, FIRS has issued quite a few TP letters to not just multinational entities (MNEs) but also, local entities with connected persons. This increases the number of potential TP audits in the coming months.
Nigeria does not currently have a threshold for TP reviews/audits, as all entities with connected persons regardless of size and jurisdiction of the entities, are subjected to the same level of compliance obligation.
The tax authority has been aggressive in its attempt to enforce the provisions of the 2018 TP Regulations and imposing the stiff penalties enshrined in the TP Regulations on defaulters. The recent increase in the request for the TP documentations and proof of transactions can be seen as a means to further drive compliance with the documentation requirement of the TP Regulations and to ensure that entities pay fair taxes on the profits generated from Nigeria. This initial request along with the TP returns filed by the company is usually reviewed and used as a basis of the TP risk assessment. This review might eventually lead to a full-blown TP audit, depending on the conclusions drawn by FIRS from the review.
It is therefore important for taxpayers to ensure they re-assess and review their controlled transactions in readiness for a possible TP audit. In this article, we have discussed some considerations and critical steps to be adopted by affected entities in this regard.
Need to Maintain a Contemporaneous TP Documentation
It is important to mention that a letter from the tax authority does not necessary equate to a TP audit. However, this is usually the first step taken by the tax authority to perform a risk assessment on the taxpayer. The TP documentation requested by FIRS, along with the previously submitted TP returns serve as one of the major bases for the tax authority to ascertain whether a taxpayer has complied with the TP Regulations or not.
The Regulation in summary, requires that all transactions with any connected person be done at arm’s length (i.e., as the transaction would have been if it were with an independent person) and any such method used in arriving at such pricing be properly documented to justify the pricing of the transactions that had occurred.
The first step in readiness for a TP audit is to ensure that all transactions have been properly priced. This step cannot be overemphasized, as it is one of the major bases for determining the risk level of a taxpayer. The TP Regulations require taxpayers to keep contemporaneous documentation that confirms that its transactions with related entities align with the arm’s length principle.
Given the above, MNEs or local entities with connected parties should ensure that a TP Policy establishing methods for pricing of transactions has been developed in setting the prices of all transactions within the Group. Where the pricing had been established by the parent company of a multinational outside Nigeria, it is important that this pricing regime is strictly followed and adopted by the local entity, provided that it aligns with the guidelines issued by the Organisation for Economic Cooperation and Development (OECD) and Nigerian TP Regulations.
Upon developing a TP Policy and setting the pricing, it is also critical to ensure proper implementation of the policy in conducting the transaction, as this cascades downwards into the annual TP documentation prepared to justify the transactions that had occurred in each year. Having a transfer pricing documentation that is prepared in line with the TP Regulations is the first step to proving that the connected transactions are consistent with the arm’s length principle. Please note that the onus of proof of compliance with the arm’s length principles is the sole responsibility of the taxpayer.
Regulation 16(4) of the TP Regulations expects this document to be in place prior to the due date for filing the income tax return for the year in which the documented transactions occurred. Therefore, taxpayers should ensure all documentation and support documents are available and ready for submission upon request from the tax authority. This will prevent the taxpayer from incurring the stiff penalties provided in the 2018 TP Regulations.
Other Important Documents to Maintain
Taxpayers should ensure that annual transfer pricing returns have been filed and that they are up to date. Regulations 13 and 14 of the Nigerian TP Regulations 2018, requires all connected persons to file their annual TP returns (disclosure forms and the declaration form) in an appropriate form. This annual TP return is one of the major requirements for any taxpayer in this category and non-compliance to this requirement attracts stringent administrative penalties.
A major issue that arises in a typical TP audit is the inability of a taxpayer to provide the adequate support documents needed to validate transactions that had occurred in the year. Therefore, the effort put into the development of a Policy and its implementation would have been wasted, if proper documentation of all necessary support and compliance documents to justify the transactions with related parties are not kept in a manner that they can be retrieved. Some of these important documents include contract / agreements, invoices, internal memos, financial statements, details of a third-party cost/pass-through cost, etc. Taxpayers should therefore ensure there is a proper system in place to document all necessary information that can support their claim in case of any TP audit exercise and these documents are readily available for submission upon request.
Transfer Pricing Risk Assessment – Health Check
This is an important step that should be considered by the taxpayer. It serves as an internal pre-audit evaluation to identify potential risk areas where there are gaps in the compliance requirements and in the pricing of transactions with connected persons.
The evaluation allows the taxpayer to consider its options and possible steps to mitigate any risk that might have been discovered during the risk assessment, including insight into the availability of necessary support documents or otherwise. This will also allow the taxpayer to evaluate the strength of the TP methods that have been adopted for specific transactions and proffer adjustments where necessary.
It is important to carry out TP risk assessment regularly, either internally or outsourced to a seasoned professional. It gives the taxpayer ample time to make necessary amends in the way it conducts its transactions or make necessary financial adjustments if required. Also, carrying out TP risk assessment can help a group entity neutralize the effect of TP adjustments.
In conclusion, given the recent drive of the tax authority to ensure compliance with the provisions of the TP Regulation, the continuous request for TP documentation is inexorable. However, the receipt of such letters does not necessary equate to a TP audit. It is just the first step taken by the tax authority to perform a risk assessment on the taxpayer.
Taxpayers should therefore take necessary actions to ensure their books are in order to avoid pitfalls, penalties and TP adjustments that may result from a TP audit.
News
FIRS LAUNCHES ‘TAXPRO MAX’ FOR ONLINE RETURNS’ FILING AND PAYMENT OF TAXES
May 25, 2021
Further to the provisions of the Finance Act 2020 and in line with the Federal Inland Revenue Service (FIRS) mandate to automate the tax administration system, the FIRS has recently launched a one-stop online platform – TaxPro Max.
On the platform, taxpayers will be able to file returns electronically, pay taxes online, get instant credit for withholding taxes deducted from their income, ascertain capital allowance carried forward, loss carried forward to be utilised for subsequent income tax returns, generate tax clearance certificates, respond to tax assessments raised, keep track of outstanding debt and communicate with the FIRS local tax offices on other tax matters.
What should Taxpayers do?
Visit FIRS office to complete tax update form
Visit the TaxPro Max platform via https://taxpromax.firs.gov.ng and login with your user details, after which a dashboard will be displayed
Carry out a reconciliation of the outstanding withholding tax credit notes to be uploaded on the TaxPro Max
Carry out a reconciliation of losses and capital allowance carried forward to be uploaded on the TaxPro Max, so that these can be automatically available for utilisation.
Be mindful that downtime or technical glitches may occur towards the due date of filing. It is therefore imperative that payment of taxes in respect of the tax returns to be filed, should be done as early as possible and filing process initiated before the due date.
Regularly visit the TaxPro Max website to check for any correspondence or assessment that may have been raised and the due date for a valid response or payment already counting against the company.
Identified Shortcomings of TaxPro Max
The “TaxPro Max” is not yet configured for the filing of companies income tax returns for Insurance Companies and Upstream Oil & Gas Companies.
Some of the returns filing processes are repetitive and can be further compressed
The TaxPro Max platform recognises only Naira (NGN) as the reporting currency
There is no provision for correction or amending tax returns
The platform did not make provision for instalment payment.
Payment is expected to be completed within 24 hours after initiation of payment / generation of Remita Retrieval Reference (RRR) Number.
The platform does not generate any report for the user after completion of the filing process.
Adequate consideration not made for confidentiality and security of taxpayers’ information on the TaxPro Max
Our Comments
The introduction of the TaxPro Max is a laudable effort by the FIRS to ensure that taxpayers enjoy a seamless tax filing process and also ease compliance. Taxpayers in return are expected to get acquainted with the platform, to fully maximise the benefits.
In view of the imminent migration from the current manual tax returns filing to the full implementation of automated filing on the platform, there is need to allow for a transition phase, to ensure that the usual glitches associated with system integration is prevented. Implementation can also be done in batches according to the current local tax office groupings i.e Large Tax Offices (Non-oil), Medium Tax Offices, Micro & Small Tax Offices e.t.c.
To fully achieve the objective of introducing this platform, the FIRS must ensure that sufficient measures are put in place to ensure that concerns raised by users of the platform are promptly attended to and resolved. Some of the identified inadequacies like the exclusion of the insurance and upstream oil & gas companies from using the platform as well as the restriction of currency of filing to Naira, should be urgently addressed.
Overall, it is expected that this initiative, if properly managed, will improve tax compliance in Nigeria by reducing the related costs, time and inconvenience associated with manual returns filing.
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FIRS PROVIDES CLARIFICATION ON TAXATION OF NON-GOVERNMENTAL ORGANISATIONS AND ISSUANCE OF TAX-DEDUCTIBLE CERTIFICATE FOR THE PURPOSE OF FIFTH SCHEDULE
May 10, 2021
The Federal Inland Revenue Service (FIRS) had on 31 March 2021 published a circular titled “Guidelines on the Tax Treatment of Non-Governmental Organisations” and another one titled “Requirements for Funds, Bodies or Institutions for Listing under the Fifth Schedule to CITA’”. These Circulars aim to clarify issues relating to the taxation of Non-Governmental Organisations (NGOs) in Nigeria and qualification as approved bodies for donation under the Fifth Schedule of CITA.
Highlights of the Circular on Taxation of NGOs
The Circular defines an NGO as a not-for-profit association of persons incorporated as a company or incorporated trustees under CAMA, or under any other law in force in Nigeria, or registered under the laws of a foreign jurisdiction and approved as such in Nigeria. These NGOs include organisations engaged in ecclesiastical, charitable, benevolent, literary, scientific, social, cultural, sporting or educational activities of a public character.
The Circular reiterates that an NGO must be of public character as defined under Section 105 of CITA. Public character with respect to any organisation infers that such organisation is registered in accordance with the relevant laws in Nigeria, and does not distribute or share its profit in any manner to its members or promoters. Rather, their income is to be wholly applied for the objects of the organization or institution in the interest of the public. Furthermore, where there is a distribution of assets whether in cash or in kind for the personal use of its promoters or members, such distribution shall be construed as distribution of profit.
The Circular mandates all NGOs to register for tax purposes and obtain their Taxpayer Identification Number (TIN) at designated FIRS offices in their respective geo-political regions. The tax obligations of these entities as contained in the Circular include:
Filing of Income Tax Returns.
Liability to Companies Income Tax on profits from trade or business, or income from investment in revenue generating assets or businesses.
Obtain Tax Deductible Certificates so that donations made to the NGO will be allowed for deduction in the hand of donors, in line with Section 25 of CITA (as amended by Finance Act 2020). The procedure for obtaining this certificate has also been discussed in another circular released on the same date, and discussed in the next section.
Account for PAYE on income of individual promoters and employees (from all sources, including the NGO), fees, other remuneration or benefits-in-kinds paid to trustees and guarantors; and salaries or other remuneration of employees.
Capital Gains Tax on gains derived from the disposal of assets acquired in connection with any trade or business carried on by the institution.
The circular also clarifies that while VAT on goods purchased by NGOs for use in humanitarian donor-funded projects is chargeable at zero rate, the NGO itself is not exempted from VAT. Also, that an NGO is liable to VAT where it consumes services, other than those exempted under the VAT Act.
Finally, the circular reminded that even though the NGOs are exempted from tax on their incomes, they are not exempted from the obligation to deduct WHT on payments to suppliers and contractors, as well as other qualifying payments, for remittance to the relevant tax authorities in the currency of transaction.
In a similar circular, The Federal Inland Revenue Service (FIRS) provided clarification on the procedure for listing under the 5th Schedule of Companies Income Tax Act Cap C21, LFN 2020 (CITA) by relevant entities.
Highlights of the Circular on Listing under Fifth Schedule of CITA
1. Section 25 of CITA provides the legal framework for Companies to make charitable donations, (which are tax deductible by the donor), to funds, bodies or institutions listed in the Fifth Schedule of CITA. Furthermore, Section 25(6) of CITA empowers the Minister to make amendments to the Fifth Schedule by an Order to be published in the Federal Gazette.
2. The general criterion for listing under the Fifth Schedule is for the fund, body or institution to be of public character, and the advantage of such listing is the tax deductibility of donations made by persons to these entities as enshrined under Section 25(2) and (3) of CITA. Also, listing under the fifth schedule will confer tax exemption status on such Funds, Bodies or Institutions.
3. The Circular further provides that an application in compliance with the checklist set out in Schedule 1 to the Regulations is to be made with a non-refundable payment of the sum of Two Hundred and Fifty Thousand Naira (₦250,000) to the FIRS.
4. A Tax-Deductible Certificate is to be issued, which shall be valid for 3 years in the first instance and renewable after every 3 years upon satisfactory performance at a fee of One Hundred and Fifty Thousand Naira (₦150,000).
5. The Circular also lists out the documents required for the issuance and renewal of the Certificate.
Our Comments
The Circular focusing on NGOs has elucidated the tax obligations of such organisations. It is expected that the clarifications would put to rest all misconceptions as to the requirements of these entities particularly, with the definition of public character contained in CITA and further reiterated in the Circular. Also, it is now clear that goods and services consumed by NGOs and not for use in humanitarian donor-funded projects are liable to VAT.
In the same vein, providing a guideline on issuance of Tax-Deductible Certificate will afford the donor entity the opportunity to deduct such expenses without any hassle, as well as confirm the tax exemption status of the donee entity.
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Companies Income Tax (Exemption of Bonds and Short-Term Government Securities Order) 2011 – What Next after Ten Years?
April 27, 2021
Introduction
The Nigerian economy has for some years been burdened with the menace of deficit budgeting, which the government has often supplemented, using external and internal borrowings besides other measures. The internal borrowings have been largely via the issuance of government securities through the Central Bank of Nigeria. These include the Nigerian Treasury Bills, Treasury Certificates, Stocks and Bonds. This source of funding the budget is not peculiar to the Federal Government alone, but also applicable to State Governments as well as corporate entities that raise funds by issuing bonds to the public.
In order to encourage investment in these securities, the President in exercise of the powers conferred on him under Section 23 of CITA issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011. In the same year, the Personal Income Tax Act (PITA), 2011 was also amended, introducing similar tax exemptions for non-corporate entities. The Personal Income Tax amendment Act which has a commencement date of July 2011, exempts from income tax, incomes earned by individuals, partnerships, trusts and other non-corporate entities, on Bonds issued by the Federal, State and Local Governments, as well as those issued by corporate organisations and Supra-nationals.
The Companies Income Tax Exemption Order, 2011 which became effective in January 2012, provides the legal backing for the exemption from Companies Income Tax (CIT), the income earned from the following securities:
Short term Federal Government of Nigeria Securities, such as treasury bills and promissory notes.
Bonds issued by the Federal, State and Local governments and their agencies.
Bonds issued by corporate bodies and supra-nationals.
Interest earned by the holders of the Bonds and short term securities listed in 1-3 above.
Matters Arising
While the tax exemption provided by the PITA does not have a time frame, the Companies Income Tax Exemption Order specifies a 10-year time limit, except on income earned by companies from Bonds issued by the Federal Government, which shall enjoy the tax exemption without limit.
By implication, effective January 2022, incomes accruing to companies on Bonds issued by corporate and supra-national bodies, State governments, Local government and their agencies shall be liable to Companies Income Tax at the prevailing rates as specified in CITA as well as Tertiary Education Tax at 2% for medium and large companies. Similarly, profits or gains arising from trading on short-term Federal Government securities such as treasury bills and promissory notes, e.t.c., will be liable to income tax. On the other hand, individual taxpayers and non-corporate entities shall continue to enjoy the tax exemption on incomes earned from these securities.
The disparity in tax treatment for corporate and non-corporate investors begs the question; will the expiry date of the Companies Income Tax Exemption Order 2011 be extended or a law enacted, to put both corporate and non-corporate investors on the same pedestal for tax purposes.
This uncertainty on the possibility of extension or otherwise creates the following challenges:
Corporate investors will be faced with varied investment decisions on whether to hold or dispose existing investments in these securities, for more viable alternatives, considering the impact on returns on investment. These investors include mostly banks and other financial institutions.
The ability to source financing via bond issuance by state & local governments, corporate entities, and supra-national entities will be affected.
Conclusion
The tax incentives created by both the Exemption Order and the PITA 2011 amendment, have over the years boosted capital market activities, made investments in the securities more attractive and provided the issuers (including Federal Government) access to long and short-term funding. It is therefore pertinent for all corporate stakeholders, investors and issuers alike to consider the future business implications of investment in these securities, evaluate viability should the tax exemption not be extended and take timely action, as necessary.
Also, the Government needs to embark on some tax expenditure reporting, to assess the impact of the Tax Exemption Order on the Nigerian economy over the past 10 years, and issue a timely public statement on the likelihood of extending the Tax Exemption Order or otherwise.
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Companies and Allied Matters Act 2020: Interactions with Extant Tax Provisions
February 2, 2021
It is no longer news that the Companies and Allied Matters Act (CAMA) 2020 was signed into law in August 2020 by the President, further to significant changes in the economic and business world compared to when the law was enacted in 1990. The new CAMA is to ensure economic and business realities with the legislation governing the conduct of such businesses.
The CAMA 2020 has become effective from 1 January 2021 and it is expected that business owners, investors and other stakeholders adhere to its provisions which are primarily aimed at ensuring the ease of doing business and enhanced corporate governance structures in companies. Similarly, the Companies Regulations 2021 has been issued to give effect to the implementation of the CAMA 2020.
Although not a tax statute, some provisions of the CAMA 2020 have bearings on tax obligations and compliance processes and have consequently altered certain tax requirements.
This article highlights the possible interactions of CAMA 2020 with existing tax provisions.
1. Definition of Small Companies
CAMA 2020 classifies companies to small and others using a combination of different parameters, whereas CITA classifies companies on the basis of their turnover. Below are the classifications of companies under CAMA and CITA:
CAMA Classification
CITA Classification
Section 394(3) of CAMA 2020 classifies a company as small if it satisfies ALL the following conditions: a. must be a private company; b. maximum turnover of ₦120million; c. maximum net assets value of ₦60million; d. has no foreign member; e. has no government membership; and directors must hold at least 51% of its share capital.
a. Small Company: Gross turnover of less than ₦25million
b. Medium-sized Company: Gross turnover of more than ₦25million but less than ₦100million
c. Large Company: Gross turnover of ₦100million and above
These features of a small company under CAMA 2020 differ significantly from the tax classification of companies. The Finance Act 2019 (amending the Companies income Tax Act) introduced the classification of companies into small, medium and large for tax purposes. The variances in the basis of determining small companies under the CAMA and CITA have created ambiguities. For instance, while a company with a turnover of ₦110million qualifies as a large company under CITA for tax purposes, the same company may qualify as a small company under CAMA provided all other conditions are satisfied.
This contradiction transcends mere classification as it borders on the taxability of affected companies. Section 40 of CITA (as amended by the Finance Act 2019) prescribes varying tax rates for each class of companies. While profits of small companies are exempt from tax, medium-sized and large companies are taxed at 20% and 30% respectively. Again, companies which qualify as ‘small’ under CAMA may still be subject to tax at 20% or 30% since such companies are considered ‘medium’ or ‘large’ under CITA. Consequently, a company deemed ‘small’ by virtue of CAMA may not enjoy the tax incentives provided for small companies under CITA.
Therefore, a harmonization of what constitutes a small company in Nigeria under CAMA, CITA as well as other relevant laws and regulations is necessary to ensure uniformity and confidence of taxpayers and stakeholders and eliminate resultant conflicts.
2. Exemption of Small Companies from Appointment of Auditors
The effect of conflicting definitions of small companies under CITA and CAMA also impacts the required documents for the purpose of filing the company’s annual income tax returns.
Section 402 of CAMA 2020 exempts companies which are yet to commence business and small companies (by its definition) from appointing auditors to audit its account for the period. Conversely, in line with Section 55 of CITA, all companies (including small companies despite exemption from tax) are required to file annual self- assessment returns with the Federal Inland Revenue Service (FIRS) along with their audited financial statements amongst other documents.
Auspiciously, the Finance Act 2020, which became operational on 1 January 2021, has amended Section 55 of CITA, such that instead of audited accounts, FIRS may specify an alternative form of accounts to be included in the tax returns to be filed by small and medium -sized companies (by its definition). This amendment was precipitated by the exemption granted to small companies from appointing auditors.
Considering the provisions of CITA, all large companies are expected to file audited accounts with FIRS regardless of whether such company falls within the category of small company under CAMA. Also, in view of the amendment introduced by FA 2020, which grants FIRS the power to specify the form of accounts to be included in a tax return, small and medium sized companies can still be compelled by FIRS to prepare audited accounts for filing.
Notwithstanding the provisions of these laws, the credibility of a company is often enhanced by the existence of an independent auditor’s opinion as to whether the financial statements of a company represent a true and fair view of the financial position of such company. It is therefore pertinent that companies, regardless of size, consider the financial audit of accounts as this allows for transparency and ultimately boosts the confidence of users of the financial statements.
3. Taxation of Single-Shareholder Companies
CAMA 2020 now allows for the incorporation of single-shareholder private companies, thus modifying the erstwhile requirement for a minimum of two (2) persons to set up a company. This type of company enjoys the full benefits of a duly incorporated limited liability company including but not limited to having a separate legal personality, perpetual succession, and so on.
Section 108 of the Personal Income Tax Act (PITA) which deals with the taxation of persons other than companies defines ‘individual’ to include ‘a corporation sole’. What then constitutes a corporation sole? This is a legal entity consisting of a single incorporated office and occupied by a sole natural person.
In the light of Section 18(2) of CAMA 2020, which now permits single-shareholder companies, there is a tendency for a mix-up with corporation soles particularly in the determination of the appropriate taxing authority. While States’ Internal Revenue Services are responsible for taxing individuals, the FIRS is responsible for the collection of taxes from incorporated companies.
It is clear that a single-shareholder company has a separate legal personality and as such, is to be taxed according to the provisions of CITA. However, it is necessary that Section 108 of PITA is amended to expunge ‘corporation sole’ from the definition of individuals to avoid potential conflicts between taxing authorities and ensure clarity. This is however not to be confused with registered business names as these do not have the same legal status as single-shareholder companies and as such the proprietors of business names are to be taxed in line with the provisions of PITA.
4. Distributable Profits – Source of Dividends
Sections 426 & 427 of CAMA 2020 provide that dividends payable to shareholders are payable only out of the distributable profits of the company. Distributable profits have in turn been defined as the company’s accumulated realised profits which have not been previously utilised by distribution or capitalisation, less any accumulated realised losses which have not been previously written off in a reduction or reorganisation of capital.
On the other hand, Section 19 of CITA which deals with excess dividend tax makes provision for the payment of dividend from retained earnings, which could be either realised or unrealised profits. Following the provisions of CAMA 2020, it is expected that dividends are only paid out of the accumulated realised profits of the company.
5. Redeemable Preference Shares
Prior to now, it was permissible for a company to issue preference shares which could either be redeemable or irredeemable. However, pursuant to Section 147 of CAMA 2020, companies are now prohibited from issuing irredeemable preference shares to shareholders. That is, all issued preference shares must be redeemable.
This is expected to clarify the previously contentious treatment of returns on such irredeemable preference shares – either as interest which is a deductible expense for tax purposes, or as dividend which is non-deductible. Therefore, this contention is eliminated as all preference shares are to be deemed redeemable by the company. Hence, the returns on such preference share will be treated as interest and therefore allowable as a deductible expense.
6. Fixed Charge Holders to take Priority over Preferential Payments including Tax
A fixed charge is a debt secured against specific identifiable assets, which can subsequently be sold to repay the debt in an event of default. Section 207(4) of CAMA 2020 provides that the holder of a fixed charge is to have priority over other debts of the company including preferential debt. This is irrespective of provisions contained in the law or in any other law currently in force.
Preferential debts, one of which is all assessed taxes of the company, are to be paid in priority to all other debts. However, in line with Section 657(6), where it relates to settlement of claims in the winding up of a company, claims of secured creditors are to rank in priority to all other claims including any preferential payment and debts relating to the expenses of winding up.
Thus, where a company’s assets are insufficient for the purpose of settling all debts, statutory payments including tax and other employee deductions under relevant Acts may be abated, since the interest of secured creditors is to be considered first before preferential payments are made. This may cause a potential loss of revenue to the tax authorities where a company in liquidation is yet to fully settle its tax obligations prior to the commencement of an insolvency process.
7. Non-deductibility of Penalties under CAMA
A major feature of CAMA 2020 is the updated amounts of penalties to reflect current economic realities. While some are expressly contained in the law, the Corporate Affairs Commission (CAC) is to prescribe most of the penalties for any contravention of the provisions therein.
Following the provisions of Section 27 of CITA (as amended by Finance Acts 2019 & 2020), penalties prescribed by an Act of the National Assembly or by any Law of a State’s House of Assembly are treated as disallowable expenses for the purpose of ascertaining the profits of a company.
Consequently, any penalty or fine stipulated in CAMA 2020 or prescribed by the CAC for non-compliance with the law will not be allowed for deduction by a company for income tax purposes.
Conclusion
Again, the enactment of the CAMA 2020 is a step in the right direction considering the developments in the business environment particularly in the last decade, which is largely aimed at ensuring ease of doing business.
This article has highlighted areas in which the CAMA 2020 has interacted with extant tax provisions and obligations. It is expected that clarification guidelines are issued to ensure that administrators, investors, taxpayers and other stakeholders are conscious of their respective responsibilities, in order to avoid ambiguities which may act as a snag in the wheel of seamless implementation of the Act.
News
Finance Act 2020: What’s New?
January 27, 2021
The President has signed the Finance Act 2020 (“the Act”) into law on 31 December 2020. The Act aims at addressing tax as well as non-tax related issues whilst improving on the success of the Finance Act 2019 and correcting its shortcomings.
The Act amends fourteen (14) existing statutes – Capital Gains Tax Act, Companies Income Tax Act, Value Added Tax Act, Personal Income Tax Act, Tertiary Education Trust Fund (Establishment) Act, Industrial Development (Income Tax Relief) Act, Stamp Duties Act, Customs and Excise Tariff etc. (Consolidated) Act, Federal Inland Revenue Service Establishment Act, Nigeria Export Processing Zone Act, Oil and Gas Export Free Zone Act, Companies and Allied Matters Act, Fiscal Responsibility Act and Public Procurement Act.
Key Focus Areas
Companies Income Tax Act
1. Reduction of Minimum Tax
Minimum tax rate reduced from 0.5% to 0.25%, but only for 2020 and 2021 years of assessment, the old rate is reactivated thereafter. Minimum tax is now clearly to be computed on the accounting gross income but excluding franked investment income.
Comments: We believe there is an error in this provision as 2020 returns have been filed by all companies and the minimum tax was computed based on the provisions of the Finance Act 2019 at 0.5%. Therefore, the reduction in rate to 0.25% for two years, should be applicable to tax returns filed during 2021 and 2022 tax years. A further amendment to this provision in the not distant future is not unlikely, to accurately reflect the obvious intention of the drafters of the law.
2. COVID-19 Incentive
Donations made in cash or in-kind to the Government (Federal or State), or any government-designated fund in respect of a pandemic or natural disaster is now an allowable deduction, subject to a maximum of 10% of assessable profits, after deduction of other allowable donations made by the company.
Comments: The extra burden of having to provide documentary proof for this claim and the fact that any unutilized claim cannot be carried forward plus the restriction to 10% of assessable profit could render this incentive cumbersome and insignificant.
3. Tax Returns of Small and Medium Companies
Instead of audited accounts, the FIRS may specify by notice, an alternative form of accounts to be included in the tax returns filed by small and medium-sized companies.
4. Adoption of Electronic Processes
The Act allows for the use of electronic means to exchange correspondence between FIRS and the taxpayers. Also, the Tax Appeal Tribunal may now conduct its proceedings virtually.
Value Added Tax Act
1. Non-Resident Companies to obtain TIN
NRCs making taxable supplies in Nigeria are now required to obtain a Tax Identification Number (TIN) upon registration with FIRS and an NRC may appoint a representative for the purposes of its tax obligations in Nigeria.
2. No VAT on Buildings
The Act has clarified that buildings and interest therein are exempted from VAT. This also means that VAT will not be charged on rental or leasing of buildings, whether for residential or for commercial purposes. However, rights in other tangible and immovable assets are subject to VAT at the applicable rate. Services relating to immovable properties (including the services of agents, experts, engineers, architects, valuers, etc.) are liable to VAT
3. Expansion of VAT-Exempt Goods and Services
Commercial aircrafts, aircraft engines and spare parts as well as commercial airline tickets and lease of agricultural equipment for agricultural purposes now exempted from VAT. Also, animal feed now deemed as basic food item, and as such not subject to VAT.
4. Re-definition of VATable Supplies
Supplies in respect of goods re-defined to mean all forms of movable or immovable tangible properties, excluding land, building, money or securities. Services include those consumed by a person in Nigeria, whether rendered within or outside Nigeria, excluding services provided under a contract of employment.
In respect of incorporeal, taxable supplies include the exploitation, acquisition or assignment of rights by a person in Nigeria or where the incorporeal is connected with a tangible or immovable asset located in Nigeria.
Personal Income Tax Act (PITA)
1. Significant Economic Presence Rule for Individuals
An individual, executor, or trustee outside Nigeria and providing technical, management, consultancy or professional services to a person resident in Nigeria may be subject to tax in Nigeria to the extent that such individual, executor or trustee has significant economic presence in Nigeria. The Minister is to determine what constitutes SEP of a non-resident individual.
2. Exclusion of Minimum Wage Earners from Tax
People with an annual gross income of N360,000 or less are now exempted from payment of PAYE. However, their employers will still be required to file annual tax returns.
3. Gross Income for Personal Relief
The gross income for the purpose of calculating consolidated relief allowance (CRA) for personal income tax purpose is now redefined as income from all sources less all non-taxable income, income on which no further tax is payable and tax-exempt items.
Other Notable Changes
1. Introduction of the Electronic Money Transfer Levy (EMT Levy)
The ₦50 stamp duty previously payable on money transfers of sums over ₦10,000 has been scrapped, and as a substitute, an EMT Levy of ₦50 is now to be paid on every electronic transfer of at least ₦10,000. The revenue generated from the collection of the Levy is to be distributed between the Federal and State Governments at 15% and 85% respectively and on derivation basis to the States.
2. Treatment of Unclaimed Dividends and Dormant Accounts Balances
Unclaimed dividends in a listed company and unutilized amounts in a dormant bank account outstanding for 6 years or more are to be transferred to the Unclaimed Funds Trust Fund (UFTF), to serve as a perpetual trust. The UFTF is to be managed by the Debt Management Office and transferred dividends and amounts constitute a special debt owed by the Federal Government to the shareholders and dormant bank account holders respectively and shall be available for claim at any time, together with the yield thereon.
Failure by any company or any deposit money bank to transfer unclaimed dividends or dormant accounts balance into the UFTF shall attract a fine of not less than five times the value of the unclaimed dividends and unutilized funds plus accumulated interest on the amount not transferred at the CBN Monetary Policy Rate.
Unclaimed dividends in a private limited company outstanding for 12 years shall be distributed to other shareholders of the company.
3. Excise Duties on Telecommunication Services
Telecommunication services provided in Nigeria are now included in the scope of goods liable to excise duties. The duty payable shall be at rates to be prescribed by the President via an Order.
4. Capital Gains Tax on Compensation for Loss of Office
The Finance Act has clarified that only the excess of ₦10,000,000 paid as compensation for loss of office is subject to CGT whilst employers are now appointed as agents of collection and thus obligated to deduct and remit tax due to the relevant tax authority within the time specified under the PAYE Regulations pursuant to PITA.
5. Companies in Free Zones (Export Processing Zones and Oil and Gas Export Free Zones
Approved enterprises within free trade zones are now expected to render returns to the FIRS and comply generally with the provisions of Section 55(1) of CITA, as a condition to be tax exempt.
6. Pioneer Status for Primary Agricultural Production Companies
Small or medium-sized companies engaged in primary agricultural production, may now qualify for an initial tax-free period of four (4) years, renewable for an additional maximum period of two (2) years, subject to satisfactory performance.
7. Amendment of Excise Duties and Levy
Type of Vehicle
Old Rate
New Rate
Tractors (HS Headings 8701)
35% Duty
5% Duty
Motor Vehicles for the transport of more than 10 persons (HS Headings 8702)
35% Duty
10% Duty
Motor Vehicles for the transport of persons [cars] (HS Headings 8703)
30% Levy
5% Levy
Motor Vehicles for the Transport of Goods (HS Headings 8704)
35% Duty
10% Duty
We commend the Federal Government for the demonstrated commitment to continually review the tax laws via the Finance Acts as this will ensure that the laws are in tune with the times and that taxation plays the expected role in any modern economy.
News
Peter Asemah has been Appointed as a New Director, Morison KSi Africa Board.
October 13, 2020
Morison KSi is pleased to announce 8 new directors on 4 of its regional Boards.
Joining the Morison KSi Africa Board is Peter Asemah from Pedabo, Lagos, Nigeria and joining the Morison KSi Asia Pacific Board are Afwaz Alkhuzam from Alkhuzam & Co, Kuwait City, Kuwait and Harsh Bhuta from Bhuta Shah & Co, Mumbai, India.
The Morison KSi Europe Board welcomes Isabelle Strecker-Hazan from Aplitec, Paris, France; Jonas Derycke from Van Havermaet, Brussels, Belgium and Sachin Ramaiya, from Jeffreys Henry, London, UK.
Joining the Morison KSi Latin America Board are Carlos Urbina from Urbina & Asociados, Panama City, Panama and Leonel Villamar from ACOFI – Villamar & Asociados, Guatemala City, Guatemala.
All Directors were appointed following a new recruitment and selection process, led by a Nomination Committee, aimed at attracting new talent and diversity to the Boards. All new Board Director profiles can be found in the attached document.
Source: MorisonKSi.com
News
FIRS GRANTS WAIVER OF INTEREST AND PENALTY TO TAXPAYERS