Guardian

ON Tuesday 13 December 2011, the president of the Federal Republic of Nigeria presented the 2012 Federal Budget proposal to the joint session of the National Assembly under the theme “Fiscal consolidation, inclusive growth and job creation”.

Besides the confirmation by the president that the Personal Income Tax (Amendment) bill has been signed into law, the proposed budget contains a number of tax policy initiatives. These include corporate tax waiver on all bonds and debt instruments, a review of the Export Expansion Grant and ECOWAS Trade Liberalisation Schemes, import duty regime and corporate tax rate reduction to encourage the substitution of cassava flour for wheat flour in bread-making, concessions and waivers to be granted only on a sectoral basis, regulations to support companies involved in social projects and community developments, tax rebates for companies that create jobs, measures to encourage the purchase and utilization of locally manufac- tured products, engagement with key stakeholders to review the proposed Petroleum Industry Bill with the intention of passing the revised version into law, zero percent duty on equipment for processing of cassava flour and composite flour blending, and machinery for use in the agricultural sector as well as equipment and machinery for use in the power sector. On the other hand import duties on wheat flour, wheat grain and rice are to increase while importation of cassava flour will be prohibited.

Despite the attempt to leverage tax policies to improve the economy, many aspects of our tax system which require improvements are yet to be addressed.

In continuation of our Top 50 Tax Issues in Nigeria, we analyse the third top 10 issues in this publication.

Risk based audit

Many tax officials focus too much on non value adding areas during tax audit resulting in unnecessary waste of taxpayers’ time and inefficient use of tax authority’s resources. A risk-based approach to tax administration should be adopted to improve efficiency both for the tax authority and the taxpayers. This should be supported with the necessary tools and measures such as Data Mining Software, taxpayer profiling and so on in order to focus more on high risk taxpayers and significant tax issues.

Double tax treaties and unilateral tax relief

Nigeria currently has double taxation treaties with only 12 countries many of which are not major trading partners with Nigeria. One of the reasons why the Netherlands is a popular investment holding destination is because of the country’s wide treaty network with about 100 countries. The UK has treaties with over 80 countries while South Africa has over 60 including treaties with major countries such as the United States. To be competitive on the global stage, Nigeria must improve its double tax treaty network and provide equivalent unilateral relief where there is no double tax treaty.

Taxation of free zone enterprises and individuals

The free trade zone regulations provide exemptions to companies registered in the zones on all taxes but in practice there are often controversies on whether the exemption covers individuals, both nationals and expatriates working and living in the zone. There is also no clarity as to whether approved enterprises in the zone are obliged to account for withholding taxes on payments to vendors within the custom territory. There should be a clear guideline on the intention of the enabling laws regarding withholding tax, VAT and PAYE tax.

Tax clearance certificate

Taxpayers are required to obtain a tax clearance certificate (TCC) annually which is often needed to conduct many business transactions. Some tax officials use this as an avenue to harass taxpayers by bringing up issues outside the period covered or contrary to the provisions of the law regarding TCC such as the recent requirement to provide directors’ TCCs before obtaining company TCC. The CITA requires that TCC must be issued within 2 weeks of application otherwise the tax authority must explain. TCC should be issued automatically within 2 weeks of every new calendar year provided a taxpayer has no outstanding undisputed tax liability on the last day of the previous year of assessment.

VAT registration by non resident entities

A non resident entity carrying on business in Nigeria is required to register for VAT using the address of the Nigerian customer. The issue here is what happens if the non resident has more than one contract with different customers at the same time or in succession? Also, the registration requirement is often extended by the FIRS in practice to cover any non resident doing business with a Nigerian customer. This leads to complications where the non resident entity does not require any physical presence in Nigeria as in the case of royalty. Reverse VAT system should be introduced and non residents without a fixed base of business in Nigeria should not be required to register for VAT.

Reverse charge of VAT

This is a system whereby the recipient of a VATable supply is required to self assess VAT on imported services. This provision does not exist in the Nigerian VAT Act but is being introduced by the FIRS through Information Circulars which are not binding. This is a loophole in the tax law as certain imported services where the provider does not have to be physically present in Nigeria can legally escape VAT. The VAT Act should be amended to specifically require the Nigerian recipient of imported services to self account for VAT under a reverse charge system.

Interest and penalty for tax default

A number of tax laws in Nigeria require penalty to be calculated on an annual basis. Also, there is no guideline regarding what base lending rate or commercial interest represents and whether interest should be one off, simple or compound. There is also no standard practice regarding the effective date interest should begin to accrue especially where an assessment is under objection or appeal. All these issues should be addressed accordingly.

Compulsory Tax Identification Number (TIN) registration by non residents

The procedure for withholding tax remittance put in place by the FIRS makes it mandatory for all beneficiaries of withholding tax remittance to have tax identification numbers without which the customer will not be able to remit the withholding tax. This means for instance that a non resident investor who only earns dividend from Nigeria will also be forced to register for income tax. This procedure should be fine-tuned to exclude non residents who earn passive income from Nigeria.

Exempt and zero rated items Basic food items, educational materials, medical and pharmaceutical products are VAT exempt rather than zero rated. This implies that any input VAT not claimable will be passed on to consumers in form of higher prices thereby defeating the objective of ensuring that tax does not increase the cost of these items beyond the reach of ordinary people. Also, exported services are exempt rather than zero rated thereby making exported services from Nigeria less competitive in the global market place. In addition, the schedule of exempt and zero rated items are too generic which creates unnecessary confusion, for instance, what is basic food? This also creates a conflict between exemptions in the VAT act and the customs tariff code for imported items. Medical products, basic food items and educational materials should be zero rated and the schedules of exempt and zero rated items should be explicit. Exported services should be zero rated for the same reason that exported goods are zero rated.

Branch operations

Branch operations are not permitted. The Companies and Allied Matters Act (CAMA) requires a non resident entity doing business in Nigeria to incorporate a Nigerian entity regardless of the duration of the project. This creates unnecessary administrative burden for investors without any benefits to the Nigerian economy. Branch operations should be permitted and taxed accordingly especially as the tax laws recognise the taxation of non resident companies on their Nigerian derived income.

To be continued…..

Taiwo Oyedele is a Partner in the Tax and Corporate Advisory Services Unit of PwC Nigeria and a regular paper presenter on professional tax matters - This e-mail address is being protected from spambots. You need JavaScript enabled to view it .