The Top 50 Tax Issues in Nigeria:Still no improvement one year later ( 4)
IN the past couple of weeks we have witnessed an unprecedented debate around the issue of fuel subsidy in Nigeria.
According to Investopedia, subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. There are many forms of subsidies given out by various governments, including welfare payments, housing loans, student loans and farm subsidies.
Call it a transfer payment, social benefit, or grant and you will not be far from the truth. However from a fiscal point of view, the fuel subsidy in Nigeria is akin to a negative tax for those who agree that there is a subsidy while for those who disagree it is an outright tax. Therefore, the reduction in fuel subsidy through an increase in the regulated pump price is effectively a reduction in the negative tax and consequently an increase in tax.
Whatever your view, one thing we can all agree on is that government must reduce the tax burden on individuals and businesses including simplifying tax administration and compliance process.
In continuation of our series on the Top 50 Tax Issues in Nigeria, we articulate the fourth top 10 issues in this publication.
Ruling practice – It is often difficult and slow to obtain a ruling from the tax authorities. This makes voluntary compliance difficult for willing taxpayers. As is the case in some countries, Nigerian tax authorities should adequately resource the relevant departments in charge of tax ruling. If a request for ruling is not replied by the tax authorities within a specified period, say 60 days, then the tax treatment of the situation under analysis as proposed by the taxpayer should be considered as approved.
VAT and withholding tax point of payment – This is a practical challenge where an entity supplies VATable goods or services on credit with payment due after the due date for filing and payment of VAT. Businesses without free cash flow will inevitably default in VAT payment unless they borrow to pay VAT which adds to the cost of doing business. VAT payment should be on cash basis not accrual except in instances where the transaction will not be settled in cash. The same issue and possible solution apply to withholding tax.
Capital allowance on certain assets - The Second Schedule to CITA on capital allowance does not include assets such as ships, aircraft and intangible assets such as license, software and franchise. The schedule of qualifying assets should be expanded for capital allowance purposes. A related issue is pre-incorporation expenditures being necessary expenses incurred to establish a company in order to generate taxable business income in future. Since the company is yet to make profits, these expenses are capitalised but are not regarded as qualifying capital expenditure under CITA for capital allowance purposes. It is also not permissible to claim a tax deduction for them as they are normally regarded as capital in nature. There should be a provision to allow tax deduction for all necessary business expenditures.
Certificate of acceptance - The CITA requires a certificate of acceptance to be obtained for assets addition from the Ministry of Industry for capital allowance purposes. This is of no relevance and creates an extra burden without adding any value to the process in addition to creating an avenue for sharp practices. The need for certificate of acceptance should be abolished.
Tax awareness and communication – It is currently difficult to obtain the necessary information required for tax compliance purposes even for entities willing to comply voluntarily. Tax laws, guidelines, forms, information circulars, regulations, tax rulings, administrative procedures, tax treaties etc should be easily accessible to the public and freely available on the internet for instance on the website of the Joint Tax Board, FIRS and states tax authorities.
Cost recovery and tax deductibility – This is one of the major issues in the petroleum industry. Where an expense is disallowed for cost recovery by the NNPC, the practice is often to disallow also for tax purposes. Tax deduction for expenses should be based strictly on provisions of the tax law regardless of the practice of any government agency. Other contentious issues in the petroleum industry include treatment of investment tax credit, operator sole cost, NDDC levy, community development expenses, interest on related party loan and gas flaring penalty. The Petroleum Industry Bill, when eventually passed, should hopefully address these issues.
Capital gains tax and inflation - Capital Gains Tax (CGT) is applicable on capital gains derived from the disposal of a chargeable asset. The determination of chargeable gain ignores inflation and time value of money. A taxpayer may therefore be required to pay CGT even when in real terms the tax payer has incurred a loss. There should be inflation adjustments to cost of chargeable assets in line with global best practice in calculating capital gains tax.
Investment allowance – Any expenditure on plant and equipment entitles the owner to investment allowance. However, the tax authorities often challenge whether office equipment such as computers, printers, and generators fall into this category. Since equipment is not defined or qualified in the CITA and there is no other more appropriate classification, office equipment should be allowed to enjoy investment allowance. The law should be amended if this is not the intention.
Statute of limitation – The period to reopen tax assessments is limited to 6 years unless there is any form of fraud, wilful default or neglect. This provision is to encourage the tax authorities to carry out tax audit promptly and to manage the challenges associated with document retention on the part of the taxpayers. However, in practice, the tax authorities often make allegations of wilful default and negligence to reopen past tax assessments without any limit. The law should be amended to limit the ground of exemption from the statute of limitation only to fraud and exclude wilful default and neglect which are subjective.
Tax transparency and accountability – Tax is a compulsory levy designed to generate revenue for public expenditure including infrastructure. Taxpaying culture is poor in Nigeria due largely to the lack of transparency and accountability on the part of government as taxpayers’ money is rarely seen at work. When people have to pay taxes and also provide their own infrastructure this effectively increases tax rates and costs to taxpayers. Government should be transparent and publish detailed information on tax collection and utilisation of the revenue generated on a regular basis as a mark of accountability and fiscal responsibility. This will encourage voluntary compliance.
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.
For regular tax updates and technical analyses, visit www.pwc.com/ng to subscribe to our Tax Blog “Tax Matters Nigeria” anchored by Taiwo.
According to Investopedia, subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. There are many forms of subsidies given out by various governments, including welfare payments, housing loans, student loans and farm subsidies.
Call it a transfer payment, social benefit, or grant and you will not be far from the truth. However from a fiscal point of view, the fuel subsidy in Nigeria is akin to a negative tax for those who agree that there is a subsidy while for those who disagree it is an outright tax. Therefore, the reduction in fuel subsidy through an increase in the regulated pump price is effectively a reduction in the negative tax and consequently an increase in tax.
Whatever your view, one thing we can all agree on is that government must reduce the tax burden on individuals and businesses including simplifying tax administration and compliance process.
In continuation of our series on the Top 50 Tax Issues in Nigeria, we articulate the fourth top 10 issues in this publication.
Ruling practice – It is often difficult and slow to obtain a ruling from the tax authorities. This makes voluntary compliance difficult for willing taxpayers. As is the case in some countries, Nigerian tax authorities should adequately resource the relevant departments in charge of tax ruling. If a request for ruling is not replied by the tax authorities within a specified period, say 60 days, then the tax treatment of the situation under analysis as proposed by the taxpayer should be considered as approved.
VAT and withholding tax point of payment – This is a practical challenge where an entity supplies VATable goods or services on credit with payment due after the due date for filing and payment of VAT. Businesses without free cash flow will inevitably default in VAT payment unless they borrow to pay VAT which adds to the cost of doing business. VAT payment should be on cash basis not accrual except in instances where the transaction will not be settled in cash. The same issue and possible solution apply to withholding tax.
Capital allowance on certain assets - The Second Schedule to CITA on capital allowance does not include assets such as ships, aircraft and intangible assets such as license, software and franchise. The schedule of qualifying assets should be expanded for capital allowance purposes. A related issue is pre-incorporation expenditures being necessary expenses incurred to establish a company in order to generate taxable business income in future. Since the company is yet to make profits, these expenses are capitalised but are not regarded as qualifying capital expenditure under CITA for capital allowance purposes. It is also not permissible to claim a tax deduction for them as they are normally regarded as capital in nature. There should be a provision to allow tax deduction for all necessary business expenditures.
Certificate of acceptance - The CITA requires a certificate of acceptance to be obtained for assets addition from the Ministry of Industry for capital allowance purposes. This is of no relevance and creates an extra burden without adding any value to the process in addition to creating an avenue for sharp practices. The need for certificate of acceptance should be abolished.
Tax awareness and communication – It is currently difficult to obtain the necessary information required for tax compliance purposes even for entities willing to comply voluntarily. Tax laws, guidelines, forms, information circulars, regulations, tax rulings, administrative procedures, tax treaties etc should be easily accessible to the public and freely available on the internet for instance on the website of the Joint Tax Board, FIRS and states tax authorities.
Cost recovery and tax deductibility – This is one of the major issues in the petroleum industry. Where an expense is disallowed for cost recovery by the NNPC, the practice is often to disallow also for tax purposes. Tax deduction for expenses should be based strictly on provisions of the tax law regardless of the practice of any government agency. Other contentious issues in the petroleum industry include treatment of investment tax credit, operator sole cost, NDDC levy, community development expenses, interest on related party loan and gas flaring penalty. The Petroleum Industry Bill, when eventually passed, should hopefully address these issues.
Capital gains tax and inflation - Capital Gains Tax (CGT) is applicable on capital gains derived from the disposal of a chargeable asset. The determination of chargeable gain ignores inflation and time value of money. A taxpayer may therefore be required to pay CGT even when in real terms the tax payer has incurred a loss. There should be inflation adjustments to cost of chargeable assets in line with global best practice in calculating capital gains tax.
Investment allowance – Any expenditure on plant and equipment entitles the owner to investment allowance. However, the tax authorities often challenge whether office equipment such as computers, printers, and generators fall into this category. Since equipment is not defined or qualified in the CITA and there is no other more appropriate classification, office equipment should be allowed to enjoy investment allowance. The law should be amended if this is not the intention.
Statute of limitation – The period to reopen tax assessments is limited to 6 years unless there is any form of fraud, wilful default or neglect. This provision is to encourage the tax authorities to carry out tax audit promptly and to manage the challenges associated with document retention on the part of the taxpayers. However, in practice, the tax authorities often make allegations of wilful default and negligence to reopen past tax assessments without any limit. The law should be amended to limit the ground of exemption from the statute of limitation only to fraud and exclude wilful default and neglect which are subjective.
Tax transparency and accountability – Tax is a compulsory levy designed to generate revenue for public expenditure including infrastructure. Taxpaying culture is poor in Nigeria due largely to the lack of transparency and accountability on the part of government as taxpayers’ money is rarely seen at work. When people have to pay taxes and also provide their own infrastructure this effectively increases tax rates and costs to taxpayers. Government should be transparent and publish detailed information on tax collection and utilisation of the revenue generated on a regular basis as a mark of accountability and fiscal responsibility. This will encourage voluntary compliance.
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.
For regular tax updates and technical analyses, visit www.pwc.com/ng to subscribe to our Tax Blog “Tax Matters Nigeria” anchored by Taiwo.
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