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Transaction Taxes in Nigeria: Key Issues 2011

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1 Transaction Taxes in Nigeria: Key Issues 2011
25/03/2017 Transaction Taxes in Nigeria: Key Issues 2011

2 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

3 At the end of this session, you should be able to:
25/03/2017 Course Objectives At the end of this session, you should be able to: Identify the provisions of the law on transaction taxes List the compliance requirements relating to transaction taxes Describe the impact of these taxes on profitability Manage exposure to transaction taxes

4 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

5 Overview of transaction taxes in Nigeria: Value Added Tax (VAT)
25/03/2017 Overview of transaction taxes in Nigeria: Value Added Tax (VAT)

6 Value Added Tax Definitions
25/03/2017 Value Added Tax Definitions “VAT is a tax on the supply of goods and services which is eventually borne by the final consumer but collected at each stage of the production and distribution chain” – Statement of Standard Accounting Practice (SSAP) No.5 UK “VAT is a multi-stage consumption tax levied on the difference between a firm’s sales and the value of its purchased inputs used in producing goods”. – Oliver Oldman

7 Introduction to VAT In Nigeria:
25/03/2017 Introduction to VAT In Nigeria: VAT is a consumption tax which is to be levied on all goods and services, other than those exempted under the VAT Act It is collected at each stage of the production and distribution process by authorised persons It is eventually borne by the final consumer, (however sometimes multiple layers do bear part of the burden e.g. VAT on tax on services and fixed assets) Standard rate of tax is 5% of invoice value of goods and services VAT commenced in Nigeria effectively 1 January 1994 It is administered by the Federal Inland Revenue Service (FIRS)

8 INCIDENCE IS ON FINAL CONSUMER
25/03/2017 Introduction to VAT (Cont’d) 3 Essential Characteristics Consumption tax VAT can only be levied and paid if there is a consumption of either VATable goods or services CONSUMPTION INCIDENCE IS ON FINAL CONSUMER A MULTISTAGE TAX

9 INCIDENCE IS ON FINAL CONSUMER
25/03/2017 Introduction to VAT (Cont’d) 3 Essential Characteristics A Multi-Stage Tax VAT must be paid at every stage wherein value is added CONSUMPTION INCIDENCE IS ON FINAL CONSUMER A MULTISTAGE TAX

10 INCIDENCE IS ON FINAL CONSUMER
25/03/2017 Introduction to VAT (Cont’d) 3 Essential Characteristics Incidence on Final Consumer Being a consumption and transferable tax, incidence of VAT is borne by the final consumer CONSUMPTION INCIDENCE IS ON FINAL CONSUMER A MULTISTAGE TAX

11 Illustration of VAT VAT is paid at each stage
25/03/2017 Illustration of VAT VAT is paid at each stage Producer Sales 1000 5% Gross Sales Net VAT at Stage (50-0) 50* Manufacturer Sales 1500 5% Gross Sales 1575 Net VAT at stage (75-50) 25* Wholesaler Sales 2000 5% Gross Sales Net VAT at stage (100-75) 25* Retailer Sales 3000 5% Gross Sales Net VAT at stage ( ) 50* *Net VAT Paid= =150=Borne by final consumer Note: This illustration does not reflect effect of tax on services

12 Important VAT definitions
25/03/2017 Important VAT definitions Output VAT – This is VAT that is chargeable on sales Elements of Output VAT: This is VAT on sale or supply of goods and services to customers VAT is collected at the rate appropriate to the category of items (in Nigeria, this is currently at a flat rate of 5%) VAT must be accounted for properly as the collector is an agent of the Government

13 Important VAT definitions
25/03/2017 Important VAT definitions Input VAT – This is VAT that is chargeable on purchases Elements of Input VAT: This is VAT on goods purchased or imported directly for resale Also includes goods that form stock-in-trade used for direct production of any new product Input VAT is not reclaimable on fixed assets, overheads, services and general administration expenses. VAT on fixed assets is capitalised as part of the cost of the asset while VAT on overheads etc are expensed through the income statement

14 Important VAT definitions
25/03/2017 Important VAT definitions Exempt Goods and Services - These items are specifically listed in the Act and are primarily essentials. Sellers are not to charge VAT on sales. Also, they cannot reclaim VAT paid on purchase of inputs.  Zero-rated goods and services - These items were recently reintroduced into the VAT Act e.g. non-oil exports. Sellers are to charge VAT on sales at 0%. The difference is that they can claim a refund for any VAT paid on inputs purchased. Exported service - This is a service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria. Imported service - This is a service rendered by a non-resident to a person inside Nigeria.

15 Important VAT definitions (Cont’d)
25/03/2017 Important VAT definitions (Cont’d) Tax Invoice A taxable person who makes a VATable supply (i.e. a supply that is liable to VAT) is required to furnish the purchaser with a tax invoice which should contain the following: Tax payers identification number Name and address VAT registration number The date of supply Name of purchaser or client Gross amount of transaction Tax charged and rate applied

16 Important VAT definitions (Cont’d)
25/03/2017 Important VAT definitions (Cont’d) Supplies - Any transaction, whether it is the sale of goods or the performances of services for a consideration, that is, for money or money’s worth Supply of Goods - Any transaction where the whole property in the goods is transferred or where the agreement expressly contemplates that this will happen and in particular includes the sale and delivery of taxable goods and services used outside the business, the letting out of taxable goods on hire or leasing, and any disposal of taxable goods Supply of Services - Any services provided for a consideration Payment/Refund of VAT If VAT collected > VAT paid, remit excess to Government If VAT collected < VAT paid, request refund from Government

17 VAT Exemptions and Zero-rated Supplies
25/03/2017 VAT Exemptions and Zero-rated Supplies Goods Exempted from VAT 1. All medical and pharmaceutical products 2. Basic foods items 3. Books and educational materials 4. Baby products 5. Plan, machinery and goods imported for use in the export processing zone or free trade zone. Provided that production of such company is for export otherwise tax shall accrue proportionally on the profits of the company 6. All exports 7. Plant, machinery and equipment purchased for utilisation of gas in downstream petroleum operations 8. Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes

18 VAT Exemptions and Zero-rated Supplies
25/03/2017 VAT Exemptions and Zero-rated Supplies Services Exempted from VAT 1. Medical services 2. Services rendered by Community Banks, People Banks and Mortgage institutions 3. Plays and performances conducted by educational institutions as part of learning All exported services Zero-rated Supplies 1. Non-oil exports 2. Goods and services purchased by diplomats 3. Goods purchased for use in humanitarian donor-funded projects

19 Overview of transaction taxes in Nigeria: Withholding Tax (WHT)
25/03/2017 Overview of transaction taxes in Nigeria: Withholding Tax (WHT)

20 Withholding Tax (WHT) Introduction
25/03/2017 Withholding Tax (WHT) Introduction WHT is an advance payment of income taxes. It is deductible from every payment for a transaction liable to WHT and all types of contracts and agency arrangements other than sale and purchases in the ordinary course of business i.e. any sale that falls within the norms, customs and practices of a business. Therefore, if a transaction or part of a transaction (e.g. reimbursement of costs) is not going to give rise to a liability to income tax, WHT would not be applicable on that portion. Similarly, if a payment is made to a non-resident company which has no permanent establishment in Nigeria for work that is done wholly outside Nigeria, no Nigerian tax liability would arise for the non-resident company and WHT should not be deducted from payments made to the company.

21 Withholding Tax (WHT) Introduction (Cont’d)
25/03/2017 Withholding Tax (WHT) Introduction (Cont’d) Withholding tax is tax deducted at source from income earned by a taxpayer on a qualifying transaction, investment or income stream It is designed to capture tax and information on transactions to prevent tax evasion It guarantees steady tax inflow on a monthly basis to Government It is not another type of tax; just an advance (in some cases final) payment of income tax Qualifying Transactions – A qualifying transaction is a transaction specified in tax laws as liable to withholding tax

22 Withholding Tax (WHT) 22 Introduction (Cont’d) Qualifying Income
25/03/2017 Withholding Tax (WHT) Introduction (Cont’d) Qualifying Income Companies Individuals Dividend, rent, interest 10% 10% Royalty 10% 5% Hire of equipment, motor vehicles, plant & machinery 10% 10% All commissions, consultancy, technical & management fees, legal fees, audit fees, listing fees and other professional fees 10% 5% Construction and all types of contracts & agency arrangement, other than sales in the ordinary course of business 5% 5% Director’s fees 10% 10% 22

23 Withholding Tax (WHT) Introduction (Cont’d)
25/03/2017 Withholding Tax (WHT) Introduction (Cont’d) Withholding tax was introduced into the Nigerian tax system in 1977 with limited coverage to few transactions Prior to May 1985, it only applied to unearned income (i.e. rent, dividend, interest and royalty) Deduction of tax on payments was introduced by the Finance (Miscellaneous Taxation Provisions) Decree No.4 of 1985 (“Decree 4”), which required certain companies, Government bodies and other establishments to withhold tax at specified rates on specific categories of payments made by them

24 25/03/2017 Withholding Tax (WHT) Introduction (Cont’d) The applicable laws governing Withholding tax are: Companies Income Tax Act Personal Income Tax Act Petroleum Profits Tax Act Tax Regulations (pronouncements issued by Minister of Finance, 1997, 2000) FIRS Information Circulars are not a legal basis for Withholding tax. They may be relied upon for guidance.

25 Withholding Tax (WHT) 25 An Overview
25/03/2017 Withholding Tax (WHT) An Overview Franked Investment Income – Withholding tax is final tax for the following transactions: (a) Rent, interest or royalty (non-residents only) (b) Dividend (Nigerian and non-resident companies) Dividend income is called franked investment income Where a Nigerian company subsequently redistributes its dividend and tax is to be accounted for on the gross amount redistributed, it may offset the withholding tax it suffered on the same income 25

26 Withholding Tax (WHT) 26 An Overview (Cont’d) Double Tax Treaties
25/03/2017 Withholding Tax (WHT) An Overview (Cont’d) Double Tax Treaties Rates are reduced from 10% to 7.5% on rent, dividend, interest or royalty for entities operating in Double Tax Treaty Countries Current DTT countries include United Kingdom, Pakistan, Romania, Belgium, France, Canada, Czech and Slovak Republics, etc 26

27 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

28 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Value Added Tax – Compliance requirements VAT Registration A taxable person is required to register with the FIRS for the purpose of the tax, within six months of commencement of business A non-resident company that carries on business in Nigeria shall register for the tax with the board, using the address of the person with whom it has a subsisting contract, as its address for purposes of correspondence relating to the tax

29 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Value Added Tax – Compliance requirements (Cont’d) Monthly Filing of VAT Returns VAT returns are due for filing by the 21st of the month following the month of the transaction Withholding of VAT at Source Government, government agencies are required to withhold VAT at source from all VATable supplies Local recipients of the services of non-residents are required to withhold VAT at source from non-resident suppliers From 2007, oil and gas companies are required to withhold VAT from all VATable supplies

30 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Value Added Tax – Compliance requirements (Cont’d) Introduction of VAT Refund Mechanism In view of the Federal Inland Revenue Service (Establishment) Act and the Value Added Tax (Amendment) Act 2007, there is now a mechanism for claiming VAT refunds. If properly implemented, this means that VAT deduction at source and zero rated goods and services should not result in any additional tax cost to taxpayers as they will be able to claim a refund from the FIRS.

31 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Value Added Tax – Penalties and Offences Failure to issue tax invoice: The penalty for failure to issue a tax invoice for goods sold or services rendered, is a fine of 50% of the cost of the goods or services for which tax invoice was not issued. This means that every invoice in respect of a taxable transaction (a transaction not exempt from VAT) should include 5% VAT Failure to keep proper records: The penalty for failure to maintain proper records and accounts of business transactions to allow for correct ascertainment of tax and filing of returns is N2,000 for every month in which the failure continues Failure to submit returns: The penalty is a fine of N5,000 for every month in which the failure continues

32 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Value Added Tax – Penalties and Offences (Cont’d) Failure to remit VAT: The penalty for failure to remit VAT within the stipulated time limit is a sum equal to 5% per annum of the amount of tax not remitted plus interest at commercial rate Where an offence is committed by a company, the directors and other officers of the company will be held to be severally guilty of the offence as well, unless they are able to establish that the act or omission constituting the offence took place without their knowledge, consent or connivance.

33 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Withholding tax (WHT) – Compliance requirements WHT Registration Registration for the various income taxes i.e. Companies Income Tax, Petroleum Profits Tax and Personal Income Tax automatically registers the taxpayer for WHT WHT Remittance Remittance is to be made on the earlier of the dates when the payment is made or credited. Remittance is to be made as follows:   - To the FIRS– For companies under CITA, within 21 days of deduction of the tax For companies under the PPTA, remittance must be made within 30 days of the deduction of the tax - To the relevant SIRS: within 30 days of the deduction of the tax.

34 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Withholding tax (WHT) – Compliance procedures Tax is payable in the currency of the qualifying transaction In practice, remittance is made within 21 days or 30 days (depending on the taxpayer) of the month following deduction Following payment and filing of returns, the Revenue processes credit notes for the suppliers on whose income tax was deducted Credit notes will be used in applying for tax credit against current and future tax liabilities (i.e. where it is not final tax)

35 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Withholding tax (WHT) – Penalties The penalties for non-compliance with WHT deduction and remittance are as follows: - In respect of WHT payable to the FIRS: For companies under CITA, 10% of the amount due as penalty and interest at commercial rate. For companies under the PPTA, 200% of the amount due as penalty and interest at the commercial rate. However, by virtue of the FIRS (Establishment) Act, the penalty is 10% plus interest at the prevailing Central Bank of Nigeria minimum re-discount rate - In respect of WHT payable to SIRS: The higher of N5,000 or 10% of the amount due and interest at the commercial rate.

36 Compliance requirements and penalties
25/03/2017 Compliance requirements and penalties Withholding tax (WHT) – Penalties (Cont’d) Section 40 of the FIRS (Establishment) Act provides that: “Any person who being obliged to deduct any tax under this Act or the laws in the First Schedule to this Act, but fails to deduct or having deducted, fails to pay to the Service within thirty days from the date the amount was deducted or the time the duty to deduct arose, commits an offence and shall, upon conviction, be liable to pay the tax withheld or not remitted in addition to a penalty of 10 per cent of the tax withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment for period of not more than three years” Therefore, is it legal to subject taxpayers to pay the tax not deducted in addition to penalty and interest?

37 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

38 is the good or service taxable
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) - The Charging Section …… payable on the supply of taxable goods and services 5 Where did the supply take place? 1 Is it a supply? 3 or a service? 2 is it a good? 6 when is the tax payable? 4 is the good or service taxable

39 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) 1. “VAT is payable on the supply of taxable goods and services” Meaning of Supply – clarity on tax implications of self-supply, gratuitous transfers and other deemed supplies Is VAT chargeable when a company supplies its staff goods produced by it? Is VAT chargeable on gifts given by company to its staff VAT should not apply as no consideration can be imputed to the transaction. However, input VAT on such goods and services should be reversed as the staff is now the final consumer

40 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) 2. “Does every transaction involve either a good or a service”? Is the sale of interest in an oil block a good or a service? Is the sale of shares a good or a service? Are insurance premiums goods or services? The FIRS in its Information Circulars has excluded the last two items from VAT. However, there is still no clarification on whether “interest” is a good or a service

41 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) 3. “How should VAT be accounted for in barter transactions”? Both parties should charge VAT based on the market value of the exchange commodity. 4. “When is a VATable sale deemed to have taken place in Nigeria”? This is when a sale occurs anywhere in the geographical area covered by the land mass and territorial waters and all the economic zones excluding the Free Trade Zone

42 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) 5. Should VAT be filed on accrual or cash basis? Section 10(1) of the VAT Act “A taxable person shall pay to the supplier the tax on taxable goods and services purchased or supplied to the person” Section 11(1) of the VAT Act “A taxable person shall on supplying taxable goods or services….., collect the tax on the goods and services……… Section12 of the VAT Act “ A taxable person shall render …, on or before the 21st day of the month following that in which the supply was made, a return of all taxable goods and services purchased or supplied by him during the preceding month….”

43 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Value Added Tax (VAT) 6. How should VAT be accounted for in deposit and advance payment transactions? The supplier should charge VAT on the invoice for deposits and advance payments

44 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Withholding Tax (WHT) 1. Obscure description / disclosure of activities e.g. Transport Service vs. Rent/Hire 2. Absence of Invoice-splitting between “cost” and “fee/service charge” - This leads to confusion on whether or not to charge WHT on the whole amount

45 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Withholding Tax (WHT) 3. The “all-embracing” transaction category ? “All types of contracts & agency arrangement, other than sales in the ordinary course of business” (taxable at 5%) Tax examiners attempt to rein in many transactions, other than those falling into specific identified categories, into this caption.

46 Practical Issues in accounting for VAT & WHT
25/03/2017 Practical Issues in accounting for VAT & WHT Withholding Tax (WHT) 4. Deciding on the appropriate WHT rate Mere use of credit terms does not necessarily signify existence of a contract Lack of definition of “ordinary course of business” or relevant case law leaves interpretation to ambiguity Each transaction should be reviewed against the specific transaction categories set out in the tax laws and Regulations Transactions should also be examined if they occur in the “ordinary course of business”

47 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

48 Tax Planning Opportunities
25/03/2017 Tax Planning Opportunities Value Added Tax (VAT) Split contracts - Under the law, services performed outside Nigeria are not subject to VAT. By splitting a contract with in-country and offshore portions into its component parts, invoices for the offshore work will be excluded from VAT. - This can also be used to avoid intercompany invoicing by ensuring that a non-resident and its Nigerian affiliate contract with a customer separately. Accrual vs. Cash based VAT filing Determine which approach best suits the company before the first VAT filing. Be consistent with whatever approach is adopted. Page 48

49 Tax Planning Opportunities
25/03/2017 Tax Planning Opportunities Value Added Tax (VAT) Invoicing When invoicing, reimbursements should be shown separately from the fee portion. VAT is not chargeable on reimbursements Location in a FTZ/EPZ Businesses located in an Export Processing Zone (EPZ) or Free Trade Zone (FTZ) are not subject to VAT on goods and services received from Nigeria Page 49

50 Tax Planning Opportunities
25/03/2017 Tax Planning Opportunities Withholding Tax (WHT) Split contracts - Under the law, services performed outside Nigeria by a non-resident are not liable to income tax and therefore not liable to WHT. By splitting a contract with in-country and offshore portions into its component parts, invoices for the offshore work will be excluded from WHT. - This can also be used to avoid intercompany invoicing by ensuring that a non-resident and its Nigerian affiliate contract with a customer separately. Splitting transactions Splitting transactions into the various services to be performed can reduce the WHT applicable e.g. a contract to rent out equipment and maintain the equipment should be split into: Rent - subject to 10% Maintenance - subject to 5% Page 50

51 Tax Planning Opportunities
25/03/2017 Tax Planning Opportunities Withholding Tax (WHT) Invoicing When invoicing, reimbursements should be shown separately from the fee portion. WHT is not chargeable on reimbursements as it is not income in the hands of the supplier Location in a FTZ/EPZ Businesses located in an Export Processing Zone (EPZ) or Free Trade Zone (FTZ) are not subject to income tax or WHT income earned from goods and services sold at the Zones Page 51

52 25/03/2017 Conclusion This presentation examines tax compliance issues and tax planning opportunities around VAT and WHT It is important now more than ever before, to manage tax costs and minimise or eliminate potential tax exposures from non compliance with tax laws I hope you have found this presentation enlightening

53 Overview of transaction taxes in Nigeria
25/03/2017 Content Overview of transaction taxes in Nigeria Compliance requirements and penalties Practical issues in accounting for VAT and Withholding tax Tax planning opportunities Case studies

54 25/03/2017 Case studies Company A Segun Daniels has just been confirmed as the CFO in the oil company he works for. With the recession, his mandate is to drive costs down and that includes taxes. The company has an arrangement with a GSM company to provide contract lines to over 150 senior and middle management staff. At the end of each month, the company pays the call costs without deducting WHT and VAT. Segun is worried that the company is exposing itself to significant tax liabilities. He has written the GSM company telling them that the company would start deducting WHT and VAT. The GSM company has stated that while they are not against the deduction of VAT, they are opposed to the deduction of WHT as they have had trouble getting their WHT credit notes in the past. They have threatened to cancel the arrangement if the company follows through on its plans. Segun is in a fix and has come to you for advice.

55 25/03/2017 Case studies Company B David is the CEO of a newly established tax consulting firm. The firm provides payroll services for which it requires an efficient payroll software to compute taxes and print the pay slips. On one of his trips abroad, he discovered a software company, Intelligent Outcomes LLC, which provides affordable and tailor made software programmes. Before returning to Nigeria, David purchased the software but has been told he has to pay a license fee for updates and routine maintenance. David, however, only signed the contract after agreeing that staff of the software company would have to travel to Nigeria at short notice to fix any major problem the software may have. The entire costs of such visits were taken into account in arriving at a monthly license fee of US$500. Upon his return to Nigeria, David suddenly realises that he has not considered the VAT and WHT impact of the transaction. He knows that if he gets the treatment of WHT and VAT wrong, it would be bad for his reputation as a tax consultant. He needs your advice urgently.

56 25/03/2017 Questions

57 Notes Notes FIRS Information Circular, No.2006/02 of February 2006
25/03/2017 Notes Notes FIRS Information Circular, No.2006/02 of February 2006


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