Transaction Taxes in Nigeria:
Key Issues
2011
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
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
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
Overview of transaction taxes in Nigeria:
Value Added Tax (VAT)
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
Page 6
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)
Page 7
Introduction to VAT (Cont’d)
3 Essential Characteristics
Consumption tax
CONSUMPTION
INCIDENCE IS
ON FINAL
CONSUMER
VAT can only be levied and
paid if there is a consumption
of either VATable goods or
services
A MULTISTAGE
TAX
Page 8
Introduction to VAT (Cont’d)
3 Essential Characteristics
A Multi-Stage Tax
CONSUMPTION
VAT must be paid at every
stage wherein value is added
INCIDENCE IS
ON FINAL
CONSUMER
A MULTISTAGE
TAX
Page 9
Introduction to VAT (Cont’d)
3 Essential Characteristics
CONSUMPTION
Incidence on Final
Consumer
INCIDENCE IS
ON FINAL
CONSUMER
Being a consumption and
transferable tax, incidence of
VAT is borne by the final
consumer
A MULTISTAGE
TAX
Page 10
Illustration of VAT
VAT is paid at each stage
Producer
Sales
VAT @ 5%
Gross Sales
1000
50
1050
Net VAT at Stage (50-0) 50*
Manufacturer
Sales
VAT @ 5%
Gross Sales
1500
75
1575
Net VAT at stage (75-50) 25*
Wholesaler
Sales
VAT @ 5%
Gross Sales
2000
100
2100
Net VAT at stage (100-75) 25*
Retailer
Sales
VAT @ 5%
Gross Sales
3000
150
3150
Net VAT at stage (150-100) 50*
*Net VAT Paid=50+25+25+50=150=Borne by final consumer
Note: This illustration does not reflect effect of tax on services
Page 11
Important VAT definitions
Output VAT – This is VAT that is chargeable on sales
Elements of Output VAT:
o
This is VAT on sale or supply of goods and services to customers
o
VAT is collected at the rate appropriate to the category of items
(in Nigeria, this is currently at a flat rate of 5%)
o
VAT must be accounted for properly as the collector is an agent of
the Government
Page 12
Important VAT definitions
Input VAT – This is VAT that is chargeable on purchases
Elements of Input VAT:
o
This is VAT on goods purchased or imported directly for resale
o
Also includes goods that form stock-in-trade used for direct
production of any new product
o
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
Page 13
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.
Page 14
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:
o
o
o
o
o
o
o
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
Page 15
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
Page 16
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
Page 17
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
4.All exported services
Zero-rated Supplies
1.
2.
3.
Non-oil exports
Goods and services purchased by diplomats
Goods purchased for use in humanitarian donor-funded projects
Page 18
Overview of transaction taxes in Nigeria:
Withholding Tax (WHT)
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.
Page 20
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
Page 21
Withholding Tax (WHT)
Introduction (Cont’d)
Qualifying Income
Dividend, rent, interest
Royalty
Hire of equipment, motor vehicles, plant &
machinery
All commissions, consultancy, technical &
management fees, legal fees, audit fees,
listing fees and other professional fees
Construction and all types of contracts &
agency arrangement, other than sales in
the ordinary course of business
Director’s fees
Companies
10%
10%
Individuals
10%
5%
10%
10%
10%
5%
5%
5%
10%
10%
22
Page 22
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
Page 23
Withholding Tax (WHT)
Introduction (Cont’d)
•
The applicable laws governing Withholding tax are:
(a) Companies Income Tax Act
(b) Personal Income Tax Act
(c) Petroleum Profits Tax Act
(d) 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.
Page 24
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
Page 25
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
Page 26
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
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
Page 28
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
Page 29
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
2007 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.
Page 30
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
Page 31
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.
Page 32
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.
Page 33
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)
Page 34
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.
Page 35
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?
Page 36
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
Practical Issues in accounting for VAT & WHT
Value Added Tax (VAT) - The Charging Section
1
Is it a supply?
5
Where did the supply
take place?
3
or a service?
…… payable on the supply of taxable goods and services
6
when is the
tax
payable?
4
2
is the good or
service taxable
is it a good?
Page 38
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
o
Is VAT chargeable when a company supplies its staff goods
produced by it?
o
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
Page 39
Practical Issues in accounting for VAT & WHT
Value Added Tax (VAT)
2. “Does every transaction involve either a good or a service”?
o
Is the sale of interest in an oil block a good or a service?
o
Is the sale of shares a good or a service?
o
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
Page 40
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
Page 41
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….”
Page 42
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
Page 43
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
Page 44
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.
Page 45
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”
Page 46
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
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 incountry 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
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 Businesses located in an Export Processing
FTZ/EPZ
Zone (EPZ) or Free Trade Zone (FTZ) are not
subject to VAT on goods and services received
from Nigeria
Page 49
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 WHT @ 10%
Maintenance - subject to WHT @ 5%
Page 50
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
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
Page 52
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
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.
Page 54
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.
Page 55
Questions
Page 56
Notes
Notes
1.
FIRS Information Circular, No.2006/02 of February 2006
Page 57