transaction taxes in nigeria: key issues 2011. content overview of transaction taxes in nigeria...

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





• 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

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)

Introduction to VAT (Cont’d)

CONSUMPTION

INCIDENCE IS ON FINAL

CONSUMER

Consumption tax

VAT can only be levied and paid if there is a consumption of either VATable goods or services

A MULTISTAGE TAX

3 Essential Characteristics


CONSUMPTION


CONSUMER

A Multi-Stage Tax

VAT must be paid at every stage wherein value is added

A MULTISTAGE TAX



CONSUMPTION


CONSUMER

Incidence on Final Consumer

Being a consumption and transferable tax, incidence of VAT is borne by the final consumer

A MULTISTAGE TAX


Illustration of VAT

ProducerSales 1000VAT @ 5%

50Gross Sales 1050

Net VAT at Stage (50-0) 50*

ManufacturerSales 1500VAT @ 5% 75Gross Sales 1575

Net VAT at stage (75-50) 25*

WholesalerSales 2000VAT @ 5% 100Gross Sales 2100


RetailerSales 3000VAT @ 5% 150Gross Sales 3150


*Net VAT Paid=50+25+25+50=150=Borne by final consumer

VAT is paid at each stage

Note: This illustration does not reflect effect of tax on services

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


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


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.

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 Tax payers identification numbero Name and addresso VAT registration numbero The date of supplyo Name of purchaser or cliento Gross amount of transactiono Tax charged and rate applied

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 GovernmentIf VAT collected < VAT paid, request refund from Government

VAT Exemptions and Zero-rated Supplies

Goods Exempted from VAT 1. All medical and pharmaceutical products2. Basic foods items3. Books and educational materials4. Baby products5. 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 company6. All exports7. Plant, machinery and equipment purchased for utilisation of gas in

downstream petroleum operations8. Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes

VAT Exemptions and Zero-rated Supplies

Services Exempted from VAT 1. Medical services2. Services rendered by Community Banks, People Banks and Mortgage institutions3. Plays and performances conducted by educational institutions as part of learning4.All exported services

Zero-rated Supplies

1. Non-oil exports2. Goods and services purchased by diplomats3. Goods purchased for use in humanitarian donor-funded projects

Overview of transaction taxes in Nigeria:

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.

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



Companies Individuals

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

10%

10%

10%

10%

5%

10%

10%

5% 5%

10%

Qualifying Income

Dividend, rent, interest

Royalty 10% 5%

22



• 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



• 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.

An Overview


25

• 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

An Overview (Cont’d)


26

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

Content





• Case studies

Value Added Tax – Compliance requirements

Compliance requirements and penalties

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

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

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.

Value Added Tax – Penalties and Offences


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.

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 taxFor 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.

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)

Withholding tax (WHT) – 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?

Content





• Case studies

Value Added Tax (VAT) - The Charging Section

Practical Issues in accounting for VAT & WHT

…… payable on the supply of taxable goods and services

1

Is it a supply?

2

is it a good?

3

or a service?

4

is the good or service taxable

6

when is the tax payable?

5

Where did the supply take place?



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



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



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



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….”



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



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



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.



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”

Content





• Case studies


Tax Planning Opportunities

Page 48

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 49

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 50

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 51

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

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

Content





• Case studies

Company A

Case studies

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.

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.

Case studies

Questions

NotesNotes

1. FIRS Information Circular, No.2006/02 of February 2006

transaction taxes in nigeria: key issues 2011. content overview of transaction taxes in nigeria...

Documents

services vat

tax vat slide

incidence of vat

vat act

tax definitions vat

uk vat

final consumer vat

customers o vat