January 07, 2019 /11:52 AM / By Taiwo Oyedele* Tax Partner, PwC
Nigeria / Header Image Credit: ACCA Global
Each time you blinked in 2019, something happened in the tax space, some positive, some not so positive while others were completely outrageous. Like the proverbial blind men trying to describe an elephant based on the different parts of the elephant's body they touched, their individual story Is likely to be true but incomplete and perhaps misleading. This article seeks to bring the different pieces of the 2019 tax elephant together to help you make a sense of it all and provide some insights into expectations for 2020.
2019 Tax Policy Events
Budget and fiscal policy direction - The 2019 Budget was signed into law on 27 May 2019 but contained no specific fiscal policy measures while the 2020 Budget was signed into law on 17 December 2019 returning the country to a calendar fiscal year.
Although the 2020 Budget was presented to the National Assembly accompanied by a finance bill containing sweeping fiscal measures, the finance bill was not signed into law along with the Budget.
Supporting infrastructures - The "Companies Income Tax (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme) Order 2019" was introduced to enable private sector companies fund the construction of roads in exchange for negotiable tax credits.
Ease of doing business and paying taxes - In line with the ease of doing business initiative, NOTAP commenced an automated platform for the registration of technology transfer agreements aimed at reducing the bureaucracy involved in the paper-based registration process. Nigeria improved from 146 to 131 on the latest ease of doing business ranking but the country declined from 157 to 159 on the ease of paying taxes.
The Nigeria Immigration Service (NIS) introduced electronic yellow fever cards to replace the old "yellow card" for travellers. This is meant to curb abuse and illegal practices regarding vaccination for travellers. The NIS also published guidelines on Migrants e-Registration requiring foreigners to register on or before 31 December 2019 or face sanctions.
Incentives reform - The Nigerian Investment Promotion Council published reports of Pioneer Status Incentives (PSI) granted, declined or cancelled from 2017 to the first quarter of 2019, as well as application guidelines and delegation order.
Fighting tax evasion & avoidance - an Executive Order on Voluntary Offshore Assets Regularisation Scheme (VOARS) introduced in October 2018 which required persons who hold offshore assets and income to declare voluntarily within 12 months and pay either a one-time levy of 35% or the applicable taxes plus penalties and interest expired in October 2019. No public information has been provided regarding the success of the scheme.
The Financial Reporting Council of Nigeria published its Code of Corporate Governance applicable to companies. It requires an organisation to develop a policy on related-party transactions among others.
Following Nigeria's signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and the Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information, signed by Nigeria on 17 August 2017, the FIRS issued the Income Tax (Common Reporting Standard) Regulations, 2019. This is expected to pave the way for the FIRS to receive specified information on the bank accounts held by Nigerian tax residents in over 100 countries and in exchange provide similar information to the other countries. Consequently, Nigerian financial institutions are required to submit certain information to the FIRS on an annual basis.
2019 Tax Administration
Technology and ease of paying taxes - The Joint Tax Board (JTB) launched a new unified Tax Identification Number (TIN) to enable tax authorities efficiently manage their taxpayers base and for taxpayers to view, retrieve and update their tax profiles online.
The Lagos State Internal Revenue Service (LIRS) introduced an Enterprise Tax Administration System, a digital, end-to-end, multi- channel solution for tax filing and payments. The system is designed to perform tax registration, tax calculation, filing of returns, payment and processing of treasury receipts.
In order to promote investment, the FIRS issued guidelines on Mutual Agreement Procedure (MAP) for dispute resolution regarding international tax disputes arising from inconsistent interpretations of double tax agreement (DTA) provisions, which may result in double taxation for taxpayers. Also, the FIRS announced a 30-day window to ease the issuance of Tax Clearance Certificates commencing 2 Jan 2020 to 31 Jan 2020.
Expanding the tax base - The LIRS issued a Public Notice mandating employers to deduct and remit capital gains tax on compensation for loss of employment and any other capital sum paid to employees. The LIRS also issued a notice on the new JTB TIN for every individual, registered business and incorporated companies. The new TIN will provide access to the Lagos State Government Electronic Banking System (LASG-EBS) and linked to the BVN of individuals or companies.
The FIRS published a circular on the claim of tax treaty benefits under the avoidance of double taxation agreements with Nigeria including the eligibility criteria, procedures, and principal purpose test.
Tax enforcement and revenue generation - The FIRS started to enforce compliance with Nigeria's Country-by-Country Reporting Regulations including imposition of administrative penalty of N5 million in the first instance and N10,000 for every day of default. The Service also began enforcement of its transfer pricing rules including imposition of administrative penalties under the Income Tax (Transfer Pricing) Regulations, 2018 which replaced the 2012 TP Regulations.
The substitution order to banks appointing them as collection agents of taxpayers considered to be delinquent in their tax payments which started in 2018 intensified in 2019. The FIRS released a notice threatening to go after the directors, managers, secretaries and other persons concerned with the management of companies to recover tax liabilities owed by their companies.
The FIRS issued a notice to the effect that WHT and VAT are due on all forms of payments or compensation made to agents, dealers, distributors and retailers by principal companies.
In a bid to raise revenue from the digital economy, the FIRS announced its intention to appoint financial institutions and other service providers involved in online payment settlement to collect VAT on online transactions effective from January 2020.
Change of leadership - A new Chairman was appointed to lead the FIRS along with a new Board comprising of 14 other members. By implications the Chairman of the FIRS doubles as the Chairman of the Joint Tax Board, the body of all tax agencies in Nigeria.
2019 Tax Laws and Regulations
Raising revenue - Certain provisions of the Finance Bill seek to raise revenue for government - the increase in VAT rate from 5% to 7.5%; restriction on deductibility of interest on related party loans; deemed services PE and taxation of digital transactions; non-deductibility of expenses incurred to generate exempt income; introduction of WHT on petroleum profits dividend; and rationalisation of tax waiver on foreign loan interest among others.
The president signed into law, a bill to amend the Production Sharing Contract Act in the petroleum industry. The amendment introduced a field-based royalty rates of 10% for deep offshore (>200m water depth) and 7.5% for frontier/inland basin operation as well as an incremental royalty rate based on the price of oil.
The Nigerian Police Trust Fund Act was signed into law on 24 June 2019. It establishes a Fund to train police personnel and procure security machinery and equipment. The Act imposes a levy of 0.005% of the "net profit" of companies "operating business" in Nigeria.
The National Assembly introduced a Bill to impose and collect communication services tax on charges payable by consumers of electronic communication services in Nigeria at the rate of 9%.
Tax enforcement - The National Assembly is seeking to pass a Bill that will create a Tax Police Commission to enforce the collection of taxes across the country.
Housing - The 8th National Assembly passed a National Housing Fund Bill to repeal the extant NHF Act. Some of the provisions include a compulsory 2.5% contribution of monthly income by employees, 2.5% levy on cement; and investment of 10% of profits by banks, insurance companies and PFAs. The Bill was denied assent by the President.
Tax Justice and Dispute Resolution in 2019
No to arbitrary taxation - In the case between Theodak Nigeria Limited v FIRS, the Federal High Court ruled that FIRS cannot assess companies to income tax based on value of properties, as the taxpayer is not in the business of selling properties.
The Tax Appeal Tribunal (TAT) ruled that the fact that a taxpayer had paid a tax liability in full does not prevent the taxpayer from contesting the liability where the assessment was defective.
In another judgement, the TAT ruled that it is illegal to impose taxes based on the Taxes and Levies (Approved List for Collection) Act without a primary taxing law since the Taxes and Levies Act simply allocates taxing rights among the three tiers of government. It also stated that assessments that do not follow due processes are invalid.
In a suit between Nigerian Breweries and Abia State Board of Internal Revenue, the TAT ruled that gratuities are wholly exempt from tax on the ground that where there is a conflict between a section in a statute and a provision in the Schedule to the statute, the section would prevail.
Ease of doing business - The Court of Appeal reversed the decision of the Federal High Court in Stanbic IBTC Holdings v Financial Reporting Council of Nigeria & Anor (2015), which had held that failure to obtain NOTAP approval (on a registrable contract) rendered the contract illegal and void; and payment could not be made on an unregistered contract.
The Court also held that NOTAP approval does not apply to technology transfer from Nigeria to a foreign company.
Raising revenue - In a case between Nexen Petroleum Nigeria Limited vs LIRS, the TAT ruled that withdrawal of voluntary pension may be taxable if withdrawn earlier than allowed, but it is not the responsibility of the employer to account for tax that may arise from the withdrawal.
In Vodacom vs FIRS, the Court of Appeal ruled that imported services are subject to VAT, on the ground that VAT is chargeable in cross-border transactions "where the person receiving the service is resident". However, in another case between Alan Gray vs FIRS, which involved VAT on exported services, the tribunal ruled that the basis for charging VAT in cross-border transactions is "where the service was performed and not the location of the consumer".
The TAT also ruled that excess dividend tax at 30% is applicable notwithstanding that the dividend was paid out of profit of a previous year, on which tax had been paid.
The Global Tax Stage in 2019
The Organization for Economic Cooperation and Development (OECD) published the full version of its 2017 Model Tax Convention. It is designed to provide a standard template for concluding avoidance of double taxation treaties between countries to facilitate economic development, limit double taxation, prevent double non-taxation, and enhance mutual agreements and assistance on tax matters.
On the African stage, the historic African Continental Free Trade Area agreement entered into force on 30 May 2019 and was signed by Nigeria on 7 July 2019. Its key objective is to boost intra-African trade through progressive elimination of tariffs and non-tariff barriers to trade in goods and liberalization of trade in services. Also, the treaty will promote cooperation on investment, intellectual property rights and competition policy.
What to expect in 2020
The Finance Bill which introduces sweeping changes to different tax laws will have the biggest impact on the Nigerian tax environment in 2020 with MSMEs as the biggest winners. Given the current cozy relationship between the Executive and the Legislature, the chances of the PIB being enacted into law in 2020 is high.
With respect to tax administration, tax authorities at all levels will continue with their aggressive measures to raise revenue but actual results will fall short of budget. It is however wise for taxpayers to voluntarily comply and brace up for more tax disputes.
Globally, the tariff war between the Trump administration and the rest of the world will continue while efforts by the OECD to fight tax avoidance will record some progress but taxation of the digital economy will continue to be a thorny issue without global consensus while more countries will resort to unilateral measures.
About The Author
Taiwo Oyedele is the Head of Tax and Corporate Advisory Services at PwC Nigeria. He has been in the forefront as a thought leader and prominent speaker on key accounting and tax issues including the tax implications of IFRS Adoption and Transfer Pricing. Taiwo writes articles in leading national newspapers, professional journals, international magazines and newsletters. He is a regular presenter and a highly sought after public speaker delivering over 200 speeches and presentations around the world in the past 3 years alone. Taiwo is the Head of PwC Tax Academy, Dean of the Direct Taxation Faculty of the Chartered Institute of Taxation of Nigeria, member of the Nigerian Taxation Standards Board and a member of the Taxation and Fiscal Policy Management Faculty Board of ICAN. He can be reached via @taiwoyedele