Nigeria: Monitoring of compliance with transaction taxes the taxman’s way
25 March 2014
Posted by: Author: Taiwo Oyedele
Nigeria: Monitoring of compliance with transaction taxes the taxman’s way - A review of the recent FIRS’ notice on nationwide Value Added Tax and Withholding Tax verification exercise
Author: Taiwo Oyedele (PwC)
There is no doubt that tax compliance rate in Nigeria is very low. According to the Heritage Foundation, the ratio of tax revenue to GDP in Nigeria is only 6.1%. This is within the range of countries with no income taxes such as the UAE, Bahrain, Saudi Arabia and in fact less than some war-torn countries like Afghanistan at 6.4%. At the other end of the spectrum are countries such as Denmark with 49.0%, France 44.6%, and United States 26.9%. In Africa some of the leading countries include Botswana with 35.2%, South Africa at 26.9% and Ghana with 20.8%.
Various studies have shown that there is a high correlation between tax compliance and good governance as people who pay taxes tend to ask questions and hold their leaders accountable. This is due in large measure to the feeling that since they contribute to government funding they have a stake in the way they are being governed. Therefore getting services from government will no longer be a privilege to thank politicians for but a right to demand of government. A typical example is Britain where car owners sue their local councils for damages to their cars due to potholes. In 2012 alone more than 22 million pounds (about N6 billion) was paid in compensation to drivers for pothole damages to their vehicles and other related injuries.
A few years back I was window shopping for a new car. I was surprised when one of the car dealers I visited on Victoria Island asked if I would like him to include VAT on my invoice. Very curious to know if VAT had become optional, the salesperson told me that some customers don't like VAT to be charged on their purchases and they would not agree to pay. I was thoroughly amazed at such an attitude towards tax compliance by a notable company in the commercial center of Nigeria. This in a way is also a reflection of the general attitude of the populace towards tax compliance which must be addressed as a matter of urgency. Government must provide social services but the people also have a legal obligation to pay their taxes.
Apparently in a bid to stem the ugly trend, the Federal Inland Revenue Service (FIRS) has announced its intention to commence a nationwide verification exercise to ensure full compliance with VAT and WHT requirements. The exercise is scheduled to take place from 12 March to 11 April 2014 as stated in the public notice published in some national newspapers dated 12 March 2014.
According to the public notice, the FIRS will deploy four tax auditors to each organisation selected for the exercise within this period to verify relevant records of transactions over the last six years, covering the period from January 2008. Taxpayers are expected to have the following documents readily available and presented in an organized manner in anticipation of the audit:
- Relevant remittance schedule of VAT and WHT, with evidence of bank tellers and FIRS receipts (where obtained);
- Audited accounts, cash books and general ledgers printed out;
- Year-end trial balances;
- Evidence of input taxes paid on raw materials and fixed assets;
- Sales/purchases documents and related import documents; and
- Relevant bank statements.
Under section 35(1) of the VAT Act, an authorised officer of the FIRS can at any time enter without warrant, a taxpayer's premises to determine the level of compliance with respect to VAT and can if necessary, carry out such inspections or make such requests as the Revenue may deem fit. Section 26 of the FIRS Establishment Act also empowers the FIRS to examine a company's books, documents and any other information at a place and time stated in the notice for a period deemed necessary. The Act however requires a minimum of not less than seven days' notice from the date of service of such notice. However, where an officer of the FIRS not below the rank of a Chief Inspector of Taxes or its equivalent requests for such information for the purpose of inspection, then he can do so without prior notification. The Notice was signed by four Directors of the FIRS.
It is therefore apparent from the above that the FIRS has a legal basis for the proposed action as published in some national newspapers. This serves as a notice to taxpayers and would therefore take effect from the date of publication being 12 March 2014. The verification exercise will cover the period January 2008 to date which is within the six years statutory period permitted for the FIRS to raise additional assessment for non-remittance of taxes or underpayment. This restriction does not apply where fraud, neglect or wilful default is established. It is also important to note that the statute of limitation does not preclude the FIRS from carrying out examinations beyond six years with or without fraud, wilful default or neglect although it may be impracticable in some cases given that the Companies and Allied Matters Act only requires records to be kept for six years.
Overall, the exercise is a step in the right direction but the notice given and the one month timeline slated for the exercise is rather short, raising questions about the depth and quality of review that will be carried out and the FIRS's capability to start and conclude the exercise diligently within the stated time. There are over a million companies registered with the Corporate Affairs Commission (CAC), as well as unincorporated entities who are taxable persons for VAT purposes. Even if one takes into account that many companies registered with the CAC are dormant, there is still a significant number of active companies and given the 6-year period to be covered the FIRS may be faced with manpower constraints. Also the notice makes no reference to how the inspection would be done and the selection criteria. While this may not be made public for obvious reasons, it will be necessary for the FIRS to limit the exercise to organisations that are either not registered with the FIRS or have not been filing their tax returns as at when due.
Where the taxpayer is unable to meet the timeline specified, he has the right to apply for an extension of time if there is good cause for his inability. Taxpayers should also expect the verification
exercise to identify and flag non-compliance in other tax areas such as companies' income tax, capital gains tax and so on for subsequent follow up and tax audit. For companies that have been audited for parts of the period in view, the FIRS should exclude such periods from the verification exercise to avoid unnecessary duplication. In any event it is advisable for all taxpayers to be prepared for this verification exercise and expect the completion to possibly extend beyond the specified period.
This article first appeared on mondaq.com.