Corporate - Significant developments

Last reviewed - 01 September 2023

TAT rules on the conditions for deductibility of expenses and claim of input VAT

The Federal Inland Revenue Service audited Chi Limited and issued a tax assessment of about N585m. In arriving at the assessment, the FIRS:

  1. disallowed certain expenses for Companies Income Tax ( purposes including expenses for: sales promotion, bad and damaged goods, repairs and maintenance, and statutory fees paid to the Abia State Government Advertising Agency. The FIRS also disallowed foreign exchange losses on usance adjustments, exports and loan revaluations, and subjected certain exchange gains to tax. According to the FIRS, the expenses were not justifiably proven to have been Wholly, Reasonably, Exclusively, and Necessarily (WREN) incurred for business purposes.
  2. adjusted the Company’s input VAT claimed on raw and packaging materials on the basis that input VAT should only be claimed when the relevant output has been sold. The FIRS also adjusted input VAT in respect of discounts granted by Chi to its distributors.
  3. calculated penalty and interest on the assessment.

The TAT ruled in favour of the FIRS on all issues. This judgement re-emphasises the need to keep adequate support documentation. The expenses were disallowed largely due to the failure to provide enough support documents on the part of the taxpayer. Companies that incur significant write offs due to obsolescence or damaged goods should also maintain a company policy and endeavour to carry out other reasonable procedures to justify the expenses, as this is an area typically scrutinised by the FIRS.

FIRS and LIRS agree to establish joint audit and investigation framework

The Federal Inland Revenue Service (“FIRS”) and Lagos State Internal Revenue Service (“LIRS”) signed a Memorandum of Understanding (MoU) to establish a Joint FIRS and LIRS Audit and Investigation Team (“JAIT” or “the Team”) on 6 February 2023. The JAIT implementation committee organised a sensitisation meeting on 10 August 2023 to educate stakeholders on the guidelines for successful implementation of the collaborative framework. The objective of the MoU is to harmonise the tax procedures between the FIRS and LIRS, foster collaboration, promote exchange of information and reduce time and cost for relevant stakeholders. There are perceived concerns about the likelihood of success of the JAIT initiative, considering the short lived nature of a similar policy introduced in 2017 which aimed to harmonise audits among the FIRS and all the State Internal Revenue Services (SIRSs). However, carrying out a pilot with only the FIRS and LIRS under the JAIT is more practical. 

FHC upholds Tribunal’s ruling on the taxation of income earned by non-resident shipping companies in Nigeria

CMA CGM Delmas SA (the “Company” or “CMA-CGM”) is a French shipping company that transports freight from foreign countries to Nigeria and vice versa. The Federal Inland Revenue Service (FIRS) audited the Company’s tax returns for the 2014 and 2015 years of assessment (YOAs) and assessed the Company to additional tax of about N1bn in respect of damages, cleaning fees, Shipper’s load, stow and count (SLAC), NIMASA Environmental Levy and bonded terminal commission.

The Company objected to the assessment on the grounds that the income items constitute income from the operation of ships in international traffic, which are exempt from Companies Income Tax (CIT) based on the Nigeria-France Double Taxation Agreement (DTA).

TAT rules that the FIRS can appoint Non-Resident digital platform providers to fulfil VAT obligations on behalf of their customers

Bolt Operations OU (“Bolt” or “the Company”) is a Non-resident company (NRC) which operates a ride-hailing app to help drivers and restaurants to find customers to transport and deliver food respectively. The Company charges a commission to the drivers and restaurants subscribed to its ride hailing and food delivery platforms as its fee for using the app. The Company charges, collects and remits VAT on its commission. The drivers and food vendors provide their services directly to the customers and collect their cash directly from the customers or allow Bolt to collect their fees on their behalf for debit or credit card transactions. In summary, the people who procure food or book a ride on the Platform are customers of the drivers and food vendors, not Bolt.

In 2021, the Federal Inland Revenue Service (“FIRS ''), relying on section 10(3) of the VAT Act appointed the Company as its agent to charge, collect and remit VAT on the services provided by the drivers and restaurants who find customers using the Company’s app. Subsequently, the FIRS released a Guideline stating that supplies facilitated through the Company’s platform are to be deemed as supplies made directly by the Company. The Company objected to this appointment on the basis that there is no deeming provision in the Value Added Tax Act (as amended) (“the Act”) and it cannot fulfill the self-assessment obligations for another party.

Nigeria’s FIRS issues assessments to international petroleum tankers and transport vessels

In a recent turn of events, the Federal Inland Revenue Service (FIRS) has begun to issue assessments to companies operating ocean-going petroleum tankers, based on intelligence obtained from regulators. The letters have been addressed to International Petroleum Vessel Companies (IPVCs) deemed to have “conducted business” in Nigeria. In the assessment letters, the FIRS either apply a 6% tax plus a 10% penalty and 19% interest on perceived freight income earned by the IPVCs from periods as early as 2011, or assume a treaty rate which is lower in most cases. In some of those assessments, the FIRS includes a tax on demurrage and detention charges earned on vessels chattered. There are no public details of how the income earned by the IPVCs was determined.

The FIRS stated that if the IPVCs assessed fail to submit their tax returns or make payments, it will be considered as tax evasion. The FIRS also mentioned that they are prepared to activate international cooperation mechanisms with foreign jurisdictions to enforce the tax payments.

International shipping companies need to evaluate whether they are required to register and pay taxes in Nigeria and determine the extent of their revenue subject to Nigerian tax. This is now more critical, considering new tax law amendments that require international shipping companies with Nigerian operations, to submit their Tax Clearance Certificates (TCC) upon request by the regulators.

Highlights of Nigeria’s 2023 Fiscal Policy Measures

The Federal Government has approved the Fiscal Policy Measures 2023 (FPM 2023). The FPM 2023, which is dated 20 April 2023 with an effective date of 1 May 2023, replaces the Fiscal Policy Measures 2022 (FPM 2022) and comprises:

  1. Supplementary Protection Measures (SPM) for the implementation of the ECOWAS Common External Tariff (CET) 2022 to 2026
  2. Import Prohibition list (Trade), applicable only to certain goods originating from non ECOWAS Member states;
  3. Changes in excise duty rates on certain items such as tobacco and alcoholic beverages;
  4. Introduction of Green Taxes on Single Use Plastics and certain categories of vehicles; and
  5. Reduced import duty rates on certain manufacturing items available to verifiable manufacturers.

    There are some concerns around the matters included in FPM 2023. Government needs to consider suspending the FPM 2023 and engage stakeholders to address the various concerns raised, clarify potential ambiguities and prepare detailed regulations to accompany the FPM before implementation.

    TAT ruling for deduction of product losses and taxpayer's right to claim capital allowance below the maximum threshold

    Ardova Plc in the normal course of its business as a petroleum marketing and distribution company incurs product losses and shrinkages. The company expenses the losses in its financial statements and takes a tax deduction in its tax returns. The company filed its 2014 and 2015 financial year tax returns reflecting the above deductions. Thereafter, it filed amended tax returns adjusting the capital allowances claimed to be lower than the maximum threshold of 2/3rd as prescribed in the 2nd Schedule of the Companies Income Tax Act (CITA).

    The FIRS conducted a tax audit and disallowed part of the shrinkages and product losses on the ground that it exceeded the acceptable industry benchmark. It also disallowed the adjustments made to the capital allowance brought forward based on the revised capital allowance claims. The dispute was escalated to the Tax Appeal Tribunal (TAT) for determination. The Tribunal held that where an expense has passed the WREN (Wholly, Reasonable, Exclusive and Necessary) test under CITA, then it is deductible and CITA does not subject such expense to any industry average or benchmark. Also, CITA does not give FIRS the discretion to allow only a quantum of the said expense.

    The FIRS has introduced new changes to TaxPro Max VAT filing procedure

    The Federal Inland Revenue Service (FIRS) has announced new updates to the Value Added Tax (VAT) filing procedures on the TaxPro Max system. The aim is to increase the efficiency of the input VAT claim, sales adjustment entries and output VAT filing procedures. The changes take effect from the April 2023 filing period.

    The FIRS is seeking to seamlessly match Output VAT collection to the Input VAT claimed by businesses and promote transparency in VAT compliance. To educate the public on the process and the increased data requirements to file a complete VAT return, the FIRS released illustrative videos on YouTube, documented guides and also held a sensitisation event on 18 April 2023 targeted at various stakeholders.

    The FIRS mentioned that the changes are in their pilot phase but there is absolute commitment from management towards full implementation and adoption by taxpayers.

    TAT rules that WHT applies at 5% on security services, among other matters

    In 2018, the Federal Inland Revenue Service (FIRS) audited McKinsey & Company Nig. Global Limited (McKinsey or the “Company”) and raised assessments covering Companies Income Tax (CIT), Withholding Tax (WHT), and Value Added Tax (VAT) relating to a number of varying issues. Following an objection by the Company and a subsequent Notice of Refusal to Amend (NORA) issued by the FIRS, the Company filed a Notice of Appeal to the Tax Appeal Tribunal (TAT or the Tribunal).

    Among other rulings, the TAT held that security services are not professional in nature and therefore attract WHT at 5%. In making this ruling, the TAT relied on definitions in the FIRS Circular 2009/01 and the Black Law’s Dictionary. The TAT also highlighted that NSCDC does not license individuals or provide for any specific type of training or certification for private security personnel.

    The President signs the Business Facilitation (Miscellaneous Provision) Bill 2022

    On 10 February 2023, the President signed the Business Facilitation (Miscellaneous Provision) Bill 2022 (also known as the Omnibus Bill) into law. The Act is a legislative intervention by the Presidential Enabling Business Environment Council (PEBEC) which codifies Executive Order 001 and amends 21 business related laws to remove bureaucratic constraints to doing business in Nigeria. 

    TAT rules that Information Technology (IT) Levy does not apply to network facilities providers

    A telecommunication infrastructure company carries on the business of infrastructure sharing and colocation, i.e operates telecom facilities ( e.g masts, towers and related equipment) and gives telecom companies access to these facilities. The Company drew the attention of the Federal Inland Revenue Service (FIRS) to the automatic assessment of IT Levy (1% of its Profits Before Tax) as part of the Company’s 2021 tax returns filed on the FIRS’ e filing platform ( TaxPro Max).

    After reconciliation meetings, the FIRS issued an official notice of assessment in this regard, which the Company objected to. The FIRS subsequently issued a Notice of Refusal to Amend this liability, after which the Company filed an appeal at the TAT.

    TAT says certain legal costs and employee remuneration are not deductible

    A Bank set up a reward scheme (the “Programme”) for exceptional employees. The Programme entailed subsidising the interest on mortgage loans taken by qualifying employees, and therefore the Bank recognised these costs in its books. The FIRS disallowed expenses relating to the Programme.

    Also, the Bank incurred legal expenses in respect of a Court of Appeal (COA) suit against the Financial Reporting Council of Nigeria (FRCN) and the National Office for Technology Acquisition and Promotion (NOTAP). The FIRS also disallowed the legal costs on the grounds that they were avoidable and were not necessarily incurred in the course of the Bank’s business. In an interesting turn of events, the Tribunal ruled in favour of the FIRS and held that the Bank was liable to the additional assessments in both instances.

    Nigeria Startup Act - Positioning the country for the 4th Industrial Revolution

    On 19 October 2022, the Nigeria Startup Act was signed into law and took effect immediately. The Startup Act complements and provides a legal framework for the National Digital Economy Policy and Strategy (NDEPS) launched in 2019. The NDEPS is anchored on eight (8) pillars, i.e. Developmental Regulation, Digital Literacy and Skills, Solid Infrastructure, Service Infrastructure, Digital Services Development and Promotion, Soft Infrastructure, Digital Society and Emerging Technology and Indigenous Content Development and Adoption.

    TAT clarifies Permanent Establishment rules, and the application of Stamp Duties on certain contracts

    A non-resident company engages in the business of distributing satellite capacity across the globe via its communication satellites in Nigeria.

    The Company entered into a contract with the Nigerian Broadcasting Corporation (NBC or the “Customer”) through a related party in Nigeria. Based on the facts presented, this arrangement was in line with a Federal Government Executive Order mandating government Ministries, Departments, and Agencies (MDAs) to include Nigerian companies as parties to contracts with foreign service providers. The also contracted an unrelated local Company to provide uplinks and transmission services to the Customer.

    The FIRS took the position that the Nigerian companies created a Permanent Establishment (PE) for the Non-resident company in Nigeria. The FIRS also assessed Stamp Duties at 1% on the contract between NBC and the Non-resident company.

    The Tax Appeal Tribunal (TAT) upheld the FIRS' view and ruled that the non-resident Company created a PE in Nigeria. On the other hand, the TAT held that a Non-resident Company is not liable to Stamp Duties.

    In view of this judgement, Non-Resident Companies (NRCs) should pay a bit more attention to their arrangements with Nigerian companies, in executing contracts with Nigerian customers. The burden of proof is on the NRC to justify that the activities of the Nigerian company would not be deemed as creating a taxable presence in Nigeria for the NRC. 

    FIRS issues Guidance Notes on Tax Audits and Investigations

    The FIRS released Guidance Notes on 28 October 2022 which set out general expectations of stakeholders regarding tax audits and investigations including timelines. These Guidelines provide a framework aimed at facilitating seamless tax audits and investigations exercises to increase trust, and reduce compliance costs.

    Tax audits and investigations can be quite time, cost and resource demanding if not properly managed. It is therefore commendable that the FIRS has engaged with key stakeholders to seek input in putting together the Guidance Notes. The engagement and feedback process with relevant stakeholders should be sustained to ensure regular review of the Guidance Notes and further improvement of the audit and investigation process.

    FIRS appoints Telcos and Banks to withhold VAT

    The FIRS has appointed MTN, Airtel and all money deposit Banks to collect or withhold VAT on invoices received from their vendors and remit to the FIRS effective from 1 January 2023.

    Ordinarily under a VAT system, a supplier or service provider charges VAT on their invoice which is to be paid by the customer along with the price of the good or service for onward remittance to the FIRS. However, under the Withholding VAT rule, a customer is required to pay the vendor net of VAT while the VAT is remitted directly to the FIRS. Currently a similar arrangement is applicable to companies operating in the Oil & Gas sector as well as Government and their agencies.

    The new excise duties on telecommunications services: What you need to know

    The Federal Government of Nigeria recently announced excise duties at 5% on telecommunications services in Nigeria, as part of the 2022 Fiscal Policy Measures and Tariffs Amendments Order. This is further to recent amendments to the Customs and Excise Tariff, Etc. (Consolidation) Act which included telecommunications services provided in Nigeria, as subject to excise duties.

    Although there are indications that the tax may have been suspended according to the Minister of Communications and Digital Economy, the legal process required to suspend the tax is yet to be activated or published. Therefore, from a legal perspective, the tax is still applicable and affected taxpayers need to take steps to ensure compliance.