KPMG, the global advisory services firm, has identified gaps, errors, omissions, and inconsistencies in the new Nigeria Tax Act (NTA), calling for urgent reviews to ensure the attainment of the stated tax reform objectives.
KPMG in its latest newsletter titled, “Nigeria’s New Tax Laws: Inherent Errors, Inconsistencies, Gaps and Omissions”, published on its website, however reaffirmed the potential of the laws to transform tax administration in the country.
It said in the newsletter: “There are many provisions in these laws that will result in increased revenue for the government, if well implemented. However, there is always the need to strike a delicate balance between revenue generation and sustainable growth.
“It is, therefore, critical that the government review the gaps, omissions, inconsistencies and lacunae highlighted in this Newsletter to ensure the attainment of the desired objectives.”
Below are some of the errors and inconsistencies:
In Section 17(3) (b) of the NTA which bothered on taxation of non-resident persons, KPMG recommended that Section 6(1) of the NTAA (Nigeria Tax Administration Act) should be updated to include not only non-residents that derive passive income from investments in Nigeria but also income in which the deduction at source is the final tax. Such amendment absolves non-residents from the tax registration requirement where they have no Permanent Establishment (PE) or Significant Economic Presence (SEP) in the country.
“This section specifies the conditions under which profits derived by a non-resident are taxable in Nigeria. Although Section 17(4) of the NTA states that payment deducted at source in respect of payments by Nigerian residents to non-residents, irrespective of where the service is rendered, shall be final tax where the non-resident has no permanent establishment (PE) or Significant Economic Presence (SEP) in Nigeria to which the payment is attributable, it does not clearly absolve the non-resident from tax registration requirements under Section 6(1) of the NTAA.
“This in, our view, cannot be the intention of the law. The intention should be that non-residents that do not have PE or SEP in the country should not be required to file tax returns as provided for in Section 11(3) of the NTAA.”
In Section 3(b)&(c) of the NTA (imposition of tax), KPMG explained: “The section specifies persons on whom taxes should be levied, including individuals, families, companies or enterprises, trustees, and an estate, but omits ‘community. However, community’ is included in the definition of ‘person’ under Section 201.
“The Act states that undistributed foreign profits are to be ‘construed as distributed’ but also mandates that they be “included in the profits of the Nigerian company” (implying income tax at 30 per cent).
“Though dividend distributed by a Nigerian company is deemed to be franked investment income, this does not appear to be the case with dividends distributed by foreign companies.
“It thus appears that such dividends will be taxed at the income tax rate. Consequently, there will be differences in the treatment of dividends distributed by Nigerian companies and those distributed by foreign companies.”
KPMG recommended that Section 6(1) of the NTAA on taxation of non-resident persons be updated to include not only non-residents that derive passive income from investments in Nigeria but also income in which the deduction at source is the final tax, adding that this would clearly absolve non-residents from the tax registration requirement where they have no PE or SEP in the country.
Section 20(4) of the NTA regarding tax deductions states that expenses incurred in a currency other than the naira may only be deducted to the extent of its naira equivalent at the official exchange rate published by the Central Bank of Nigeria (CBN). It sought amendment to this section.
According to KPMG, this implied that where a business buys forex at a rate that is higher than the official rate, such a company cannot claim tax deduction for the difference in value between the official and the other rates.
The intention is to discourage speculative foreign exchange transactions and encourage the appreciation of the naira, but issues surrounding the accessibility of all forex needs due to supply problems have not been fully considered, it observed.
“We do not think that this condition is necessary at this time. With the current state of the economy, focus should be on improving liquidity and introducing stricter reporting requirements to track and monitor foreign exchange transactions.”
On Section 21 of the NTA which includes expenses on which VAT had not been charged, KPMG wrote: “This means that such expenses will not be considered allowable tax deductions even when those expenses have been validly incurred for business purposes. This implies that a company could be held accountable for any inaction or non-performance by its suppliers or service providers.
“While the defaulting service providers may eventually be required to pay the VAT during an audit or investigation, the company will have already been denied the ability to claim a deduction for the related expense.
“The only criteria should be that any expense that is wholly and exclusively incurred for business purposes should be allowable for tax purposes.”
On Section 27 of the NTA (Ascertainment of total profits of companies), KPMG prescribes modification to specify the deduction of capital losses.
“The NTA is not definite on whether capital loss, other than that arising from the disposal of digital or virtual assets, is deductible. However, we believe that the intention is for such losses to be deductible.”
In conclusion, KPMG wrote: “Undoubtedly, the new tax laws will transform tax administration in Nigeria. There are many provisions in these laws that will result in increased revenue for the government, if well implemented. However, there is always the need to strike a delicate balance between revenue generation and sustainable growth. It is, therefore, critical that government review the gaps, omissions, inconsistencies and lacunae highlighted in this Newsletter to ensure the attainment of the desired objectives. Government must also seek international cooperation and collaboration to facilitate the sharing of information, build capacity and capability of tax administration in the country.
“Businesses should conduct a comprehensive analysis of the impact of the changes on their business operations. The analysis should include a detailed evaluation of tax footprints to manage undue exposures and ensure compliance. There must be assurance that adequate documentation is in place to support related-party and third-party transactions and manage exposures during a tax audit/review exercise by the tax authority. Their finance and tax functions should have a basic knowledge of the changes through training programs and consultation with professionals and experts to ensure compliance and mitigate risks. They also will need to leverage experts for payroll configuration and support, e-invoicing support, and outsourcing tax-managed services, among others. There must be proper configuration of companies’ ERPs and other systems to align with the provisions of the Acts, such as PIT tax rates/computation, Fiscalisation/E-invoicing, etc.”
