Understanding Tax Compliance Requirements for Nigerian MSMEs

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Document Classification: KPMG Confidential

© 2016 KPMG Professional Services, a Nigerian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

FATE Foundation

February Knowledge Building Workshop

Understanding Tax Compliance Requirements for Micro, Small & Medium Enterprises in Nigeria

Ehile Adetola AibangbeeAssociate Director, Tax, Regulatory & People Services KPMG Advisory ServicesEmail: [email protected]

11 February, 2016

mailto:[email protected]

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©2014 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘’KPMG International’’), a Swiss entity. All rights reserved. Printed in Nigeria.

“The hardest thing in the world to understand is the income tax.”–Albert Einstein

Tax compliance means:

• Reporting of tax base• Computation of tax liability • Timely filing of the return• Payment of tax due

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Outline

Introduction1

Taxation of Micro, Small & Medium Enterprises (MSMEs)2

Understanding Tax Compliance Requirements 3

Recent trends

6

4

Common Pitfalls & Tax Planning Ideas

Housekeeping

5

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Introduction - What is tax?

The National Tax Policy defines ‘Tax’ as:

“a monetary charge imposed by government on persons, entities, transactions or properties to yield revenue.”

The system of taxation is not a quid quo pro system wherein the benefits reaped are equivalent to the amount invested.

The primary purpose of taxation is to finance

government expenditure.

Taxes are imposed at the Federal, State and Local Government levels

Taxes due to the Federal Government are collected by the Federal Inland Revenue Service (FIRS), while taxes due to State Governments are collected by State Boards of Internal Revenue (SBIRs)

There is renewed focus on taxation due to dwindling oil revenue

http://www.investorwords.com/5971/taxation.html

http://www.investorwords.com/1940/finance.html

http://www.investorwords.com/5590/government_expenditure.html

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Introduction - Overview of Nigerian tax laws

Companies income tax

Petroleum profits tax /Nigerian

Hydrocarbon Tax

NITDTertiary

education tax

Capital gains tax

Personal income tax

Direct taxes

Withholding tax

Direct taxes are taxes that cannot be shifted to another individual or entity.

Value added tax

Stamp dutyCustoms & Excise duties

Indirect taxes

Consumption Based

Consumption Tax

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Introduction -Tax administrators in Nigeria

Federal Taxes

Companies Income Tax (CIT)

Withholding Tax (WHT)

Tertiary Education Tax (TET)

Petroleum Profits Tax (PPT)

Value Added Tax (VAT)

Capital Gains Tax (CGT)

Stamp Duties Personal Income Tax (PIT) of Members of the Nigerian armed forces, other

than civilians; individuals resident in Abuja officers of the Nigerian Foreign Service; and non-residents who derive income or profit

from Nigeria

State Taxes

Personal Income Tax

Withholding Tax

Capital Gains Tax

Stamp Duties

Consumption tax

Other statutory levies, such as: Land use charge Entertainment tax Economic development levy Social services contribution levy Produce sales tax, amongst others

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Taxation of Micro, Small & Medium Enterprises (MSMEs)

Unlimited liability

Less statutory obligations

Easily dissolvable

One layer of taxation {Owner only}

Restriction of size of partners

Companies – Incorporated by CACPartnership, Enterprises, Sole Proprietorship & Individuals

Limited liability

Statutory Obligations

Stricter governance and regulatory requirements

Not easily dissolvable

Two layers of profit taxations {Company level & Owners}

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Understanding Tax Compliance Requirements - Companies Tax Requirements

Companies Income Tax

(CIT)

Legal Basis &

Registration

Companies Income Tax (CIT) Act, Cap C21, Laws of the Federation of Nigeria

(LFN), 2004 as amended by the CIT (Amendment) Act, 2007 is the enabling

legislation.

The CIT Act (as amended) imposes tax upon the profits of all companies,

including SMEs

CIT is administered by the Federal Inland Revenue Service (FIRS).

All companies liable to pay tax are required to register with the relevant FIRS

in their jurisdiction & obtain unique Taxpayer’s Identification Number

Rate General rate of 30%

Specific rate of 20%, applicable to:

companies with a turnover not more than N500,000 engaged in agricultural production/the mining of solid minerals

companies with turnover of not more than N1,000,000 in the manufacturing and export promotion sectors

companies in their 1st five years of operations.

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(CIT)

Minimum Tax Highest of:

a. 0.5% of gross profitb. 0.5% of net assetsc. 0.25% of paid up capitald. 0.25% of turnover of N500,000

And

0.125% of turnover in excess of N500,000

Exemption

A company in its first four calendar years of commencement of business (for resident companies).

A company engaged in agricultural business.

Where 25% or more of a company’s equity capital is imported (this must be supported by a certificate of capital importation)

Compliancerequirements

Companies Income Tax returns must be filed on self-assessment basis with the FIRS, within six (6) months after a company’s accounting year end

Companies are required to file a self-assessment return that contains audited financial statements, tax and capital allowance computations and true and correct statement in writing containing the amount of profit from each and every source

The deadline for paying Companies Income Tax liability is two (2) months from the due date of filing the return for the relevant tax year

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(CIT)

Capital allowances

Initial Allowance

Investment Allowance

Annual Allowance

Balancing Adjustment

balancing allowance balancing charge

Disallowable Expenses

Depreciation

Appropriation of profits

Management fees incurred without the Ministerial approval

Expenses incurred outside Nigeria to the extent the FIRS approves

Capital repaid or withdrawn or any expenditure of a capital nature

Any sum recoverable under an insurance or contract of indemnity

Taxes on income or profits levied in Nigeria or elsewhere

Payments to unapproved pension / provident funds

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Employment tax relief (ETR)

Work experience acquisition relief programme (WEARP)

Infrastructure tax relief (ITR)

Reliefs gazetted by the Federal Government {Expires 2017}

Pioneer status

1

Export expansion grant

2

Free trade/export processing zone

3

Exemption of profits from exported goods

4Exemption of agricultural business from import duties on equipment and from minimum tax payment

5Significant incentives to investors in the agricultural, manufacturing, power & mining sectors

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Understanding Tax Compliance Requirements - Companies Incentives

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Tertiary Education Tax (TET)

Legal Basis Tertiary Education Trust Fund (Establishment, Etc.) Act, 2011

Administered by the FIRS

Applicable to only Nigerian companies

Rate 2% of Assessable profits

Compliance requirements

Based on the provisions of the TET Act is payable within sixty (60) days after a company has been served a notice of assessment by the FIRS in respect of the TET return.

In practice, many companies settle their TET liability within two (2) months of the due date of filing their CIT return

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Understanding Tax Compliance Requirements - Companies Computation of Companies Income Tax (Format)

Profit before tax XX Add: Disallowable Expenses:

Depreciation XX Donations XX Unrealised losses XX Others XX XX

XX Less: non-Taxable Income:

Profit on sale of investments XX Profit on sale of fixed assets XX Dividends XX Others XX (XX)

Assessable profit XX Balancing charge XX Less:

Loss brought forward (XX) Capital allowance (XX) Balancing Allowance (XX) (XX)

Total profit XX

Tax at 30% XX Tertiary Education Tax @ 2% of Assessable Profit XX

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Understanding Tax Compliance Requirements – Partnerships, Enterprises, Unincorporated Joint -

ventures and Sole proprietorships – Personal Income Tax

Tax Requirements

Personal Income Tax

Legal Basis The PIT Act, Cap P8, LFN, 2007 (as amended by the PIT (Amendment) Act, 2011), is the legal basis for the imposition of PIT on the income of individuals in Nigeria

Each State has an SBIR or State Internal Revenue Service, that is responsible for the assessment and collection of PIT/PAYE tax from persons resident in that State

Sixth Schedule - Tax Exempt

National Housing Fund Contribution

National Health Insurance Scheme (NHIS)

Life Assurance Premium

National Pension Scheme

Gratuities

Relief Higher of:

1% of gross income OR consolidated relief allowance on income at a flat rate of N200,000;plus 20% of gross income.

Sixth Schedule - Income Tax

Table and Rates

First N300,000@7%

Next N500,000@ 15%

Next N1,600,000@21%

Next N300,000@ 11%

Next N500,000@ 19%

Above N3,200,000 @ 24%

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The residency rule is based on the provisions of Section 2(2) of the PIT Act (as amended) and the First Schedule to the Act

The rule is adopted in determining the RTA empowered to assess and collect PIT from an individual

The PIT Act defines the place of residence (POR) of an individual as: “a place available for his domestic use in Nigeria on a relevant day and does not include any hotel, rest-house or other place at which he is temporarily lodging unless no more permanent place is available for his use on that day”

Where an individual has two or more PORs in different States of the Federation, his residency in Nigeria will be determined based on his principal place of residence (PPOR)

Understanding Tax Compliance Requirements – Partnerships, Enterprises, Unincorporated Joint ventures and Sole proprietorships – Personal Income Tax - - The residency rule

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ventures and Sole proprietorships – Personal Income Tax

Tax Requirements

Personal Income Tax

Compliance requirements

Under the PAYE regulations, the timing of remittance of PAYE taxes is on the 10th day following the month of deduction.

Taxation of business profits is similar to the provisions of the CIT

A taxable person shall file with the relevant tax authority the returns as stipulated in this section within 90 days from the commencement

of every year of assessment.

Where the tax authority has raised an assessment for the tax due, the assessment must be paid within 2 months from the date the assessment is received if the assessment is not in dispute. If the assessment is disputed, it would be in abeyance until the dispute is determined.

The tax authority is empowered to levy a penalty of 10% per annum plus interest at the prevailing commercial rate from the date when the tax becomes payable until it is paid

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ventures and Sole proprietorships – Personal Income TaxComputation of Personal Income Tax (Format)

Profit from Business XX Add: Disallowable Expenses:

Depreciation XX Donations XX Others XX XX

XX Less: non-Taxable Income:

Profit on sale of investments XX Profit on sale of fixed assets XX Dividends XX Others XX (XX)

Assessable profit (from operations) XX

Share of Profit/Assessable Profit XX Other Income – Rent XX Gross Income XX

Capital Allowance Balancing charge XX

Less:

Loss brought forward (XX) Capital allowance (XX) Balancing Allowance (XX) (XX)

Assessable Income XX

Less: Reliefs and allowances Consolidated relief allowance (XX) Pension (XX)

Others (XX) (XX)

Taxable Income XX Tax payable First N300,000 @7% X Next N300,000 @ 11% X Next N500,000 @ 15% X Next N500,000 @ 19% X Next N1,600,000 @ 21% X Above N3,200,000 @ 24% X XX Less WHT Credit notes (X) Net tax due XX

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ventures and Sole proprietorships – Personal Income TaxSAMPLE INCOME TAX CALCULATOR - PAYE

N NGross salaryBasic salary XXXXHousing XXXXLeave XXXX13th Month XXXXTransportation XXXXBenefit-in-kind XXXX

Gross Income XXXXX

Less statutory reliefsConsolidated Relief Allowance(Fixed) XXXConsolidated Relief Allowance(Variable) XXXPension (8% of BHT) XXXNHF 2.5% of Basic XXXChildren reliefs XXXDependent relative relief XXX (XXX)

Taxable income XXXX

Monthly tax table:

First 300,000 7% XXNext 300,000 11% XXNext 500,000 15% XXNext 500,000 19% XXNext 1,600,000 21% XXAbove 3,200,000 24% XX

Total Tax Payable XX

Net Salary XXXX

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Understanding Tax Compliance Requirements – Value Added TaxValue Added Tax (VAT) is a consumption tax levied on the supply of all goods and services, other than those expressly exempted by the VAT Act.

Tax Requirements

Value Added Tax (VAT)

Legal Basis VAT is governed by the VAT Act, Cap. V1, Laws of the Federation of Nigeria (LFN) 2007 (as amended by the VAT (Amendment) Act, 2007)

VAT is administered by the FIRS

Applicable to all taxable persons - A manufacturer, wholesaler, importer or a supplier of VATable goods or services for a consideration.

Rate 5%

Compliance Requirements

A taxable person is required to render monthly VAT returns within 21 days of the month following the month of the VATable transaction.

The returns are to be filed using the VAT returns Form 002 which can be obtained from the tax office nearest to the taxpayer.

Failure to file returns attracts a penalty of N5,000 for every month in which the failure continues.

Non-remittance of VAT payable to the FIRS attracts a penalty of 5% per annum and interest charged at the prevailing commercial rate on the amount of tax in default

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Understanding Tax Compliance Requirements – Value Added TaxTax Concepts

Value Added Tax

(VAT)

Input VAT VAT paid on goods and services purchased, or goods imported into Nigeria

Allowable input VAT

VAT on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output VAT is charged

Input VAT on overheads, services and general administration is to be expensed through the profit and loss account.

Input VAT on any capital item and asset is to be capitalized together with the cost of the item or asset.

Output VAT VAT collected by a supplier from its distributor, agent, client or consumer on goods and services supplied to them

Where output VAT exceeds input VAT, the Taxpayer is required to remit the excess to the FIRS

However, where input VAT exceeds output VAT, the Taxpayer is entitled to a refund from the FIRS

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Sales price(excluding

VAT)

VAT charged on sales

VAT recoverable

on purchases

VAT paid toGovernment

A

B

C

D

N

1,000

1,500

2,000

2,500

N

50

75

100

125

N

0

50

75

100

N

50

25

25

25

125

Note that the total VAT paid to the Government is N125 (i.e. 5% of the final sales price of N2,500). This VAT amount is borne by the final consumer.

e Added TaxUnderstanding Tax Compliance Requirements – Value Added Tax Illustration on Operations in Nigeria

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Understanding Tax Compliance Requirements – Withholding Tax Withholding tax (WHT) is an advance payment of income tax, deductible

at source on qualifying transactions.

It may also represent the final tax liability on certain passive income.

Tax Requirements

WHT Legal Basis WHT is governed by the following legislation/regulations:

PIT Act, Cap. P8, LFN 2007 (as amended by the PIT (Amendment) Act, 2011)

CIT Act, Cap. C21, LFN 2007 (as amended by the CIT (Amendment) Act, 2007)

Petroleum Profit Tax (PPT) Act, Cap. P13, LFN 2007

The FIRS administers the tax for corporate entities

SBIRs administer the tax for individuals and unincorporated entities

Compliance Requirements

The entity making the payment is required to remit the WHT deducted within 21 days after the payment is made or credited, whichever occurs first.

Failure to deduct WHT or remit taxes withheld attracts, a penalty of 10% of the amount due to the relevant tax authority plus interest.

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Payment Corporate beneficiary (%)

Individual/ Partnership (%)

Dividend / Interest 10 10

Rent / Charter / Hire / Lease 10 10

Directors’ fees N/A 10

Commission/ Consultancy fees/ Professional fees/ Technical fees/ Management fees/Royalty*

10 5

Contracts and agency arrangements, excluding sales in ordinary course of business

5 5

All aspects of building construction and relatedactivities (excluding survey, design and deliveries)

2.5 2.5

The WHT rate applicable to survey, design and deliveries paid to corporate or individual / partnership is 5%

Understanding Tax Compliance Requirements – Withholding Tax Applicable Rates

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Withholding Tax

Understanding Tax Compliance Requirements – Withholding Tax

S/N Beneficiary TIN

Beneficiary Name

Beneficiary Address

Invoice No.

Contract Date(DD/MM/YY)

Contract Description

Contract/Invoice Amount

AmountLiable

Contract Type

WHTRate

WHTAmount

N N % N1234

Year of Assessment Credit Note Number Period Covered (MM/YY)

Agent Amount Rate Amount

£/ $/ € % N

Sample Application for WHT Credit

Withholding Tax Remittance Schedule

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Understanding Tax Compliance Requirements – Other Taxes

Employee-related Taxes

Industrial Training Fund – 1% of Annual Payroll

Pension – Employer Contribution – 10% of Basic Housing and Transport Allowances (BHT)

Employee Compensation levy – 1% of BHT

Other Income Taxes

Capital Gains Tax – 10% of chargeable gain

Consumption Tax – 5%

Other Levy's by the State

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E-tax filing and E-tax payment

- Integrated Tax Administration System (ITAS)

Increased enforcement of

compliance with the relevant laws by the

tax authorities

Implementation of deduction of Stamp

Duties

Tax risk management

Potential increase in VAT rate from 5%

to 10%

Recent Trends - Future direction of taxation in Nigeria

Transfer pricing

Restructuring of the tax offices

Introduction of new taxes – States

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Direction of

Signing of Multilateral Competent Authority

Agreement (MCAA) for the Exchange of

Country-by-Country (CbC) Reports

New Taxes

Taxation of investment

incomes earned by non-taxable

entities

Filing of tax returns by non-

resident companies based on actual profits

Joint Tax Audit by FIRS and SBIRs

Yearly Audits and Desk reviews

AGGRESSIVE!!

Recent Trends – Tax Administrators

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Common pitfalls & Tax Planning Ideas

“…. there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. ……… nobody owes any public duty to pay more than the law demands: taxes are enforced extractions, not voluntary contributions” (Justice Learned Hand)

Tax planning is the act of taking advantage of

legally availableopportunities in order to minimise one's tax

liability

Tax avoidance:

• The objective

• Legitimate

• Legal

Tax evasion:

• Illegal

• Intent to defraud

• Unprofessional practice

Vs.

Being proactive

Being reactive

Vs.

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Doing Business in Nigeria Client NameCommon pitfalls & Tax Planning Ideas

Poor/non-existent tax compliance internal control

system

Errors in claiming capital allowance on

qualifying capital expenditure

Enagaing proper

advisors

Remittance to wrong taxauthorities

Failure to File returns

or pay taxes

Inappropriate Investment Vehicle

Providing inadequate or false documentation

to the revenue authoritiies

Failure to charge WHT / VAT on qualifying

transactions.

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Practical Tips for SMSEs

Seek expert opinion especially on contentious issues1

Put standard tax processes, technologies and control framework, in place across the whole group and business operations

2

Conduct periodic process, control and tax compliance diagnostic reviews3

Work collaboratively on advocacy to institute the changes required in the sector

4

Ensure adequate documentation and efficient document retention policy5

Practical tips

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