Nigeria Recent Developments in Company Income Taxation in Nigeria

Abiola Sanni, LLM, BL, FCTI [*]
Issue: Bulletin for International Taxation, 2011 (Volume 65), No. 1
Published online: 22 November 2010

• This article outlines the major changes introduced in Nigeria by the Companies Income Tax Act, 2007

under the following broad policy headings: (1) streamlining company taxation; (2) ensuring fairness in tax

administration; (3) reviewing penalties; (4) countering tax avoidance; and (5) reviewing allowances and

reliefs.

INRODUCTION

 Since 1939, when the Companies Income Tax Ordinance [1] was enacted, the federal government of Nigeria has maintained exclusive jurisdiction over the taxation of companies. [2] In 1940, the Income Tax Ordinance [3] was enacted regarding the taxation of both companies and individuals. A joint statutory framework for taxation of individuals and companies continued until 1961, when the Companies Income Tax Act (CITA) [4] was enacted. The CITA was re-enacted in 1979 [5] and again in 1990 [6] during the Law Revision Exercise of that year. [7] In 2002, the Minister of Finance established a Study Group, headed by Prof. Dotun Phillips, an economist, to review the Nigerian tax system. The Study Group submitted its report in 2003, which contained far-reaching recommendations, some of which the government may have considered to be too radical or impracticable or for which it simply lacked the political will to implement. Subsequently, a Working Group, headed by Seyi Bickersteth, [8] was established to revise the recommendations of the Study Group. The recommendations of the Working Group largely formed the basis of the present ongoing tax reform. [9] [10] One of the by-products of the tax reform exercise is the recent amendment of the Companies Income Tax Act, the Laws of the Federation of Nigeria (LFN), [11] as amended (“the Principal Act”) by the Companies Income Tax (Amendment) Act [12] (“the Amending Act”). The objective of this article is to review the provisions of the Amending Act against the background of the recommendations of the Study Group and Working Group. The article is divided into four parts. Section 1. introduces the subject, whilst section 2. provides the background to the recommendations of the Study Group and Working Group that served as the basis for the current tax reform of the federal government, which includes the enactment of the Amending Act. Section 3. is an overview of the major changes introduced by the Amending Act and the effects on the Principal Act. Section 4. concludes the article and contains recommendations for further amendments, but expresses regrets that some of the major recommendations of the Study Group and the Working Group were not implemented, particularly with regard to the eduction in the company income tax rate from 30% to 20%. Following the precedent established a decade earlier, [13] a Study Group on the review of the Nigerian tax system was set up in 2002. The terms of reference of the Study Group included, inter alia: (1) reviewing all aspects of the tax system and recommending improvements; (2) reviewing all tax legislation in Nigeria and recommending amendments where necessary; (3) considering international developments and recommending suitable adaptations to Nigerian circumstances; and (4) evaluating and confirming the desirability or otherwise of the retention of the portfolio of fiscal incentives in the tax laws. [14] A Working Group was subsequently established to review the recommendations of the Study Group. [15] This section is devoted to the contents of the recommendations of the Study Group (see 2.2.) and the Working Group (see 2.3.). The Study Group viewed the Nigerian tax system as “unduly complex, skewed, low revenue-yielding, poorly administered, anti-federalism, largely-inequitable, and loaded with unduly large number of overlapping taxes which have more nuisance value than revenue value”. [16] The Study Group also noted that Nigeria’s corporate income tax rate of 30% is one of the highest in the world and diverges from the growing international trend of harmonizing

1. Introduction
2. Reports of the Study Group and Working Group
2.1. Introductory remarks
2.2. The Study Group

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the rates of personal and corporate taxes. [17] In addition, the Study Group considered it to be grossly inequitable
and destructive to business enterprise to tax a company realizing losses. [18] Consequently, the Study Group
recommended the adoption of a simple tax system with a low tax burden comprising a few broad-based taxes. [19] According to the Study Group “in the not-too-distant future, Nigeria should fully replace the whole of her existing
tax system with only two taxes: income tax and expenditure tax”. [20] Other recommendations included the
following:
The Working Group was convened in 2004 by the former Minister of Finance, Dr Ngozi Okonjo-Iweala, to “critically
evaluate the recommendations of the Study Group and propose prioritised set of strategies whose
implementations would give effect to the reform of the Nigerian Tax System”. [24] Whilst the Working Group agreed
with the Study Group that the Nigerian tax system had to be redesigned and managed to encourage economic
growth on a sustainable basis, [25] it disagreed with the recommendation of the Study Group on the replacement of
the existing tax system with a broad-based income tax and expenditure taxes. The Working Group also disagreed
with the recommendation that small companies should pay their income tax to the states on the grounds that: [26]
The Working Group also recommended that:
The Amending Act consists of 25 sections. A general appraisal of the amendments reveals the following key policy
objectives: (1) streamlining the provisions of the CITA by the establishment of the FIRS under an independent
statute (the Federal Inland Revenue Service (Establishment) Act, 2007 [31] – FIRSEA); (2) ensuring fairness in tax
administration; (3) reviewing penalties; (4) countering tax avoidance; and (5) reviewing allowances and reliefs.
The division of the various reforms for consideration in 3.2. to 3.6. has been adopted only for the purpose of
convenience. Whilst each of the amendments may fit into one or more of the objectives noted previously, there is
the possibility that some may overlap. It should be noted that the various amendments are not of the same
significance. In this regard, the changes introduced by the Amending Act are discussed in no particular order of
importance.
– a reduction in the companies income tax rate from 30% to 20% to improve Nigeria’s global competitiveness; [21]
– a company realizing a loss in the year of assessment should not be liable to pay tax in that year and, therefore,
Sec. 28A of the CITA should be repealed;
– companies whose turnover is less than NGN 50 million in a year of assessment should pay tax on their profits
to the state either at a rate of 2% of turnover or 20% of the total, i.e. chargeable profit, whichever is lower;
– Sec. 17 of the CITA, which empowers the tax authorities to treat the undistributed profits of a Nigerian company
controlled by not more than five persons as distributed and taxable, should be repealed on the basis that it is
impractical for the tax authorities to compel such companies to declare dividends against their wishes;
– taxes should no longer be withheld at source from the dividend, interest, rent or royalties income of companies
that are exempt from company income tax; [22] and
– the investment tax credit of 15% on expenditure incurred by companies to replace plant or machinery should be
amended to become a 15% investment tax allowance to safeguard state revenue. [23]
2.3. The Working Group
– the current constitutional provisions do not permit the delegation to the states of the power to collect tax on the
profit of companies;
– the high probability of ineffective tax administration due to fluctuations in the turnover of companies on the
borderline of the proposed tax threshold and the consequent lack of vigilance and coordination between the
Federal Inland Revenue Service (FIRS) and States’ Inland Revenue Services; and
– the current unhelpful approach of the states to revenue collection would be likely to discourage small
companies, especially small and medium-sized enterprises (SMEs), which require support in their initial years.
– the rate of company income tax should be reduced to 20%; [27]
– the assessment rules on the commencement and cessation of business should be abolished; [28] and
– the preceding-year basis of taxation should be changed to a current-year basis of taxation [29] (the Working
Group thought that such a reform would realize a significant increase in revenue on a current-year basis,
although further study of the implications of the change would be required, particularly with regard to the
application of the withholding tax regime). [30]
3. Synopsis of the Provisions of the Amending Act
3.1. Introductory remarks
3.2. Streamlining the CITA and the FIRSEA
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The campaign to restructure and grant administrative and financial autonomy to the FIRS has been a long one. The
end came with the promulgation of the FIRSEA. [32] Previously, the Federal Board of Inland Revenue (FBIR) and
the Body of Appeal Commissioners (BAC) had been established under the CITA. With the far-reaching
restructuring of the FBIR, [33] a separate statute was dedicated to the establishment of the (new) FIRS, under which
a Tax Appeal Tribunal (TAT) was set up. [34]
Secs. 1 to 7 of the CITA (which formed Part 1 on the establishment, composition and powers of the FBIR) were
abolished by the Amending Act to avoid overlapping provisions, some of which could have been conflicting.
Specifically, Sec. 2(2) of the Amending Act provides that the “Federal Board of Inland Revenue established under
the Principal Act is dissolved”. The establishment of the FIRS under a separate statute of its own makes for easy
reference by administrators, practitioners and researchers. The FIRSEA granted a number of powers and a
measure of autonomy to the FIRS to enable it to discharge its statutory roles. For instance, the FIRS may now
recruit, discipline and determine the terms and other conditions of service of its staff outside the civil service
structure. With the institution of the new structure, the FIRS has been reinvented in terms of dynamism and
professionalism. [35]
In view of the establishment, under the FIRSEA, of the TAT with jurisdiction to settle disputes arising from the
operation of all of the federal taxing statutes listed in the First Schedule to that Act, Secs. 53-57 of Part X of the
Principal Act dealing with Appeals to the Body of Appeal Commissioners were abolished [36] and substituted with
the provision that “Appeals shall be as provided in the Federal Inland Revenue Service Act”. [37] Accordingly,
appeals from the decisions of the FIRS in respect of the companies income tax, personal income tax, capital gains
tax, petroleum profits tax, education tax, technology tax and VAT now lie with the TAT. [38]
A strong and efficient administrative framework is a sine qua non for a good tax system. Whilst the far-reaching
restructuring of the FIRS under the FIRSEA is intended to strengthen the FIRS, there is also a commitment to
review provisions that were considered to be unfair to taxpayers.
The operation of the withholding tax system has been a cause of serious concern in Nigeria. Withholding tax
applies not only to investment income, such as dividends, interest, directors’ fees and rents, but also to payments
made under a contract, except for purchases on the open market. If a refund is due to companies, the FIRS has
always been reluctant to make such refunds, even in appropriate cases. In a move that was apparently to
safeguard the interests of the tax authorities, what is popularly known as the “matching concept” was enacted in
Sec. 63(5) of the Principal Act. This provides that:
Income tax recovered under the provisions of this section by deduction from payments made to a
company shall be set-off for the purpose of collection against tax charged on such company by an
assessment, but only to the extent that the total of such deductions does not exceed the amount of the
assessment and provided the assessment is for the period to which such payments relate... (emphasis
added)
The effect of this provision, especially the italicized text, is to allow taxpayers to use credit notes of a particular year
of assessment only for the purpose of offsetting the tax liability of that year of assessment, whilst any excess
withholding tax credit in a particular period is generally not allowed as a set-off against future tax liabilities.
In response to criticism of this practice, Sec. 63(5) of the Principal Act has been amended by deleting the italicized
words, thereby removing the provision that a withholding tax deduction set-off against the tax liabilities of a
company cannot exceed the amount of the assessment for the year. [39] Sec. 19 of the Amending Act also provides
that excess payments are to be refunded by the FIRS within 90 days of the assessment if duly filed, with an option
for set-off against future taxes. [40]
3.2.1. Initial comments
3.2.2. Repeal of Part 1 of the CITA
3.2.3. Appeal process – abolition of the BAC
3.3. Ensuring fairness in tax administration
3.3.1. Initial comments
3.3.2. Abolition of the matching concept for withholding tax
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It is, however, remarkable that, despite this new legal basis for refunds, the attitude of the FIRS to refunds has
remained unchanged on the basis that the government has yet to establish a dedicated account from which
refunds are to be made. In practice, despite the fact that Sec. 19 of the Amending Act states that refunds are to be
granted within 90 days of approval, the approval process is tedious and bureaucratic, involving inter-ministerial
approvals that, in some cases, may take around two years. [41] Accordingly, laudable as the abolition of the
matching concept may be, the existing bureaucratic procedures in making refunds have made this reform only a
partial success by allowing taxpayers to carry forward any unutilized credit notes. The current situation still leaves
unresolved the concerns of taxpayers who may genuinely have large credit notes that cannot be relieved in a
reasonable time.
One of the features of a tax is that it is a compulsory payment for which no direct benefit is received in return. Few
persons, if any, willingly pay to the state on a continuous basis, hence the cliché that no one pays tax with a smile!
Yet, anyone who fails to pay tax risks severe penalties. It is remarkable that the various penalties in the Principal
Act and other tax laws could unwittingly serve as incentives for non-compliance, as they are sometimes
ridiculously low. In a few instances where stringent penalties were imposed, [42] they are not really enforced,
thereby reflecting corruption in the tax administration. The Amending Act, therefore, altered some of the penalties
under CITA to reflect current realities and or make them more administrable.
Sec. 13(3) of the Amending Act [43] increased the penalty for failure by companies to file annual returns as and
when due from NGN 500 to NGN 25,000 for the first month of default and from NGN 400 to NGN 5,000 for every
subsequent month. A higher sanction of NGN 100,000 or two years’ imprisonment on conviction is provided for in
respect of any director, manager, secretary or other similar agent of an errant company who has connived at, or
consented or attributed to the default of a company. [44] The penalty for sundry offences has also been increased
from NGN 200 to NGN 20,000 on conviction and from NGN 40 to NGN 2,000 for each day the failure continues.
[45]
A pre-operational levy of NGN 500 for the first year and NGN 400 for every subsequent year is payable by
companies that are yet to commence business six months after incorporation. [46] The pre-operation levy has been
increased to NGN 20,000 for the first year and NGN 25,000 for every subsequent year. [47] Apart from having a
role in revenue generation for the FIRS, the basis of the pre-operational levy appears to be questionable, as
company income tax is generally payable on profits. It may be sufficient to require such companies to at best file a
nil return rather than subjecting them to taxation under any form before the commencement of business.
The penalty for failure to deduct or remit withholding tax as and when due has been reduced from 200% on
conviction to 10% a year of the tax not withheld or remitted, as the case may be. [48] The removal of the
requirement of a criminal conviction has turned the penalty from a judicial one into an administrative one. The
question is whether or not the new penalty, which is less than the commercial lending rate, [49] could encourage
default.
Generally, the main thrust of most tax amendments is to address issues relating to evasion and avoidance by
closing unintended opportunities that become apparent following previous amendments. The Amending Act has
attempted to address this issue in a number of ways.
Under new Sec. 41(4) of the Principal Act, [50] an income tax assessment must be made in the currency in which
the transaction took place. The failure to expressly provide for this in respect of the petroleum profits tax partly was
the contentious issue in Shell v. FBIR, [51] which lasted for almost 20 years before the final determination of the
case by the Nigerian Supreme Court. The statutory period of filing a withholding tax return is also reduced from 30
days to 21 days by Sec. 20 of the Amending Act. [52]
3.4. Review of penalties
3.4.1. Initial comments
3.4.2. Increase in late-filing penalty
3.4.3. Increase in pre-operational levy
3.4.4. Failure to deduct or remit withholding tax
3.5. Countering tax avoidance
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The Amending Act provides a new basis for assessing the profits of insurance companies. Out of almost 100
sections in the Principal Act, there was only one direct provision dealing with insurance companies, i.e. Sec. 14.
The legal framework proved inadequate to address some issues relating to assessing the profits of insurance
companies. Sec. 4 of the Amending Act [53] has amended the applicable tax regime in respect of insurance
companies in Nigeria as follows:
These are laudable anti-avoidance measures, especially following the recent consolidation of the insurance sector.
[64] The elaborate provisions for the insurance sector may be an indication that, in the future, the legislature may
wish to make similar interventions in other sectors, such as shipping, aviation and even banking.
Tax incentives are often used to compensate for perceived deficiencies in the investment environment.
Internationally, tax incentives are used to give a country a competitive edge over other countries in an increasingly
competitive global economy. However, studies have raised serious doubts as to the efficacy of tax incentives in
Nigeria and their role in business decisions. [65] It should be noted that tax incentives by their very nature represent
a revenue cost for the government and may become an unacceptable cost if not well focused and administered.
The recent disclosure by the Controller General of Customs that Nigeria is losing very large sums as a result of
exemptions is instructive. [66] Tax incentives, if well coordinated and implemented, can stimulate economic growth
in certain areas. However, if tax incentives are not well coordinated and implemented, they could waste resources
that could have been put to better use.
According to the Study Group, the most important tax incentive for corporate investors is a low income tax rate.
Consequently, the Study Group recommended that the company income tax and education tax should be
combined into a single tax at the lower rate of 20%. [67] The Working Group, for its part, was also of the view that
tax incentives should rarely be used as a tax policy instrument and that the best tax incentive is a low-tax regime.
[68] Whilst the Working Group shared the view that the best incentive for investors was a low tax rate, [69] it posited
that tax incentives alone are not sufficient to promote investment, but that good governance, political and
economic stability, the necessary infrastructure and social services would.
The Amending Act expands the scope of tax exemptions in respect of the interest payable on bank loans
“providing working capital for any cottage industry established by the company”. [70] The requirement under Sec. 9
(7)(b) of the Principal Act that the cottage industry must have been established under the Family Economic
– Life insurance business and non-life insurance business are distinguished through the keeping of separate
books of accounts and the filing of separate returns for each class of insurance. [54]
– If there are several types of insurance within a class, these form one type of insurance. Losses from one type of
business cannot be set off against the income of another type of insurance. However, losses can be carried
forward and set off against the profits from the same class of insurance, but limited to a four-year period. [55]
– The profits of non-life insurance business (whether Nigerian or non-Nigerian) are determined for tax purposes
by adding together gross premiums, interest and other income receivable in Nigeria, less reinsurance and a
deduction from the balance of a reserve for unexpired risks. [56]
– The allowable deduction for non-life insurance business with regard to unexpired risks is 45% of total
premiums; for marine cargo insurance it is 25% of total premiums. [57]
– The profits of a life insurance business (non-Nigerian companies) that are to be assessed for tax purposes are
investment income less management expenses, including commission. [58]
– If part of the profits accrue outside Nigeria, investment income is determined by the sum of the premiums less
agency and head office expenses. [59] Total allowable expenses and outgoings are restricted to 15% of the total
profits of the company.
– The profits of a life insurance business (Nigerian companies) are determined for tax purposes as the
investment income less the management expenses, including commissions. [60] Total allowable expenses are
restricted to 15% of the total profits.
– Life insurance business is granted the following allowable deductions: (1) 1% of its gross premium or 10% of
profits, whichever is greater, in respect of a special reserve fund; [61] (2) all normal allowable business
outgoings; and (3) an amount to make a general reserve fund equal to the net liabilities on policies. [62]
– An insurance company that engages an insurance agent, loss adjustor and insurance broker must include in its
annual tax returns a schedule of the names and addresses of service providers, the date of their employment
and the payments made. [63]
3.6. Review of allowances and reliefs
3.6.1. Initial comments
3.6.2. Interest on loans to cottage industries
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Advancement Programme to be entitled to the exemption has been removed. “Cottage industry” is defined as “an
industry where the creation of products and service is home-based, rather than factory-based”. [71] The two
conditions to be entitled to the relief now are that: (1) the tax moratorium must not be less than 18 months long;
and (2) the rate of interest on the loan must not be more than the base lending rate at the time the loan was
granted. [72]
The attempt to encourage banks to lend money to cottage industries is commendable. However, it is doubtful if
these provisions alone are sufficient to encourage banks and other financial institutions, in general, to lend to
cottage industries because of the high-risk nature of such lending. [73] It could also have been expected the
incentives would have been extended to small-scale industries generally, considering their critical roles in
economic development. [74] For this laudable objective to be achieved, this policy must be vigorously pursued in a
larger policy and legal framework aimed at encouraging the growth and development of small-scale industries.
Under the Principal Act, the period for the carry-forward of losses is limited to four years. [75] Both the Study Group
and Working Group considered this to be unfair and recommended that companies should be able to set off all
past losses against future profits without time limitation. [76] The reasoning behind this is that it is poor tax policy to
levy tax on the capital (the tree) instead of the profits (the fruits). Effect was, therefore, given to this
recommendation by Sec. 8 of the Amending Act, which removed the four-year limitation and brought the treatment
of losses under CITA into line with that on Petroleum Profits Tax Act. [77] However, vigilance is required on the part
of the FIRS to prevent abuse of this provision by carrying out random audits of companies that may be declaring
losses repeatedly as a tax planning device.
By way of a new Sec. 21A of the CITA, donations to universities and other tertiary or research institutions in
respect of research or any developmental purpose are now tax deductible, subject to a maximum of 15% of total
profits or 25% of the tax payable, whichever is greater. [78] The upper limits may be varied by an Order of the
Minister, subject to the approval of the Federal Executive Council and published in the Federal Gazette. Hitherto,
for a donation to be deductible it had to meet the following conditions: [79]
The Amending Act removed condition (3), whilst increasing the percentage of the total profits of a company in
condition (4) that can be used for donations to universities and other tertiary or research institutions. [80] This has
provided a new basis for corporate social responsibility. In this regard, it should be noted that, for donations to
qualify under the new provisions, they must be made to “universities” or “institutions”. Accordingly, if a donation is
intended for a college, faculty or department of a university or institution, it is advisable that such donations be
routed through the university or institution. In any case, it is to be hoped that the FIRS interprets the provisions
liberally to encourage a positive response from corporate bodies.
Sec. 14 of the Amending Act [81] abolished the provision that companies that filed returns benefited from a 1%
discount (bonus) of the tax payable for early filing, as provided for by the Principal Act. The implication is that the
self-assessment system, which was previously deemed to be optional in respect of corporate tax, is now a
statutory duty for corporate taxpayers.
Sec. 5 of the Amending Act [82] provides for the inclusion of the profits of the companies established in free-trade
or export processing zones to be tax exempt. This section reinforces similar provisions made in the Export
Processing Zone Act. [83] However, the provisions in the Amending Act are subject to the condition that 100% of
the production of the company is to be wholly for export if it is to benefit from the tax exemption. Accordingly, the
profits realized by companies established in an export processing zone or free trade zone from goods sold in
3.6.3. Loss relief carry-forward period
3.6.4. Deductible donations for educational purposes
(1) it had to be made to a public fund, or a statutory body or institution, or an ecclesiastical, charitable,
benevolent, educational or scientific institution established in Nigeria, as specified in the Fifth Schedule to the
CITA;
(2) it had to be made out of the profits of the company and not its capital;
(3) it could not be an expenditure of a capital nature; and
(4) it could not exceed 10% of the company’s total profits for the year of assessment (any donation in excess of
such an amount was not allowed).
3.6.5. Repeal of 1% discount (bonus) for self-assessment filers
3.6.6. Taxation of profits of companies in free-trade zones
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Nigeria are taxable.
Sec. 9 of the Amending Act [84] abolished the 5% rural investment allowance (granted in addition to initial
allowances) previously enjoyed by companies in respect of capital expenditure incurred in the provision of
telephones in areas at least 20 kilometres from where such a facility is provided by the government.
Sec. 10 of the Amending Act [85] abolished the 25% investment tax credit for companies engaged wholly in the
fabrication of spare parts, tools and equipment in respect of qualifying capital expenditure. The 15% investment tax
credit allowed to companies that had incurred expenditure on the replacement of obsolete plant and machinery
was also abolished by Sec. 12 of the Amending Act. [86] In addition, the 15% investment tax credit previously
available to a company that purchased locally manufactured plant, machinery or equipment for use in its business
was abolished. Furthermore, Sec. 12 of the Amending Act abolished Sec. 30(41) of the Principal Act in respect of
the relief relating to the replacement of obsolete plant and machinery. Previously, if a company had incurred
expenditure in respect of the replacement of obsolete plant and machinery, the 15% investment tax credit was
granted to the company.
In computing the deductions to be allowed for the purposes of determining the profits or losses of a company, the
Amending Act repealed the provisions in Sec. 20(24) of the CITA that allowed as a deduction to a property-holding
company the expenses attributable to the maintenance of the property and directors’ remuneration. By this
amendment, a property-holding company now cannot deduct such expenses attributable to the maintenance of a
property. [87]
The power previously vested in the Minister to alter the rate of tax or allowances by regulation under the Principal
Act [88] was abolished by Sec. 23 of the Amending Act, which now states that:
The National Assembly may on the proposal by the President by a resolution of each of the Houses of
National Assembly impose, increase, reduce, withdraw, or cancel any rate of tax, duty or fee chargeable
specified in section 29 and Second Schedule to the Act and in accordance with section 59(2) of the
Constitution of the Federal Republic of Nigeria, 1999.
This provision is a welcome attempt to curb the prevalent practice of amending the tax law via the budget speech
or circulars. This tendency began to manifest itself in the 1999 Constitution and had to be ended at an early stage
in its development. For example, there was an attempt by the administration of General Olusegun Obasanjo to
introduce fuel tax via the budget speech. [89] The Minister of Finance of the same administration also purportedly
increased the VAT rate from 5% to 10% by way of the publication of an article in a newspaper after the proposal
had been rejected by the National Assembly. [90] In this regard, it should be noted that a resolution of the National
Assembly is insufficient to impose, increase, reduce, withdraw or cancel any rate of tax. Statutory enactment in
accordance with Sec. 59 of the 1999 Constitution is still required for such an imposition, reduction, withdrawal or
cancellation to be valid. [91]
This article has attempted to highlight the major changes introduced by the Amending Act in respect of the taxation
of company income or profits in Nigeria. Background information has been provided to cast light on the policy
reasons for some of the changes. Except perhaps for the insurance sector, the provisions of the Amending Act
are, in the author’s opinion, mere tokenism compared to the far-reaching recommendations of the Study Group
and the Working Group. If the recommendations of both the Study Group and the Working Group that the income
tax rate should be reduced to 20% had been adopted, this would have provided an incentive for both local and
foreign investment in Nigeria, where cost of doing business continues to increase due to a combination of political
instability, a declining infrastructure, bribery and corruption and complex bureaucratic processes. The need for a
reduction in the company income tax rate has become more compelling so as to attenuate the effect of the global
economic crisis on businesses. The recommendation of the Study Group that Nigeria should adopt two broadbased
taxes as soon as possible is also worth considering in greater detail, in view of the large number of taxes
3.6.7. Abolition of rural investment allowance
3.6.8. Abolition of certain investment tax credits
3.6.9. Abolition of maintenance allowance for property-holding companies
3.6.10. Power to alter rates
4. Conclusions
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that exist in Nigeria, most of which may not be generating sufficient revenue to make economic sense. [92]
Finally, although such a policy shift would have significant implications for fiscal federalism, it is suggested that the
recommendation requires further in-depth study, rather than being discarded. For example, further study could
recommend some more taxes, in addition to the two proposed by the Study Group, as this would still significantly
reduce the number of existing taxes and help in improve taxation in Nigeria. Accordingly, if tax policymakers
should propose more significant changes in the overall development of Nigeria’s tax system, it may be a good idea
to borrow from the recommendations of the Study Group, which could be adapted, reworked or updated, as
appropriate.
Senior Lecturer, Department of Commercial and Industrial Law, University of Lagos, Fulbright
Fellow, legal adviser and fellow of the Chartered Institute of Taxation of Nigeria. The author is
grateful for the comments of Prof. M.T. Abdulrazaq in writing this article. He can be contacted at
abiosanni@yahoo.com.
No. 14 of 1939. Companies income tax was introduced for the first time in Nigeria in 1939.
Nigeria is a federation of 36 states and a Federal Capital Territory. The federal government is vested with
legislative powers in respect of the “taxation of incomes, profits and capital gains”. See Sec. 4, item 59 of
the Exclusive Legislative List, Second Schedule of the 1999 Constitution.
No. 3 of 1940. The Income Tax Ordinance of 1940 was comprehensive legislation that provided for the
taxation of individuals and companies for the first time.
Cap 22 of 1960.
No. 28 of 1979.
Cap 60 of 1990.
There have been Law Revisions in Nigeria in 1948, 1958, 1990 and 2004. LFN 2004 did not become
effective until May 2007, following the enactment of the Companies Income Amendment Act No. 11, 2007.
Accordingly, the Amending Act were based on the provisions of the Companies Income Tax Act as
contained in the LFN 1990, as amended, which was the then extant law.
Bickersteth was the Managing Partner of Arthur Anderson at the time of his headship of the Working
Group and is currently the Managing Partner of KPMG Consulting.
The federal government had initiated the following nine executive tax bills in the National Assembly in one
go in 2005 to establish a legal framework for its tax reform: A Bill for an Act to establish the Federal Inland
Revenue Service; A Bill for an Act to amend the Companies Income Tax Act; A Bill for an Act to amend the
Personal Income Tax Act; A Bill for an Act to amend the Value Added Tax Act; A Bill for an Act to amend
the Petroleum Profits Tax Act; A Bill for an Act to amend the Education Tax Act; A Bill for an Act to amend
the National Sugar Development Council Act; A Bill for an Act to amend the National Automotive Council
Act; and A Bill for an Act to amend the Customs, Excise Tariffs etc. (Consolidation) Act.
The recommendations are discussed in 2.2. and 2.3., respectively.
Cap 60 of 1990.
No. 11 of 2007.
Prof. Edozien led the Study Group on the Review of the Nigerian Tax System. See Federal Government of
Nigeria, “Report of the Study Group on the Nigerian Tax System and Administration” (Lagos: Government
Press, 1992).
“Nigerian Tax Reform in 2003 and Beyond”, Main Report of the Nigerian Tax System (July 2003) (“Study
Group Report”), pp. 1-2.
“Nigerian Tax Reform 2003 and Beyond. Report of the Working Group on the Review of the Report of the
Study Group on the Review of the Nigerian Tax Reform” (March 2004) (“Working Group Report”).
Study Group Report, supra note 14, p. 18.
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Id., p. 206.
Id.
Id.
Id.
Id.
Sec. 19(1)(n) CITA.
Sec. 12 of the Amending Act abolished Sec. 30 of the Principal Act.
Working Group Report, Introduction, supra note 15, p. 5.
Id., Para. 2.1.1, p. 7.
Id., Para. 4.2.2, p. 15.
Id., Para. 4.2.1, p. 15.
Id., Para. 4.2.3, p. 15.
Id., Para. 4.2.4, p. 15.
Id.
No. 13 of 2007.
J.A. Arogundade, Nigerian Income Tax and Its International Dimensions (2nd ed.) (Ibadan: Spectrum
Books Ltd, 2010), p. 1.
Id., pp. 4 and 13. Whilst under the Principal Act the FBIR was a legal person, whilst the FIRS was the
operational arm of the FBIR, the Amending Act removed the oversight function of the FBIR with regard to
the activities of the FIRS. A major implication of the new structure is that the decision-making process on
tax administration now lies with the FIRS, with a legal personality and power to sue and be sued. The
membership of the board has increased from 14 to 15. The six Departments Heads and the office of the
Legal Adviser ceased being members. The offices of the Minister of Justice and Attorney General of the
Federation and the Governor of the Central bank of Nigeria are now represented on the Board. Whilst the
FIBR was charged primarily with the administration of the tax laws under the Principal Act, the FIRS has
very significant powers as prescribed by Sec. 7 of the FIRSEA.
The TAT was established by Sec. 59 and the Second Schedule of the FIRSEA.
The public perception of the FIRS has been mixed. From a notoriously corrupt, inefficient and ineffective
bureaucracy, the agency has recently received recognition as one of the few public institutions that is
doing relatively well. In this regard, This Day newspaper awarded the FIRS the Government Agency of the
Year 2008 Award for initiating “a revolutionary tax collection system that has helped increasing the
revenue profile of the Federal Government”. See C. Ukeje and K. Olayode, “The Federal Inland Revenue
Service as a Pocket of Effectiveness: Evidence and Contradictions of Tax Administration in
Nigeria” (unpublished), p. 5.
Para. 18 Amending Act.
Sec. 18(2) CITA.
The establishment of the TAT is one of the landmark features of the ongoing tax reform of the federal
government. The TAT is an attempt to provide a single appeal tribunal for the adjudication of disputes
arising from the administration of all the federal taxes administered by the FIRS, instead of the prior
arrangement whereby the VAT Tribunal was responsible for determination of appeals on VAT and the
Body of Appeal Commissioners was responsible for appeals arising from the administration of other
federal taxes. The TAT was inaugurated on 4 February 2010.
Sec. 19 Amending Act. This was one of the recommendations of the Study Group that was implemented.
See Study Group Report, supra note 14, p. 225.
The recommendation of the Study Group was that the tax authorities should pay refunds within 30 days.
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See Study Group Report, supra note 14, p. 225.
The process requires the approval of the Office of the Accountant General to authorize that a payment
should be made by the Treasury.
For example, the penalty of 200% for failure to remit tax withheld at source.
Amending Sec. 41 of the Principal Act. This was one of the recommendations of the Study Group that was
implemented. See Study Group Report, supra note 14, pp. 215-218.
Sec. 13(5) Amending Act.
Sec. 21 of the Amending Act amending Sec. 71(1) of the Principal Act. This was one of the
recommendations of the Study Group. See Study Group Report, supra note 14, p. 226.
Sec. 29(4) Principal Act.
Sec. 11 of the Amending Act amending Sec. 29(4) of the Principal Act. The Study Group had
recommended that Sec. 29(4) be deleted completely. See Study Group Report, supra note 14, p. 214.
Sec. 20 of the Amending Act amending Sec. 64 of the Principal Act.
At the time of the writing of this article, between 21% and 25%.
Inserted by Sec. 13 of the Amending Act.
[1996] 8 NWLR (Pt.466) 256.
Amending Sec. 64 of the Principal Act.
Amending Sec. 14 of the Principal Act.
Sec. 14(6) of the Principal Act, as amended.
Sec. 14(7) of the Principal Act, as amended.
Sec. 14(1) of the Principal Act. as amended.
Sec. 14(8)(a) of the Principal Act, as amended.
Sec. 14(2)(a) of the Principal Act, as amended.
Sec. 14(2)(b) of the Principal Act, as amended.
Sec. 14(5)(b) of the Principal Act, as amended.
Sec. 14(9)(a) of the Principal Act, as amended.
Sec. 14(9)(b) of the Principal Act, as amended.
Sec. 14(11) of the Principal Act, as amended.
“Consolidation: Insurance industry two years after”, Punch (9 November 2009), available at
www.punchng.com/Articl.aspx?theartic=Art200911092243350.
Study Group Report, supra note 14, p. 40.
“FG Loses N200bn to Tax Waivers”, This Day (3 June 2009), available at
www.thisdayonline.com/nview.php?id=145204.
Id.
Working Group Report, supra note 15, p. 2.
Id., Para. 2.4, p. 10.
Sec. 3 Amending Act.
Sec. 3(c) CITA.
Sec. 3 Amending Act.
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O.G. Amokaye, “Financing Micro, Small and Medium Enterprises (MSMs) in Nigeria: Security Options”,
Current Law Series (2006), pp. 1-2. Institutional lenders often perceive SMEs generally as high risk, as
entrepreneurs lack a sufficient capital base and adequate collateral to guarantee loans. Lenders are also
of the view that SMEs have no performance record on which to evaluate their credit worthiness and regard
most SMEs as unstable, as such enterprises often enter and exit the market and often lack incentives to
remain for a tangible period, and are as such risky borrowers.
Id., p. 2. One of the current key socio-economic issues confronting Nigerian policymakers and institution
lenders alike is how to stimulate sustained investment in micro, small and medium enterprises (MSMEs).
The reason for this increased focus and emphasis can be understood, given the global recognition of
MSMEs as important engines of industrialization, economic growth, employment generation, poverty
eradication, wealth creation, increased productivity and competitiveness in the global market.
Sec. 27(2)(a)(iii) Principal Act.
Amokaye, supra note 73, pp. 62-63. This recommendation was enacted into law by Sec. 8 of the
Amending Act.
Sec. 16 Petroleum Profits Tax Act, Cap P13, LFN 2004.
Sec. 7 Amending Act.
Sec. 21 CITA.
Sec. 7 Amending Act.
Deleting Sec. 41A of the Principal Act.
Amending Sec. 19 of the Principal Act.
No. 63 of 1992 Cap N107 Laws of Federation, 2004.
Deleting Sec. 28B of the Principal Act.
Deleting Sec. 28F of the Principal Act.
Deleting Sec. 30 of the Principal Act.
Sec. 6 Amending Act.
Sec. 79 Principal Act.
Fuel tax was initially introduced in 2003 as a “price modulator” by the government of former President
Olusegun Obasanjo to keep the prices within a certain range through the upward and downward
adjustments of the tax in response to the prices of crude oil in the international market. Following a public
outcry, however, the former President resorted to an outright price increase without implementing it as a
tax. See the 2003 Budget Speech, available at www.budgetoffice.gov.ng/Archive.htm.
The increase in VAT to 10% was announced by the federal government on 24 May 2007 and was to have
had retroactive effect from 23 May 2007. The Minister of Finance, Mrs Nenadi E. Usman, justified the
increase on the ground that Nigeria has the lowest rate in the West African subregion. The tax was
resisted by the Nigerian Labour Congress, the Organised Private Sector (consisting of the Members of the
Manufacturers Association of Nigeria, the Nigerian Employers Consultative Association, and the Nigerian
Association of Chambers of Commerce, Industries, Mines and Agriculture) and civil society organizations
across Nigeria. See “Nigeria: FG increases VAT to 10 Percent”, all Africa.com (25 May 2007), available at
http://allafrica.com/stories/200705250476.html.
It is a well-settled principle that taxation is statutory. See Cape Brandy Syndicate v. IRC ([1921] K.B. 64);
S.A v. Regional Tax Board (1970) 1 ALR Comm. 68; and Aderawos Timbers Trading Company Ltd. v.
FBIR. (1969) 1 All NLR 247.
Although there are 38 taxes and levies listed in the Taxes and Levies (Approved List for Collection) Act No.
2, Cap T2, LFN 2004, more than 95% of tax revenue is generated by the petroleum profits tax, personal
income tax, companies income tax and VAT.

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CURRENT LAW AND PRACTICE OF VALUE ADDED TAX IN NIGERIA

- Nature and legal framework of VAT and Sales Tax

- New concepts – taxable person, zero rate, taxable goods and services

- Note the exemptions

- Divergence between the law and practice

- Contentious Issues or Matters arising:

• Does the fact that VAT replaced sales tax make VAT and sales tax to be the same?

• Whether the VAT Act is constitutional in view of the 1999 Constitution

• Whether the VAT Account constitutional in view of section 162 of the 1999 Constitution

• What are the options open to federal and state government?

• Is it possible within the current constitutional framework for State to administer Sales tax and federal VAT? What are the implications for taxpayer and tax administration?

ABSTRACT

The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the Federal Military Government. Since then, the Value Added Tax Decree, had been amended more than half a dozen times the latest being the Value Added Tax (Amendment) Act of 2007. Some of the amendments have introduced significant changes which are yet to be reflected in the body of existing literature. This article discusses the thrust and evolutionary path of the changes to the legal and administrative framework of VAT and assesses the direction of development. The aim is to succinctly discuss the current position of the VAT law and administration in Nigeria in a coherent form for the proper guidance of taxpayers, researchers and foreign investors.

1. INTRODUCTORY BACKGROUND

Countries introduce a Value Added Tax (VAT) because they are dissatisfied with their existing tax structure. The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the Federal Military Government. Before then, Sales tax was under the jurisdiction of the States and generally poorly administered with marginal contribution in terms of revenue. The idea of introducing VAT was recommended by the Study Group set up by the Federal Government in 1991 to review the tax system of the Federation as a replacement of Sales Tax. After extensive deliberation and consultation, VAT was introduced on 24th August 1993 as a federal tax by the Value Added Tax Decree.

Since, then the relative success of VAT in Nigeria has surpassed the expectations of all sceptics including the International Monetary Fund (IMF) and emerged as a significant source of income for all the levels of government. The current policy is to gradually reduce the rate of income tax while focus is shifted to indirect taxes, especially VAT. According to the National Tax Policy Document:

“It is proposed to have a shift from direct to indirect taxation within the non-oil sector in order to stimulate economic growth in the sectors, whilst still meeting revenue requirements. This is particularly necessary, given that oil revenues are no longer viewed as a sustainable source of revenue and there is the urgent necessity to diversify tax revenue. In this regard, it is proposed that there should be lower rates of direct taxes such as Companies’ Income and Personal Income tax to reduce the cost of doing business in Nigeria by increasing cash flow and disposable income for corporate entities and individuals alike.”

A writer has, however, cautioned against any temptation to abolish income tax in favour of VAT. According to the learned writer “The two taxes can nonetheless be efficiently administered side by side without any problem especially in the context of the low tax regime. There should be no question of one replacing the other. They are complimentary in revenue mobilisation”.

Since 1993, the Value Added Tax Act, had been amended more than half a dozen times the latest being the Value Added Tax (Amendment) Act of 2007. Some of the amendments have introduced significant changes which are yet to be reflected in the body of existing literature. This article discusses the thrust and evolutionary path of the changes to the legal and administrative framework of VAT and assesses the direction of development. The aim is to succinctly discuss the current position of the VAT law and administration in Nigeria in a coherent form for the proper guidance of taxpayers, researchers and foreign investors.

2.0. LEGAL FRAMEWORK

The Value Added Tax Act originally consisted of 42 sections and three Schedules. The various amendments introduced by the Finance (Miscellaneous Taxation Provisions) Decrees over the years were differentiated by adding alphabets such as A, B, C, etc after the amended sections. For example, in 1996, Section 8 of the Decree was amended by inserting Sections 8A and 8B in addition to existing section 8 resulting in sections 8, 8A and 8B. The same applies to sections 10 and 13 which later have sections 10A, 10B and 13A. The various amendments to the VAT Decree, as amended, were consolidated in Value Added Tax Act, Cap V-1, Laws of Federation of Nigeria, 2004. Sequel to the consolidation exercise, the provisions of the Act were renumbered serially including the sections which were hitherto differentiated by alphabets. After the consolidation exercise of 2004, the VAT Act was recently amended by the Value Added Tax (Amendments) Act 2007.

The Value Added Tax Act, Cap V-1, Laws of Federation, 2004 consists of 47 sections with one Schedule which contains a list of goods and services exempt. The Federal Inland Revenue Service (FIRS) had published a number of Information Circulars on VAT which to some extent throw light on some of the provisions. It suffices to say that the FIRS Circulars or Information Notices are not legal documents and are merely issued for the guidance of taxpayers. They are neither binding on nor create estoppel against the FIRS.

2.1 Scope of imposition

VAT is imposed “on the supply of all goods and services other than those goods and services listed in the First Schedule to this Act”. If the charging provisions were to be strictly construed, VAT will be chargeable on international, inter-State and intra-State supplies of goods and services. Apparently in recognition of the need for territorial limitation of the tax to goods and services supplied in Nigeria, the FIRS Information Circular 9304 provides that “supplies made outside Nigeria are outside the scope of Nigerian VAT. Even without making this qualification, it is hard to see how the tax can be administered extra-territorially considering the principle in Boucher v Lawson that no nation will take account of the revenue law of another nation. While the self imposed limitation in the Information Circular might have served good practical purpose, there is the need to effect amend section 2 of the VAT Act to limit the scope of the tax to supply of goods and services in Nigeria. Guidance can be taken from the provisions of section 1(1) of the Value Added Tax Act, 1994 of the United Kingdom which provides that:

“Value Added Tax shall be charged in accordance with the provisions of this Act – (a) on the supply of goods and services within the United Kingdom (including anything treated as such a supply, (b) on the acquisition in the United Kingdom from other member states of any goods; and (c) on the importation of goods from places outside the member States.

The VAT Act had witnessed significant changes in the design of its charging clause. At inception, VAT was chargeable and payable on goods and services listed in column A of Schedules 1 and 2 while Schedule 3 contained the list of exempted goods and services. Based on the original design, there were 17 chargeable goods and 24 chargeable services. However, following the policy to expand the base of VAT, a new design was adopted which imposed tax on the supply of “all” goods and services other than the goods and services listed in the Schedule to the Act. The new design, therefore, fundamentally changed the standard for determining chargeable goods. The bright line rule for determining whether a particular good or service is taxable under the extant law is whether it is specifically exempted in the First Schedule. In the absence of any specific exemption, the good or service will be taxable thus giving the tax a very wide base.

2.1.1. Exempted goods and services

Taking the social, political and economic development of Nigeria into consideration, section 3 of the Act exempts the under listed goods and services listed in the Schedule which is divided into two parts thus:

Part 1 – Good Exempt

1. All medical and pharmaceutical products

2. Basic food items

3. Books and educational materials

4. Baby products

5. Locally produced fertilizer, agricultural and veterinary medicine, farming

machinery and farming transportation equipment

6. All exported goods

7. Plant and machinery imported for use in the Export Processing Zone

8. Plant, machinery and equipment purchased for utilization of gas in

downstream petroleum operations

9. Tractors, ploughs, agricultural equipment and implements purchased for

agricultural purposes.

Part II – Services Exempt

1. Medical services

2. Services rendered by Community Banks, People’s Bank and Mortgage

Institutions;

3. Plays and performances conducted by educational institutions as part

of learning and

4. All exported services.”

The meaning and scope of the exempted goods and services are not defined in either the Statute or the FIRS Circulars. For example, the scope of what is meant by “basic food” is not clear. Generally, what is a basic food depends on the status in life of an individual and varies from person to person. The present practice by the FIRS is to limit the meaning of basic food to uncooked and unprocessed food items, while processed food items such as spaghetti, corn flakes, baked beans and cheese are taxable. It is submitted that in the absence of clear definition of what constitutes basic food item, the current practice which imposes tax on processed and manufactured foods is open to challenge. This will also accord with the principle that ambiguity in tax laws should be construed in favour of the taxpayer.

At inception, there were 7 exempted goods and three exempted services. Initially, the trend was to extend the exempted goods and services from time to time ostensibly in response to lobby from interest groups. In 1996 the exempted list were increased to twelve while the services were increased to four. Apparently being wary of the gradual erosion of the revenue base of VAT and perhaps curb the growing demand for tax exemption, a policy was adopted to restrict the scope of exemptions by reducing the number of goods and services on the First Schedule and therefore broadening the base of VAT. Against this background, newspapers and magazines and commercial vehicles and commercial vehicle spare parts which were part of the original seven exempted items were deleted by Decree No. 30 of 1999. Only five out of the original 7 exempted goods survived till today in the First Schedule under the LFN, 2004 while all the exempted services had been retained with a new addition.

2.2. Rate

Nigeria adopts the single rate of 5 per cent of the value of all taxable goods and services which is the world lowest VAT rate. A recent attempt by the National Assembly to increase the rate of VAT to 10% was unsuccessful. Despite the avowed policy of the Federal Government to increase the VAT rate the implementation has proved to be Herculean and unachievable so far due to social and political environment. The arguments of those who are opposed to the rate increment have always been that FIRS should strive to expand the coverage of VAT to those who are presently out of the tax net and generally increase the compliance level.

2.3. Taxable person Registration for VAT

VAT is collected through registered persons who are known as “taxable persons”. A taxable person is obliged to register with the FIRS for VAT collection “within six months of the commencement of the Act or within six months of the commencement of business, whichever is earlier.” Failure to register attract a penalty of N10, 000.00 for the first month in which the failure occurs; and N5,000.00 for each subsequent month. Since a period of six months has elapsed after the promulgation of the Act, it presupposes that every taxable person is now obliged to register as soon as it commences business. There has been a suggestion that all new businesses should be granted a period of six months’ grace after the commencement of business to register for VAT. If the suggestion were to be adopted, it might lead to the unintended effect of denying taxable persons the opportunity to set off their inputs against the output VAT. Since VAT can only be lawfully collected after registration it means that until then the taxable person will not have any output VAT against which the input tax can be offset.

Although, the Act imposes an obligation on every taxable person to register, there was the initial concession, which allowed retailers a period of three years to register. Going by the bare statutory provisions, every retailer is obliged to register for VAT be collecting tax due upon the supply of goods and services to its customers since 1996 after the expiration of the concession period. This however, seems to be a tall order judging by little or no formal regulation of commercial activities of the retail level in Nigeria. The futility of collecting sales tax at the retail level in Nigeria was underscored by the Supreme Court in the case of Aberuagba v A.G. Ogun State thus:

“In developed countries where retail trade is carried on in departmental stores, supermarkets, drug stores and shops where all sales are accounted for and the business addresses registered, it is convenient and save for any government to appoint retailers as its agents for the collection of Saes Tax. Every penny collected will ordinarily reach the government. The position is entirely different in Nigeria. T is notorious fact that except in few departmental stores, shops and drug-stores, where accounts of sales are kept, the bulk of the retail trade is carried on by swam of amorphous trades in the market places and in their homes, on our streets and highways, under our bridges and trees. They do not keep record or account of their business dealings and they cannot be reached by any Government. It would be a bonanza t those retail traders to appoint them as agents for the collection of any sales tax. Except in the case of the few retailers that I have mentioned, not a kobo would reach the government. Consequently, for any meaningful sales tax to reach the government, it must be collected by agents, such as distributors, whose accountability to the government for the tax collected is assured”.

Although section 9 of the VAT Act simply requires a taxable person to register for VAT collection which presupposes a single registration, in practice, the FIRS has however directed that where a taxable person has more than one branch, each branch should register separately at the nearest tax office to it. The implication of this is that such a business entity is obliged to have a multiple registration and maintain independent records of its VAT transactions at each branch. This directive has been severely criticized as imposing avoidable hardship on affected taxable persons.

The VAT Act has been quite dynamic in the area of registration of taxable person. The initial policy was to exclude public authorities from being taxable persons. In a bid to accelerate the rate of registration, the VAT Act was amended to impose obligation on all Government Ministries, Statutory bodies and Agencies at the Federal, State and Local Government levels to act as VAT collecting agents. A taxable person is defined as “a person who independently carries out in any place an economic activity as a producer, whole a trader, supplier of goods, supplier of services (including mining and other related activities) or person exploiting tangible or intangible property for the purpose of obtaining income therefrom by way of trade or business and includes an agency of government acting in that capacity.

Section 10 mandates a non-resident company, carrying on business in Nigeria to register for VAT by using the address of the person with whom it has a subsisting contract. A non resident company shall include the tax in its invoice while the person to whom the goods and services are supplied shall remit tax in the currency of the transaction. As laudable as the provisions may be, they however pose certain administrative challenges in practice. For instance, where a foreign company has business dealing with more than one person, who are located in different places across the country, the foreign company will be required to register with the tax office at different locations where its customers are located which may be administratively burdensome and discouraging. A better approach, in our view, may be to require each local supplier to disclose such transaction and withhold the requisite VAT rather than requesting the foreign company to register. This is more so when in practice, the trading activities of such foreign companies usually became known to through either a voluntary compliance or during the audit of the local companies with which the foreign company had contracted.

It is remarkable that the obligation to remit tax in the currency of transaction applies only to transactions involving non-resident companies. The basis for these discriminatory provisions is not clear. While, transactions involving foreign companies are usually denominated wholly in foreign currency or partly in foreign currency and partly in naira, Nigerian companies may, and sometimes do, request payment in foreign currencies whether partly or wholly. Against this background, it is suggested that the provision should be extended to all taxable persons as it is done under the Companies Income Tax and the Petroleum Profits Tax.

2.4. Rendering of Account

Taxable persons are obligated to keep such records and books of all transactions, operations, imports and other activities relating to taxable goods and services as are sufficient to determine the correct amount of the tax due. No particular accounting standard is prescribed. Hence books and records which a taxable person is expected to keep will depend on the nature and size of its business provided that they are “sufficient to determine the correct amount due”. A writer had opined that it is sufficient if a taxable person keeps the usual account books such as Cashbook, Sales and Purchase Daybooks, Trial Balances, Profit and Loss Accounts and Balance Sheets. A taxable person shall render a monthly return of all the taxable goods and services to the FIRS on or before the 30th day of every month. Failure to render a return within the stipulated period of time attracts a penalty of 5 per cent of the sum due per annum plus interest at the commercial rate in addition to the tax.

A taxable person who fails to render a return or renders an inaccurate return is liable to be assessed by the FIRS based on its best of judgement (BOJ). VAT is largely a self-assessed tax. Assessment by the FIRS will only be made as a last resort. Although no specific time is prescribed within which a taxable person is required to respond to the BOJ, it is submitted that the taxable person is nevertheless entitled to reasonable notice failing which the assessment may be voided.

2.5. Computation of tax due

The question of how much VAT is payable may be straightforward for the final consumer (who simply pays without obligation to do anything else) but this is not so for a taxable person who is an agent of collection. While a taxable person has obligation to collect tax on taxable goods and services he is also under obligation to pay VAT on taxable goods and services supplied to him. The tax collected by a taxable person is called output VAT while the tax paid by him is called input VAT. The VAT system is structured in such a way that a taxable person is able to take credit for the VAT paid by it on its inputs. The processes are contained in sections 12, 13, 14, 15 &-16 of the VAT Act. There are three steps leading to the ascertainment of the VAT due or refundable. First, a taxable person will ascertain the VAT collected by him on his supplies during the reporting period. Second, he will ascertain the VAT paid by him on purchases used by him to provide the taxable goods during the same reporting period. Third, find out the difference between the VAT on supplies made and VAT paid on purchases made towards such supplies to determine the amount of VAT either payable to FIRS or refundable to the registered person. The taxable person is thus allowed to indemnify itself against any loss and the rate of VAT that is ultimately borne by the final consumer is kept at 5 percent. In this way, the registered person acts as a mere unpaid agent of the FIRS without bearing the tax burden.

One of the areas that have generated serious controversy in practice is the provision of section 16 which entitles a registered person to deduct its input VAT from its output VAT and claim refund if the input VAT exceeds the output VAT. At the preparatory stage for the introduction of VAT in Nigeria, the refund system was adumbrated as one of its unique features designed to ensure that registered persons do not bear the burden of the new tax. After the commencement of the tax it was said that a VAT Refund Account had been opened with the Central Bank of Nigeria where definite provision were made every month to take care of verified fund claims. Section 16 simply provides that:

“16-(1) A taxable person shall, on rendering a return under subsection (1) of section 12 of this Act –

(a) If the output tax exceeds the input, remit the excess to the Board; or

(b) If the input tax exceeds the output tax, be entitled to a refund of the

excess tax from the Board produce then of such documents as the Board may, from time to time require”.

Section 12(2) simply defines input tax as “the tax paid by a taxable person to his supplier on the taxable goods and services purchased by or supplied to him”. Going by the literal interpretation of this provision, a taxable person should be entitled to claim all the VAT paid on all his inputs. Hence, the provision can be said to enact the classical approach to the treatment of refund. Consequently, there was a floodgate of applications for refund. The FIRS responded by setting out the guidelines and requirements for claiming refund in the Information Circular ostensibly to curb abuses. The circular stated that there were three ways of claiming refund viz: (i) as credit method; or (ii) direct cash method; or (iii) a combination of (i) and (ii). Unless a person indicates, his preference for cash refund, the FIRS would presume a preference for the credit method after the necessary audit has been carried out. While the audit requirement could have discouraged some taxable person with skeleton in their cupboard, this is, however, not for those with genuine claims and fairly good tax records.

It is submitted that the practice of granting credit is a violation of the express provision of the law that prescribes a refund. Although the word “cash” refund was not employed by the Act, the literal meaning of “refund” is “to pay back or repayment of money”. Therefore, a refund cannot by any imagination be said to include a credit system. What the FIRS ought to have done was to propose an amendment to the Act to incorporate a credit system.

In 1998, the VAT Act was amended by delimiting the scope of allowable and unallowable input vide Section 6 of the Finance (Miscellaneous Taxation Provisions) Act No 18 1998 which introduced 13(A) (now section 17 LFN, 2004) as follows:

“17(1) For purpose of Section 13 (1) of this Act, the input tax to be allowed as a deduction from output tax shall be limited to the tax 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 tax is charged.

(2) Input Tax:

(a) On any business, service and general administration of any business

which otherwise can be expended through the income statement (profit and loss accounts) and

(b) On any capital item and asset which is to be capitalized along with cost

of the capital item and asset; shall not be allowed as a deduction from output tax”.

For the avoidance of doubt, an input tax will only be allowed under section 13 when it is on:

(i) goods purchased or imported directly for resale; or

(ii) goods which form stock-in-trade; or

(iii) goods used for the direct production (raw materials) of any good.

The above provisions, thus, limit allowable input VAT to VAT on goods purchased or imported directly for resale or and goods which form stock in trade. Input VAT on overhead, services and fixed assets are not allowed. By allowing input VAT to be expensed through the profit and loss account only provides a taxable person with a 30% relief. Taxable persons in such situations, therefore, bear some hidden VAT contrary to the principle that the final consumers bear the entire VAT burden.

2.6. VAT ON EXPORTS

Non-Oil exports are zero-rated by virtue of the VAT (Amendment) Act, 2007. Originally, the FIRS granted exported goods and services “zero-rated status” as a form of concession ostensibly to enhance the competitive advantages of Nigerian goods and services in the international market. The FIRS, became inundated with applications for refund, particularly from the oil producing companies who were involved in exportation of petroleum products. The inability of granting all the applications for refund in such cases eventually made the FIRS to rethink the expediency of the concession and consequently amended the First Schedule by including “all exports” and “all export services” in the list of exempted goods and services. Considering that exemption status puts a taxable person somewhat at a disadvantage in claiming its input VAT, the position was eventually reviewed by making non-oil exports zero rated with the hope that it will make Nigerian products more competitive in the international market. For the laudable objective to be achieved, other resources of the nation will have to be harnessed to create an overall enabling environment that will reduce cost of doing business.

2.7. Distribution of VAT Proceed

VAT was introduced in Nigeria in 1993 mainly as a Federal intervention to help the State Government to modernize their sales tax and consequently enhance their revenue. The initial policy on the distribution of the revenue from VAT was that 80 percent of it would be shared among the States and the Federal Capital Territory while the Federal Government will retain 20 percent as administrative charges. However, when VAT turned out to be quite successful, the distribution formula was altered in favour of the Federal Government and also extended to the local government councils in the ratio of 50, 25 and 25 per cents to the federal, state and local governments respectively. Due to protest by State Governments, the distribution formula has been reviewed on several occasions in favour of the States and Local Government Councils to arrive at the present formula which is 15, 50 and 35 percents to the Federal, States and Local Governments.

In spite of the review of the sharing formula, Lagos State, has always expressed concern about the fairness of the formula for the distribution of VAT revenue which eventually caused the Lagos State Government to re-introduce its Sales Tax Law vide the Sales Tax (Schedule Amendment) Order 2000 of Lagos State. Hence, Lagos State commenced the collection of Sales Tax within Lagos State from retailers and manufacturers notwithstanding that it continues to share from the VAT revenue. In an attempt to address the demand for a more equitable sharing formula, the VAT Act was recently amended vide Value Added Tax (Amendment) Act No 12 of 2007 such that not less than 20% of the revenue distribution among the States and Local Government shall reflect the principle of derivation. Although the amendment has significantly increased the share of the Lagos State, it has not sufficiently addressed its concern about equity in the distribution.

Meanwhile, aggrieved taxpayers in Lagos State had instituted a number of actions to challenge the constitutionality of the Sales Tax Law in about 10 different suits at both the Lagos High Court and the Federal High Court Lagos Division. Remarkably, virtually all the suits instituted in the Lagos High Court upheld the constitutionality of Sales Tax Law of Lagos State and assessments raised there under, while the VAT Act was declared null and void. This development caused some taxpayers to institute their action in the Federal High Court against the Lagos State and the FIRS. At least, two of the concluded suits in the Federal High Court upheld the constitutionality of VAT Act and declared the Sales Tax Law of Lagos State null and void while others are still pending. Lagos State appealed unsuccessfully to the Court of Appeal in Attorney-General, Lagos State v. Eko Hotels which affirmed the decision of the Federal High Court that Sales Tax Law of Lagos State was null and void. In view of the adverse decision of the Court of Appeal in Attorney-General, Lagos State v. Eko Hotels(Supra) Lagos State recently invoked the original jurisdiction of the Supreme Court pursuant to section 232(1) of the Constitution of the Federal Republic of Nigeria, 1999 (1999 Constitution) seeking the determination of the constitutionality of VAT as a federal tax.

Meanwhile, while the VAT case is pending at the Supreme Court, the Lagos State House of Assembly passed the Hotel Occupancy & Restaurant Consumption Law (popularly known as “consumption or tourism tax”) which imposes a five per cent tax on goods and services purchased from hotels, restaurants and event centres in the State which again had sparked off chains of litigation.

2.8. Recovery

VAT operates on the basis of self assessment. A taxable person is required to remit tax collected not later than the 21st day of the following that in which the purchase or supply was made, a return of all taxable goods and services made by him during the preceding month. The period for fling return was reduced from 30 days to 21 days by the 2007 Amendment Act.

A taxpayer who is aggrieved by an assessment made him may file an objection to the FIRS which shall be determined within 30 days. Appeal lies from the decisions of the FIRS to the Tax Appeal Tribunal established under the Federal Inland Revenue Services and thereafter to the Federal High Court. Originally, section 16 of the VAT Decree vested jurisdiction in the Federal High Court for the recovery of any tax, penalty or interest which remains unpaid after the period stipulated for payment. The Federal High Court is one of the Superior Courts established under the Constitution. Section 251(a) of the 1999 Constitution vests the Federal High Court with exclusive jurisdiction to hear and determine causes and matters relating to the revenue of the Federal Government in which the Federal Government or any of its organs or agency is a party.

In 1996, the Value Added Tax Tribunal was established. Section 16 of the Decree provides thus:

16 (1) Any tax, penalty or interest which remains unpaid after the period specified for payment may be recovered by the FIRS through proceedings in the value Added Tax Tribunal.

(2) A taxable person who is aggrieved by an assessment made on the person may appeal to the Value Added Tribunal.

(3) Appeal from the Value Added Tax Tribunal shall be made to the Federal Court of Appeal.

Although the above provisions derogated from section 251(a) of the Constitution which vested jurisdiction on the Federal High Court, the power of the Military Government to overreach the provisions of the Constitution pursuant to the Constitution (Suspension and Modification) Decree No 1 of 1984 was not in doubt. Hence, the jurisdiction of the VAT Tribunal prevailed over that of the Federal High Court by virtue throughout the period of the Military rule.

Sequel to the commencement of civilian rule under the 1999 Constitution, some taxpayers leveraged on the supremacy of the Constitution to challenge the jurisdiction of the VAT tribunal to entertain action by the FIRS for recovery of taxes due. The Court of Appeal held in Stabilini v FBIR and Cadbury v FBIR that the establishment of the VAT Tribunal violated the provisions of section 251(1)(a) of the 1999 Constitution which vests exclusive jurisdiction on the Federal High Court on causes or matters relating to federal taxation and revenue of the Federal Government and therefore null and void.

A Tax Appeal Tribunal has now been established with power to settle disputes arising from the operations of all the federal tax statutes listed in the First Schedule to Federal Inland Revenue Service (Establishment) Act including the VAT Act thus abolishing the jurisdiction of VAT Tribunal by necessary implication. The FIR Act has cured the mischief which caused the Court of Appeal to invalidate the jurisdiction of the VAT tribunal by providing that appeal shall go from the decisions of the Tax Appeal Tribunal to the Federal High Court. The Tax Appeal Tribunal was recently inaugurated and will hopefully commence sitting in no distant future.

2.9. Offences

Various offences were created under the VAT Act in order to punish defaulters and minimize evasion. These are contained in Chapter V. The offences range from furnishing of false document, evasion, failure to make attribution, failure to notify change of address, failure to issue tax invoice, resisting an authorized officer of the FIRS, issuing of tax invoice by an unauthorized person, Failure to register, failure to keep proper record and accounts, failure to collect tax, failure to submit returns, aiding and abetting commission of offences, Where an offence is committed by a body corporate every director, manager or secretary and in the case of partnership, every partner is severally guilty and liable. Each offence attracts penalties such as a fine and or imprisonment depending on the gravity. The offence of evasion of VAT payment carries the severest penalty of “a fine of N30.000 or two times the amount of the tax being evaded, whichever is greater, or to imprisonment for a term not exceeding three years.” The premises of a taxable person can be sealed up where he knowingly or intentionally fails to register for VAT after one month of being convicted for the offence of non-registration.

3.0. ADMINISTRATION

VAT is administered and managed by the FIRS, a federal agency responsible for the administration of federal taxes with power to do such things as may be deemed necessary and expedient for the assessment and collection of the tax due. At the planning stage, some reservations were expressed about the competence and desirability of the FIRS to effectively administer VAT. The Federal Government, rightly in my view, rejected the recommendation that a fully independent and self-sustaining Commission should be established to administer VAT. Rather, a VAT Directorate was established as one of the six Directorates of FBIR while Local VAT Offices (LVOs) were established in all the State capitals and some major towns in each States with the ultimate plan to have an LVO in each of the 774 Local Government Councils. Each of the LVO was under the supervision and control of the Zonal Office in the area. The Zonal Co-ordinator on his part reports regularly the activities and performances of the LVOs in his zone to the VAT Director in Abuja. In terms of physical location, the Local VAT offices are separated from the Income Tax Area Offices of the FIRS but the same Zonal Co-ordinator was maintained for both the Income Tax and VAT. Furthermore, a separate VAT Technical Committee was established by the Act and vested with powers to consider all matters that may require professional and technical expertise and make recommendation to the FIRS.

The administration of VAT has undergone significant changes in the wake of the ongoing tax reform of the Federal Government of Nigeria. The campaign for restructuring and grant of administrative and financial autonomy for the Federal Inland Revenue Services (FIRS) has been a long drawn battle. The triumph came with the promulgation of the Federal Inland Revenue Service (Establishment) Act which establishes the FIRS under a separate statute dedicated for that purpose. Hitherto, the Federal Board of Inland Revenue (FBIR) was established under the Companies Income Tax Act. The Establishment of the Federal Inland Revenue Service (FIRS) under a separate statute of its own now makes for easy reference for administrators, practitioners and researchers. The FIRS Act has granted array of powers and a measure of autonomy to the FIRS to enable it discharge its statutory roles. For instance, FIRS is now able to recruit, discipline and determine the terms and other conditions of service of its staff outside the civil service structure. Since the take off of the new structure, the FIRS has been re-invented in terms of dynamism and professionalism.

Hitherto, taxpayers were required to approach different offices- sometimes situated far apart – for different tax needs, thus making the process of assessment and collection of tax cumbersome and distinctly tortuous. To address this concern, the FIRS had created 77 Integrated Tax Offices (ITOs) as one-stop shops for all tax payments including VAT. This development therefore drew a curtain on the existence and functionality of Local VAT Offices. Towards this end, section 2 of the VAT (Amendment) Act 2007 provides that the word “VAT Office” should be substituted with ‘Tax Office” wherever it appears in the Principal Act.

4.0. CONCLUSION

The legal framework for VAT in Nigeria is quite simple and easy-to-understand. The simplicity of the VAT Act is commendable considering that VAT is not only the concern of lawyers and accountants but also that of ordinary businessmen and women who are under obligation to register and collect VAT as agent of the Government. The VAT administration has been pursued so far in a manner devoid of political and civil upheavals, which heralded its introduction and administration in some other countries.

The VAT Law and administration had witnessed some significant growth since inception in 1993. The above discussion has revealed that more changes have taken placed in the areas of expanding the base of the tax for instance through the restriction of exemption, expansion of registered persons, restricting the scope of refund, and curbing evasion by making the issuance of invoice mandatory. The VAT administration has also been streamlined with that of other federal taxes under the Federal Inland Revenue Service (Establishment) Act (FIRS Act). For instance, the Local VAT Offices (LVOs) which were hitherto separated from Income Tax Offices now form part of the Integrated Tax Office (ITO). Also, the dichotomy in appeal process under the VAT Act through the establishment the VAT Appeal Tribunal has been abolished while all appeals in respect of federal taxes (including VAT) now lie to the Tax Appeal Tribunal. Notwithstanding, these changes, there are a number of areas which are of concern to the taxpayers which are yet to be reviewed. Such areas include the need to make the scope of VAT more definite rather than open-ended, abolition of branch registration, the need to redefine input VAT in a manner that will ensure that businesses do not bear any burden of VAT by making it possible for them to net off their input VAT. It may also be expedient to exempt the retail stage in the informal sector of the economy until the commercial activities at this level becomes fairly well regulated and streamline the gap between law and practice. In the final analysis, the future growth of VAT will, to a large extent, depend on the outcome of the case that is pending before the Supreme Court on the competence of the Federal Government to continue to administer VAT under the 1999 Constitution. Should the case be the decided in favour of the Federal Government, it is hoped that future amendments would address some of these concerns. However, if the Plaintiff should succeed, it will draw the curtain on VAT in Nigeria and give birth to State Sales Tax or State modified VAT.

How VAT works

. The VAT system is structured in such a way that a registered person is able to take credit for the VAT paid by it on the various goods and services consumed by it in the course of its business from all the VAT collected by it on behalf of the government (output tax). The processes are contained in sections 10-13. Where its output exceeds its input the registered person will remit the balance to the Board and where the input exceeds the output it will claim a refund. In this way the registered person is allowed to indemnify itself against any loss and the rate of VAT ultimately ……… by the final consumer is kept at 5 percent. The registered person is therefore a mere unpaid agent of the government and not the sufferer.

It may be useful to illustrate the workings of the tax system thus: if a product moves from raw materials producer (A) to manufacturer (B) at N1,000.00 then to Wholesaler (C) at N1,500.00 then to Retailer (D) at N2,000.00 and finally to the consumer who pays N2,500.00 to the Retailer. VAT payable to Government at 5% rate of VAT on the product.

VATable Sale price VAT collected VAT on Inputs VAT paid to

Person (Before VAT (Output Tax) (Input Tax) government

N N N N

A 1000 50 - 50

B 1,500 75 50 25

C 2,500 100 75 25

D 2,000 125 100 25

350 225 125

Thus the total VAT payable to government in the four transactions is N125 which is 5% of the final consumer price of N2,500.00 This can be translated into a figure thus:

Sale Price

(before VAT) Payment to Government

Supplier Price = N1000 RAW MATERIALS By Supplier

SUPPLIER VAT Collected = N50

Sales Price = N1050 Less VAT paid = N

(inclusive of VAT) VAT payable = N50

Manufacturer Price = MANUFACTURER By Manufacturer

N1500 Sales Price = N1575 VAT Collected = N75

(inclusive of VAT) Less VAT paid = N50

VAT payable = N25

Wholesaler Price = WHOLESALER By Wholesaler

Sales Price = N2100 VAT Collected = N100

Less VAT Paid = N 75

VAT payable = N 25

Retailer price = N2500 RETAILER By Retailer

Sales Price = N2625 VAT Collected = N125

Less VAT Paid = N100

VAT payable = N 25

CONSUMER Total VAT paid = N125

Payment to retailer (i.e. 5% of N2500)

= N2625