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Companies operating in Nigeria with the history of default in paying their income taxes, will succeed in paving the way for higher tax debt, as the new administration of penalty and interest rates regime becomes effective on July 1.
As part of the efforts of the Federal Inland Revenue Service (FIRS) to promote voluntary tax compliance among taxpayers, by providing clarity and certainty in tax operation, the FIRS has published for year 2017, the approved rates of penalty and interest to be applied as sanctions on all unpaid tax amounts, arising as either tax debt or arrears.
Companies Income Tax (CIT) is tax on the profits of incorporated entities in Nigeria. It also includes the tax on the profits of non-resident companies carrying on business in Nigeria. The tax is paid by limited liability companies, inclusive of the public limited liability companies. The CIT rate is 30percent, assessed on a preceding year basis (that is tax is charged on profits for the accounting year ending in the year preceding assessment).
Section 32 (1) of the FIRS (establishment) Act, has specifically provided that if any tax is not paid within the periods prescribed, “a sum equal to 10 percent of the amount of the tax payable shall be added thereto, as penalty”; and “the tax shall carry interest at the prevailing Central Bank of Nigeria (CBN) Minimum Rediscount Rate (MRR), plus a spread to be determined by the Minister.”
Based on the strength of Section 32 (1) b of the FIRS (establishment) Act, Kemi Adeosun, Minister of Finance, recently directed the Federal Inland Revenue Service to implement a spread of 5 percent over the Central Bank of Nigeria (CBN) Minimum Rediscount Rate of 14percent, translating to an interest rate of 19percent on unpaid taxes for the year 2017.
Economy watchers recall that the FIRS had in 2014 and 2015 issued two separate public notices retaining the interest rate chargeable in default of payment of taxes at 15percent.
This new regime implies that the current practice of applying a flat rate of 15percent by the FIRS as interest charge on unpaid taxes, will stop this month –heralding further moves against tax debts.
While the applicable rate of penalty on unpaid taxes remains at 10percent of tax payable, the rate of interest on unpaid taxes is now 19percent of the tax payable, with effect from July 1, 2017.
Ahead of the implementation date for this new interest rate regime for unpaid companies’ income taxes, tax experts at Lagos-based Akintola Williams Deloitte, said taxpayers should promptly evaluate their potential tax exposure with the aim of closing any identified compliance gap(s) before the implementation date.
“This practice (flat rate of 15percent) was questioned by various stakeholders, as to the powers of FIRS to fix interest rates. This defect seems to have been cured with the directive of the Minister, as S. 32(1)(b) of the Federal Inland Revenue Establishment Act (FIRSEA) empowers the Minister to determine the spread to be added to the MPR (official interest rate) issued by the Central Bank of Nigeria (CBN),” Deloitte experts further said.
Taiwo Oyedele, West Africa Tax Leader, PwC, who is also the Dean, Direct Tax Faculty, Chartered Institute of Taxation of Nigeria (CITN) noted that it is the responsibility of government to implement and regularly review tax policies and laws; provide information on all revenue collected on a quarterly basis; ensure a minimum of between three to six months before implementation of a new tax.
Oyedele spoke on Monday, at the seminar on the New National Tax Policy and Economic Recovery Growth Plan (ERGP) and the 2017 national budget.
“Nigeria tax system – all existing and future taxes are expected to align with the following fundamental features: equity and fairness, simplicity, certainty and clarity, low compliance cost, low cost of administration, flexibility, and sustainability.
“The tax system should be geared towards: wealth creation and employment; taxation and diversification; focus on indirect taxation; convergence of tax rates; special arrangements and other incentives; creating a competitive edge; as well as international and regional treaties”, Oyedele said.
“The National Executive Council [NEC] recently approved in principle, the implementation of a Voluntary Assets and Income Declaration Scheme (VAIDS). The scheme is expected to come into effect from July 2017 once formal guidelines have been issued. The scheme will encourage voluntary disclosure of previously undisclosed assets and income for the purpose of payment of all outstanding tax liabilities. Some of the objectives of the scheme include: Increasing Nigeria’s tax to GDP ratio from 6% to 15% by 2020; broadening the tax net –only 214 individuals nationwide pay N20 million or more in tax annually; curbing non-compliance with existing tax laws and discouraging use of tax havens; and discouraging illicit financial flows and tax evasion.”
The finance minister had emphasised that with a tax to GDP ratio of only 6percent, one of the lowest levels in the world, the country had to intensify effort at tax collection, to build a sustainable revenue base that will deliver inclusive growth. She made known that the focus of the Federal Government in 2017 was to improve tax revenue through ensuring voluntary compliance with tax laws.
Iheanyi Nwachukwu
