A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures.....
A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.
1. Multiplicity of taxes –
This means paying similar taxes on the same or substantially similar tax base. Examples of multiple taxes include Companies Income Tax, Information Technology Tax (NITDA Levy), Education Tax, Nigerian Content Development Levy all of which are based on income or profits and Value Added Tax, Sales Tax and Hotel Consumption Tax all based on sales. Multiple taxes should be distinguished from numerous taxes which mean many but different taxes on different tax bases. Numerous taxes are likely to occur in a federation like Nigeria. To address multiple and numerous taxation earmark taxes should be reduced to the barest minimum and approved list of taxes should be streamlined and adhered to by all tiers of government.
2. Excess dividend tax
The relevant provision of the law is usually interpreted and applied by the tax authorities to levy tax on a company whose dividend exceeds taxable profit regardless of whether the profit being distributed has already suffered tax (as in the case of dividend income received by a holding company or taxed retained earnings) or whether the profit is tax exempt (as in the case of pioneer profit and capital gains on stocks). The section should be amended to specifically exclude taxed profits and profits exempt from tax.
3. Input VAT restriction claimable input VAT is limited to VAT on inventory. Input VAT on services, overhead and fixed assets are not creditable but must be expensed or capitalized as the case may be. This increases the true cost of VAT borne by taxpayers on goods and services consumed much beyond the 5% nominal rate. Input VAT should be allowed as claimable on all items except where the taxpayer is the final consumer or does not produce VATable output.
4. Commencement, change of accounting date and cessation – – –The Companies Income Tax Act (CITA) sets out the rules for the taxation of a company during commencement of business, change of accounting date and cessation. These rules create unnecessary complications especially where a company changes its accounting date or ceases operation within the first 3 years of commencement. In addition, the commencement rule often leads to double taxation on a company at its early stage thereby increasing the risk of failure.Commencement, change of accounting date and cessation rules should be abolished. Tax should be based on accounting period using preceding year basis.
5. Ministerial and FIRS approval for tax deduction
Based on CITA the approval of the Minister (of Finance) is required for expenses incurred within or outside Nigeria as management fees or for the purpose of earning management fees to be allowed as tax-deductible. Also the Federal Inland Revenue Service (FIRS) has the discretion to determine the amount allowable for tax purposes in respect of any expenses incurred outside Nigeria for and on behalf of any company. These restrictions only create a bottleneck without any concrete benefit. The section should be amended to dispense with the need for companies to obtain the permission of the Minister or FIRS for management fees and other expenses. In place of this, Nigeria should introduce a detailed transfer pricing regulation – In place of this, Nigeria should introduce a detailed transfer pricing regulation with appropriate guidelines as to what is allowable for tax purposes.
6. Minimum tax -
CITA imposes minimum tax on companies where they have no taxable profits or taxable profits resulting in lower than minimum tax. This effectively means that such companies would have to pay taxes out of their capital. This section is discriminatory as it does not apply to entities with significant imported equity. More importantly, it discourages investment and increases the risk of failure for companies in periods of little or no profitability.
7. Group taxation and reorganization -
There are instances where it may be necessary for a company to reorganize its affairs for better efficiency. The relevant section of CITA only focuses on foreign companies reconstituted and transferred to Nigerians after the civil war which ended in 1970. The section does not encourage business reorganization and internal reconstructions for better efficiency by companies operating in Nigeria today. There should be clear provisions to enable groups of companies to freely transfer assets within their groups without a tax charge in order not to hinder internal arrangements that are necessary for better management and efficiency. The tax legislation should permit intra-group transactions without noncompetitive double taxation in the form of VAT, withholding tax or dividend tax. Put differently, the tax tail should not wag the business dog.
8. Artificial transactions and transfer pricing -
CITA and the Capital Gains Tax Act stipulate that transactions between related or connected parties must be at arm's length else the tax authority could make adjustments as may be necessary. This allows for extreme subjectivity and gives too much discretionary power to the tax officials. Like many countries around the world, Nigeria should adopt the Organization for Economic Cooperation and Development (OECD) guidelines on transfer pricing. Also, guidelines should be issued regarding thin capitalization to bring clarity to investors. These will address the concern about the result potential erosion of tax base as a result of artificial transactions.
9. Separate source of income -
Section 25(1) of CITA states that the profits of any company for each year of assessment from such sources of profits shall be the profits of the year immediately preceding the year of assessment from each such source. Section 27(2) restricts the losses that may be relieved in any year to the assessable profits from the trade or business in which the loss was incurred. The combined effect of these sections is normally interpreted by tax officials to mean ring fencing of different sources of income to the effect that losses from one line of business cannot be used to offset profits from other lines of business by the same company. This practice is not equitable and it seems to punish genuine businesses for incurring real losses. The separate taxation of income should be abolished in line with global best practice as many countries have even gone beyond this level to permit group consolidated tax returns.
10. Withholding tax and sales in the ordinary course of business
Based on the tax laws, withholding tax is not applicable on sales in the ordinary course of business but there is no definition of ordinary course of business. Circulars issued by the FIRS have not been helpful in clarifying this phrase. The phrase should be clearly defined to ensure easy application.
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