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In the era of non-oil budgeting

What is the fate of taxpayers on double taxation provisions?

The National Tax Policy (NTP) acknowledges this challenge when it states, “elimination of multiple taxation must be of major concern to government at all levels. This is because increased demand to grow internally generated revenue has led to the exercise of the powers of taxation to the detriment of taxpayers who bear a higher tax burden than anticipated”.

Barring any significant upward recovery in the international price per barrel of crude oil, it is clear that the focus of the Federal Government in 2016 and beyond will be on non-oil revenue sources of which tax is a significant component. This naturally implies the following in relation to tax revenue:

  • Expanding the tax net: Accelerated expansion of the tax net to increase the number of taxpayers and reduce the ranks of defaulting taxable persons.  An approach which allays the concerns of taxable persons who wish to make voluntary tax disclosures would surely enable the expansion of the tax net.
  • Enhancing operational capacity: The tax revenue target of the FIRS or any relevant State tax authority must be complemented with the appropriate level of manpower.  The tax administration must necessarily be powered by competent, intelligent, vibrant, knowledgeable, adaptable and engaged tax officers within the administrative structure of the relevant tax authorities in the country.
  • Emplacing a more efficient tax system: Accelerated debottlenecking of the tax system to ensure a fair, simple, more predictable, administratively efficient and a more tax compliance friendly system for citizens.

However, before the present financial, fiscal and economic realities confronting Nigeria, the structure of the Nigerian tax system already exposed taxpayers to multiple taxation.  Given that Nigeria is a Federation, there are naturally three levels of taxation in the country: Federal Government, State Government and Local Government.  The distribution of the taxing powers of the Federation follows the structure of the Federation.

The National Tax Policy (NTP) acknowledges this challenge when it states, “elimination of multiple taxation must be of major concern to government at all levels.  This is because increased demand to grow internally generated revenue has led to the exercise of the powers of taxation to the detriment of taxpayers who bear a higher tax burden than anticipated”.

Whilst the challenge of multiple taxation remains structural, a more tractable challenge would appear to be that of double tax provisions within the tax laws especially the provisions of the Companies Income Tax Act (as amended)(CITA).  The relevant concern is whether corporate taxpayers can dare to expect relief against double tax provisions within the tax laws in this era of non-oil budgeting given that elimination of double tax provisions may in the short run reduce potential tax revenue accruable to the government.

Under CITA, the following provisions trigger double taxation exposure to corporate taxpayers but double “take” to government:

  • Section 29(3): Commencement Tax Rules
  • Section 29(4): Cessation Tax Rules
  • Section 29(2): Change of Accounting Dates
  • Section 19: Dividend Tax Rules

These rules are now examined more closely.

(I) Commencement Tax Rules. These rules apply to businesses in their first three years. Generally, business profits are assessable to tax on a preceding year basis.  This implies that the profit derived in prior year will form the basis for assessing the company to tax in the following year. 

These rules per the provisions of section 29(3) of CITA are summarized below:

  • 1st Year of Assessment (YOA): The assessable profit for the first year of assessment will be the profit earned from the date of commencement of business to 31 December of that year.  If we assume that a company commences operation on 1 September 2015 and makes up its accounts up to 31 December of every year.  The first year of assessment will be 2015  and the basis period will be 1 September 2015 to 31 December 2015.
  • 2nd YOA: The assessable profit for the second year will be the profit for the first 12 months of operation. Using the above illustration, the second year of assessment will be 2016 and the basis period will be the results for the period starting from 1 September 2015 to 31 August 2016.
  • 3rd YOA and Subsequent YOA: The assessable profit for the third and subsequent years of assessment will be based on the operating results for the financial year preceding the year of assessment. Using our earlier illustration, the third tax year will be 2017 and the basis period will cover the results from 1 January  2016 to 31 December 2016.

The critical impact of these provisions is that a company may suffer income tax twice on the same profits for a particular year of assessment in the first three years of carrying on its business in Nigeria.  In practice and from experience, the double tax impact may occur between the 2nd and the 3rd YOA or 3rd and 4th YOA.  This risk, however, becomes moot where the company turns in a tax loss in the first three years of business operations.

For companies with taxable profits, the risk of double tax exposure is managed (though not completely) by exercising their right to elect the basis on which to file their income tax returns for the 2nd and 3rd YOA (i.e. whether on preceding year or actual year basis) as appropriate.  This usually depends on determining which basis provides a higher tax savings for the company.  Even then, this requires some planning because of the tax returns of the 4th YOA that will rely on the basis period for the 3rd YOA.

To be continued.

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