March 13, 2018
Tax Assessment of non-resident companies (NRCs) on a deemed profit/turnover basis has been, wholly until 2014 and now partially, the standard procedure for assessing NRCs to tax. However, in order to have full disclosure, amongst other things, of the activities of multinational companies operating in Nigeria, the Federal Inland Revenue Service (FIRS), in 2014 directed all taxpayers, specifically, NRCs to file their tax returns on actual profit basis in line with the provisions of Section 55 of Companies Income Tax Act (CITA).
In spite of the directive, the FIRS in some instances, in exercise of its powers under Section 30 of CITA, assesses NRCs to tax on a fair and reasonable percentage of turnover especially in situations where the turnover assessment gives rise to a higher tax assessment when compared to the returns filed on actual profit basis. Given that the FIRS simply applies a flat rate of 6% of turnover (20% assumed profit, taxed at 30%) regardless of the nature of the NRC’s business or the sector in which the NRC operates, the application of the flat rate of 6% could be considered to be arbitrary and not in line with the law.
This article examines the validity of FIRS’ practice of applying a flat rate of 6% of turnover for tax assessments without a proper determination of what is fair and reasonable in relation to the taxpayer and the remedies available to a taxpayer in this instance.
Section 55 of CITA requires all companies, including NRCs, to prepare and file their annual tax returns to the FIRS on actual profit basis. The returns should comprise, amongst others, completed self assessment forms, audited financial statements, tax and capital allowance computations and evidence of payment of self-assessed tax liabilities. Although the provision of Section 55 of CITA has always been part of the law, NRCs had previously been assessed to tax on the basis of their turnover, rather than actual profits.
This is based on the provisions of Section 30 of CITA which empowers FIRS to assess a company to tax based on its turnover where it appears that in a particular year of assessment it has no assessable profit or assessable profits which are less than might be expected to arise from that trade or business or where the true amount of the assessable profit cannot be ascertained. Under FIRS’ Guidelines, the NRC is then taxed on the higher of actual or deemed profit. Invariably, the deemed profit produces higher tax. This is referred to as the turnover or deemed income basis of assessment.
In arriving at the tax payable by an NRC using the turnover basis, 20% of the turnover is treated as the deemed profit, which is then taxed at the corporate tax rate of 30%, resulting in an effective tax rate of 6%. This rate has been in operation since 1996 when the (then) Minister of Finance, on behalf of the Federal Government of Nigeria, announced at the 1996 budget press briefing that effective tax rate for NRCs will be 6% of turnover. Since 1996 to date, FIRS has continued to apply 6% of turnover for NRCs when assessing NRCs to tax.
However, in 2014, after the Income Tax (Transfer Pricing) Regulations No 1, 2012, came into effect, FIRS recognised the need to have full disclosure on the activities of NRCs in Nigeria and therefore issued a directive, that all companies, including NRCs will be required to file income tax returns on actual profit basis as prescribed in Section 55 of CITA and its implementation commenced on 1st January, 2015. Notwithstanding the fact that NRCs file their tax returns on actual profit basis, the FIRS has in some instances, reverted to the deemed income basis of tax assessment under Section 30 of CITA, especially in situations where tax payable using the actual basis is lower than the tax that would have been payable using the turnover/deemed income basis.