October 31, 2023
Recently, the Federal Inland Revenue Service (FIRS or the Service) released a Public Notice announcing the commencement of a nationwide Value Added Tax (VAT) and Withholding Tax (WHT) Compliance Monitoring Exercise in line with the provisions of Sections 2, 8, 26 and 29 of the Federal Inland Revenue Service (Establishment) Act 2007, which empowers the Service to carry out this exercise, and was scheduled to begin on Monday 23rd October 2023. The exercise is expected to cover previously unaudited accounting years up to 2022 for all taxable persons or tax agents, who are required to deduct VAT at source from all qualifying payments, including Non-Governmental Organisations (NGOs), Ministries, Departments and Agencies (MDAs) of governments at the Federal, State and Local Government levels in Nigeria.
VAT and WHT represent major components of Nigeria’s tax system, which are backed up by extant legislation such as the VAT Act, Companies Income Tax (CIT) Act, Personal Income Tax (PIT) Act, WHT Regulations among others, and are collectively described as “transaction taxes”. While VAT and WHT are charged on the supply of goods and services in Nigeria, WHT represents advanced payment of income taxes (i.e., CIT or PIT), and these taxes contribute significantly to Nigeria’s tax revenue generation which is crucial for running the country’s affairs and its development. According to the National Bureau of Statistics (NBS), VAT revenue contributed ₦2.51 trillion in 2022, whereas, WHT aided in the generation of ₦2.83 trillion in CIT revenue in 2022 which collectively make up nearly half of the revenue generation efforts by the key tax authorities in Nigeria.
Following from the continuous and increased drive for VAT and WHT compliance, there is therefore a strong need for all taxable persons, companies, organizations and agents in Nigeria to adhere to the relevant provisions of the applicable law to ensure good standing as corporate citizens and prevent avoidable fines, penalties and interests for non-compliance. This article therefore seeks to discuss the best practices for VAT and WHT compliance in Nigeria, common compliance challenges faced by taxable persons, and solutions that can be adopted by taxpayers, policymakers and legislators.
Pursuant to the provisions of Section 2(1) of the VAT Act, VAT is paid on all supplies of goods and services in Nigeria, other than those listed in the First Schedule to the VAT Act, and charged at a flat rate of 7.5% in line with Section 4 of the VAT Act. Where taxable persons, companies or organisations meet the revenue threshold of ₦25 million as provided in Section 15 of the VAT Act, such taxpayers are required to charge VAT on sales through the issuance of a tax invoice, collect, remit and file monthly VAT returns and payments to the FIRS on or before the 21st day of the following month in which the purchases or supplies were made. Similarly, Ministries, Departments and Agencies and companies operating in the oil and gas sector are required by law to withhold VAT on purchases or payments to their vendors, remit and file monthly VAT returns and payments to the FIRS on or before the 14th day of the following month in which the purchases or supplies were made. Nonetheless, taxpayers who do not meet the revenue threshold may opt to comply with the VAT requirements at their discretion based on business needs, and the FIRS are also empowered by Section 14(3) of the VAT Act to appoint other specific taxpayers as tax agents.
The provisions of the CIT Act and the PIT Act mandate the deduction of WHT at source on qualifying transactions with other companies (such as transactions relating to the payment of dividend, interest, rent, royalties, commission, consultancy, technical, management fees, legal fees, audit fees and other professional fees and contracts etc.) at either 2.5%, 5% or 10%, depending on the nature of the transaction, and must be filed and remitted to the FIRS on or before the 21st day of the following month in which the deduction was made. Although WHT is an advanced payment of CIT, WHT serves as the final tax where any technical, management, consultancy or professional services from a foreign company are received by a Nigerian resident to the extent that the company has significant economic presence but does not fall under the definitions of non-Nigerian companies with profits deemed to be derived from doing business and taxable in Nigeria in line with Section 13 of the CIT Act.
To ensure compliance with VAT and WHT in Nigeria, taxable persons, companies, organizations and agents must develop and implement effective policies, procedures, processes and enforcement mechanisms that promote the ease of compliance. Taxpayers and tax agents may consider the following strategies for best practices to facilitate VAT and WHT compliance, and may also be applied to other categories of taxes.