KPMG Identifies Errors, Inconsistencies, Gaps, Others in New Tax Laws

• Says shortfalls need urgent reconsideration to attain stated objectives of tax reform

•Seeks action on controlled foreign companies, taxation of non-resident persons, imposition of tax, deductions allowed, others

•Calls for exclusion of withholding tax on insurance premiums paid to non-residents

James Emejo in Abuja

Global advisory services firm, KPMG has exposed gaps, errors, omissions, and inconsistencies in the new Nigeria Tax Act (NTA), calling for urgent reviews to ensure the attainment of the stated tax reform objectives.

Some of the identified shortfalls bothered on clarity among other critical oversights in the legislation.

KPMG in its latest newsletter titled, “Nigeria’s New Tax Laws: Inherent Errors, Inconsistencies, Gaps and Omissions”, reaffirmed the potential of the laws to transform tax administration in the country.

It stated, “There are many provisions in these laws that will result in increased revenue for the government, if well implemented. However, there is always the need to strike a delicate balance between revenue generation and sustainable growth.

“It is, therefore, critical that the government review the gaps, omissions, inconsistencies and lacunae highlighted in this Newsletter to ensure the attainment of the desired objectives.”

The firm noted that as with any tax reform, the new tax laws aimed to achieve equity and fairness; simplification and efficiency of tax administration; competitiveness; adapt to changing economic conditions; combat tax avoidance and tax evasion; improve revenue generation and stimulate economic growth.

But it stressed that certain errors, inconsistencies, gaps, omissions, and lacunae in the new tax laws must be urgently reconsidered to achieve desired objectives.

Citing an error/gap in Section 17(3) (b) of the NTA which bothered on taxation of non-resident persons, KPMG recommended that Section 6(1) of the NTAA should

be updated to include not only non-residents that derive passive income from investments in Nigeria but also income in which the deduction at source is the final tax.

This, it stated, would clearly absolve non-residents from the tax registration requirement where they have no Permanent Establishment (PE) or Significant Economic Presence (SEP) in the country.

The report stated, “This section specifies the conditions under which profits derived by a non-resident are taxable in Nigeria. Although Section 17(4) of the NTA states that payment deducted at source in respect of payments by Nigerian residents to non-residents, irrespective of where the service is rendered, shall be final tax where the non-resident has no permanent establishment (PE) or Significant Economic Presence (SEP) in Nigeria to which the payment is attributable, it does not clearly absolve the non-resident from tax registration requirements under Section 6(1) of the NTAA.

“This in, our view, cannot be the intention of the law. The intention should be that non-residents that do not have PE or SEP in the country should not be required to file tax returns as provided for in Section 11(3) of the NTAA.”

Also, on Section 3(b)&(c) of the NTA which pertained to imposition of tax, KPMG recommended that if the intention is to impose tax on communities, this should be explicitly introduced in the section, otherwise, the law should clearly state that communities are now exempt from tax.

It said, “The section specifies persons on whom taxes should be levied, including individuals, families, companies or enterprises, trustees, and an estate, but omits ‘community. However, community’ is included in the definition of ‘person’ under Section 201.”

The report further urged the government to modify Section 6(2) of the NTA, concerning Controlled Foreign Companies (CFC), by providing clarity on the treatment of foreign and local dividends.

It noted, “The Act states that undistributed foreign profits are to be ‘construed as distributed’ but also mandates that they be “included in the profits of the Nigerian company” (implying income tax at 30 per cent).

“Though dividend distributed by a Nigerian company is deemed to be franked investment income, this does not appear to be the case with dividends distributed by foreign companies.

“It thus appears that such dividends will be taxed at the income tax rate. Consequently, there will be differences in the treatment of dividends distributed by Nigerian companies and those distributed by foreign companies.”

In addition, KPMG recommended that Section 6(1) of the NTAA on taxation of non-resident persons be updated to include not only non-residents that derive passive income from investments in Nigeria but also income in which the deduction at source is the final tax, adding that this would clearly absolve non-residents from the tax registration requirement where they have no PE or SEP in the country.

The audit firm also sought amendment to Section 20(4) of the NTA regarding tax deductions allowed.

The section states that expenses incurred in a currency other than the naira may only be deducted to the extent of its naira equivalent at the official exchange rate published by the Central Bank of Nigeria (CBN).

According to KPMG, this implied that where a business buys forex at a rate that is higher than the official rate, such a company cannot claim tax deduction for the difference in value between the official and the other rates.

The intention, it noted, is to discourage speculative foreign exchange transactions and encourage the appreciation of the naira, adding however, that issues surrounding the accessibility of all forex needs due to supply problems have not been fully considered.

The firm said, “We do not think that this condition is necessary at this time. With the current state of the economy, focus should be on improving liquidity and introducing stricter reporting requirements to track and monitor foreign exchange transactions.”

Furthermore, KPMG picked holes in Section 21 of the NTA which includes expenses on which VAT had not been charged.

The firm said, “This means that such expenses will not be considered allowable tax deductions even when those expenses have been validly incurred for business purposes. This implies that a company could be held accountable for any inaction or non-performance by its suppliers or service providers.

“While the defaulting service providers may eventually be required to pay the VAT during an audit or investigation, the company will have already been denied the ability to claim a deduction for the related expense.”

It stated, “The only criteria should be that any expense that is wholly and exclusively incurred for business purposes should be allowable for tax purposes.”

On Section 27 of the NTA which dwelt on ascertainment of total profits of companies, KPMG called for the modification to specify the deduction of capital losses.

It said, “The NTA is not definite on whether capital loss, other than that arising from the disposal of digital or virtual assets, is deductible. However, we believe that the intention is for such losses to be deductible.”

KPMG also reviewed Section 30 of the NTA on ascertainment of chargeable income of an individual.

The firm pointed out that in determining the taxable income of an individual, the section limits the deductible items to contribution to the National Housing Fund (NHF), contribution to National Health Insurance Scheme, pension contribution, annuity and life insurance. premium, interest on mortgage for developing owner-occupied residential house, rent relief of 20 per cent of annual rent, subject to a maximum of N500,000.

It also noted that the expanded tax bands and rates will be applied to the taxable income to determine the tax payable.

The firm added, “It appears that the objective of these revisions is to ensure that low-income individuals are not taxed heavily. However, it is also not right that the tax payable by high-income earners should be oppressive. Finding the right balance is, therefore, critical.

“Over taxation can negatively affect economic growth while under taxation can increase inequality. Consequently, many countries embrace the concept of progressive taxation. Efforts are always being made to lessen the tax burden on all taxpayers to enhance sustainable growth.

“Where citizens deem the provisions of the tax law to be oppressive, it may lead to noncompliance and capital flight as wealthy individuals relocate to lower-tax jurisdictions. This may eventually stifle economic growth as high tax may discourage entrepreneurship, investment and job creation.”

It said, “Therefore, the rent relief of N500,000 is so insignificant given the personal allowances that other countries offer their citizens. In the erstwhile Personal Income Tax Act (PITA), every individual taxpayer was entitled to 20 per cent of income plus the higher of N200,000 or one per cent of income.

The report recommended that “Since the tax bands and rates have been expanded, we suggest that the erstwhile consolidated personal allowance in the PITA be retained to promote voluntary compliance.”

Among other things, KPMG said the government must seek international cooperation and collaboration to facilitate the sharing of information, build capacity and capability of tax administration in the country.

The firm urged businesses to conduct a comprehensive analysis of the impact of the changes on their business operations.

“The analysis should include a detailed evaluation of tax footprints to manage undue exposures and ensure compliance. There must be assurance that adequate documentation is in place to support related-party and third-party transactions and manage exposures during a tax audit/review exercise by the tax authority.

“Their finance and tax functions should have a basic knowledge of the changes through training programs and consultation with professionals and experts to ensure compliance and mitigate risks. They also will need to leverage experts for payroll configuration and support, e-invoicing support, and outsourcing tax-managed services, among others.

“There must be proper configuration of companies’ ERPs and other systems to align with the provisions of the Acts, such as PIT tax rates/computation, Fiscalisation/E-invoicing, etc,” it stated.