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Legal Alert – January 2011 – Interest Charged In Simple Contracts
In this Issue:-
1. Legal News – Employees Compensation Act, 2010
2. Legal Alert – January 2011 – Interest Charged In Simple Contracts Claims
3. Disclaimer
4. Subscribe & Unsubscribe
Legal News
The Workmen Compensation Act, 2004 has now been repealed by the Employees Compensation Act, 2010 which new statute was signed into Law in January 2011. The Employees Compensation Act, which applies to employees and employers in the public and private sectors of the Nigerian economy, seeks to provide a more open and fair system " ... of guaranteed and adequate compensation to all employees or their dependants for any death, disease or disability arising out of or in the course of employment."
Legal Alert - January 2011 – Interest Charged in Simple Contracts Claims
Introduction
Interest has been generally described as the sum payable in respect of the use of another party's money or asset which is called the principal. Interest has also been described as connoting a compensation allowed by law or fixed by the parties for the use or forbearance of an asset or money or such other consideration that the parties have agreed upon. Interest rate on the other hand refers to the percentage of an amount of money which is paid for its use for a specific period of time. See the decision in Veepee Industries Limited v. Cocoa Industries Limited (2008) 4-5 SC (part 1) 116 @ 129-130 for these legal definitions.
A reoccurring area in many disputes in simple contract claims, especially where the party claiming interest is not a licensed financial institution, is the question of whether interest is payable on an ascertainable business debt? Many business people, unaware of the correct position of the law, always contend that once a debt is owed to them and such a debt is not paid or liquidated within the period that the debt is contracted or expected to be paid or liquidated, or where there is no contracted period for payment then within a reasonable time, such a debt must attract interest. Is this however the correct position of the law?
Legal Basis to Charge Interest
At common law, the general rule is that a debtor is not allowed to charge or claim interest on a debt except there is an express contract to justify such a claim or charge and particularly where it was not within the contemplation of the parties at the time they were entering into the contract to envisage that the defaulting party will be required to pay interest on an outstanding liquidated contracted amount.
However, to every rule, there is usually an exception, and the following are some of the exceptions to the above mentioned common law rule.
The first exception is that where there is an express agreement to charge and pay interest, then interest can and must be paid on the claimed principal amount. Parties to a contract could expressly or impliedly contract to pay interest, at a prior agreed percentage, on any sum that remains due and outstanding under their contract after an agreed period of time has elapsed.
The second exception is mercantile custom. The Law recognises that certain trades or industries have their peculiar but acknowledged customs which though not written down have remained binding for many years. For equity and to avoid fraud, the Law is always willingly to enforce these customs including the ones that recognise that interest will be paid on a debt if such a debt is not settled within a certain period of time.
A third and further exception to the common law general rule which bars the payment of interest on ordinary contracts is the rule of implicit agreement. Parties under a fiduciary arrangement can as a matter of equity be deemed to have contracted to implicitly pay interest on a claimed ascertainable amount particularly if there exist evidence of previous instances when such interest was paid.
See the decision in Ekwunife v. Wayne (W.A.) Limited (1989) 12 SC 92 @ 111-112 for the general judicial position on the payment of interest in Nigeria.
Conclusion
Contracting parties will be guided to ensure that they keep in contemplation every possibility that could arise in their contract, negotiate and reach agreements on these possibilities which must then be transcribed into their written agreements. This is in the light of the harsh reality that litigation in Nigeria takes an average of about a decade and if no provision is made for interest to be paid in the event of a breach and subsequent award, the sum awarded would have being grossly eroded by inflation, etc.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached
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1. Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012
2. Disclaimer Notice
3. Copyright Notice
The Income Tax (Transfer Pricing) Regulations, No. 1, 2012
Introduction
The proposed Income Tax (Transfer pricing) Regulations, 2012 ("TPRs") is published by the Federal Inland Revenue Service ("FIRS") in pursuance of the powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007.
The proposed commencement date for the implementation of the Transfer Pricing Regulations is 1st January 2013.
Objectives of the Transfer Pricing Regulations, 2012
One of the primary objectives of the Transfer Pricing Regulations is the provision to the Nigerian tax authorities, tools to fight tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm's length tax principle.
Two other objectives of the Transfer Pricing Regulations are the reduction of the risks of economic double taxation; and the provision of a level playing field between associated companies on the one hand and independent un-associated companies doing business in Nigeria on the other hand.
Transfer Pricing – Arm Length and Artificial Taxable Transactions
Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies' Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorises FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.
A transaction will be deemed to be artificial or fictitious where one of the parties either has control over the other party, or the parties are so related that the terms of the transaction will be biased or more favourable as amongst the controlled or related parties; in contrast to where the parties are engaged in the same or similar transactions as independent parties, dealing at arm's length basis.
A company that is affected by a decision of FIRS in the above regard has a right to appeal against such a FIRS decision in the first instance to a FIRS appointed Decision Review Panel, with a further right of appeal to the Federal High Court, the Court of Appeal and the Supreme Court which is the Court of last resort in Nigeria.
Permanent Establishments and Transfer Pricing Regulations, 2012
The proposed Nigerian Transfer Pricing Regulations, 2012 now formally provides that permanent establishments ("PE") will be treated under these Regulations as separate tax entities, and any transaction between a permanent establishment and its parent company or head office, or between it and another connected taxable persons, shall be treated as a controlled transaction liable to the application of the provisions of the Transfer Pricing Regulations, 2012.
Compliance with Arm's Length Principle, Documentations, Advance Pricing Agreements, etc.
Arm's Length Principle: The arm's length principle requires that the conditions of a transaction, between connected taxable persons, should not differ from the conditions that would have applied if the connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.
Connected persons are therefore required by Article 4 of the Transfer Pricing Regulations to always ensure that all taxable profits that result from transactions between them are in compliance with the arm's length principle. Where connected persons fail to abide with the arm's length principle, the Federal Inland Revenue Service is authorised to make such necessary tax adjustments that will bring the transaction within the parameters of the arm's length principle.
Transfer Pricing and Comparability Factors
Barring repetition, Article 9 of the proposed Transfer Pricing Regulations, 2012 provides that for the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm's length principle, the tax payer shall, in the first instance, ensure that the transaction is comparable with a similar or identical transaction between two independent persons carrying on business under comparable conditions.
Transfer Pricing Methods
Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm's Length Principle include (i) the Comparable Uncontrolled Price ("CUP") method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.
The Cost Plus Method is described by the proposed Transfer Pricing Regulations to mean the method in which the mark-up on the costs directly and indirectly incurred in the supply of goods, property or services in a controlled transaction is comparable with the mark-up on those costs directly or indirectly incurred in the supply of similar goods, property or services in a comparable uncontrolled transaction.
A connected taxable person however has the right to apply to FIRS for the application of a different transfer pricing method other than the ones stated in the TP Regulations provided that such a TP method gives rise to a result that is consistent with that which exists between independent contracting persons engaged in comparable business or circumstances. A connected taxable person is also permitted by the Transfer Pricing Regulations to enter into an Advance Pricing Agreement with FIRS.
Advance Pricing Agreements with FIRS
Regulation 7(1) of the proposed Income Tax (Transfer Pricing) Regulations, 2012 provides that "A connected taxable person may request the service (which is FIRS) to enter into an Advance Pricing Agreement ("Advance Pricing Agreement") establishing an appropriate set of criteria for determining whether the person has complied with the arm's length principle for certain future controlled transactions undertaken by the person over a fixed period of time provided that such agreement shall be consistent with the requirements established by this regulation."
It however appears from the proposed Regulation 7(d) that only tax payers with an annual cumulative transaction amount of not less than Two Hundred and Fifty Million Naira (N250,000,000) can make the request to enter into an Advance Pricing Agreement with FIRS.
Also, an Advance Pricing Agreement is only allowed to apply to controlled transactions for a period not exceeding three years. While the TPR is silent on the renewal or otherwise of these Agreements, it is expected that the Agreements will be renewable provided there is no prior breach, or non-compliance, or any material change in the tax legislations in Nigeria. Where any of the latter events occurs, FIRS is authorised to terminate the Advance Pricing Agreement.
Transfer Pricing Documentation
A connected taxable person is required to, in advance, record and provide sufficient information, data and analysis of the data submitted verifying that the pricing of the controlled transaction is consistent with the arm's length principle.
FIRS is however authorised to request for additional information where it deems it necessary to effectively carry out its functions under the proposed Transfer Pricing Regulations.
The burden of proof that the conditions of the controlled transactions are consistent with the arm's length principle is on the affected tax payer.
Transfer Pricing Disclosure
For each year of assessment, a connected taxable person must without notice or demand by FIRS, make a Transfer Pricing Disclosure in the form prescribed in the proposed Transfer Pricing Regulations. The Transfer Pricing Disclosure Form is required to be filed along with the connected taxable person's annual tax returns for each year of tax assessment.
Double Taxation Treaty and Transfer Pricing Regulations
The Transfer Pricing Regulations authorises FIRS to, upon request by a tax payer, make a corresponding tax adjustment where it is established that a connected taxable person, subject to tax in Nigeria, has suffered tax on a connected transaction in another country with which Nigeria has a subsisting Double Taxation Treaty ("DTT").
TPR and Supremacy of Tax Laws
All applicable Tax Laws in Nigeria shall prevail whenever there is any inconsistency between these tax laws and the 2012 Transfer Pricing Regulations or the United Nations ("UN") Practical Manual on Transfer Pricing, the OECD Transfer Pricing Guidelines for multi-national Enterprises and Tax Administrations.
Save for the above proviso, the Nigerian proposed Transfer Pricing Regulations, 2012 shall be applied in a manner consistent with the arm's length principle stated in Article 9 of the UN and the OECD Model Tax Conventions on Income and Capital as may be in force at the relevant time.
Limitation of Usage of Information
Documentation and correspondence provided by a connected taxable person for TP purposes shall only be used for the purpose of establishing the arm's length principle in respect of the controlled transaction for which the documentation was supplied to FIRS.
All records and data relating to any trade carried on by a tax payer for which documentation and or data are provided for any tax purpose are required to be preserved for a period of at least six (6) years from the date on which the tax return with the data relevant to their tax return was made.
Offences, Penalties & Dispute Resolution
Any taxable person who contravenes any of the provisions of the proposed Transfer Pricing Regulations, 2012 shall be liable to bear the penalties prescribed for such contravention as already stated in the applicable tax law.
Any dispute arising from the application of the various Transfer Pricing Regulations shall be referred to the Decision Review Panel set up by FIRS, for such Panel's further review and final decision. An aggrieved tax payer with any decision of the Review Panel has the right to appeal against such a decision to a Court with competent jurisdiction in taxation matters which is usually the Federal High Court when it comes to the taxation of corporations.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.
COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.
Oserogho & Associates
Business Solicitors, Tax Advisers & Notary Public
NEC Centre, 1 Engineering Close
2nd Floor, Suite 206, Off Idowu Taylor Street
Victoria Island, Lagos, Nigeria
Phone/Fax: (+234-1) 463 7414
Office Phone: (+234-1) 765 5635
Mobile: (+234-1) 803 326 4753;
P. O. Box 56261 Falomo Ikoyi Lagos
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.oseroghoassociates.com/

1.            Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012

2.            Disclaimer Notice

3.            Copyright Notice

 

The Income Tax (Transfer Pricing) Regulations, No. 1, 2012

 

Introduction

 

The proposed Income Tax (Transfer pricing) Regulations, 2012 (“TPRs”) is published by the Federal Inland Revenue Service (“FIRS”) in pursuance of the powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007.

 

The proposed commencement date for the implementation of the Transfer Pricing Regulations is 1st January 2013.

 

Objectives of the Transfer Pricing Regulations, 2012

 

One of the primary objectives of the Transfer Pricing Regulations is the provision to the Nigerian tax authorities, tools to fight tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm’s length tax principle.

 

Two other objectives of the Transfer Pricing Regulations are the reduction of the risks of economic double taxation; and the provision of a level playing field between associated companies on the one hand and independent un-associated companies doing business in Nigeria on the other hand.

 

Transfer Pricing – Arm Length and Artificial Taxable Transactions

 

Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies’ Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorises FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.

 

A transaction will be deemed to be artificial or fictitious where one of the parties either has control over the other party, or the parties are so related that the terms of the transaction will be biased or more favourable as amongst the controlled or related parties; in contrast to where the parties are engaged in the same or similar transactions as independent parties, dealing at arm’s length basis.

 

A company that is affected by a decision of FIRS in the above regard has a right to appeal against such a FIRS decision in the first instance to a FIRS appointed Decision Review Panel, with a further right of appeal to the Federal High Court, the Court of Appeal and the Supreme Court which is the Court of last resort in Nigeria.

 

Permanent Establishments and Transfer Pricing Regulations, 2012

 

The proposed Nigerian Transfer Pricing Regulations, 2012 now formally provides that permanent establishments (“PE”) will be treated under these Regulations as separate tax entities, and any transaction between a permanent establishment and its parent company or head office, or between it and another connected taxable persons, shall be treated as a controlled transaction liable to the application of the provisions of the Transfer Pricing Regulations, 2012.

 

Compliance with Arm’s Length Principle, Documentations, Advance Pricing Agreements, etc.

 

Arm’s Length Principle: The arm’s length principle requires that the conditions of a transaction, between connected taxable persons, shouldnotdifferfromtheconditionsthatwouldhaveappliedifthe connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.

 

Connected persons are therefore required by Article 4 of the Transfer Pricing Regulations to always ensure that all taxable profits that result from transactions between them are in compliance with the arm’s length principle. Where connected persons fail to abide with the arm’s length principle, the Federal Inland Revenue Service is authorised to make such necessary tax adjustments that will bring the transaction within the parameters of the arm’s length principle.

 

Transfer Pricing and Comparability Factors

 

Barring repetition, Article 9 of the proposed Transfer Pricing Regulations, 2012 provides that for the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm’s length principle, the tax payer shall, in the first instance, ensure that the transaction is comparable with a similar or identical transaction between two independent persons carrying on business under comparable conditions.

 

Transfer Pricing Methods

 

Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm’s Length Principle include (i) the Comparable Uncontrolled Price (“CUP”) method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.

 

The Cost Plus Method is described by the proposed Transfer Pricing Regulations to mean the method in which the mark-up on the costs directly and indirectly incurred in the supply of goods, property or services in a controlled transaction is comparable with the mark-up on those costs directly or indirectly incurred in the supply of similar goods, property or services in a comparable uncontrolled transaction.

 

A connected taxable person however has the right to apply to FIRS for the application of a different transfer pricing method other than the ones stated in the TP Regulations provided that such a TP method gives rise to a result that is consistent with that which exists between independent contracting persons engaged in comparable business or circumstances. A connected taxable person is also permitted by the Transfer Pricing Regulations to enter into an Advance Pricing Agreement with FIRS.

 

Advance Pricing Agreements with FIRS

 

Regulation 7(1) of the proposed Income Tax (Transfer Pricing) Regulations, 2012 provides that “A connected taxable person may request the service (which is FIRS) to enter into an Advance Pricing Agreement (“Advance Pricing Agreement”) establishing an appropriate set of criteria for determining whether the person has complied with the arm’s length principle for certain future controlled transactions undertaken by the person over a fixed period of time provided that such agreement shall be consistent with the requirements established by this regulation.”

 

It however appears from the proposed Regulation 7(d) that only tax payers with an annual cumulative transaction amount of not less than Two Hundred and Fifty Million Naira (N250,000,000) can make the request to enter into an Advance Pricing Agreement with FIRS.

 

Also, an Advance Pricing Agreement is only allowed to apply to controlled transactions for a period not exceeding three years. While the TPR is silent on the renewal or otherwise of these Agreements, it is expected that the Agreements will be renewable provided there is no prior breach, or non-compliance, or any material change in the tax legislations in Nigeria. Where any of the latter events occurs, FIRS is authorised to terminate the Advance Pricing Agreement.

 

Transfer Pricing Documentation

 

A connected taxable person is required to, in advance, record and provide sufficient information, data and analysis of the data submitted verifying that the pricing of the controlled transaction is consistent with the arm’s length principle.

 

FIRS is however authorised to request for additional information where it deems it necessary to effectively carry out its functions under the proposed Transfer Pricing Regulations.

 

The burden of proof that the conditions of the controlled transactions are consistent with the arm’s length principle is on the affected tax payer.

 

Transfer Pricing Disclosure

 

For each year of assessment, a connected taxable person must without notice or demand by FIRS, make a Transfer Pricing Disclosure in the form prescribed in the proposed Transfer Pricing Regulations. The Transfer Pricing Disclosure Form is required to be filed along with the connected taxable person’s annual tax returns for each year of tax assessment.

 

Double Taxation Treaty and Transfer Pricing Regulations

 

The Transfer Pricing Regulations authorises FIRS to, upon request by a tax payer, make a corresponding tax adjustment where it is established that a connected taxable person, subject to tax in Nigeria, has suffered tax on a connected transaction in another country with which Nigeria has a subsisting Double Taxation Treaty (“DTT”).

 

TPR and Supremacy of Tax Laws

 

All applicable Tax Laws in Nigeria shall prevail whenever there is any inconsistency between these tax laws and the 2012 Transfer Pricing Regulations or the United Nations (“UN”) Practical Manual on Transfer Pricing, the OECD Transfer Pricing Guidelines for multi-national Enterprises and Tax Administrations.

 

Save for the above proviso, the Nigerian proposed Transfer Pricing Regulations, 2012 shall be applied in a manner consistent with the arm’s length principle stated in Article 9 of the UN and the OECD Model Tax Conventions on Income and Capital as may be in force at the relevant time.

 

Limitation of Usage of Information

 

Documentation and correspondence provided by a connected taxable person for TP purposes shall only be used for the purpose of establishing the arm’s length principle in respect of the controlled transaction for which the documentation was supplied to FIRS.

 

All records and data relating to any trade carried on by a tax payer for which documentation and or data are provided for any tax purpose are required to be preserved for a period of at least six (6) years from the date on which the tax return with the data relevant to their tax return was made.

 

Offences, Penalties & Dispute Resolution

 

Any taxable person who contravenes any of the provisions of the proposed Transfer Pricing Regulations, 2012 shall be liable to bear the penalties prescribed for such contravention as already stated in the applicable tax law.

 

Any dispute arising from the application of the various Transfer Pricing Regulations shall be referred to the Decision Review Panel set up by FIRS, for such Panel’s further review and final decision. An aggrieved tax payer with any decision of the Review Panel has the right to appeal against such a decision to a Court with competent jurisdiction in taxation matters which is usually the Federal High Court when it comes to the taxation of corporations.

 

DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.

 

COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.

 

Oserogho & Associates

Business Solicitors, Tax Advisers & Notary Public

NEC Centre, 1 Engineering Close

2nd Floor, Suite 206, Off Idowu Taylor Street

Victoria Island, Lagos, Nigeria

Phone/Fax:    (+234-1) 463 7414

Office Phone: (+234-1) 765 5635

Mobile:       (+234-1) 803 326 4753;

P. O. Box 56261 Falomo Ikoyi Lagos

Email:     This email address is being protected from spambots. You need JavaScript enabled to view it.

Website:   http://www.oseroghoassociates.com/

 

1. Tax Alert – Companies' and Personal Withholding Tax
2. Disclaimer Notice
3. Copyright Notice
Legal & Tax Alert – Companies' and Personal Withholding Tax Regime
Introduction
Withholding Tax ("WHT") is an advance tax payment which is deducted and withheld from any income or disbursement due to a taxable person or to a taxable corporation, for onward remittance to the relevant tax or government collecting authority, against a final income tax liability.
This advance tax payment can be set-off against the final tax obligation(s) of the taxable person or corporation subject to such taxable person applying for and obtaining the Withholding Tax Credit Notes in respect of each advance tax withheld and remitted to the tax authorities.
Tax payers do not have any discretion as to whether to withhold and remit this advance tax in the light of the mandatory statutory obligation on the person making the payment to withhold and remit this advance tax. Failure to deduct or to withhold, and remit this advance tax to the relevant tax authority attracts punitive fines and penalties some of which are enumerated in this tax alert.
Companies WHT
Section 78 of the Companies' Income Tax Act (as amended) ("CITA") requires that where a company makes a payment to another company or to an individual, either as interest (with inter-bank deposits and royalty excluded), rent, dividend, etc, such a company shall at the time of making such payment deduct an advance tax of ten per cent (10%) of the gross amount that is paid, and remit such deducted and withheld tax to the Federal Inland Revenue Service ("FIRS") forthwith.
Non-Resident Companies & WHT
Any tax withheld from the income due to a non-resident company or individual is deemed to be a final tax on such non-resident's income earned from its Nigeria sources provided that the non-resident company does not have a fixed base or permanent establishment for doing business within Nigeria. See Section 78 (4) CITA.
Franked Investment Income. Section 80(3) CITA
Dividend income received after the deduction of the advance withheld tax of ten per cent (10%) of such dividend income is regarded as Franked Investment Income to the company receiving such dividend, and such dividend would not be charged to any further Nigerian tax with regard to the income of the recipient company.
Where however such franked investment income is re-distributed and tax is required to be accounted for on the gross amount of the dividend so earned, such company will be entitled to set-off the tax already withheld on the dividend income in order for double taxation not to accrue on the franked investment income.
Currency for Remitting WHT
All taxes that are withheld are required to be remitted in the currency of the transaction to the relevant tax authority not later than 21 days for corporations, and 30 days for individuals, from the date that the withheld amount was deducted or ought to have been withheld and remitted. See Sections 82 & 84 of CITA.
Unutilised Withholding Tax Credit Notes
The Companies' Income Tax Amendment Act, 2007 now allows all unutilised withholding tax credits to be set-off against the future tax obligations of the beneficiary of such withheld taxed income. There is however no similar provision with respect to any unutilised WHT credit notes for individuals under the Personal Income Tax regime.
Penalties for Failure to Deduct WHT
Any person obligated to deduct, withhold and remit immediately this advance tax, in the currency of the transaction from which the deduction was effected, but who fails to do so, or having withheld or deducted this advance tax, fails to pay it over to the Federal Inland Revenue Service within twenty-one (21) days from the date the obligation to withhold or deduct the advance tax arose, shall be guilty of an offence and liable on conviction to (a) pay in addition to the tax not withheld or where withheld, is not remitted; (b) a penalty of one hundred per cent (100%) per annum on the advance tax withheld or not withheld, or where withheld the advance tax is not remitted; in addition to (c) interest at the prevailing commercial bank lending rates on the advance tax and the penalty for not remitting the advance withheld tax.
PERSONAL INCOME AND WITHHOLDING TAX PROVISIONS
Sections 69-75 of the Personal Income Tax (Amendment) Act ("PITA") mandatorily requires that where any rent, interest or royalty, dividend or directors fees is paid by a corporation to an individual, or where such income is paid by an individual to another individual, the payer of such income must deduct, withhold and remit forthwith, or otherwise within thirty (30) days of the deduction, whether the deduction is made or not, ten per cent (10%) of the gross amount paid as an advance or withheld tax to the tax authority of the State where the recipient of the income resides.
Where the income paid is with regard to interest or royalty income, the rate of the advance tax to be withheld and remitted forthwith is ten per cent (10%) of the gross interest income; and for royalty income, the rate of advance tax is five per cent (5%) of the royalty income.
Non-Resident Individual Tax Payer
Non-resident individuals who receive income in Nigeria are entitled to deem the ten per cent (10%) advance tax that is withheld from such income to be a final tax on such Nigerian earned income provided they are not resident in Nigeria.
Non-Resident individuals may also be able to claim further tax relief from their home country if their home country has a signed Double Taxation Agreement or Treaty (''DTT'') with Nigeria with regard to such Nigerian earned income.
WHT and Total Tax
The primary purpose of the withholding tax regime is to ensure that all advance taxes withheld in Nigeria entitles the recipients of such income to claim a tax credit or a tax relief against such recipient's final/total tax obligation(s) for the relevant tax year.
The withholding tax systems in Nigeria also assist the tax authorities to reduce tax evasion in Nigeria.
Penalty for Failure to Deduct and Remit
Section 74 of the PITA provides that where a taxable individual who is obligated to deduct, withhold and remit an advance tax, as stated above, fails to deduct or having deducted or withheld this advance tax, fails to remit the tax to the relevant tax authority within the 30 days from when the tax was required to be deducted or withheld, such a taxable person shall be guilty of a tax offence which on conviction carries the following penalties:-
a) A Fine of N5,000 or ten per cent (10%) of the amount of the advance tax due, whichever is higher of the two, in addition to;
b) The tax deductible or deducted; plus
c) Interest on both amounts at the prevailing commercial bank lending rates.
Exemption from Withholding Tax
Dividend, interest, rent or royalty derived from outside Nigeria but brought into Nigeria through approved government channels like the Central Bank of Nigeria or any bank or corporation licensed in Nigeria to provide foreign exchange services, are exempted from the advance or withholding tax provisions in Sections 69, 70, 71 and 72 of PITA.
WHT and Relevant Tax Authority?
Some State tax authorities are now insistent on the production of withholding tax credit notes issued by such State tax authority where the payer of the income is a corporation while the recipient is an individual, before any withholding tax relief is granted. This may be in the light of the provisions of Sections 69-72 and Section 108 of the Personal Income Tax Act (as amended) which latter Section describes a person to include an executor, trustee, company, partnership, community, family and individual.
Sections 78-80 of the Companies Income Tax Act (as amended) however provides that where any income is payable by a corporation to another corporation or by a corporation to an individual to whom the provisions of the Personal Income Tax Act (as amended) apply, the corporation paying the income is statutorily required to deduct, withhold and remit ten per cent (10%) of the income so paid to the Federal Inland Revenue Service.
In the light of the provisions of the Companies' Income Tax Act (as amended) on withholding tax, it will amount to double taxation for a corporation to withhold income twice from the income of an individual for remittance to FIRS and or to the relevant State tax authority.
An amendment is therefore desirable to both PITA and CITA to definitively make all incomes due to an individual liable to withholding tax remittances to the relevant State tax authority where the individual resides; while incomes due to corporations should suffer advance withholding tax for remittance to the Federal Inland Revenue Service.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.
COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.
Oserogho & Associates
Business Solicitors, Tax Advisers & Notary Public
NEC Centre, 1 Engineering Close
2nd Floor, Suite 206, Off Idowu Taylor Street
Victoria Island, Lagos, Nigeria
Phone/Fax: (+234-1) 463 7414
Office Phone: (+234-1) 765 5635
Mobile: (+234-1) 803 326 4753;
P. O. Box 56261 Falomo Ikoyi Lagos
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.oseroghoassociates.com/
1. Legal Alert – November 2012 - Property Taxes in Nigeria
2. Disclaimer Notice
3. Copyright Notice
Introduction – Property Taxes in Nigeria
There are various taxes that apply to real estate or real property transactions in Nigeria. The common public representation or perception that there are no real property or real estate taxes in Nigeria is not correct.
Some of the common taxes that apply to real property transactions in Nigeria, which will be discussed in summary formats, in this Legal Alert, are the following:-
a) Companies Income Tax and Personal Income Tax.
b) Education Tax.
c) Value Added Tax.
d) Capital Gains Tax.
e) Stamp Duties Tax.
f) State Property Taxes – Lagos State Land Use Charge Law and the Federal Capital Territory Property Tax.
Companies Income Tax & Personal Income Tax
Any income with the resulting profit earned by any person from such income, whether such a person is a corporation or an individual, from a property transaction, is liable to the payment of tax.
Where the income earner is a corporation, the corporate tax rate in Nigeria is thirty per cent (30%) of the annual profit of the corporation; and where the income earner from a property transaction is an individual or a registered business enterprise or partnership, the graduated tax rate is twenty-four per cent (24%) for individuals earning N3,200,000 and above, per annum.
Withholding Tax
One of the tax avoidance regulations in Nigeria is the withholding tax regime which applies to both corporate bodies and individuals.
The withholding tax requirement mandatorily requires the payer of any income to withhold ten per cent (10%) of such income earned, where the recipient of the income is a corporate body, and 5% where the recipient is an individual. The withheld tax amount is an advance tax payment which must be remitted by the payer of the income to the relevant tax authorities simultaneously with the payment of the income.
The recipient, from whose income this advance tax is withheld, is entitled to utilise this advance tax so withheld, to reduce his or her or its final tax liability provided that a withholding tax credit note or certificate is obtained on the recipient's behalf from the State or the Federal tax authority to whom this advance tax was remitted.
Education Tax
In addition to paying Companies Income Tax, incorporated corporations in Nigeria, engaged in any commercial activity, including real estate or real property transactions from which they make a profit, are liable to pay two per cent (2%) of such profit as Education tax to the Education Trust Fund. This Tax is collected on behalf of the Education Trust Fund by the Federal Inland Revenue Service ("FIRS").
Value Added Tax
All goods and services in Nigeria, including goods and services utilised in the real estate industry, are liable to be invoiced and to the payment of Value Added Tax ("VAT") at the rate of five per cent (5%) of the value of such real estate goods and services.
All taxable persons are required to ensure that within six months of their commencing business, they are registered for VAT, and mandatorily file monthly VAT returns.
Any failure to register for VAT, or to collect VAT, or to issue a VAT invoice, etc is an offence which entitles the Federal Inland Revenue Service ("FIRS") to assess the tax payer for the VAT payable based on FIRS' best of judgment of the VAT that is liable for payment; this is in addition to fines and interest at commercial interest rates on the unpaid VAT. The decisions of FIRS are however subject to further appeals where the tax payer disputes any decision of FIRS.
Capital Gains Tax
The Capital Gains Tax Act provides that any time an asset, including a real estate asset, whether situated in Nigeria or outside of Nigeria, is disposed off by a Nigerian tax payer, and a gain is derived as a result of such disposal, the resulting gain or profit shall be liable to a ten per cent (10%) Capital Gains Tax ("CGT") less such allowable expenditures that were utilised to enhance or preserve or defend the title to the asset.
However, gains arising from the disposal of an individual's principal private residence for another person's principal private residence are exempted from the provisions of the Capital Gains Tax Act. Also exempted from CGT are commercial motor vehicles and personal Gifts from which no monetary gain is derived.
In Lagos State however, the Capital Gains Tax, when applying for Governor's consent of a transfer of any interest in a property, is a flat rate of 2% of the consideration of the property transaction.
Stamp Duties Tax
The Stamp Duties Act requires that all written instruments, including instances where any property or interest in property is or are transferred or leased to any person, must be stamped.
Generally, Stamp Duties is charged at the rate of 75 kobo for every N200 of the consideration of certain real estate transactions like mortgages, while for conveyances or the transfer or sale of real property, the stamp duties rate is 75kobo for every N50. The Stamp Duties rate for lease and rental agreements is 16kobo for every N200 of the consideration of the lease or rental agreement.
Any written document that is not stamped is not allowed to be received in any judicial proceeding in Nigeria until the stamp duty and the resulting penalty for the non-payment of the stamp duty is paid.
There are fines and other penalties for any failure to pay stamp duties on any written instrument that is not exempted from the payment of stamp duty.
Again in Lagos State, the flat Stamp Duty rate of 2% of the consideration of the property transaction is charged when applying for Governor's consent to the transfer of any interest in a landed property.
Lagos State Land Use Charge
The Lagos State Land Use Charge Law consolidated all real property with all land Based Rates and Charges which were formerly charged under the Assessment Law, the Land Rates Law, the Neighbourhood Improvement Charge Law and the Tenement Rates Law, into one single Property Land Use Charge ("LUC").
The Annual Charge Rates Notice, published in furtherance of the Land Use Charge Law, among other things, prescribes various Land Use Charge Rates for different kinds of properties in Lagos State.
As a guide only, commercial and residential owner-occupied properties attract an annual property Land Use Charge Rate of 0.394% of the assessed value of the property; new owner-occupier/individual properties are assessed at an annual land use charge rate of 0.132% of the assessed value of the property. It is always advisable to contact the Land Use Charge Office for a definitive assessment of your property; or visit the Lagos State Land Use Charge website, www.landusecharge.com, for more information on the LUC office closest to you.
Owner-occupier properties occupied by pensioners, family compounds, properties occupied by recognised traditional rulers, public libraries, cemeteries and burial grounds, and properties owned and occupied by a religious body but used exclusively for public worship or religious education, are exempted from the provisions of the Land Use Charge Law.
There are stiff penalties for failure to pay a property land use charge within the period stipulated in a LUC Demand Notice. In additional to fines, a defaulting tax payer can have his property brought under receivership, advertised and sold to defray all outstanding taxes, penalties and administrative charges resulting from the default to pay this property tax.
Lagos State Governor's Consent – Property Taxes
In addition to the above stated flat rate of 2% as Capital Gains Tax and 2% as Stamp Duties Tax, a new owner of a real property in Lagos State will also be liable to pay 3% of the accepted consideration of the property as Registration fee, and a further 8% of the value of the property as Governor's consent fee.
The Federal Capital Territory Property Tax Bill
The Nigerian National Assembly will soon pass into law the Federal Capital Territory Property Tax Bill ("FCT Property Bill"). This Property Bill imposes a property tax on all real property situated within the Federal Capital Territory ("FCT").
For commercial properties, the proposed property tax rate is 1.5% of the appraised current market value of the property, while the property tax rate for non-commercial properties is 1% of the appraised market value of the property.
Like the Lagos State Land Use Charge, properties that are exempted from the FCT Property Tax include those that are owned, occupied and used by religious bodies exclusively for religious or congregational worship, education or such similar purpose. Other exempted persons from this property tax include non-profit making cemetery or burial grounds, public parks, diplomatic premises and real property used strictly by public institutions for learning or education.
The FCT Property Tax Bill also seeks to create a Property Tax Fund which will be administered by the Minister of the Federal Capital Territory.
There are various penalties for the non-payment of this Property Tax, in addition to fines for non-compliance, obstruction and rendition of false Property Tax Returns. Other penalties include the sale of the subject property to defray any unpaid Property Tax and Fines.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.
COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.
Oserogho & Associates
Business Solicitors, Tax Advisers & Notary Public
NEC Centre, 1 Engineering Close
2nd Floor, Suite 206, Off Idowu Taylor Street
Victoria Island, Lagos, Nigeria
Phone/Fax: (+234-1) 463 7414
Office Phone: (+234-1) 765 5635
Mobile: (+234-1) 803 326 4753;
P. O. Box 56261 Falomo Ikoyi Lagos
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.oseroghoassociates.com/
1. Tax Alert – Personal Income Tax Residency Rules
2. Disclaimer Notice
3. Copyright Notice
Personal Income Tax Residency Rules
The controversy over which State Government is the relevant tax authority authorised to collect Personal Income Tax where the tax payer resides in one State but works in another State, or where the tax payer works in more than two State, during each year of tax assessment, has not abated with the passing into Law of the Personal Income Tax (Amendment) Act, 2011, Act No. 20 ("PITA Amendment").
Section 2 (1) (A) and (2) of the Personal Income Tax Act, CAP P8, Laws of the Federation of Nigeria, 2004 (''PITA'') provides that Personal Income Tax shall be paid for each year of assessment on the total income of every individual based on the State where the tax payer resides, in the relevant year of personal income tax assessment, and not based on where the individual tax payer works or carries on business.
The individuals excluded from the above PAYEE Residency Rule include Itinerant workers, persons employed in the Nigerian Armed Forces and Police other than in a civilian capacity, employees in the Nigerian Foreign Service, residents of the Federal Capital Territory, Abuja and Nigerians residing outside Nigeria but deriving income or profit from Nigeria. With the exception of itinerant workers who work from place to place, all other persons mentioned in this exception to the Residency Rule are obligated to fulfil their tax obligations to the Federal Government of Nigeria (represented by the Federal Inland Revenue Service).
Tax Payee and Multiple Residences
An individual tax payer's place of residence under the Personal Income Tax Act is the place where such an individual lives or uses as his residence most frequently in Nigeria. A tax payer's residence does not include his hotel room, vest-room or office place at which he may be temporarily lodging.
However, for individuals with multiple residences, Section 32 of the Personal Income Tax (Amendment) Act, 2011 has amended the First Schedule to the principal Personal Income Tax Act – which is on the determination of individual tax payer's residence - by inserting a new sub-paragraph (d) after paragraph 1(c). The new sub-paragraph 1(d) provides that "in the case of an individual who works in the branch office or operational site of a company or other body corporate, the place at which the branch office or operational site is situated : provided that operational site shall include Oil Terminals, Oil Platforms, Flow Stations, Factories, Quarries, Construction Sites with a minimum of 50 workers, etc."
Itinerant Workers
An itinerant worker is an individual who moves from one place to another place in the performance of his employment contract or in the provision of services.
Section 31 of the Personal Income Tax (Amendment) Act, 2011 amended the description of a Itinerant worker in Section 108 of the Personal Income Tax Act to now include individuals, irrespective of their status, who work at any time in any State during a year of tax assessment for wages, salaries or livelihood, by working in more than one such State, but works for a minimum of twenty (20) days in at least three (3) calendar months of every year of the personal income tax assessment in at least one of such States.
Section 2 (b) of the Personal Income Tax (Amendment) Act, 2011 has now inserted a new sub-section 1(A) to the principal Personal Income Tax Act, and the insertion now authorises the relevant tax authority in the State where the itinerant tax payer works for a minimum of twenty (20) days in at least three (3) months of the relevant year of assessment to collect Personal Income Tax from the itinerant worker.
Conclusion
The ability of the various State Governments and the Federal Government to properly apply the residence rule, and the itinerate workers rule, will be gravely hampered by the lack of a reliable public data on the residence and movement of tax payers and their place of work, at each given tax assessment and payment period. Building reliable public and private data bases that are interconnected is therefore very crucial to minimising tax avoidance practices in Nigeria.
Presented by:
Oserogho & Associates
Business Solicitors, Tax Advisers & Notary Public
NEC Centre, 1 Engineering Close
2nd Floor, Suite 206, Off Idowu Taylor Street
Victoria Island, Lagos, Nigeria
Phone/Fax: (+234-1) 463 7414
Office Phone: (+234-1) 765 5635
Mobile: (+234-1) 803 326 4753;
P. O. Box 56261 Falomo Ikoyi Lagos
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.oseroghoassociates.com/