Introduction

In the wake of an increasing need for tax administrations across the globe to protect their tax base from tax evasion and avoidance, there has been increasing focus on transparency as evidenced by increase in efforts to adopt models that will encourage the automatic exchange of information amongst tax administrations. In recent years, Nigeria has joined other countries in signing the Organization for Economic Co-operation and Development (OECD)'s approved treaties like the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA), Country-by-Country Reporting Multilateral Competent Authority Agreement (CbCR MCAA) and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) among others. These treaties are all aimed, inter alia, at curbing tax evasion and avoidance by means of automatic exchange of information between tax administrations, among different countries.

In an attempt to give effect to one of these international treaties, the Federal Inland Revenue Service (FIRS) recently released the Income Tax (Common Reporting Standard) Regulations (the "Regulations"), with an effective date of 1 July 2019. The Regulations requires Reporting Financial Institutions (RFIs), which include depository institutions, custodial institutions, investment entities and specified insurance companies, to file annual financial accounts report in a standardized format that will facilitate automatic exchange of information between Nigeria and other foreign jurisdictions who are parties to the treaties. Subsequently, the FIRS also issued the Income Tax (Common Reporting Standard) Implementation and Compliance Guidelines (the "Guidelines") to supplement the Regulations and provide specific information for the implementation of the Regulations.

In the light of these developments, this newsletter provides an overview of the Regulations to determine the powers of the FIRS in issuing the Regulations, obligations of financial institutions, the type of accounts that need to be reported, and the powers of the FIRS to administer and enforce compliance with the Regulations.

Income Tax (Common Reporting Standard) Regulations 2019

The issuance of the Regulations by the FIRS is premised on the need to give effect to the provisions of the MAC and MCAA on Automatic Exchange of Financial Account Information, the Common Reporting Standards and its Commentaries, to which Nigeria is a signatory (CRS). The MCAA and the MAC are international regulatory frameworks that provide a standard mechanism to facilitate international cooperation in tackling tax evasion and avoidance through automatic exchange of financial information between different countries, in accordance with the OECD Standard for Automatic Exchange of Information (AEOI) in Tax Matters.

The Regulations deals with requirements for due diligence procedures regarding reporting of financial account information to the FIRS as well as requirements with respect to the effective implementation of the CRS and its Commentaries.

Obligations under the Regulations

The Regulations creates the following obligations for RFIs, amongst others:

  1. RFIs are to file financial reporting information on or before 31 May of the year following the calendar year to which the returns relate.
  2. Information return to be filed by RFIs shall be filed electronically using such technology as may be communicated by the FIRS.
  3. RFIs are to carry out comprehensive due diligence procedures on accounts maintained by the RFIs in order to identify 'Reportable Accounts' as described in Section II – VII of the OECD's CRS. However, RFIs may use service providers to carry out their reporting and due diligence obligations, but the obligations remain the responsibility of the RFIs.
  4. RFIs are also mandated to retain records of information made pursuant to the Regulations, for a minimum period of six years from the end of the last calendar year in respect of which the record is relevant.
  5. RFIs that obtain or create records in a language other than English are mandated to provide an English translation to the FIRS.

Administration

The Regulations confers on the FIRS the power to administer and enforce compliance with the Regulations and issue guidelines for such purposes. In this regard, the FIRS may by a notice in writing, of not less than 14 days, enter the premises of an RFI at reasonable times to demand such information as the FIRS may reasonably require for the purpose of administration and enforcement of the Regulations.

However, the FIRS has a duty of confidentiality with respect to the information provided by the RFIs to the extent that would apply if such information were provided under the provisions of domestic laws, the MAC or the MCAA.

Under the Guidelines issued by the FIRS, RFIs are required to comply with standard reporting and due diligence requirements as well as CRS commentaries in accordance with the provisions of AEOI. The Guidelines highlights the specific information that should be contained in an information return as well as the nature of due diligence exercise to be conducted on different kinds of bank accounts maintained by RFIs.

"The Regulations outlines a number of penalties for non-compliance with the strict provisions of the Regulations. As such, where a person fails to comply with a duty or obligation imposed by the Regulations, such a person shall be liable to pay a general administrative penalty of ₦10 million in the first instance, for each of such failure and ₦1 million for every month in which the failure continues."

Consequences for Failure to Comply

The Regulations outlines a number of penalties for noncompliance with the strict provisions of the Regulations. As such, where a person fails to comply with a duty or obligation imposed by the Regulations, such a person shall be liable to pay a general administrative penalty of ₦10 million in the first instance, for each of such failure and ₦1 million for every month in which the failure continues.

Similarly, there is a specific administrative penalty of ₦10 million for failure by an RFI to file an information return as and when required under the Regulations. The penalty applies in the first month in which the failure occurs with incremental penalty of ₦1 million for every month the failure continues.

Where a person gives false information or omission in respect of any information required to be included in an information return, such a person shall be liable to an administrative penalty of ₦5 million. Also, failure by a financial institution or any person to comply with the FIRS' requirement in the exercise of its powers under the Regulations shall attract an administrative penalty of ₦1 million in the first instance and ₦100,000 for each subsequent day the failure continues. In addition, failure by a RFI to keep records in accordance with the Regulations, will attract an administrative penalty of ₦10 million in the first instance and ₦1million for every subsequent month the failure continues.

Notwithstanding the penalties imposed for noncompliance with the Regulations, a person or RFI shall be exempted from the administrative penalties, where the FIRS is satisfied that there is a reasonable excuse necessitating the non-compliance.

Conclusion

The Regulations gives some strength to efforts on fighting tax avoidance and evasion in Nigeria. The implementation of the Regulations should facilitate the automatic exchange of financial information between Nigeria and other tax jurisdictions that are signatories to the CRS MCAA. This allows FIRS to easily carry out risk assessments of taxpayers which may instruct more tax and transfer pricing audits in Nigeria. Thus, the Regulations provides the FIRS with a tool for an effective tax administration in the country.

Although the Regulations seeks to give effect to the provisions of MAC and CRS MCAA which are international treaties to which Nigeria is a signatory, the absence of a substantive law by Nigeria's legislative arm to back the Regulations raises some concern regarding the legal status of the Regulations. It appears to be in conflict with the express provision of Section 12(1) of the 1999 Constitution of Nigeria (as amended), which stipulate that an international treaty can only have the force of law in Nigeria to the extent that it has been domesticated by an Act of the National Assembly.

On another note, there are concerns as to whether the Regulations, which was released pursuant to the FIRS (Establishment) Act (Act) can introduce such huge penalties outside the express provisions of the Principal Act. This is on the backdrop that the Act does not provide for the huge penalties contained in the Regulations.

It is necessary for RFIs and taxpayers to be mindful of the obligations under the Regulations and liaise with relevant professionals, for guidance to avoid undue potential penalty and or financial exposures. Taxpayers should also realize that the Regulations is ushering us into an era of open access to financial information that compels them to keep their tax affairs transparent and accurate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.