Nigeria: VAT And WHT Compliance: Preparation Towards The FIRS' Nationwide Compliance Monitoring Exercise

Recently, the Federal Inland Revenue Service (FIRS or the Service) released a Public Notice¹ 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 2022² 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.

VAT and WHT Compliance In Nigeria – Best Practices

VAT

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.

WHT

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.

Best Practices to Facilitate VAT and WHT Compliance

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.

• Proper classification of vendors or suppliers and the resultant transactions during their onboarding to determine whether they qualify or are liable to VAT and WHT, and whether they qualify for input VAT (i.e., VAT on purchases) which can be used to offset output VAT (i.e., VAT on sales.).
• Ensuring accurate computation for VAT on supply of qualifying goods and services, as well as the accurate deduction of WHT from qualifying transactions depending on their nature, filing and remittance on or before the required deadline(s). It is important for the filing process to be clear and organisations may opt for automation using an appropriate Enterprise Resource Planning (ERP) system to promote ease and timeliness.
• Taxpayers and tax agents should also conduct continuous periodic review of financial records and transactions to determine tax compliance status of the business, and make swift remedial actions where necessary.

Common Compliance Challenges In Nigeria

As part of the efforts to discourage and curb tax evasion, the tax laws provide for various fines, penalties and interests which are enforced by the FIRS towards non-compliant taxpayers and tax agents. For VAT, failure to submit returns or submission of incomplete or inaccurate returns could expose the taxpayer to a best of judgement assessment, failure to remit the tax attracts a penalty of 10% of the uncollected tax and an interest at the prevailing Central Bank of Nigeria's (CBN's) minimum rediscount rate, failure to register for VAT also attracts a penalty of ₦50,000 for the first month in which the failure occurs and ₦25,000 for each subsequent month in which the failure continues. Similarly, in the instance of failure to deduct or remit WHT within the stipulated timeline, this attracts a penalty of 10% of the taxes not remitted, in addition to the amount of tax deductible or deducted plus interest at the prevailing commercial rate, and the penalty for late filing of WHT returns is ₦25,000 for the first month it occurs and ₦5,000 for each subsequent month the failure continues, alongside other fines and penalties for non-compliance.

Although taxpayers and tax agents apply various approaches to ensure VAT and WHT compliance in Nigeria, they tend to encounter issues as a result of substandard financial record-keeping practices which hinder a taxpayers' ability to document and substantiate its transactions, inadequate taxpayer education and awareness, delays in tax refunds from overpayments which discourage organisations from complying with tax regulations, limited access or funds to engage highly skilled tax professionals, and filing errors, amongst others.

First Time Companies Attempting to Comply and Clear Back-Logs

Taxable persons, companies, organisations and agents which are yet to comply with VAT and WHT requirements for extended periods would be liable to fines, penalties and interests in addition to the taxes due for the affected periods. Substantial backlogs on tax liabilities typically discourage taxpayers and tax agents from compliance. A possible remedy which could be adopted by the FIRS would be to replicate and establish a Voluntary Assets and Income Declaration Scheme (VAIDS) for the purposes of VAT and WHT which would enable taxpayers assess their income and liability and encourage them to pay and clear out all backlogs. FIRS may further encourage incentives such as waiver of penalties, interests, and criminal prosecutions from defaulting taxpayers. The introduction of a VAIDS-like scheme would create an opportunity for taxpayers in Nigeria to fulfill their past tax obligations and highly motivate voluntary tax compliance with a well-publicized drive.

Conclusion

VAT and WHT compliance are essential for the revenue generation drive, which in turn are vital for the growth and development of Nigeria, which eventually stimulate a more conducive environment for business growth. Complying with the tax laws and extant tax obligations helps taxpayers prevent avoidable fines and penalties for non-compliance and fosters better relationships between the FIRS/other tax authorities on the one hand, and the taxpayers or tax agents on the other hand. The FIRS is therefore positioned to continuously monitor and enforce VAT and WHT compliance through audits, investigations or other review exercises.

It is important for taxpayers and tax agents to put effective measures in place, periodically assess and review their financial transactions and records, in order to ensure compliance and adequately prepare for the FIRS's compliance monitoring exercises alongside audits, investigations and other reviews. Prior to entering into business transactions, taxpayers or tax agents should conduct in-depth analyses of such transactions or engage professional tax consultants for proper tax planning advisory in determining the most tax efficient structure(s) for transactions based on the business operations.

Footnotes

1.Jimisayo Opanuga, FIRS to Embark on Nationwide VAT, WHT Compliance Monitoring Exercise (Guardian Newspaper, Lagos, 16 October 2023).

2.The Nigerian Observer, Nigeria realises N5.34trn from VAT, company tax in 2022 (Nigerian Observer, Benin).

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.