In a bid to shore of government revenue, the Federal Inland Revenue Service (FIRS) is doing everything possible to expand the tax net and collect due taxes. The current fiscal landscape calls for no less response. Needless to say that the country is going through tough challenges. The Federal Government of Nigeria (FGN) has a plan to spend about N6 trillion in 2016. Less than 15% of this is projected to be sourced from oil revenue. Execution of 2016 Appropriation Act is largely dependent on non-oil revenue sources and borrowing. As FIRS and Nigeria Customs Services (NCS) collect revenue for the entire federation, all State Governments and FG looks on these institutions for miracle.
FIRS has a targeted revenue of nearly N5 trillion for 2016. Actually, N4.957 trillion.
This includes taxes (like Petroleum Profit Tax and Value Added Tax) collectible centrally and distributable amongst the 3 tiers of government. The revenue target for 2015 was N4.572 trillion with actual collections of N3.743 trillion. With this kind of pressure, at a time of serious economic crisis and shrinking bottom-line, the tension is better imagined.
So far, FIRS is trying its possible best to deliver on its mandate. Widening the tax net is a task that must be done. About N500 billion was shared by FAAC in June 2016 with 70% from non-oil sources. FIRS is said to have added over 700,000 new corporate taxpayers over the last 1 year with plans for more. Number of individual taxpayer currently at 10 million is planned to be doubled by end of 2016.
Monitoring and enforcement mechanisms are being strengthened to ensure due taxes are collected. Tax education and engagement, collaboration amongst various tax authorities are also part of the measures. With data sharing, exchange of information, joint audits and capacity building, the bar of tax compliance is being raised.
In the midst of all these, FIRS will need to explore unconventional (yet legal) means to meet the high expectations placed on it by FGN. Today, I’ll be looking at one recent development on use of withholding tax as offset against tax liability. Some taxpayers have received letters from FIRS which suggests that withholding tax claim as offset against tax liabilities should now be matched to actual assessment year. There’s been no official circular on this case. It seems limited to few FIRS offices but needs to be nipped in the bud.
Let me try to break this down for general appreciation and avoid jargons as much as practicable. Withholding Tax (WHT) is an advance payment of income tax. It was introduced partly to address problem of tax evasion. Advance payment of tax provides information that an income source has been identified through third party. This is intelligent information at its best, if used appropriately. WHT provisions seek to collect taxes that may otherwise have been lost through evasion and/or avoidance. It enhances collection efforts of Tax Authorities and ensures that revenue is generated in advance.
WHT has become a veritable source of revenue to government while helping to trap taxpayers that could otherwise have escaped. WHT is normally deducted at source when a payment is to be made to a supplier or service provider. When invoices are issued for goods supplied or services rendered, certain tax is deducted and paid to FIRS based on specific rate guide.
In principle, WHT is a payment on account of the ultimate income tax liability of a taxpayer. Taxpayer who suffered WHT is usually given a WHT credit note which serve as evidence of deduction. Traditionally, taxpayers are expected to present WHT credit notes which pass through a “clearing process” for credit grant. When tax returns are filed, credit is given for tax deducted at source and evidenced by WHT credit notes. Available credit will be deducted from the tax liability and the balance will be settled in cash. If the tax credit is in excess of the tax liability the balance will be carried forward to subsequent year(s).
For some untenable reasons, access to WHT credit notes often take much longer than is expected.
The result of this is that taxpayer could have suffered WHT but unable to utilize same to defray tax liabilities. When this happens, taxpayer will be expected to settle tax liabilities in cash while waiting for credit notes. For years, taxpayers have battled with growing WHT receivable while still coughing out cash to settle liabilities. Then comes the saving grace in 2007 with the introduction of tax refund through FIRS Establishment Act. FIRS Act introduced refund of excess tax (after proper audit) with option of setting off against future tax.
WHT credit is money owed taxpayers and when the credit is not fully used up with tax assessment, refund is a right. In fact, the law specified that refund should be made within 90 days. Usually, this is preceded by an audit. Refund is preceded by tax audit to establish the veracity of the claim. The law says “proper audit”. As feared by many, getting refunds from government is like trying to source for water from the rock. The conciliatory provision is that where refunds is hard, carry forward of credit to offset future liability should be easy (and probably automatic?).
It is therefore surprising to note that FIRS now seems to be exploring possible restriction of right to WHT credits. Some FIRS offices have started notifying taxpayers that WHT credit note that could be used to offset tax liability is limited to current year. For example, to settle tax liability for 2016 tax year, only WHT credit relating to the accounting year could be used. That’s those relating to 2015 financial year which form the basis for 2016 assessment year. What happens to prior years’ confirmed credits? Well, wait to have a “proper audit” and seek refund, appears to be the position of some FIRS offices.
Just to put it in perspective, a “proper audit” may take several years to conclude. Your guess is as good as mine in terms of the number of successful refund cases in the country since 2007. While the drive for tax revenue remains critical, denying taxpayers’ right to confirmed credit is inimical.
Taxpayers shouldn’t ordinarily be asked to wait until credit notes are issued before credits are granted. Nobody waits for deposit slips before having access to bank lodgments. Why with tax?
There’s plan to ensure that this no longer happen when the e-tax takes full effect with WHT administration. But somehow, taxpayers have become used to this painful process of waiting forever for credit notes.
When the credit notes are gotten, after a long wait, they are turned in for confirmation by FIRS and grant of credit. Once WHT has been confirmed, taxpayers should be allowed to offset same against tax liability. FIRS will be asking for too much if it denies taxpayer the right to offset their liabilities through all confirmed credits. A close analogy is that of a Bank customer who has funds in his savings account and an overdrawn current account. The Bank says: Mr. Customer, please bring cash to settle your overdrawn account as we can’t allow use of funds from your Savings. The Bank then goes on to say: in fact, we would need copies of your deposit slips to confirm the balance in your Savings account, carry out a proper audit and when we’re done (say, after about 2 years), we will initiate the process of refunding your trapped savings.
The point here is not to use confirmed credit applicable to company income tax (CIT) as offset for other taxes (like VAT). It is a case of being able to use WHT credit applicable to CIT to offset CIT liability irrespective of year covered. This new move by FIRS is like going back to the old provisions of Companies Income Tax Act (CITA) – prior to 2007- where WHT credit needs to be matched to specific assessment year. The provision requiring matching of WHT credit to specific assessment year was removed via CITA Amendment Act of 2007. The law no longer require matching of WHT credit to specific year. Use your credit as offset or get refunded is the new order.
There’s a question of fairness if FIRS holds on to prior year’s WHT credit and demand cash settlement for current liability. Fairness could also mean that taxpayer should be entitled to interest when refund is not made after 90 days. After all, penalties and interest are imposed on taxpayers when tax liabilities are not settled with specified timelines.
Footnote:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday 17 August 2016, during my weekly “tweetax” session with hashtag #TaxWiseNG. The tweets are subsequently posted as article on my blog www.yomiolugbenro.com and my social media accounts – facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
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