Tax evasion and avoidance pose significant challenges to the Nigerian economy, leading to reduced government revenue and hampering public service delivery. To combat these practices and strengthen the country’s tax system, the Nigeria Finance Act of 2019 introduces several measures aimed at addressing tax evasion and avoidance. As a prominent accounting firm in Nigeria, we explore the key provisions in the Nigeria Finance Act 2019 that tackle tax evasion and avoidance head-on.
1. Introduction of the Digital Services Tax (DST):
The Finance Act 2019 addresses the challenges of taxing digital transactions by introducing the Digital Services Tax (DST). This provision requires foreign companies providing digital services to Nigerian consumers without a physical presence in the country to pay DST at a rate of 2% of their gross revenue. The DST aims to capture revenue from previously untaxed digital activities and prevent tax avoidance by multinational digital service providers.
Implication: The DST ensures that foreign digital companies contribute their fair share to Nigeria’s tax revenue, reducing the potential for profit shifting and tax avoidance in the digital economy.
2. Controlled Foreign Company (CFC) Rules:
The Finance Act 2019 introduces Controlled Foreign Company (CFC) rules to prevent tax avoidance through the use of foreign subsidiaries in low-tax jurisdictions. Nigerian-resident companies that control foreign companies are now required to include the income of those foreign entities in their tax computation. This measure discourages the shifting of profits to tax havens and enhances transparency in multinational corporations’ global operations.
Implication: The CFC rules enhance tax enforcement and prevent profit erosion through complex multinational structures, promoting a fair and equitable tax system.
3. Strengthening Transfer Pricing Regulations:
The Finance Act 2019 aligns Nigeria’s transfer pricing regulations with international best practices set by the Organization for Economic Co-operation and Development (OECD). Multinational corporations (MNCs) engaged in related-party transactions must now maintain comprehensive transfer pricing documentation to support the arm’s length nature of their transactions. This measure enables tax authorities to scrutinize intercompany dealings and detect potential transfer pricing abuses that lead to tax avoidance.
Implication: Strengthened transfer pricing regulations deter MNCs from manipulating prices in related-party transactions, ensuring fair taxation and preventing base erosion and profit shifting (BEPS).
4. Mandatory Country-by-Country Reporting (CbCR):
To enhance tax transparency and monitor the global activities of MNCs, the Finance Act 2019 introduces mandatory Country-by-Country Reporting (CbCR). Large multinational groups with a consolidated group revenue above a specified threshold must now disclose financial and tax-related information for each jurisdiction in which they operate. This reporting requirement enables tax authorities to identify potential tax avoidance practices and take appropriate actions to ensure tax compliance.
Implication: CbCR empowers tax authorities to analyze the tax risk posed by MNCs’ global operations, allowing for targeted investigations and corrective actions to combat tax evasion.
The Nigeria Finance Act 2019 demonstrates the government’s commitment to addressing tax evasion and avoidance, promoting tax transparency, and creating a level playing field for businesses. By introducing measures such as the Digital Services Tax (DST), Controlled Foreign Company (CFC) rules, strengthened transfer pricing regulations, and mandatory Country-by-Country Reporting (CbCR), the Act takes decisive steps towards building a robust and fair tax system.
As an accounting firm in Nigeria, we emphasize the importance of understanding and complying with these tax reforms. By aligning their financial strategies with the changes brought about by the Finance Act 2019, businesses can contribute to a transparent and accountable tax system, fostering economic growth and development for the benefit of all Nigerians.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.