Tax evasion and avoidance have long been challenges for tax authorities around the world, impacting revenue collection and distorting the fairness of tax systems. In response to these issues, the Nigeria Finance Act 2019 introduced a range of measures to address tax evasion and avoidance by Nigerian businesses. These measures aim to enhance transparency, plug loopholes, and ensure that businesses contribute their fair share of taxes. In this article, we will delve into the key provisions of the Finance Act 2019 that address tax evasion and avoidance and their implications for Nigerian businesses.
1. Strengthening Transfer Pricing Regulations:
Transfer pricing manipulation is a common avenue for tax avoidance. The Finance Act 2019 strengthens transfer pricing regulations to prevent profit shifting and ensure that related party transactions are conducted at arm’s length. The Act requires businesses to maintain comprehensive documentation of their transfer pricing analyses, making it more difficult for companies to manipulate prices and artificially reduce taxable income.
2. Introduction of Controlled Foreign Company (CFC) Rules:
The Finance Act 2019 introduced Controlled Foreign Company (CFC) rules to prevent Nigerian companies from shifting profits to low-tax or tax-haven jurisdictions. Under these rules, Nigerian companies with significant ownership in foreign entities are required to report and pay tax on the profits of those foreign entities. This measure helps curb profit shifting and ensures that income earned by foreign entities controlled by Nigerian companies is appropriately taxed.
3. Thin Capitalization Rules:
The Act also addresses thin capitalization, a strategy used to create excessive interest deductions through related-party debt. The Finance Act 2019 limits the deductibility of interest expenses on related-party loans to 30% of the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA). By doing so, the Act prevents companies from inflating interest expenses to reduce taxable income artificially.
4. Mandatory Digital Tax Transactions:
Digital transactions are increasingly becoming a focus for tax authorities, as they can be difficult to track and regulate. The Finance Act 2019 introduces measures to ensure that Nigerian businesses engaged in digital transactions, especially with foreign entities, comply with tax obligations. These measures aim to prevent revenue leakage and ensure that digital economy businesses contribute their fair share of taxes.
5. Stricter Penalties for Non-Compliance:
The Finance Act 2019 increases penalties for tax evasion and non-compliance with tax regulations. These penalties include substantial fines, interest charges on overdue taxes, and potential criminal sanctions for serious offenses. The Act’s stricter penalties serve as a deterrent and encourage businesses to comply with tax obligations.
6. Encouraging Voluntary Tax Compliance:
While the Act introduces measures to address tax evasion and avoidance, it also emphasizes voluntary tax compliance. The Act’s provisions, such as the Taxpayers’ Bill of Rights and technology-driven tax administration, are designed to create a more transparent and efficient tax system. Businesses that proactively comply with tax regulations benefit from reduced exposure to penalties and legal consequences.
The Nigeria Finance Act 2019 sends a clear message that tax evasion and avoidance will not be tolerated. The Act introduces a range of measures to enhance transparency, prevent profit shifting, and ensure that businesses contribute their fair share of taxes. Nigerian businesses must recognize the importance of complying with these provisions to avoid penalties, reputational risks, and legal consequences.
By embracing the Act’s measures to address tax evasion and avoidance, Nigerian businesses can contribute to a fair and robust tax system that supports economic growth, infrastructure development, and the overall prosperity of the nation.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.