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Types of Tax Audits Conducted by FIRS: Exploring Different Audit Procedures for Nigerian Companies.

Accountancy Services, Statutory Audit / GLORY

Introduction: For Nigerian companies, tax audits are an integral part of ensuring compliance with tax laws and regulations. The Federal Inland Revenue Service (FIRS) is responsible for conducting tax audits to verify the accuracy and completeness of tax returns filed by businesses. Understanding the different types of tax audits conducted by FIRS is crucial for companies to be prepared and cooperate effectively with tax authorities. In this article, we will explore the various types of tax audits carried out by FIRS and shed light on the audit procedures involved. Desk Audit: A desk audit is a relatively straightforward and less intrusive form of tax audit. During a desk audit, tax officials review the taxpayer’s financial records and tax returns at the FIRS office. This type of audit is typically conducted for smaller businesses or those with relatively simple tax affairs. The FIRS may request specific documents or seek clarifications on certain transactions during the review process. Procedure: The company receives a notice of a desk audit from the FIRS, stating the time and location for the review. The company compiles and submits the requested financial records and documents to the FIRS. Tax officials analyze the provided information, comparing it with the tax returns filed by the company. If any discrepancies or issues are identified, the company may be required to provide additional explanations or evidence to resolve the matter. Field Audit: A field audit is a more comprehensive and in-depth examination of a company’s financial records and operations. Tax officials conduct a field audit by visiting the company’s premises to conduct on-site inspections and interviews with key personnel. Field audits are usually conducted for larger businesses or those with complex financial structures. Procedure: The company receives a notice of a field audit, specifying the date and time of the visit. The tax officials visit the company’s premises to conduct the audit, inspecting financial records, assets, and conducting interviews with relevant personnel. The company’s accounting systems and internal controls may also be assessed during the field audit. If discrepancies or non-compliance issues are detected, the company may be required to provide additional documentation or explanations to resolve the matter. VAT Compliance Review: Value Added Tax (VAT) compliance reviews focus specifically on a company’s adherence to VAT regulations. VAT is a consumption tax levied on the value added at each stage of production or distribution of goods and services. Businesses are required to charge, collect, and remit VAT to the FIRS. VAT compliance reviews aim to ensure that companies are correctly calculating, reporting, and remitting VAT amounts. Procedure: The FIRS may conduct a VAT compliance review either through desk-based analysis or on-site inspections. The company’s VAT records, invoices, and relevant documentation are assessed to verify the accuracy of reported VAT amounts. If discrepancies are found, the company may be asked to provide additional supporting documents or explanations. Transfer Pricing Audit: Transfer pricing audits focus on related-party transactions within multinational companies or companies with related entities. The goal is to ensure that transfer pricing arrangements are conducted at arm’s length and comply with the relevant transfer pricing regulations. Procedure: The FIRS scrutinizes the company’s related-party transactions to assess whether they comply with transfer pricing rules. The company may need to provide detailed documentation, including transfer pricing studies, to justify the pricing of intercompany transactions. Conclusion: As tax compliance is a critical aspect of running a business in Nigeria, understanding the different types of tax audits conducted by FIRS is essential. By being aware of the various audit procedures involved in each type of tax audit, Nigerian companies can better prepare themselves for potential audits and ensure their tax affairs are in order. Timely submission of accurate financial records and proactive cooperation with tax authorities will not only facilitate a smooth audit process but also demonstrate the company’s commitment to transparency and compliance. Remember, tax audits are a standard process to ensure a fair and equitable tax system and foster a conducive business environment in Nigeria. 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.

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Key Factors Triggering a Tax Audit by FIRS: What Businesses Need to Know.

Accountancy Services, Tax news, TAX SERVICES / GLORY

Introduction: For businesses operating in Nigeria, compliance with tax regulations is a fundamental responsibility. As part of its efforts to enforce tax laws and maintain fairness in the tax system, the Federal Inland Revenue Service (FIRS) conducts tax audits to assess a business’s compliance. Understanding the key factors that may trigger a tax audit is crucial for businesses to proactively manage their tax affairs and minimize the risk of potential scrutiny. In this article, we will explore the essential factors that can trigger a tax audit by FIRS and offer valuable insights for businesses to ensure compliance and transparency. Inconsistent or Underreported Income: One of the most common triggers for a tax audit is when there are discrepancies in reported income. If the income declared in a business’s tax returns does not match the income reported in other financial statements or sources, it raises a red flag for the tax authorities. Whether unintentional errors or deliberate attempts at underreporting, any inconsistency can prompt FIRS to conduct an audit to reconcile the figures and ensure accurate reporting. To avoid such issues, businesses must maintain meticulous records and reconcile financial statements regularly to ensure consistency across all sources of income reporting. Unusually High Deductions or Exemptions: Claiming excessive deductions or exemptions can attract the attention of the FIRS. While businesses are entitled to legitimate deductions and exemptions, excessively high claims without proper documentation or justification may be perceived as attempts to reduce tax liability fraudulently. To safeguard against potential audit triggers, businesses must ensure that all deductions and exemptions claimed are fully supported by valid documentation and comply with relevant tax regulations. Frequent Losses or Negative Income: Consistently reporting losses or negative income over multiple years may raise suspicions at the FIRS. While it is common for businesses to face losses in certain periods, an extended period of reporting losses might be seen as a potential indicator of tax evasion or aggressive tax planning. Businesses experiencing losses should maintain transparent records to demonstrate valid reasons for these losses, such as expansion initiatives or cyclical industry downturns. Large Transactions or Unusual Transactions: Large or unusual transactions, especially those involving related parties, can attract the FIRS’s attention. The tax authority may scrutinize such transactions to ensure compliance with transfer pricing rules and to prevent tax evasion through improper profit shifting. To mitigate this risk, businesses should document all related-party transactions thoroughly, ensuring they are conducted at arm’s length and comply with transfer pricing regulations. Industry-Specific Risk Profiles: Certain industries may have higher risk profiles for tax evasion or non-compliance, leading to a higher likelihood of tax audits. Industries known for cash transactions, such as retail, hospitality, and informal sectors, are often subject to increased scrutiny. Businesses operating in high-risk industries should pay particular attention to their tax compliance and maintain accurate financial records to avoid any audit triggers. Random Selection or Data Analysis: In addition to specific risk-based criteria, the FIRS may conduct random selection audits to maintain overall tax compliance. Moreover, tax authorities increasingly use data analytics and advanced technologies to identify patterns and anomalies that may indicate potential non-compliance. To stay ahead of potential random audits, businesses should proactively monitor their tax compliance, maintain accurate records, and adopt robust internal controls. Conclusion: Understanding the key factors that can trigger a tax audit by FIRS is crucial for businesses aiming to maintain transparency and compliance. Proactive measures, such as keeping accurate financial records, complying with tax regulations, and seeking professional advice when needed, can help businesses minimize the risk of tax audits. By taking a proactive approach to tax compliance, businesses can build a reputation for integrity, contribute to Nigeria’s economic development, and foster a positive relationship with tax authorities. Remember, tax audits are not always indicative of wrongdoing; they are essential tools for upholding a fair and equitable tax system in Nigeria. 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.

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Understanding FIRS Tax Audit: An Overview for Nigerian Businesses

Accountancy Services, Statutory Audit / GLORY

Introduction: For Nigerian businesses, navigating the complexities of tax compliance is an integral part of sustaining growth and maintaining financial stability. One crucial aspect of this process is the Federal Inland Revenue Service (FIRS) tax audit. The FIRS, as the primary tax authority in Nigeria, conducts audits to ensure that businesses are fulfilling their tax obligations correctly and transparently. In this article, we will provide an overview of the FIRS tax audit, its significance, and key insights to help Nigerian businesses prepare for and successfully navigate these audits. What is a FIRS Tax Audit? A FIRS tax audit is a thorough examination of a business’s financial records and tax returns to verify the accuracy and completeness of reported information. The primary objective of the audit is to assess the taxpayer’s compliance with relevant tax laws and regulations and identify any discrepancies, errors, or potential tax evasion. The FIRS may select businesses for an audit through various methods, including random selection, risk-based criteria, and information received from external sources. It’s essential for businesses to understand that an audit does not necessarily imply wrongdoing; instead, it is a standard procedure to maintain tax integrity across the Nigerian business landscape. Types of FIRS Tax Audits Desk Audit: A desk audit involves a review of the taxpayer’s records and documents at the FIRS office. This type of audit is generally conducted for smaller businesses with relatively straightforward tax affairs. Field Audit: In a field audit, tax officials visit the business premises to examine financial records, assets, and operations more comprehensively. This type of audit is typically carried out for larger businesses or those with more complex financial structures. Key Focus Areas during a FIRS Tax Audit: During the audit process, the FIRS will focus on specific areas to evaluate a business’s tax compliance thoroughly. Key areas of scrutiny include: Income and Revenue: The FIRS will verify whether all income and revenue generated by the business have been accurately recorded and reported. Deductions and Exemptions: Businesses must provide proper documentation for claimed deductions and exemptions to support their legitimacy. Withholding Taxes: The FIRS will assess whether the business has correctly withheld and remitted taxes from payments made to vendors, contractors, and employees. Value Added Tax (VAT): Businesses are expected to report and remit VAT appropriately, and the FIRS will review VAT records to ensure compliance. Transfer Pricing: For businesses involved in related-party transactions, the FIRS will scrutinize transfer pricing arrangements to prevent profit shifting. Tax Planning Schemes: Taxpayers should avoid engaging in abusive tax planning schemes that exploit loopholes to reduce their tax liabilities artificially. Preparing for a FIRS Tax Audit Being adequately prepared for a tax audit can significantly reduce the stress and potential disruptions to business operations. Here are some essential steps to take: Organize Financial Records: Ensure that all financial records, including tax returns, invoices, receipts, and ledgers, are well-organized and easily accessible. Comply with Tax Regulations: Maintain strict compliance with Nigerian tax laws and regulations to minimize potential issues during the audit. Seek Professional Assistance: Consider engaging the services of experienced tax consultants or auditors who can review your records and advise on compliance matters. Internal Controls: Implement robust internal controls to prevent errors and detect potential issues before they become significant problems. Stay Informed: Regularly keep abreast of changes in tax laws and regulations to ensure ongoing compliance with the latest requirements. Conclusion A FIRS tax audit is an essential component of the tax enforcement process in Nigeria. Businesses should view audits as opportunities to demonstrate their commitment to tax compliance and cooperate fully with tax authorities. By maintaining accurate and transparent financial records and staying up-to-date with tax regulations, Nigerian businesses can navigate tax audits successfully and continue on the path of sustainable growth and success. Seeking professional advice when needed can also play a crucial role in ensuring compliance and minimizing tax-related risks. Remember, tax compliance is not just a legal requirement; it is a responsibility that contributes to the development of Nigeria’s economy as a whole. 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.

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No hiding place for tax defaulters in Nigeria – FIRS

Tax news / Tobi Aminu

In a bid to widen the tax net and upscale Nigeria’s revenue, the Federal Inland Revenue Service (FIRS) has come up with policies that would aid in fishing out companies and individuals that have over time defaulted in paying taxes. That was after the tax authority on Tuesday disclosed it has developed a common tax identity and it’s working closely with banks operating in the country in line with its statutory powers to ensure that tax evaders comply. “We are working in synergy with the banks at the moment and at present, we have access to everybody’s account, so there is no hiding place for tax evaders in the country. All we need to do is request information about any individual or company and we will get it,” said Ikechukwu Odume, FIRS General Counsel. Odume, who made this disclosure at the sideline of the ongoing 2019 Annual Conference organized by the Nigerian Bar Association (NBA) in Lagos, also noted that in other to drive full compliance, the FIRS developed and launched the Common National Tax Identity. “With the click of a button, we can have the tax number of every person so if you say you pay taxes we would know,” Ndume told Businessday. Africa’s largest economy, with a gross domestic product of $380.85 billion, has Tax-to-gdp ratio of 5.6 percent, one of the lowest in the continent, according to data from World Bank. Tax-to-gdp ratio in Algeria, South Africa, Morocco, Angola, Kenya and Egypt currently stands at 34.75; 26.80; 21.35; 19.25; 18 and 15.20 percent, respectively. In a show of dire need for revenue to fund the budget, the federal government through the Chief of Staff, Abba Kyari, queried the FIRS Boss, Babatunde Fowler, to provide explanation on the widening variance between actual revenue and budgeted from 2015 to 2018. In 2015, actual revenue collection by the agency was N3.7 trillion, compared with a budgeted target of N4.5 trillion, set by the federal government for the tax regulator. A similar shortfall occurred in 2016, when actual collection was N3.307 trillion, less than the N4.95 trillion targeted in the budget. Also, in 2017, the FIRS collected a total of N4.027 trillion, less than the set target of N4.89 trillion and in 2018, actual collection was N5.3 trillion, while the budgeted target was N6,7 trillion In response to the query, Fowler blamed the shortfall in actual revenue to dwindling economic activities from the fall out of a global collapse in crude oil prices that submerged the country’s economy into five quarters of negative contraction. To shore up revenue, the tax regulatory agency embarked on several aggressive strategies within is purview including placing a “lien” in the form of suspension on the bank account of defaulting tax payers. The FIRS released a public memo naming over 20,000 businesses that are yet to remit taxes into its coffers. It has also announced plans of taking a 5 percent Value Added Taxes (VAT) on all purchases done online from 1st January 2020. In response to controversy on how the tax regulator plans on axing online savvy customers, Nudume affirmed that the 5 percent would be collected directly from the bank accounts of the users differently from the VAT already charged by the ecommerce firm. “What we are trying to achieve for the online transaction is equity in tax. So, whether you buy goods online or physically, you will pay VAT,” Udeme said in an exclusive interview with Businessday. He noted that the FIRS was building a network of collaboration with the various tax authorities at the state level so there could be some kind of interchange of information on people paying tax so as to eliminate he issues of multiplicity of taxes. The collaboration between both arms have also resulted in the establishment of a Joint Tax Audit (JTA), where the federal and the state government tax authority, come together to audit companies, Udeme noted “We can know what is happening in states across the federation. For example, a company in Lagos may have employees in Ogun state and should pay tax in Ogun state but they work in Lagos. With the JTA, we should be able to ascertain how many of these companies’ tax should go to Ogun state, Lagos state and those that should go to the FIRS,” he said. According to Udeme, the FIRS has also come up with a National Tax Policy, that would help in driving he vision of the agency and remove every bottleneck hindering effective tax payment by taxpayers. For the agency, the National Tax Policy is the spirit that drives tax laws and reforms as it helps in detecting where tax is going, the things that the agency want in the tax, avoiding multiple taxation, efficiency in tax administration so that each government looks at it as a guide towards the laws that they are making. At the conference, Udeme urged lawyers on the need to buy into tax laws as they should be the ones driving tax reforms in the country. The FIRS representative expressed dissatisfaction, noting that over time, judges have a major impediment to the agency’s efforts in tax collection in the country as many of them fail to intensively study tax laws. He explained that the FIRS has shown enough empathy in tax collection if the powers given to the agency is anything to consider. Source: Business day

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FIRS notice on taxability of certain compensation payments

Tax news / Tobi Aminu

Andersen Tax, a renowned tax advisory and regulatory services firm has noted some implications of the recent notice issued by Federal Inland Revenue Service (FIRS) on taxability of certain compensation payments. On 14 August 2019, the FIRS issued a Public Notice on deduction of tax at source from compensations paid to agents by principal companies. The notice directs companies to deduct and remit Withholding Tax (WHT) and Value Added Tax (VAT) on compensations such as commissions and rebates, which are due to their distributors and customers. According to, Andersen Tax, “This notice implies that companies are to subject all forms of compensation payments including commissions and rebates granted to dealers, agents, distributors and general customers to WHT and VAT and remit same to the FIRS. The notice has some far-reaching implications especially for companies in the FMCG sector.” “The FIRS’ directive to companies to deduct VAT at source is not in line with the express provisions of the VAT Act. Except for transactions with non-resident companies or transactions with companies in the oil and gas sector, companies are not ordinarily required to deduct VAT at source under the existing VAT Act,” it added. Andersen Tax further stated that, “The applicability of VAT on rebates and discounts issued to distributors and customers remains a contentious issue given that they do not necessarily constitute income/ revenue in the hands of the companies that enjoy it. Thus, the requirement to account for VAT and WHT on compensation payments and sales- incentives is unclear because giving a blanket directive without specifics as to the practical application of VAT and WHT on such category of transaction simply creates more ambiguities.” Based on the above, they expect the FIRS to issue further guidance to provide additional clarity on the public notice. According to the FIRS, the issuance of the PN is aimed at providing guidance to the public and in particular, taxpayers and advisers on WHT and VAT, which is deductible from the compensations or commissions due to distributors, agents and customers. In the notice, the FIRS stated that compensations and commissions earned by distributors/ dealers are to be subjected to VAT and WHT. According to the PN, its position is based on its Information Circular No. 2006/02 issued in February, 2006 and the Companies Income Tax Act (Rates, Etc. Deduction at Source (Withholding Tax) Regulations. The FIRS, however, stated that a number of companies have failed to deduct WHT and VAT from such compensations and commissions. The notice further requires companies (specifically those in the Fast Moving Consumer Goods (FMCG) Sector) to apply WHT and VAT on any compensation due to their distributors and customers. The FIRS stated that the duty to deduct and remit WHT or VAT will not be affected by the mode of payment (i.e. cash, credit notes, goods-in-trade or any other means payable). Based on the PN, such WHT/VAT must be charged at the appropriate rate and remitted to the FIRS on or before the 21st of every month. The FIRS further stated that it will commence the monitoring of compliance on relevant companies/transactions. Source: Business day

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