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Experts and groups such as the Nigeria Employers’ Consultative Association have said the recent increase in the Value Added Tax rate from five per cent to 7.2 per cent will lead to closure of many businesses. The Head of Tax and Corporate Advisory Services at  PricewaterhouseCoopers, Taiwo Oyedele, said the new VAT rate would shrink the GDP growth and disposable income of Nigerians. The Director-General of NECA, Mr Timothy Olawale, noted that the timing of the increase in VAT rate was wrong, stressing that the government ought to support businesses in reducing the alarming unemployment rate in the country. Recall that the Minister of Finance, Budget and National Planning, Zainab Ahmed, on Wednesday announced the VAT rate increase at the end of the Federal Executive Council meeting. Olawale, however, argued that the benefits of the recently signed national minimum wage of N30,000 would be neutralised by the proposed increase in the VAT, thus further reducing the purchasing power of the citizens. “If this new VAT rate is implemented, the purchasing power of the citizens would have been reduced, sales of goods and services will reduce and inventories for business will be high and could lead to closure of businesses that ought to be supported by government in reducing unemployment rate that is currently alarming.  “Furthermore, the benefits of the recently signed national minimum wage of N30,000 would be neutralised by the proposed increase in the VAT, further reducing the purchasing power of the citizens, leading to increase in prices of goods and services. It will result in upward movement of the inflation rate, and further contraction of the economy.” Olawale who was speaking in Abuja noted that the recently released data of the country’s Gross Domestic Product indicated a contraction in the past two quarters (Q4 2018, 2.38 per cent; Q1 2019, 2.10 per cent and Q2 2019 1.94 per cent). Rather than increase the VAT rate at this point, he said countries should be formulating fiscal policies to stimulate their economies.  “Therefore, this suggests that at this period of time, countries should be formulating fiscal measures/policies to stimulate their economies,” he stated. Olawale, who said that in the event that the government must increase VAT rate against the will of the people, it should have been limited to luxury or ostentatious goods. He also urged the government to double its efforts at expanding the tax net, reduce the income gap and improve the economy through more friendly fiscal policies and promote the ease of doing business in Nigeria. Oyedele of the PwC in a statement on Thursday said more people were likely to evade tax payment as businesses would become less competitive. At the current rate of five per cent, the PwC partner explained that the country’s VAT collection of N1.1tn in 2018 amounted to 0.9 per cent of the GDP compared to about 3.8 per cent for commonwealth and ECOWAS countries. While estimating that the government would earn additional N440bn annually from the two per cent increase in VAT rate, he said for Nigerian businesses, it meant a 40 per cent increase in VAT cost. The tax expert noted that because VAT on capital expenditure was not allowed as a credit in Nigeria, the cost of real investments would go up. On the positive side, Oyedele said, “Additional VAT revenue will help reduce budget deficits, reduce government debt and fund social services especially at sub-national level.” To avoid the negative impact of VAT, he argued that VAT should be paid according to individuals’ ability as not everyone could afford a seven per cent VAT rate. He suggested other palliative measures, saying “exempt or zero rate essential consumptions like foods, education and primary health care. The exemption should not be limited to only unprocessed food items. In other words, a VAT increase should not affect the price of bread.” “Create a VAT registration threshold to eliminate VAT compliance burden for small businesses. Allow businesses to account for VAT on cash basis rather than on invoice, which creates a cash-flow problem. Lead by example; ensure that government and all MDAs fully comply by remitting VAT collected from their contractors. Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure.” Reacting to the proposed increase, a former Director-General, the Securities and Exchange Commission, Dr Suleyman Ndanusa, said it would affect demand for goods and services. He said companies would suffer if people did not demand for goods and services because of VAT increase. “If people do not demand for goods because of more tax burden, it will affect the companies that produce them. And if the companies that produce them are not making money, it will obviously affect their profitability and income,” he said. Ndanusa, who spoke to the News Agency of Nigeria, also noted that the timing was wrong, considering the challenges in the economy. “The timing is quite wrong. At this point in time, our economy needs to be helped by policies that will ginger more consumption and more disposable income for the masses. The paradigm for me has to change. Are we increasing tax just for the purpose of revenue or managing our fiscal policy taxation for growth? The paradigm has shifted from revenue-driven taxation to growth-driven taxation,” he said. He added that government needed to introduce incentives, reduce interest rates and pump up consumption to help the economy to grow instead of increasing taxes. “The approach must be holistic, obviously at a time like this when there is a seeming recession or coming out of recession. Government needs to pump up consumption; when you begin to tax expenditure just for the purpose of revenue, it will further dampen demand and affect businesses.”   Source: Punch

ICC has published an inaugural issues brief on World Trade Organization negotiations on the trade-related aspects of e-commerce. The issues brief – the product of extensive consultation with businesses across a range of sectors participating in or affected by the digital economy – will form part of a series of briefs by ICC to assist WTO Member States in their plurilateral negotiations in Geneva. The negotiations, now involving 80 Member States, seek to achieve a high standard outcome that builds on existing WTO agreements and frameworks. The brief, Taxation of Physical Goods in the Context of E-commerce: Avoiding Non-tariff Barriers through Simple and Consistent Design, highlights a growing concern for micro-, small- and medium-sized enterprisess (MSMEs) accompanying the impressive growth in the cross-border sale of physical goods purchased online: the propensity for Goods and Services Tax (GST) /Value Added Tax (VAT) regimes to constitute non-tariff barriers to trade unless they are designed in a simple and consistent way. The brief sets out five key recommendations for WTO Members to ensure that their GST/VAT regimes do not hamper e-commerce growth. They are: Minimise discrimination between domestic and non-domestic businesses in registration requirements and ensure tax systems are technology-neutral in application. Allow suppliers, where relevant, to collect and remit taxes away from the border. Maintain or establish appropriate de minimis thresholds, allowing customs agencies to focus on safety and security rather than on domestic tax collection. Ensure that registration and tax payment processes are simple, consistent and non-discriminatory. Do not require a place of business or fiscal representative in the country of destination in order to supply goods.   Source: ICC

The Economic and Financial Crimes Commission, on Tuesday, arraigned a whistleblower, Lord Edem, before the Lagos State High Court in Ikeja for raising a false alarm over an alleged N700m pension and tax evasion fraud. Edem was arraigned before Justice Hakeem Oshodi on one count of making a false statement to a public officer. He pleaded not guilty to the charge. It was gathered that Edem provided false information to a public officer and the EFCC about the involvement of a company, where he was an employee, Starsonic and Sacvin Group of Nigeria, in a pension and tax evasion fraud. According to the EFCC prosecutor, S. O. Daji, the defendant claimed that the management and staff of the company were involved in massive pension fraud, tax evasion and other fraudulent activities to the tune of N700m. He added that the defendant committed the offence on August 7, 2019. The offence was said to contravene Section 96 (a) of the Criminal Law of Lagos State, 2011. Justice Oshodi, a vacation judge, ordered the remand of the defendant in prison, while the case file be returned to the registrar for re-assignment.   Source: Punch

The introduction of withholding tax (WHT) provisions in the Nigerian tax laws in 1977, imposed on taxpayers the obligation to deduct tax at source on payments for qualifying transactions. The tax deducted are to be remitted to the relevant tax authority within a statutory timeline, with penalty and interest charges imposed on defaulting taxpayers. However, the drive by taxpayers to comply with their withholding tax obligations appear impaired by the existence of certain vague provisions in the Nigerian tax laws. Where tax laws are difficult to understand, conflicting interpretations are given to these vague provisions and this may have detrimental effect on a country’s tax system, through limited compliance by taxpayers and punitive interpretations by the tax authorities. One key area of contention is the lack of clarity on the Phrase ‘sales in the ordinary course of business’, which the WHT Regulations issued pursuant to the Companies Income Tax Act and Personal Income Tax Act, have exempted from WHT. While the WHT Regulations lists certain transactions on which tax is to deducted, which include “all types of contracts and agency arrangements, other than sale in the ordinary course of business” (emphasis ours), the WHT Regulations neither defined nor provided any commentary on what constitutes a sale in the ordinary course of business. Recognising the likely impact of this ambiguity on taxpayers’ compliance with their WHT obligations, the Federal Inland Revenue Service (FIRS) attempted to provide some clarity on the phrase via the issuance of WHT Information Circulars in 1998, 2002, 2006 and 2009. Although the aim of the Circulars were to provide clarity and correct any ambiguity and misinterpretation with the operation of WHT in Nigeria, its effort to eliminate the controversy on what constitutes “sale in the ordinary course of business” further exacerbated the ambiguity. Taking the 2006 Circular as a case in point, the FIRS modified the provisions of the Regulations to “all types of contract and agency arrangements, other than outright sale and purchase of goods and property in the ordinary course of business”. While the introduction of these additional words by the FIRS may have sought to clarify the issue, it appeared to focus more on qualifying the word “sale”, rather than explaining the Phrase. Furthermore, the FIRS highlighted in the 2006 Circular that where a manufacturer delivers its normal products to its distributors and dealers for sale; and where a distributor earns income from their trading activities, such transactions are sales in the ordinary course of business and are not liable to WHT. In 2009, the FIRS issued another Circular and further attempted to clarify the ambiguity by subjecting “all types of contracts and agency arrangements” to WHT while deleting the ‘sale in the ordinary course of business’ exemption. While the modification in the 2009 Circular appears a quick fix, it is instructive to note that the Nigerian Courts have held that FIRS’ circulars are merely explanatory notes that do not carry the force of law and cannot modify the provisions of an enacted legislation.   Source: Mondaq

The new rules, originally set to come into effect from 1 October 2019 and now deferred for 12 months, mark a complete overhaul of the way VAT is payable on building and construction invoices. Under the domestic reverse charge the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS). Businesses need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cashflows for many affected businesses, as they will no longer get VAT payments from customers for services where the reverse charge applies. Some 150,000 businesses in the construction and building sector will be affected by the change. Now HMRC has issued a policy brief stating introduction of the new VAT regime will be delayed for a period of 12 months until 1 October 2020. It says this will give businesses more time to prepare and will also avoid the changes coinciding with Brexit. In July, a Federation of Master Builders (FMB) survey of around 8,000 SME construction firm members found that 69% were not aware of reverse charge VAT at all. Of those who were, 67% have not prepared for the changes, and the industry body warned of potential ‘chaos’ when the new regime started. During the twelve months before the charge now comes in, HMRC says it will focus additional resource on identifying and tackling fraud in the construction sector. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date. HRMC also said it recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed. Those businesses which have opted for monthly VAT returns ahead of the 1 October 2019 implementation date can reverse this by using the appropriate stagger option on the HMRC website. CIOT welcomed the announcement, saying it would lessen the likely flurry of disputes between suppliers and customers as to whether or not VAT should be charged. Linda Skilbeck, vice-chair of CIOT’s indirect taxes sub-committee, said:  ‘If the government had pressed ahead with a start this October we envisaged significant confusion amongst businesses, leading to disputes between suppliers and customers as to whether or not VAT should be charged. ‘It would have led to an additional influx of calls to HMRC’s phone lines, while HMRC and its call centres were already busy dealing with the implementation of Making Tax Digital, as well as the consequences of Brexit. ‘A start date of October 2020 is more sensible. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies. Such a campaign could include direct communications with businesses in the sector, particularly those registered for the Construction Industry Scheme, as well as improvements to the content and accessibility of guidance. ’The delay was also welcomed by Mike Cherry, national chairman of the Federation of Small Businesses, who said: ‘With small construction businesses already suffering due to unprecedented uncertainty, slowing growth and rising costs, this was clearly not the right moment to hit them with the reverse charge. ‘Small firms in this sector are already disproportionately impacted by late payments. Roll-out of this change without due care will make a bad situation worse, restricting cashflow and threating the futures of many.  ‘It’s also encouraging to see HMRC providing reassurances that those who’ve already changed invoice arrangements in preparation for the change will not be punished as a result of confusion following this late intervention.’ Alison Horner, indirect tax partner at MHA MacIntyre Hudson, said that while the 12-month delay is a welcome relief, it is frustrating for businesses which spent time and money to properly prepare. ‘The worst affected will be those sub-contractors who moved to monthly returns to get ahead of the changes. These sub-contractors will need to reverse their VAT return accounting dates as soon as possible, which HMRC have said they will facilitate,’ said Horner. ‘By remaining on monthly returns sub-contractors may find they have cash flow problems in funding an unexpected VAT payment to HMRC. They are the only ones who need to take immediate action. The rest can breathe a sigh of relief.’   Source: Investor king