Reasons For Tax Disputes In Nigeria

Reasons For Tax Disputes In Nigeria

Reasons For Tax Disputes In Nigeria

The following are some of the reasons for tax disputes in Nigeria.

INTERPRETATION OF TAX LAWS
The recurring need for interpretation of tax legislations has become a major cause of dispute in tax administration. In instances where the tax authorities' interpretation of the tax laws differ from that of the taxpayers, disputes are almost inevitable.

For example, the Lagos State Internal Revenue Service (LIRS), in recent times, issued a series of public notices stating their position on some tax issues, relying on the provisions of the tax laws. This resulted in a number of tax disputes as some taxpayers had different views from the reading of the same provisions.

One of such notices is the LIRS' circular on Taxation of Employee Loan issued in 2017. In that circular, the LIRS relying on Section 3(1)(b) of the Personal Income Tax (PIT) Act mandates employers to remit Pay As You Earn (PAYE) Tax on Benefits-In-Kind (BIK) relating to employee loans. According to the LIRS, the BIK is to be calculated as the difference between the interest rate on the loan and an adjusted Monetary Policy Rate and PAYE Tax should be applied thereon.

A number of taxpayers have disagreed with the position of the LIRS as the law contains no provisions with respect to determining BIK on employee loans. Consequently, this has resulted in varying disputes with the LIRS.
While the tax authorities typically tilt towards interpretations that favour revenue drive, the taxpayers tilt towards interpretations that favour tax efficiency. This conflict in the motive of interpretations could result in disputes between the taxpayers and tax authorities.

INCONSISTENCY IN TAX AUTHORITIES' POSITION
Where the tax authorities adopt an inconsistent approach in dealing with tax issues, taxpayers are put at risk and this could result in tax disputes. In the case between Federal Board of Inland Revenue (FBIR) v Halliburton West Africa Limited (2014), the FIRS reneged from its earlier published circular on the tax treatment of recharges by non-resident companies and this resulted in a major tax dispute.

Although the Court of Appeal resolved the issue in the favour of the FIRS, stating that the FIRS' earlier position could not supersede the law, taxpayers still rely largely on the decisions and positions of the tax authorities to make certain business decisions. Where the tax authority is not consistent in its position, there is bound to be dispute.

INCONSISTENCY IN THE PROVISIONS OF THE LAW
Contradictions in the tax laws have frequently resultedin tax disputes. An example of this is Section 19 of the Companies Income Tax Act (CITA) on excess dividend tax, which has led to a number of tax litigations.

This is because the literal interpretation of Section 19 contradicts other provisions of the tax laws by allowing for the taxation of income that has previously been taxed or exempt from tax under the law. For example, Section 19 appears to contradict Section 80(3) of the CITA that restricts further taxation of franked investment income and Section 60 of the Petroleum Profits Tax Act that exempts dividends distributed from petroleum profits from further tax.

INABILITY OF TAXPAYERS TO KEEP RECORDS
Although the Companies and Allied Matters Act (CAMA) requires companies to retain their accounting records for a period of six years from the date they were made, many companies do not adhere to this rule. Similarly, our tax laws stipulate varying penalties for failure to keep books of account.

Failure to keep proper tax and accounting records could pose difficulties to a taxpayer in defending its tax position with the Relevant Tax Authority (RTA). It could also lead to inability to reconcile a taxpayer's record with the tax authorities' and this is a trigger point for tax disputes.

AUDITS/TAX INVESTIGATIONS
There are a number of dispute triggers which may attract the attention of the tax authorities during a tax audit or investigation. These triggers include situations where there is an inconsistency in a taxpayer's filings or where a taxpayer engages in aggressive tax planning. Other triggers include significant unutilized capital allowance, inconsistency in filing of tax returns, frequency of acquisition and disposal of qualifying capital expenditure, related party arrangements, significant Value Added Tax and Withholding Tax (WHT) receivables, high operating expenses ratio to revenue amongst others.

PROCEDURE FOR EXERCISE OF STATUTORY POWERS
The Nigerian tax laws vest certain powers on the tax authorities which could be exercised when taxpayers fail to fulfil their tax obligations. These include the power to issue "best of judgment" assessments, impose penalties, distrain taxpayers' properties and so on. However, these powers should not be exercised arbitrarily. Unfortunately, the tax authorities sometimes exercise powers granted to them in such a manner that lead to disputes with taxpayers.

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