Should You Pay the New FIRS Tax on Rent?

Should You Pay the "New"​ FIRS Tax on Rent?

In recent weeks the Federal Inland Revenue Service (FIRS) has directed landlords to commence charging tenants a six percent stamp duty on rental agreements. As expected, there has been emotive kickback in the press and social media on the timing of this “new” tax, giving the economic distress resulting from the Covid19 pandemic. However, very few have questioned the legality of this charge.

This article seeks to answer the following three questions: Can the FIRS unanimously impose a “new” tax? Is this rental tax based on established provisions in known tax legislation? And are there tax planning alternatives?

Can the FIRS unanimously impose a “new” tax?

The FIRS draws its powers from the FIRS Establishment Act of 2007. In Section 2 of this act, the object of the Service is stated be to “control and administer different taxes and laws specified … or other laws made from time to time, by the National Assembly or other regulations made by the Government of the federation.”

Based on the above, the FIRS role is simply administrative, overseeing compliance of relevant tax legislation. Therefore, the FIRS cannot simply order a “new” tax, as this will be beyond its powers and flat out illegal.

Is this rental tax based on established provisions in known tax legislations?

If the FIRS cannot impose a “new” tax, now what? Can they at least base this levy on already existing legislation? The answer is Yes and No.

The Stamp Duties Act (“SDA” or “this act”) is the primary legislation enacting stamp duties in Nigeria. The Finance bill of 2019, has however amended a few sections of this act. Based on this act, rent is clearly liable to stamp duties. But, what are the rates?

The tax rate schedule of the SDA specifies the following rates:

For Leases/rent under one year -
  1. where the rent does not exceed the rate of N50 a year the tax payable is a flat rate of 9 kobo
  2. where the rent exceeds the rate of N50 a year the tax payable is a flat rate of 39 kobo
For Leases between 7 and an indefinite number of years, the rates range between 0.78% and 6%. But 6%? Is this how the FIRS determined their “new” tax rate? - Possibly. It is worthy of note that 6% is the highest duty payable on rental agreements in excess of 21 years as per the SDA.

Are there tax planning alternatives?

The answer to this question is a resounding YES!!

To be on the safe side and avoid any unnecessary spectacle with the FIRS, tax payers can simply have all rental lease contracts, for periods under a year. As indicated above, for rental agreements under a year and above N50, the tax due will be a flat rate of 39 kobo.

Tax payers can simply have rental agreements for 364 days and pay 39 kobo to the FIRS*.

(*Please consult your tax consultant for personalized expert advice)

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