excerpts from nigerias top

EXCERPTS FROM NIGERIA�S TOP

TABLE OF CONTENTS.GLOSSARY- Definition of Terms

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PREFACE- Excerpt from Organizers

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EXECUTIVE SUMMARY- The Past, Present and Future of the Industry

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INDUSTY OUTLOOKDeliotte - Technology � Telecommunication

PwC - FMCG�Multinationals

KPMG - Power

Andersen Tax - Manufacturing

Pedabo - Financial Services

Ascension - Oil � Gas

Mazars - Hospitality

Drudge Consulting - Real Estate

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Glossary

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AEBEPSCBNCCICGISCITCITACOACRS MCAACSRECAECCECCIECFFHCFIRSFIRSEAFSPFYGDPIMFITFLASWALIRSMPRMRRMTEFNDCCNECANEPCNIMASANIMCNIWANPPNSITFNTONTPOECDOPECPENCOMPFCPPTPPTAPSCRSARTASBIRSDATACTATTETTPVAIDSVATVCVOAYOA

Approved EnterpriseBase Erosion and Profit ShiftingCentral Bank of NigeriaCertificate of Capital ImportationComptroller-General of the Nigeria Immigration ServiceCorporate Income TaxCompanies Income Tax ActCourt of AppealCommon Reporting Standard Multilateral Competent Authority Agreement DMB Deposit Money BankCorporate Social ResponsibilityEmployees� Compensation ActExport Credit CertificatesElectronic Certificate of Capital ImportationEmployees Compensation Fund EEG Export Expansion Grant FG Federal GovernmentFederal High CourtFederal Inland Revenue ServiceFederal Inland Revenue Service Establishment ActFiscal Strategy PaperFinancial YearGross Domestic ProductInternational Monetary FundIndustrial Training FundLagos State Waterways AuthorityLagos State Internal Revenue ServiceMonetary Policy RateMinimum Rediscount RateMedium Term Expenditure FrameworkNegotiable Duty Credit CertificateNigeria Employers� Consultative AssociationNigerian Export Promotion CouncilNigeria Maritime and Safety AgencyNational Identification Management CommissionNational Inland Waterways AuthorityNational Petroleum PolicyNigeria Social Insurance Trust FundNigeria Tax OutlookNational Tax PolicyOrganization for Economic Cooperation and DevelopmentOrganization of Petroleum Exporting CountriesNational Pension Commission PFA Pension Fund AdministratorPension Fund CustodianPetroleum Profits TaxPetroleum Profits Tax ActProduction Sharing ContractRetirement Savings AccountRelevant Tax AuthorityState Board of Internal RevenueStamp Duties ActTax Appeal CommissionerTax Appeal TribunalTertiary Education TaxTransfer PricingVoluntary Assets and Income Declaration SchemeValue Added TaxVoluntary ContributionVisa on ArrivalYear of Assessment

In the quest to boost non-oil revenue, reduce budget deficit and end the country�s rising debt profile, Nigeria government increased the revenue target from tax remittance by ��.�� per cent from N�.�� trillion in �� to N�.� trillion in ��, the all-time highest the country will be remitting from tax in the review period.

Nigeria has a total public debt stock comprising external and domestic debts of the Federal Government, �� states and the Federal Capital Territory �FCT� at N��.�� trillion ��.��bn� in the third quarter of ��, this is an increase by �.�� per cent from N��.�� trillion ��.��billion� recorded in the previous quarter, Debt Management Office �DMO� disclosed.

Industry experts advise structural adjustment on the tax base and rate rather than tax target as Nigeria�s income tax at �� per cent is higher than most countries� income tax and its VAT at � per cent is lower than its peers.

The need to also increase indirect tax as a way to bring in the informal sector as mentioned in the country�s new national tax policy are areas for significant improvement by the fiscal and legislative authorities in Nigeria.

The country also needs more dynamism in case law reporting and publication of tax literature to spawn tax reform and improve tax education, tax administration and practice. The maiden edition of the Nigeria Tax Outlook Report therefore serves as a contribution in this regard.

In ��, the Federal Inland Revenue Services �FIRS� in line with improving the ease of doing business in Nigeria upgraded its online platform to perform a wider range of services to taxpayers. Some of the e-Services accessible online include taxpayer registration, payment of taxes, application for tax clearance, filing of taxes etc. It is expected that the functionalities of the platform will be upgraded to enable end to end compliance of the relevant taxes.

The country�s tax industry was more active in increasing revenue from tax remittance by broadening the tax compliance level in the country.

The Federal Ministry of Finance-initiated the Voluntary Assets and Income Disclosure Scheme �VAIDS�, an initiative that gives Nigerians with tax liabilities dating back to �� the opportunity to regularize their tax status by declaring and spreading payments over a maximum three-year period.

This led to a record high of N�.�� trillion remitted from tax as revenues in ��. Despite missing its target of N�.� trillion, the revenue generated is so the highest in the country�s history.

Although the FIRS revenue target of N� trillion may push the tax authority to devise various means possible in its tax generation drive.

This can be confirmed by the regulator�s recently action as it commenced sending out letters to banks appointing them as tax collection agents for taxes considered payable by their named customers.

In order to achieve this, the FIRS directed the relevant banks to place lien on accounts of businesses, corporate organisations and partnerships with an annual banking turnover in excess of N� billion, but without tax identification, to prevent them from drawing funds from the accounts until the taxes have been fully settled.

A compendium such as the Nigeria Tax Outlook Report will serve as a reference material and guideline for companies, tax administrators, practitioners and academics alike for whom the report will give an overview of what they are likely to expect from the tax industry in �� even as it relates to their individual sectors, as compiled from the country�s best tax advisory firms.

The Nigeria Tax Outlook,

powered by Taxhub and EAF Mgt Ltd

Preface


Nigeria recorded an increase in its �� tax activities both from the side of the regulators and corporates. The events were driven largely by the country�s quest to generate revenue to meet its budget deficit, as a result it increased tax compliance, widen the net and raise additional revenue.

The drive for a high tax revenue in the review year led to the extension date of the Voluntary Assets and Income Declaration Scheme �VAIDS� from the initial stated March �� deadline to June �� .

Other key tax and revenue highlights were the introduction of the Voluntary Offshore Assets Regularization Scheme �VOARS�, the release of the revised Income Tax �Transfer Pricing� Regulations �� the Regulations�, amongst other major activities in the year.

The efforts by the government to drive revenue through tax resulted to the all-time high tax revenue collection of N�.�� trillion in ��, out of which Value Added Tax �VAT� stood at N�.�� trillion for the first time.

Although, the country�s tax-to-Gross Domestic Product �GDP� ratio, that is the portion of a country�s output � domestic product� that is attributable to tax receipts, one of the most widely used tools for measuring the efficiency of a country�s tax system has remained stagnate at � per cent.

Nigeria�s tax-to-GDP ratio is relatively lower when compared to other developing economies like Ghana with ��.� per cent ratio and Kenya�s ��.� per cent and is also lower than the average for the �� African countries in Revenue Statistics which is ��.� per cent, as compiled from the Organisation for Economic Co-operation and Development �OECD�, an intergovernmental economic organisation with �� member countries.

Prior to ��, the highest revenue figure ever attained by FIRS was N�.�� trillion, in ��, when oil price hovered around ��-�� per barrel, but now remarkable, given that it was achieved at a period when oil prices averaged �� per barrel.

Oil component of the N�.�� trillion realised in �� reportedly stood at N�.�� trillion, representing ��.�� per cent while non-oil component contributed N�.�� trillion, representing ��.�� per cent.

Nigeria economy which is tied to crude oil price grow sluggishly in ��, this was despite a higher oil price of �� per barrel as against the all year highest of about ��.�� per barrel in ��, figures by OPEC shows.

Meanwhile, Nigeria emerged from its first recession in �� years, largely caused by low oil prices and militant attacks on energy facilities, in the second quarter of ��. The nation�s GDP grew by �.�� per cent for the full year ��, compared to its �.�� per cent in rate in ��, data by the National Bureau of Statistics �NBS� shows.

Overview Of NigeriaTax Industry

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The figure aligns with the projection of the World Bank Group and International Monetary Fund, which had projected that the economy will grow by �.� per cent in the review year.

According to the report, the �� fourth quarter GDP grew by �.�� per cent as against the �.�� per cent recorded in the third quarter. The figure is �.� percentage points less than the �.� per cent projected by the federal government in the ��-�� medium-term expenditure framework and fiscal strategy paper �MTEF�.

Figures from South Africa�s GDP report for Q� �� showed that it has overtaken Nigeria as Africa�s biggest economy in actual dollar terms.

A report by Renaissance Capital, a leading emerging and frontier markets investment bank, affirmed this as it showed that South African economy grew to �� billion in �� in GDP terms compared to Nigeria�s �� billion, using the N�� per dollar Nigerian Autonomous Foreign Exchange Fixing �NAFEX� window.

Nigeria ranked �� out of �� countries on the ease of doing business index in ��, a drop from �� ranking in the preceding year, as gathered from the World Bank group, which tracks the ease of doing business in different countries.

Other initiatives enacted by the Nigerian government included but not limited to; Transfer Pricing- the FIRS released the revised Income Tax �Transfer Pricing� Regulations �� the TP Regulations� which ushered in a Transfer Pricing �TP� specific penalty regime.

The TP Regulations repeals the Income Tax �Transfer Pricing� Regulations No. � �� the �� Regulations� and has an effective date of �� March ��.

In similar instant, the Federal Government approved an increase in the excise rates on tobacco and alcoholic beverages effective � June ��, via circular: ��II�� of � March ��. The revision introduces additional specific rates to the pre-existing ad-valorem rate for Tobacco �Cigarettes� and replaces the old ad-valorem rates for alcoholic beverages with specific excise rates.

It is expected that there will be a surge in the Federal Government�s revenue from these products.

One of the most recent activity by the FIRS is the issued Letters of Substitution, which is in pursuant to Section �� of the Companies Income Tax Act �CITA� �� and Section �� of the Federal Inland Revenue Service Establishment Act �FIRSEA� ��, to banks in Nigeria, which appoints them as tax collecting agents for certain listed customers maintaining bank accounts with such banks.

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Oil Revenue �N�bn�Non-Oil Revenue �N�bn�

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Tax revenue reached anall time high in �� with

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We are pleased to publish the maiden edition of the Nigeria Tax Outlook. The report is a compilation of the projections by Nigeria�s best � advisory firms in which they shared insight on various industry outlook for ��.

The edition provides information as contributed by the advisory firms on what Nigerian industries like; HNI�Family Wealth, Oil � Gas, Telecom � Technology, Manufacturing, Financial sector, Power Sector FMCG�Multinationals, Digital Economy �online Businesses� and Real Estate should expect in �� as it relates to tax planning as an effective strategy to cost management.

In the last two years, Nigeria tax environment has witnessed significant change and the sluggish rate at which the economy is growing at �.�� per cent in Q�� has increased the pressures on companies who are now looking for ways to reduce cost. While the regulator on the other hand is now forced to aggressively enhance revenue.

Thus, taxation, more than ever before has now become an issue to companies, Heads of Tax and Financial Heads as they are left with the burden to make critical changes that will strengthen profitability and risk management.

The aim of publishing this report is to therefore provide companies with guidelines as contributed by top advisers to be able to effectively manage tax risks and position their businesses for future success.

According to industry experts, companies that are able to master the delicate balance between cutting costs to survive and investing for potential future growth will be best positioned to take up emerging opportunities.

The Nigeria Tax Outlook Report will serve as an important and reliable reference material on important tax issues impacting business decisions.

This maiden edition of the report contains various subject matter that touches on; overview of the various industries featured in the report, tax implications, impact on taxpayers and tax authorities, projections and recommendation for the year ��.

The topics addressed in the report should add value to stakeholders if they proactively put into considerations the information shared by the foreword thinker before taking business decisions.

ExecutiveSummary

Founder,Nigeria Taxpayers Hub.

Elizabeth Aluko, ACIPM, MBA


Contributed to the Maiden Editionof the Nigeria Tax Outlook

Telecommunications� TechnologyExpert Analysis from Deliotte Tax ArmGlobally, information technology, a major aspect of telecommunications and technology industry �T�T Industry or the Industry�, has become an underpinning factor for business operations. Nigeria, being a developing economy, is also tending towards a digitized economy, with a rapidly growing T�T Industry, which has proven to be an important growth driver for the economy.

Today, many businesses in Nigeria leverage the output of the telecommunications industry to meet the needs of their customers. This ranges from innovative products in the financial services industry to on-line retail platforms, data analytics and transportation solutions.

In Nigeria, this Industry�s growth is driven by players in the different segments along the value chain with major players including mobile network operators, infrastructure and platform providers, device vendors, retailers and distributors.

According to the National Bureau of Statistics �NBS�, the telecommunications and information services sector accounts for about �� or NGN�.�trillion �US��.�bn� of the rebased gross domestic product �GDP�, approximated at NGN��.�trillion �US��.�bn�. Major players in the mobile network operators segment such as MTN Nigeria, Globacom Nigeria, Airtel and �mobile contribute largely to this data

The industry has witnessed a couple of developments, some of which are highlighted below:

�i� Release of draft regulations on electronic waste �E-waste� managementThe Nigerian Communications Commission �NCC� on �� January �� released a draft copy of the Nigerian Communications Industry E-Waste Regulations �� the Regulation�. The primary objectives of the regulation, amongst others, are to provide a regulatory framework for the management and control of E-waste and promote reuse, recycling and other forms of recovery of E-waste in the Industry. The Regulation applies to all types of electrical electronic equipment �EEE� and activities carried out by any person in relation to it. It is worth

Recent Developmentnoting that the Regulation provides for potential sanctions to concerned persons who violate the provisions of the Regulation.

�ii� Release of draft guidelines on disaster recovery

On �� January ��, NCC released the Draft Guidelines on Disaster Recovery for the Nigerian Telecommunications Industry, �� the Guideline�. The guideline seeks to address the major causes of communications system failures such as emergencies, disasters, terrorist or cyber-attacks, loss of infrastructure and network congestion.

The Guideline provides a mandate on disaster recovery plan for all


�� | Nigeria TaxOutlook ��

network facility and service provider.

�iii� Release of commercial satellite communications guidelinesNCC, on � December ��, released the Guidelines on Commercial Satellite Communications �GCSC�. This is to regulate the provision and use of all satellite communications services and networks, in whole or in part within Nigeria or on a ship or aircraft registered in Nigeria.GCSC applies to all commercial Satellite services, operators of space segments and earth stations, satellite gateway service providers, Global Mobile Personal Communications by Satellite �GMPCS� providers amongst others.

�iv� NCC licenses two more Infrastructure Company �Infraco� NCC approved two additional Infraco licenses in January ��. This approval was geared towards expanding broadband penetration in the Country. The licenses where granted to Zinox Technology Limited for South East and Brinks Integrated Solutions Limited for North East. These additional licenses are expected to improve the service providers� delivery to subscribers in these regions.

MTN - ��.�Airtel - ��.�Globacom - ��.��mobile - ��.�Others - �.�

Source: FitchSolutions � Nigeria Telecommunications Report

Mobile Market Share �in Millions�

There are various taxes applicable to the Industry. Some of the more common tax types have been examined below:

�i� Companies Income Tax �CIT� Companies under Nigeria�s tax net are to pay CIT at �� on the profits accruing in, derived from, brought into or received in Nigeria; and comply with the relevant filing obligations. CIT is generally assessed on a preceding year basis and in calculating the profit, companies are allowed to deduct from income:Ÿ All expenses incurred wholly, reasonably, excessively and

necessarily �WREN� in generating the taxable income;Ÿ An allowance for capital expenditure that passes the WREN test, at

a pre-determined percentageŸ Prior year losses that pass the WREN test

Companies resident in Nigeria are liable to CIT on their worldwide income and non-resident companies are liable to CIT on their Nigerian-source income. Furthermore there are filing obligations Noncompliance with these obligations �tax filing and payment� may result in imposition of penalties and interest.

�ii� Withholding Tax �WHT�WHT is an advance payment of CIT by the taxpayer from whose income the WHT is deducted. It only comes to play where the underlying income is subject to income tax. The applicable WHT rate, which ranges between �� - ��, depends on the type of transaction and the recipient. Details of qualifying transactions and the applicable WHT rates are set out in the table below:

Tax Considera�ons in theTelecommunica�on Industry

There are various taxes applicable to the Industry. Some of the more common tax types have been examined below:

�i� Companies Income Tax �CIT� Companies under Nigeria�s tax net are to pay CIT at �� on the profits accruing in, derived from, brought into or received in Nigeria; and comply with the relevant filing obligations. CIT is generally assessed on a preceding year basis and in calculating the profit, companies are allowed to deduct from income:Ÿ All expenses incurred wholly, reasonably, excessively and

necessarily �WREN� in generating the taxable income;Ÿ An allowance for capital expenditure that passes the WREN test, at

a pre-determined percentageŸ Prior year losses that pass the WREN test

Companies resident in Nigeria are liable to CIT on their worldwide income and non-resident companies are liable to CIT on their Nigerian-source income. Furthermore there are filing obligations Noncompliance with these obligations �tax filing and payment� may result in imposition of penalties and interest.

�ii� Withholding Tax �WHT�WHT is an advance payment of CIT by the taxpayer from whose income the WHT is deducted. It only comes to play where the underlying income is subject to income tax. The applicable WHT rate, which ranges between �� - ��, depends on the type of transaction and the recipient. Details of qualifying transactions and the applicable WHT rates are set out in the table below:

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�i� Tertiary Education Tax �TET�TET is payable by companies registered in Nigeria. TET is calculated at �� of assessable profits, as determined in line with the tax laws �Companies Income Tax Act or Petroleum Profit Tax Act�. TET returns have similar filing requirements with CIT, and are typically filed together with CIT returns.

�ii� Value Added Tax �VAT�VAT is charged on importation and supply of goods and services other than those goods and services specifically exempted by VAT Act �VATA�. Similar to most industries, businesses operating in the telecommunication industry are required by law to pay and charge VAT on VATable goods and services consumed and sold. The applicable rate is �� and �� for standard rated and zero rated supplies, respectively.

�iii� National Information Technology Development Levy �NITDL� NITDL is a levy paid by all telecommunications companies and service providers, cyber companies and internet providers, banks, insurance companies, pension managers and other financial institutions. It is levied at �� of profit before tax of the aforementioned companies with an annual turnover of over N��million and above. It is important to note that NITDL paid by eligible companies are treated as deductible expenses for tax purposes. Also, companies in the



Transaction Type

manufacturing sector do not pay NITDL.

�iv� Annual Operating Levy �AOL�This is payable to NCC annually by all holders of individual licenses � both Network Operators and Non-network Operators, issued by the NCC. Network Operators are required to pay �.�� of their net revenue while Non-network Operators are expected to pay �� of their net revenue for the relevant period.

Challenges Facing Taxa�on in theTelecommunica�on IndustryThere are several challenges that operators in the telecommunication industry face with respect to the application of taxes on their operations. Some of the major challenges are as follows: Non-deductibility of input VAT Typically, trading and manufacturing companies are permitted to recover VAT paid on raw materials and goods for resale �input VAT� from the VAT charged on the finished product �output VAT�. However, service companies including companies in the T�T industry are unable to recover through this mechanism � rather the VAT is added to normal expenses deductible under CITA.The non-recoverability of VAT incurred via the input-output mechanism is a major issue affecting profitability and it impacts the cash-flow of these companies negatively.

Multiple taxation and levies Telecommunications operators in Nigeria allege that the industry they operate in is faced with about �� different taxes and levies from the three different tiers of government � Federal, State and Local through various agencies. Some of these taxes include hawking permit, aviation clearance permit, building permit, right of way charges etc. While the government is within its right to impose taxes and levies on businesses operating in Nigeria, it is important for it to strike a balance and consider the negative effect these tax burdens have on businesses.

Requirement to obtain approval for deduc tibi l it y of technical�management feesSection �� of the Companies Income Tax Act �CITA� requires companies to get Ministerial approval before expenses incurred as management fees may be allowed as tax-deductible expenses. Considering the nature of their operations, telecommunication companies typically have to rely on foreign-source technical expertise as such expert knowledge may not be readily available in Nigeria. Consequently, operators in the Industry typically have to bear the additional burden of obtaining approval for fees paid �or to be paid� in respect of the transfer�acquisition of such expert knowledge from the National Office for Technology Acquisition and Promotion �NOTAP�. In recent times, NOTAP has been reluctant in granting approval for management fees on the grounds that the skills required to provide these management services are readily available in Nigeria.

Unusual business model and obsolete tax lawsSome of the current tax laws were enacted several years ago. These laws can be said to be old and containing provisions that do not reflect current economic realities. One of the laws and its inconsistency with business realities is CITA. CITA was last amended in ��. It does not address the impact of e-commerce and digital operations on income deemed to be derived from Nigeria

Recognition of VAT on interconnect charges Some operators in the telecommunication industry pay interconnect charges to other service providers�operators for using their networks to complete calls originating from their networks and terminating in such other networks. These charges are usually inclusive of VAT. In practice, the operators prefer to offset the VAT incurred on interconnect charges from output VAT charged to their customers for services provided. FIRS, in contrast, frowns at this practice and demands the full VAT on revenue earned from the customer, while insisting that the VAT incurred on interconnect charges be expensed in the statement of comprehensive income. This is not consistent with global best practice for operation of the VAT system.

Accounting for VAT - accrual or cash basis�In the telecommunication industry, operators such as the mobile service providers, receive cash from prepaid customers before recognising or earning revenue. The unearned portion of the cash receipts is regarded as deferred revenue �or unearned income� and reported as liability in the books of the companies. It may be argued that VAT is due on prepaid revenue�cash receipt since VAT is invoice based. This position is supported by the FIRS due to its preference that companies should account for VAT on cash basis rather than accrual basis preferred by the Industry. However, in other segments of the telecommunication industry such as the infrastructure providers who are engaged in major construction, FIRS prefers such companies to account for VAT on an accrual basis. This is because revenue is usually earned by the companies before cash is collected. The lack of consistency on the part of FIRS regarding the preferred basis of VAT accounting usually creates major conflicts between the operators and FIRS during tax audit exercises.

2019 Projec�ons from the Telecommunica�ons Industry

Nigeria achieved of over �� percent broadband target in December ��. This means a total of about �� million subscribers were connected to the internet through �G and �G networks out of �� million internet subscribers in Nigeria�s telecom networks. Stakeholders in the telecommunications industry are optimistic for significant business growth and deeper penetration of �G in ��. Some of the major projections for �� are highlighted below:

�I� Growth in total mobile phone subscribers The mobile market is expected to experience �� growth in number of subscribers over prior year. The below shows the projected growth over a period of five years.

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The projected growth is expected to be a continuous recovery after the market decl ine in ��, which occurred due to the implementation of the regulations governing the definition of active mobile customers.

�i� �G subscription Similar to the mobile subscription, �G subscription is also expected to experience growth over the next � years and a decline from �� due to the expected penetration of �G into the market.

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Conclusion & Recommenda�onsThe issues identified above are proofs that there is a wide gap between current business realities and the provisions of our current tax laws. While businesses have continued to evolve, the tax laws have not been sufficiently amended to address the new business exigencies and realities.

In order to address the challenges that are currently being faced in the telecommunications industry, the following steps, among others, may be taken:Ÿ Amendment to the tax laws � As earlier stated, business realities have changed substantially in the last ten years. This has made it

imperative to amend our tax laws. In their current form, our tax laws are unable to capture the evolution in the operations and business models of companies, including operators in the telecommunications industry.

Ÿ Fair and equitable tax system � One of the principle of a good tax system is fairness and equity. It was on this backdrop, amongst others, that the National Tax Policy was developed and subsequently revised by the Federal Government of Nigeria is ��. The discriminatory provision in VATA, for instance, as it affects the claim of input VAT in service industries has created a lot of controversies. The service industries must be given the opportunity to claim input VAT in the same manner as companies operating in the trading and manufacturing sectors. Several countries of the world, such as the United Kingdom, South Africa and even Ghana, do not have provisions restricting recoverability of input VAT from output VAT.

The telecommunication industry has been and remains one of the symbols of successful policy implementation stories of the Federal Government of Nigeria in the last decade. Therefore, to the extent that the Industry continues to be at the frontier of major economic initiatives of the government at various levels, friendlier tax practices can only help to enhance productivity and investment in the Industry and the Nigerian economy at large.

PartnerDeliotte

Olukunle Ogunbamowo

Contribu�ons from:



Senior Manager Deliotte

Asiata Agboluaje

FMCG�MultinationalsExpert Analysis from PwC Tax Arm

The Fast-Moving Consumer Goods �FMCG� industry represents one of the largest industries worldwide. Also labelled the consumer packaged goods �CPG� sector, it is mainly characterised by companies that supply low-cost products that are in constant high demand. Products classified under FMCG include food, beverages, personal hygiene products, household cleaning utensils, etc. The term �fast moving� stems from the fact that FMCG products usually have short shelf life and are non-durable.

Nigeria�s FMCG industry has faced many challenges in the last four years. The decline in consumers� purchasing power due to the decline in global oil prices in �� and the disruption in oil production in the Niger Delta negatively affected the sector. The sector experienced a fall in patronage, production, turnover and profit margins. The total contribution to GDP of the FMCG sector remained flat at �.�� in �� relative to the Agriculture, Trade, and ICT sectors which have a contribution to GDP of ��.��, ��.��, and ��.�� respectively. We expect the continued growth in GDP �although still fragile�, accelerated implementation of the �� budget and election spending to support expansion in volume performance. This, combined with the relative stability in the FX environment and continued cost curtailment efforts, may lead to a positive performance by players.

Factors Affec�ng the FMCG Industry PopulationThe continuous growth in Nigeria�s population has made the Nigerian FMCG market attractive with a wider access to increased customer base. A UN report projected that, by ��, Nigeria will become the world�s third largest country by population with a population of over �� million. Whilst this rapid population growth poses a threat to some parts of the economy, there is strong growth potential for the FMCG sector.

Logistics Remains a BottleneckNigeria continues to rank low in the World Bank�s Logistics Performance Index. The country dropped �� points from a rank of �� in �� to a rank of �� in �� out of �� countries. This is an indication of worsening supply and distribution processes. Companies operating in the FMCG sector continue to face logistics issues especially with importation of goods into the country. There has been consistent congestion along the road leading to the major port of entry causing the Apapa gridlock.

Foreign Exchange StabilityIn April ��, CBN introduced the Investors � Exporters� Foreign Exchange window �IEFX� in a bid to boost liquidity in the forex market. The monetary policy has helped maintain a stable and competitive exchange rate environment. FMCG companies are now able to import new technology, machinery and purchase raw materials at a stable exchange rate.

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Source: NBS, UN, PwC Analysis



Strategic Acquisitions and PartnershipsFMCG companies are constantly investing and making strategic decisions to achieve efficiency and gain higher market share. A number of companies have also improved their operational efficiencies by incorporating backward integration. For example, Flour Mills� embarked on a strategic partnership with Corteva Agrosciences for maize hybrid seed development and PZ Cussons invested in oil palm plantations to mention a few. We expect this trend to continue in this sector.

Regulatory Compliance Companies continue to face challenges in complying with regulations. There is limited transparency in regulatory requirements, lack of synergy amongst the various Ministries, Department and Agencies �MDAs� of government. For example, companies in the FMCG industries and multinationals are facing challenges in getting their Management and Technical Service agreement approved by the National Office for Technology Acquisition and Promotion �NOTAP�. This has an adverse effect on the tax liability of such organisations as they are unable to claim a deduction for such expenses.

2018 Tax Reforms that will Shape 2019 forMul�na�onals and Players in the FMCG Industry

Tax ReformsRevised Approved List of Pioneer Industries and ProductsThe Federal Government in its drive to diversify the economy and attract investment to select sectors of the economy, on � August ��, approved the inclusion of �� new industries to the pioneer list. About � products from the new list are FMCG products. They include; processing and preservation of meat�poultry and production of meat�poultry products, manufacture of starches and starch products, processing of cocoa, manufacture of animal feeds, manufacture of household and personal hygiene paper products. This implies that companies involved in the production of any of these products can apply for the pioneer status incentive and obtain tax exemption.Pioneer status is an incentive provided under the Industrial Development �Income Tax Relief � Act and administered by the Nigerian Investment Promotion Commission �NIPC�. Under this incentive, eligible companies are exempted from income tax for a period up to five �� years, three �� years in the first instance, and may be extended for a period of one �� or two �� years. The NIPC has also embarked on a number of reforms that will make the application and approval of pioneer status request seamless.

Inauguration of New Tax Appeal Tribunal CommissionersThe Honourable Minister of Finance in ��, after � years expiration of the tenure of the last commissioners appointed the Tax Appeal Commissioners as members of the Tax Appeal Tribunal �TAT� sitting in the six geopolitical zones of Nigeria, Lagos and Abuja for ease and accessibility by taxpayers. It is expected that all pending cases by companies in the FMCG industry and multinationals will be resolved on time with the inauguration and companies can take a more certain position on grey tax areas based on decisions of the tribunals.

FIRS e-Service PlatformThe Federal Inland Revenue Services in line with improving the ease of doing business in Nigeria upgraded its online platform to perform a wider range of services to taxpayers. Some of the e-Services accessible online include taxpayer registration, payment of taxes, application for tax clearance, filing of taxes etc. It is expected that the functionalities of the platform will be upgraded to enable end to end compliance of the relevant taxes for FMCG companies and multinationals.

Increase in Excise Duties on Tobacco and Alcoholic BeverageThe President of the Federal Republic of Nigeria, on the recommendation of the Tariff Technical Committee of the Ministry of Finance, approved an increase to the excise duties on tobacco and alcoholic beverages effective � June ��. With the diminishing revenue from oil and accruing national debts, this is in line with the government�s objective of generating more revenue from other sectors to sustain the economy. This implies that the price of these items may increase to accommodate the increase in excise duties.

�� was an active year from a transfer pricing �TP� perspective. As expected, the FIRS continued to audit the TP practices of Nigerian taxpayers.The FIRS also notably introduced two new legislation which will impact the TP compliance landscape for taxpayers with intercompany transactions, as well as those who belong to �multinational� groups. The first was the revision of Nigeria�s TP rules via the introduction of the Income Tax �Transfer Pricing� Regulations, �� TP Regulations�. The second was the introduction of Nigeria�s Income Tax �Country by Country Reporting� Regulations, �� CbCR Regulations�.

The TP Regulations provide guidance on the application of the arm�s length principle to the pricing of intercompany transactions, while the CbCR regulations imposes specific reporting obligations for members of multinational groups �including members of groups originating from Nigeria and subsidiaries of foreign groups�. The major provisions of both regulations which will likely impact the operations of players in the FMCG industry and multinationals are provided below.

TP RegulationsThe TP Regulations are effective for financial years commencing after �� March �� and include a number of changes that reflect the FIRS� recent learning from the OECD and other African jurisdictions. Some of the changes include:

Introduction of significant penalties for non-compliance �most of Ÿ

the penalties are a minimum of � �� million in the first instance�;Prescription of specific rules for the pricing of common Ÿ

transactions, including: commodities and intangible assets �IP�; Introduction of specific documentation requirements for Ÿ

procurement transactions.

Transfer Pricing Reforms

The Income Tax (Transfer Pricing) Regula�onsNo. 1 of 2012 (TP) Regula�ons was issued in August

2012 to complement the general an�-avoidanceprovisions in the various tax laws (CITA, PITA and PPTA).

The Regula�ons are applicable to accoun�ng periodscommencing a�er August 2012.

TRANSFER PRICING REGULATIONS



Commodity RuleThis rule will likely impact companies in the FMCG industry that import or export commodities from�to their related parties. The rules provide that in the first instance FIRS will determine the arm�s length transfer price in such transactions by referring to quoted price for similar commodities on recognised commodity exchanges on the date that the transaction took place between the related parties. Also, in situations where exported commodities are resold at a higher price �sale price� than the quoted price by a related party to a third party buyer, FIRS will deem the transfer price between the Nigerian exporter and its related party to be the sales price agreed between the third party buyer and the reseller. Finally, FIRS will only accept adjustments to the quoted price where taxpayers provide sufficient information that demonstrates that adjustments to the quoted price are consistent with the arm�s length principle.

Intangible Asset RuleCompanies in the FMCG industry are known to rely on IP �i.e. know-how, trade secrets, trademarks etc.� in their production processes. The right to exploit these IP is typically procured from related parties. The TP Regulations provide that rather than relying on terms of license agreement to determine the arm�s length remuneration for IP, FIRS would perform an analysis to determine the role�s� the licensor plays with regards the development, enhancement, maintenance, protection, and�or the exploitation of the IP. Further, the rules also controversially provides that tax deductions for royalty payments will be limited to �� of earnings before interest, tax, depreciation and amortization �EBITDA�, and the royalty.

Customs ValuationClosely linked to the commodity rule is the fact that FIRS will no longer automatically accept prices applied for customs valuations as the arm�s length price for transfer pricing purposes.

Document Requirement for ProcurementThe TP Regulations provide that in transactions where a related party �intermediary� procures goods or services from a third party on behalf of its related party, the related party is required to maintain invoices, contracts etc. issued by the third party to the intermediary as part of its TP documentation.

CbCR RegulationsThe CbCR Regulations have an effective date of � January �� and require Nigeria-headquartered groups that have operations in more than one country; and who�s consolidated group revenues in the preceding accounting year surpass �� billion to prepare and file annual CbC reports which disclose the group�s global financial and tax information on a country-by-country basis to the FIRS. The CbC report is required to be; prepared by the group�s ultimate parent entity �or a member of the group appointed as a surrogate�; and submitted with the FIRS no later than �� months after the end of the year for which the CbC report relates to. Prior to filing the CbC report, all members of affected Nigerian groups are expected to notify the FIRS of the identity of the member of the group that is responsible for preparing the report. This notification is due to be filed no later than the last day of the group�s accounting year end. On the other hand, Nigerian subsidiaries of foreign groups are required to file the annual notification with the FIRS no later than the last day of the group�s accounting year end.Failure to file the CbCR notification exposes affected taxpayers to a penalty of �� million in the first instance and � ��,�� for every day default continues. Late filing of the CbC report will attract a penalty of � ��million in the first instance and � �million for every month in which default continues.The first set of CbCR notifications �for groups with �� December accounting year-end� were due �� December ��. Affected groups with similar accounting year-ends will file the relevant CbC reports in ��.

Implica�ons Of The 2018 Reforms On Stakeholders

Implications of Tax Reforms on TaxpayersIt is expected that the various reforms being put in place by the Federal Government will improve the ease of paying taxes and the ease of doing business.

The FIRS revenue target of N� trillion will push the tax authority to be overly aggressive in its tax generation drive. The FMCG sector should expect more scrutiny on input VAT that will be allowable as a deduction and other tax deductions. In recent time, the tax authority has been reading tax provisions more closely and this may lead to the

rejection of previously allowed tax treatments.

The tax authority will be more aggressive in its approach to tax audits and investigations. As a result of this and the continuous introduction of numerous guidelines and public notices by the authorities, some of which have no legal backing, we expect an increase in tax disputes. Corporate leaders should ensure adequate tax strategies are put in place to enhance transparency in tax management. Companies who fail to comply with these laws�directives are likely to face business disruption, reputational damage, and financial loss amongst others.

CUSTOMS AND EXCISE DUTIES

This is charged on the sale or produc�on ofspecific goods produced within Nigeria.It is governed by the Custom and Excise

Management Act (CEMA) and severalother Acts and Regula�ons rela�ng

to customs and excise ma�ers.

Unit Cost Analyses (UCA) are agreed periodicallywith the Nigeria Customs Service. There are no

filing requirements, however manufacturersare required to keep the following records ofmanufacture and return (a) Material Register

(b) Opera�on Register (c) Finished Product Register.

FILING REQUIREMENTS s125



The introduction of the e-service portal by FIRS has minimally reduced the turnaround time for completing specific tax compliance tasks. For the platforms to have optimal effect on tax administration and compliance, the tax authority will have to upgrade the e-services platforms to enable end-to-end compliance processes for the various taxes and eradicate the frequent downtimes currently experienced by taxpayers.

Implications of the TP Reforms on Taxpayers and MultinationalsThe most obvious implication for taxpayers is the likelihood of being penalised for non-compliance. The FIRS has already shown its hand in this regard by issuing a public notice in October granting taxpayers a brief period �about � months� to comply with their TP obligations for previous years. This resulted in a scramble by taxpayers to meet the �� December deadline that was given. Although the legality of introducing TP related penalties by way of regulations are debatable, our view is that �� will see taxpayers begin to take TP compliance as a priority in a bid to avoid penalties.With regards to the commodity rule, the burden of proof on taxpayers will increase as they will be required to prepare and maintain detailed analysis that justify the pricing of commodity transactions. Where these are not available, there is the risk that the transfer prices applied will be adjusted to the quoted price, which could result in additional tax. This is also the case with regards to procurement arrangements.

Similar to the provisions on the TP penalties, our view is that the controversial cap on royalty payments for intangibles will result in considerable disputes between taxpayers and the FIRS. Again, there

are questions about the legality of introducing such a cap via regulations, and most importantly there is the issue of whether the �� cap is consistent with the arm�s length principle.

Overall, our view is that there will be an increase in the number of disputes between the FIRS and taxpayers in ��. This would likely put a strain on the FIRS� limited TP resources. Implications of the Reforms on the Government The various levels of government will be working towards increasing tax revenue. The Federal Government has shown desire to increase the number of people in the tax net and subsequently increase the tax contribution to the Gross Domestic Product �GDP� ratio. Government will go after tax defaulters and impose severe penalties. The recent substitution order on banks to freeze bank accounts of taxpayers is an indication of what the FIRS can do to achieve its revenue target. Although the order was temporarily suspended, it is expected that the FIRS will continue to use the provisions of the law to ensure tax compliance and increase tax revenue.Various tax incentives introduced by the government will attract investors to the targeted sectors of the economy. The recent executive order introducing Infrastructure Development and Refurbishment Investment Tax Credit Scheme is a way to engage the private sector in infrastructural development. We expect that the government will address the various bottlenecks that may arise from the implementation of the order and expand its coverage accordingly.

Conclusion & Recommenda�onsTaxpayers must ensure that they are fully compliant with all relevant taxes and regulations. Considering the revenue target of the FIRS for ��, it is expected that there will be increased level of aggressiveness from the tax authorities. Furthermore, taxpayers are encouraged to attend to all tax assessments promptly and keep appropriate records of their tax affairs in case of a desk review or audit by the tax authorities.

The tax authorities on the other hand, must ensure its powers are exercised in accordance with the extant laws to avoid negative impact on businesses. The tax authorities should also adopt a risk based approach to tax audits and investigations to reduce the cost of collection. The tax authorities should consult more widely with relevant stakeholders before introducing new rules, regulations and circulars.

Manager, Tax Reporting andStrategy PracticePwC Nigeria.

Oluseun Akinrinoye Senior Associate ,Transfer Pricing PracticePwC Nigeria.

Olanrewaju AlabiAssociate , Nigeria�s GeneralTax Services PracticePwC Nigeria.

Oluwatoyin Obateru




PowerExpert Analysis from KPMG Tax ArmThe power sector in Nigeria has witnessed significant evolution from the days of the Electricity Corporation of Nigeria �ECN� in the ��s to the Nigerian Electric Power Authority �NEPA�, which held sway from the ��s up to the ��s. The Power Holding Company of Nigeria �PHCN� took over the burden of providing power to Nigerians briefly from NEPA until �� when it was broken into � generation companies �GenCos�, � transmission company �TCN� and �� distribution companies �DisCos�. This was consequent upon the passage of the Electric Power Sector Reform Act �EPSRA� in the same year. However, one thing that has remained constant is the erratic supply of power to Nigerians.The EPSRA provides the basis for the subsequent privatization of the Discos and Gencos, which were wholly owned by the Federal Government. Private investors obtained majority shares in the Discos and Gencos and took control of their management at the end of ��. TCN remains completely under Government control. The successor firms of PHCN have continued to dominate the power sector today especially in the distribution sub-sector where the �� Discos have a near monopoly in their franchise areas. Nigeria has also struggled to bring on board grid power since �� as Azura�s ��Mw capacity plant remains the only on-grid success story in the � years since privatization. The reason for this is not far-fetched. The power sector has struggled to generate sufficient cash flows to stabilize, not minding capital investments which are necessary to revive a sector which suffered from decades of poor funding and neglect from Government. The total indebtedness of the Discos is alleged to be between �� billion Naira and � trillion Naira as at the end of ��. This is clearly unsustainable especially when you consider the fact that the entire on-grid industry is serviced through collections by Discos.

A lot has been said about the significantly high collection losses experienced by the Discos and their resort to estimated billing as a means to recover as much as possible from the small number of paying customers. However, the Discos would still be unprofitable and might struggle to raise cash to cover their costs and investment needs if they were able to totally eliminate collection losses. Electricity tariffs in Nigeria are not cost-reflective and Discos are in a unique position where they sell their goods �or service depending on which side of the divide you are on � we will get to it shortly� at a price lower than the cost price. Nigerians had spent years getting erratic power at a subsidized cost. It was therefore believed that they might be unwilling to pay an increased amount until they could see the benefit from the privatization exercise. Therefore, the plan was to progressively increase the tariff over time until Discos could charge tariffs that enable them recover their cost and make a profit from the sale of electricity to consumers. This should also tally with improved power supply, as one of the gains of the privatization exercise. However, there was no actionable plan to deal with the shortfall in the meantime and this has continued to build � years after privatization. Also, the much vaunted improvement in power supply, which was supposed to herald the increase in tariffs, is yet to materialize. Therefore, as it was in ��, any increase in tariff may still be met with stiff opposition from consumers.

It is no wonder that the on-grid subsector has struggled for new entrants since ��.


��| Nigeria TaxOutlook ��

Mini-grid and Off-grid DevelopmentsThese have, however, opened a new vista of opportunities in the sector. The release of the mini-grid regulation of �� by the Nigerian Electricity Regulatory Commission �NERC� has led to significant growth in the number of off-grid and mini-grid solutions. These solutions were, at the beginning, restricted to areas which were underserved or not served at all by the grid. However, this is changing with the declaration of the eligible customer regime by the Minister of Power as provided under the EPSRA.Discos would no longer have distribution monopoly in their franchise areas under the regime. Any company with the ability to supply power can now enter into contract with a buyer or group of buyers willing and able to pay for the power, provided certain conditions are satisfied. The energizing economies program of the Rural Electrification Agency �REA� has also contributed to the growth of mini-grids and off-grid solutions in urban areas. The program encourages the set-up of mini-grids in large markets in urban areas. These markets typically require significant amount of power which should normally be provided by the Discos but because of the erratic supply, generators have taken over this responsibility. Consequently, REA has partnered power companies to set up mini-grids in these markets to meet their power needs. Over �� market projects are currently at different stages of development.

Recent Developments

20 million Householdsare without Power

in Nigeria

�Source: Azura Power Holdings

REA also estimates that the establishment of mini-grids in the country could open up access to untapped revenues of about US��billion annually which would ordinarily be spent running private generators. This has encouraged a number of companies to begin to actively explore opportunities to generate and supply power to willing customers within the urban areas. The Discos are also scrambling not to be left behind as they may be hit the hardest by this development if they do not react appropriately.A number of Discos are therefore considering entering into some form of partnerships with the mini-grid developers. The developers would have access to the Discos� network and would take power from the Discos when it is available. Otherwise, they will generate their own power. This should serve to potentially reduce the tariffs payable by the customers �it would be higher than the Disco�s tariff but lower than the tariff that would have been paid if the mini-grid developer was the sole supplier� which should appeal to the customers and keep the Discos relevant in the new scheme of things. Also, the Disco would invoice and get payment from only one customer �the developer� rather than the multitudes of customers in the area; thus helping it manage its collection issues. This appears like a model that should continue to gain traction in �� and beyond.The provision of solar-powered home systems has also witnessed significant growth over the past year and is expected to continue in the New Year. The systems range from the fixed home systems which encompass the laying of solar panels on roofs or elevated areas to the mobile systems. Low to mid-income earners and people, who live in dispersed communities without the ability to pool resources together and attract a mini-grid or off-grid developer, will continue to rely on this source of power.

Power Sector Recovery PlanBut do all these developments portend the end for on-grid power� Surely not� The Government, in conjunction with the International Finance Corporation �IFC�, has crafted a Power Sector Recovery Plan �PSRP� which is meant to put the on-grid sector back on solid footing if and when it is implemented. The plan seeks to address the perennial cash shortfall challenge in the industry and provide a basis for improved investments across the on-grid value chain. This will be followed by gradual increases in tariffs �hopefully backed by increased efficiency in the sector� until cost reflective tariffs and improved supply are achieved within the timeline covered. Unfortunately, the plan is yet to see the light of day and this may not be unconnected with the political situation in the country.It is our expectation that the Plan will finally get off the ground at some point in ��.

Meter Asset Provider Regulations and Estimated BillingThe introduction of the Meter Asset Provider �MAP� Regulations last year may also provide a source of optimism for the on-grid subsector. The Regulation provides for the supply, installation and maintenance of electricity meters by third-parties. The current metering gap in the distribution segment presents a huge economic opportunity for the MAPs and hopefully its implementation will go a long way in addressing the collection loss issues faced by the industry. Its introduction is also timely as the National Assembly is currently considering a Bill which seeks to criminalise the issuance of estimated billing, which may negatively impact the Discos.There has also been some Government investment in the transmission network as the official numbers now show a transmission capacity of about �,��MW, compared with a generation and distribution capacity of �,��MW and �,��MW, respectively. The on-grid subsector may not be thriving at the moment, but it is far from being dead just yet�

Tax IssuesMinimum TaxBenjamin Franklin once said only two things are certain in life � death and taxes. This statement has seemed pretty apt for the on-grid subsector of the power industry that has been plagued by tax issues since take over, such that they may feel that only death can extinguish some of these issues. As at today, none of the Discos has earned a profit though some of them have been exposed to minimum tax payments, which have been substantial due to the basis of computation. A number of them have applied for and obtained pioneer status incentive �PSI� which has kept them from paying the minimum tax but, it is debatable if the PSI was established to save struggling companies from paying minimum taxes �which is symptomatic of a company making losses or at least not realizing the full value of its assets� as opposed to providing a platform for profitable companies to make additional investments from the significant tax savings. There has been a lot of talk about changing the tax laws in the country and the provisions on minimum tax is one of those under consideration. We therefore hope that succour, albeit belated, will come for these companies in ��.

This is governed by Regula�ons issued by theNigerian Electricity Regulatory Commission (NERC)

in 2013. The Commission exercises its powersto make Regula�ons under Sec�on 32(1) and 96

of the Electric Power Sector Reform Act 2005.

LOCAL CONTENT REGULATION



Value Added Tax �VAT�Another tax issue that has plagued the industry is the treatment of VAT. The first question is whether electricity is a good or service. The answer to this question is very important as it provides insights as to whether the players in the value chain would be able to recover any allowable input VAT incurred. This argument has more or less been settled in favour of goods. How will Discos with significant collection losses be able to recover any VAT, if charged by the Gencos �through the Nigerian Bulk Electricity Trading �Plc�� This appeared to be a herculean task so it was no surprise when the Ministry of Finance in conjunction with the Federal Inland Revenue Service �FIRS� issued a draft VAT modification order which sought to eliminate VAT at all levels in the value chain, except at the final consumer level. Unfortunately, the Order is yet to be signed. This may also be a fortunate event if you operate outside of the on-grid subsector as the Order seems to suggest that it would only cover the traditional on-grid channels. The supply of power outside of those channels, which has continued to grow, may not be covered. It is therefore important for this to be addressed and the scope of the Order expanded to include the ever changing landscape of the Sector before it is finally issued, hopefully, in ��.

Import dutiesThere is also the issue of the application of import duty and VAT on imported components of the solar powered home systems. The Renewable Energy Association of Nigeria �REAN� had, in ��, raised an alarm that the Customs Authority were refusing to apply any waiver on imported solar panels if they were part of a complete system. This was especially challenging as it is difficult to separate the panels from the system without increasing the cost of freight and other relevant charges significantly. At the end, companies which attempted to do so, incurred additional cost significantly more than the import duty saved. They therefore appealed to the Government to issue clarifications to the Customs Authority on the application of the waivers. This issue has remained largely unresolved though we are optimistic that the issue would finally be resolved one way or the other, given the continued influx of new players into that space.

End �user Incentive FrameworkOne issue which has been discussed intermittently, but with little traction so far, is the lack of end user incentive for off-grid renewable energy solutions. All the incentives so far �where they exist� have been focused on the suppliers with the expectation that the savings from their application will be transferred to the consumers. It is difficult to judge if this has been the case so far. Also, the objectives of companies differ and they may decide to apply those savings in other areas of their business rather than transfer them to customers. It has therefore become necessary for Government to begin to consider developing an incentive framework targeted at encouraging large users of power to invest in off-grid renewable energy solutions. This will help in reducing the pressure on the grid, and aid Government in meeting its clean energy commitments. It is, however, difficult to determine if these proposals will see the light of day in ��.

Relationship with the Tax AuthoritiesThe FIRS have set a very stiff budget for ��; so it is our expectation that they will retain the level of aggression that we have seen over the last few years. Given the cash flow challenges that power companies have faced over the years, it will not be surprising to see a number of them placed under immense pressure by the FIRS through threat of enforcement and warrant of distrains. However, this would not solve the issue. The issues faced by companies in the Sector run very deep and the tax authorities may need to show a bit more understanding especially with accepting staggered payments of established liabilities. It is also important for them to continue to develop knowledge of the workings of the industry as this will go a long way to eliminating some of the areas of conflict that have occurred over the years. The Sector was solely in the hands of Government for a very long time; so it escaped significant scrutiny from the tax authorities. It is therefore understandable that they may require some time to come to terms with its operations especially from a tax perspective. This, however, would only happen if sufficient investment is made in developing the required technical knowledge and skillset.

Conclusion & Recommenda�onsThe key players in the industry have spent years waiting on Government to provide solutions to the multitude of problems plaguing the industry. These problems still exist for the most part but a number of the players are developing more and more innovative solutions which allow them to evolve and move closer to sustainability and profitability. A lot of these efforts will come to the fore in ��, which should be a critical year for the industry. �� is the year the Sector finally sinks or swims. I am not a betting man but I think that the industry will swim. The Sector has reached rock bottom and is slowly finding its own level at the moment. It should be a level that takes it above water�


Associate Director ENR Tax, Regulatory � People ServicesKPMG Nigeria

Martins Arogie Senior AdviserENR Tax, Regulatory � People ServicesKPMG Nigeria

Kelechi Inyama



ManufacturingExpert Analysis from Andersen TaxThe Nigerian manufacturing sector is one of the six priority sectors of the Nigerian economy and it comprises of thirteen sub-sectors. Over the years, Nigeria�s manufacturing sector has struggled to maintain progressive productivity. This is evidenced by Nigeria�s high import of manufactured products and low export of processed goods. According to the National Bureau of Statistics �NBS�, non-oil exports have averaged �� of total exports in the past three years, while the percentage of imported manufactured and processed products increased from �� of total imports in �� to �� in ��.Although the manufacturing sector recorded an annual growth rate of �.�� in ��, its contribution to Gross Domestic Product �GDP� growth of �.�� in the year is still abysmally low when compared to countries like South Africa, Morocco and Indonesia where the manufacturing sector contributes ��, �� and ��, respectively to GDP.There has been a number of reforms by the legislature and the executive to address the issues plaguing the manufacturing sector in order to improve the sector�s performance.This article examines a number of these reforms while discussing some of the issues that have plagued the sector. It also concludes with some recommendations for the revitalization of the manufacturing sector.

The Economic Contribu�ons, Challenges & Opportuni�es of the Manufacturing SectorPrior to ��, Nigeria�s manufacturing sector experienced rapid growth by an annual average of �� for over a decade. This growth rate was largely driven by increasing consumer demand and the rebasing of the GDP that was done in ��. The scope of the manufacturing sector was expanded to include �� subsectors, namely: Oil Refining; Cement; Food, Beverages and Tobacco; Textile, Apparel, and Footwear; Wood and Wood products; Pulp Paper and Paper products; Chemical and Pharmaceutical products; Non-metallic Products, Plastic and Rubber products; Electrical and Electronic, Basic Metal and Iron and Steel; Motor Vehicles and Assembly; and Other Manufacturing.However, the growth rate of non-oil exports and manufactured goods has remained low given the increase in impor ted food items�manufactured products despite the recorded growth. Imports have also remained the dominant source of inputs into food, beverages and tobacco products in Nigeria, accounting for more than �� of all raw materials. Between �� and ��, the manufacturing sector witnessed a sharp decline in productivity with a negative growth rate of �.�� in ��.


Annual GDP Growth Rate in the Manufacturing Sector

��

-��

-��

-��

-��

-��

��

��

��

Although, the annual growth rate of the sector in �� and �� were -�.�� and �.�� respectively, this is still a far cry from the Federal Government�s projected average growth rate of �.�� for �� to ��.In addition to the declining output of the sector in recent years, the sector is highly concentrated and dominated by few subsectors, thereby making it less competitive. According to reports from the Nigerian Economic Summit Group, only three out of thirteen sub-sectors contribute �� to its overall output. These three sectors include Food, Beverage � Tobacco ��, Textile, Apparel and Footwear �� and Cement ��. The remaining �� is shared among ten major sectors including �other manufacturing�.Some of the challenges which have been identified as responsible for the low productivity of the sector include high importation of consumer goods which stifles local manufacturing. Other challenges include regulatory bottlenecks and multiple taxation; high operating costs in the sector; and paucity of the required government policies to stimulate the less productive subsectors.Despite the above challenges, there are still some opportunities within the sector. The Federal Government�s ban on importation of certain items should ordinarily result in a boost in local manufacturing on some of those items. For instance, the Nigerian instant noodles market reportedly ranks ��th in the world instant noodles market. This feat may not be unconnected with the ban on the importation of instant noodles. Also, the Federal Government set up a number of focus labs to deliberate on the implementation of the Economic Recovery and

Taxa�on and the ManufacturingSector in Nigeria

Taxation plays a very critical role in the manufacturing sector, like many other sectors of the economy. Although there are a number of tax incentives aimed encouraging investments in local manufacturing, the sector is still plagued with a number of tax related challenges. Some of the tax issues peculiar to the manufacturing sector are discussed below:

Potential Tax Trap of the Pioneer Status IncentiveThe Industrial Development �Income Tax Relief � Act �IDITRA� provides for the Pioneer Status Incentive �PSI� which grants a tax holiday to companies engaged in select pioneer products and industries. The PSI tax holiday is applicable within the first five years of operation of the company and it is granted for an initial period of three years which can be extended for another two years.Based on the provisions of Section �� a � b� of IDITRA, a company is deemed to have commenced a new business upon expiration of its PSI tax holiday. Consequently, the company is required to apply the commencement rule provisions in line with Section �� of Companies� Income Tax Act �CITA� which potentially exposes it to double taxation in the first three years of operation upon expiration of its PSI tax holiday.It is interesting to note that the revised PSI framework recently released by the Federal Government specifies that companies applying for PSI tax holiday must be within their first year of production�service. This is consistent with the provisions of the IDITRA which considers the date of production as the date in which a company commences production on a commercial scale. However, most manufacturing companies make little or no profit in the first few years of production but make significant profits in the later years. Where the profitable periods coincide with the expiration of the PSI tax holiday, and commencement rule is applied, the double tax

Growth Plan �ERGP� which was published by the government in ��. The manufacturing and processing focus lab of the ERGP was able to identify a ��.�� billion investment opportunity with the potential of generating ��,�� jobs in the manufacturing sector.There has been a number of interventions by the Federal Government to improve the performance of the manufacturing sector. Some of the interventions include the ease of doing business reforms which is championed by the Presidential Enabling Business Environment Council �PEBEC�. The PEBEC has implemented a number of reforms including simplifying company registration process in Nigeria, improving the timeline for getting businesses connected to the national electricity grid, ensuring that micro, small and medium scale enterprises have increased access to credit facilities amongst other reforms. Other government interventions in the manufacturing sector include the Nigeria Industrial Revolution Plan �NIRP�, which was developed in ��. The NIRP seeks to move the GDP growth of the manufacturing sector to ��.�� by the year �� by addressing the key challenges in the sector. The plan seeks to improve manufacturing in Nigeria by, amongst other things, creating linkages among industrial sub-sectors and other sectors of the economy, increasing local content to reduce

the amount of foreign exchange required to buy raw materials and machinery, creating jobs, increasing research � development in technology and innovation to generate the competitive edge needed to penetrate the global economy.The Federal Government also introduced the Road Infrastructure Refurbishment and Development Tax Credit Scheme �Road Tax Credit Scheme� in January ��. Although this is not specific to the manufacturing sector, many manufacturing companies are taking advantage of this scheme to improve the state of the roads affecting production and distribution channels. Specifically, the Scheme provides a platform for private companies, including manufacturing companies, to undertake the construction and refurbishment of eligible road infrastructure projects. The Scheme, which is to be in force for a period of �� years, also guarantees full and timely recovery of private companies� project costs through a tax credit mechanism. The introduction of the Scheme has the potential to improve road infrastructure across the country while easing companies of their tax burdens.

In 2018, the ManufacturingSector contributed

about 2 percent of the total GDP for the year

�Source: Nigeria Bureau of Statistics

The manufacturing sector contributedabout N864 billion of the N3.63 trillion

generated as Value Added Tax (VAT)from 2013 to 2018,

Source: Nigeria Bureau of Statistics


impact on the profits may outweigh the tax benefits obtained during the pioneer period. It is within this context that Ghana has granted companies a one-year tax holiday from commencement to reduce the tax burden at this phase of the business.Perhaps, the potential tax trap could be avoided if the incentive can be applied from years when companies break-even or if companies are given the liberty to apply the incentive to their preferred accounting years.

Basis of accounting for VAT - Cash or accrual basis Based on the VAT Act, a taxable person is required to render monthly VAT returns of all taxable supplies made in the previous month. However, the amount to be remitted when rendering the monthly returns is the Output VAT, which is the amount of VAT charged and collected by the taxable person. The taxpayer is required to recover any applicable Input VAT from the Output VAT and remit the balance to the Federal Inland Revenue Service �FIRS�. Where the Input VAT exceeds the Output VAT, the taxpayer is entitled to a refund. The approach of remitting Output VAT based on VAT collected or paid by customers is usually referred to as the cash basis. This implies that the amount yet to be collected should not form part of the remittance and should be adjusted from the total supplies.There is an alternate view which assumes that the obligation to render the monthly returns of all VATable supplies, means that all Output VAT should be remitted upon rendering the returns, whether it has all been collected or not, this is referred to as the accrual basis. In practice, taxpayers adopt either methods, depending on the nature of their business�es�. The accrual method is preferred where invoices are paid at the point of sale or within a very short period, while the cash basis is more efficient for those with longer credit periods. The FIRS prefers and indeed insists on the accrual approach, since it ensures that VAT is collected quickly. However, it is inappropriate to compel companies with significant credit sales to remit the Output VAT prior to collecting same from the customers. The principle behind the VAT system is that the taxpayer, as an agent of the FIRS charges, collects and remits VAT when collected. The FIRS� insistence on the accrual basis can lead to cash flow challenges, as taxpayers will essentially be using their working capital to fund the government. Also, taxpayers can lose the VAT already paid over to the FIRS because of bad debts.During tax review, audits or investigation, the tax officials usually expect that the Output VAT should correspond to the VAT per the revenue in the audited account for each period. They typically allege under-declaration of VAT where this is not so. However, the International Accounting Standard requires companies to recognize

revenue when it is probable that any future economic benefit associated with the item of revenue will flow to the company. The revenue per audited account therefore does not fully reflect cash collected for the period and should not be the basis for remittance of Output VAT. Therefore, companies who adopt the cash basis should be allowed to adjust for uncollected VAT in determining the VAT payable for any period.

Non-Recognition of Discounts � RebatesIn a bid to thrive in the competitive world of business, a number of

Manufacturers are en�tled tofive years tax holiday

within the first five yearsof opera�on, if they meet

the PSI requirements

�

manufacturing companies apply discounts and rebates on their sales. While this move would help retain the goodwill of the company with its customers and further improve sales, it has become a source of controversy during tax audits. The tax authorities sometimes, seek to adjust the tax computations of companies with the aim of de-recognizing the discounts and rebates and treating them as taxable items. Hence, the treatment of discount for tax purposes is usually one of the most disputed areas during routine audits and investigations.Most manufacturing companies rely on the recommendations of the International Financial Reporting Standard �IFRS� ��, which specifies that revenue should be recognized net of all discounts. While Section ��c� of the CITA provides a basis for subjecting discounts and rebates received to CIT, there are no clear provisions in the tax laws on the CIT and Value Added Tax �VAT� treatment of discounts and rebates granted. This is not the same in some other jurisdictions where there are specific guidelines on the tax implication of trade discounts. For example, VAT is generally referred to as Goods and Service Tax �GST� and it is chargeable on the net discounted price of goods and services in Singapore. Similarly, VAT is chargeable on the discounted price of goods and services in Kenya, provided that the discount is accounted for at the time of the supply and the taxpayer issues a tax invoice.In the light of the controversies associated with the lack of certainty on the tax treatment of various types of discounts. It is pertinent for the tax authorities and government to review the tax laws along these lines so that taxpayers can conduct transactions with certainty.

Excess Withholding Tax CreditsGenerally, companies in the manufacturing industry engage in the production and sale of goods�products, which are not liable to Withholding Tax �WHT� under the Nigerian law. However, there are some manufacturing companies engaged in contract manufacturing and other forms of services, which are be liable to WHT deductions. Due to the downward trend in the economy, these companies have continued to accumulate huge losses and capital allowances over time. The companies may never accrue tax on profits enough to completely utilize the quantum of accumulated WHT credits in a foreseeable future. Although the tax laws are clear on the right of a taxpayer to refund of excess tax paid, the process and activities resulting to tax refund has been perceived as a case of a camel going through the eye of a needle. This poses a serious challenge to companies affected within the manufacturing sector as they may be forced to carry forward such excess WHT credits until they are finally written-off.To address this issue, it will be necessary for the government to address the administrative bottlenecks in the refund process to enable manufacturing companies receive their excess WHT credits as cash refunds in a timely manner.

Excess Dividend TaxSection �� of the CITA is an anti-avoidance provision which has been interpreted by the Nigerian courts to put companies in a precarious position of double taxation. The Court in interpreting Section �� has stated, in the case between Oando PLC v FIRS ��, that when a company pays out dividends in excess of its total declared profits, such excess dividends would be liable to CIT. This interpretation has posed a lot of hardships for companies that have paid dividends out of retained earnings that have previously been taxed or exempt from tax.Amidst clamours for a legislative review of the CITA, the National Assembly is currently deliberating on a Bill to amend the Act. The CIT �Amendment� Act before the National Assembly provides for the non-applicability of Excess Dividend Tax to already taxed retained earnings, exempt income, and franked investment income. However, given that the year �� is an election year it remains uncertain whether the legislature would speedily review and pass the proposed legislative changes into law.


The projected increase in VAT collections is in line with the National Tax Policy and the ERGP �� - �� which projects an increase in the VAT rate for luxury items from � to �� per cent within the period. Thus, it would appear that the Federal Government would continue to drive increased tax compliance. It is also anticipated that the Federal Government�s strategy of increasing revenue by focusing on non-oil revenue sources will continue in ��. It is possible that the government will introduce new items to the list of items banned from importation within the course of the year. Although, this move may result in a reduction in revenue from Customs Duties as projected by the �� budget, it would be in line with the government�s overall objective to clamp down on importations and encourage local manufacturing.

In terms of tax incentives, the Road Infrastructure Development and Refurbishment Tax Credit Scheme introduced in January �� has the potential to improve road infrastructure while easing companies of their tax burdens. It is expected that companies within manufacturing industry, especially those within major industrial hubs would pool funds to participate in the Scheme for the benefit of their companies and the overall growth of the economy. On another note, the Nigerian Transfer Pricing �TP� space witnessed significant developments in the year ��. These include the introduction of the Income Tax �Country-by-Country Reporting� Regulations �CbC Regulations� and the release of the Income Tax �Transfer Pricing� Regulations �TP Regulations� amongst others. We expect �� to be impacted by these developments. One of the major revisions in the TP Regulations was the introduction of a TP specific penalty regime in Nigeria. The introduction of administrative penalties and the other changes were aimed at encouraging increased compliance with the TP Regulations by taxpayers and providing certainty in the treatment of certain related party transactions. The FIRS issued a notice indicating that it will begin to enforce compliance by imposing the administrative penalties on defaulting taxpayers from January ��.Furthermore, the Tax Appeal Tribunal �TAT� was reconstituted after over two years of inactivity in ��. It commenced sittings in November �� by attending to existing appeals filed from the year �� while entertaining new appeals.Given the FIRS�s commitment to raise ��.� trillion in revenue collections in the year ��, it is expected that there would be a significant number of disputes between the taxpayers and tax authorities which would result in increased appeals before the TAT in the course of the year. It is hoped that the adjudication process will be improved to ensure speedy resolution of tax disputes.

Conclusion & Recommenda�onsNigeria�s manufacturing sector has an immense potential to boost the Nigerian economy by increasing the GDP, creating jobs, stimulating foreign exchange earnings and ultimately result in increased tax revenues for government. To achieve this, it is important for the government to pursue diversification within manufacturing sector by communicating a clear plan for the less active sub-sectors such as Paper products, textile and footwear and other manufacturing etc. In addition, the government should consider an alternative funding structure for oil refining in Nigeria as the production of oil in Nigeria would go a long way in boosting the output from the manufacturing industry.

Finally, the Federal Government needs to urgently revisit the report of the National Tax Policy Review Committee and ensure the full implementation of the report. The tax authorities should also ensure that the proposed amendments being reviewed by the National Assembly is passed into law while ensuring that further amendments are proposed and legislated into law in order to strengthen the tax system.

Associate Director, Commercial Practice GroupAndersen Tax

Adeyemi Adediran


Semi-Senior Associate, Tax Advisory � Regulatory Services GroupAndersen Tax

Patience Ajogbor

Based on the Economic Recovery and Growth Plan �� , Nigeria is expected to witness a slight dip in its overall GDP growth in �� as a result of the general election in the year. However, a quick recovery is anticipated in the year ��.

According to the �� budget speech, the Federal Government�s estimated revenue for the year is ��.�� trillion. While the revenue estimates for the year �� indicate a �� reduction in the expected revenue from Customs Duties, revenue from VAT and CIT is expected to increase by �� and ��, respectively when compared to the �� figures

Projec�ons for the Year 2019

��.�� CAT

VAT

Custom Duties

�� N�bn� �� N�bn� Variance

��.��

��.�� .��

��.�� -��.��


Financial ServicesExpert Analysis from Pedabo Tax Arm

The financial sector, comprising of the various categories of Banks, Insurance companies, investment fund companies, capital markets, Finance houses and Real Estate Investment Trust �REITs�, etc has evolved over the years in Nigeria, following the trend in most developed economies around the world.As a key player in the financial sector, the banking institution in Nigeria amongst others, has grown from the days of the Bank of British West Africa in �� now First bank of Nigeria�, witnessing the entry of new and dynamic banks through mergers, acquisitions, minimum capital increase requirement, takeovers etc. The banking sector is dominated by five major banks; Access Bank, First Bank, Zenith Bank, United Bank for Africa and Guaranty Trust Bank, which together account for about �� of the sector�s assets. The contribution of the service sector to the country�s Gross Domestic Product �GDP� which stood at ��.�� as at ��, is largely driven by the financial sector. By implication, a substantial part of the country�s tax revenue of over �.�trillion in ��, was derived from the sector, especially as deliberate efforts are being made by the government to refocus and diversify the Nigeria economy from a mono economy �largely dependent on Oil�. The tax to GDP ratio indicating the percentage of tax revenue to the GDP of Nigeria per annum, stood at about �� in the first half of ��, which is a far cry from that of its South Africa counterpart of about ��.��. This is an indication that there is more to be done to improve on the Nigeria tax system.

Businesses in Nigeria are liable to a multiplicity of taxes and levies and the financial services sector is definitely not an exception. However, the following highlight the major taxes collectible from players in this sector:

Companies Income Tax and Tertiary Education TaxThe Nigeria financial sector is taxable under the Companies Income Tax Act �CITA� as amended up to �� and Education Tax Act LFN ��. Specifically, the taxation of Insurance businesses is governed by the provisions of section �� of CITA, which has since been a source of controversy between operators in the Insurance industry and the tax authority, especially due to its impracticable restriction of insurance claims and other valid business expenses of insurance companies to �� of total premium and the limitation to provisions for unexpired risks.

Value Added TaxThe Value Added Tax �VAT� is governed by the Value Added Tax Act CAP

Taxes in the Financial SectorV�, LFN �� and chargeable on the supply of all goods and services, other than those specifically exempted by the Act. The First Schedule of the VAT Act specifies services rendered by community banks, People�s Bank and mortgage institutions as exempt from VAT. Also, in line with the Value Added Tax �Modification� Order ��, proceeds from the disposal of Short-Term Federal Government of Nigeria Securities and Bonds and proceeds from the disposal of Short-Term State, Local Government and Corporate Bonds are exempted from being subjected to VAT for a period of �� years from the date of the Order, till ��. However, tax practitioners have argued that the provisions of this Order is actually unnecessary since the proceed from disposal of securities was never under the purview of the VAT Act, as they do not constitute supply of �goods or services� as stated in the VAT Act. A judicial precedence is the recently decided CNOOC vs FIRS case on what constitutes �goods or services� as per the VAT Act. This Order is especially controversial as its expiration after ��years would imply


that the proceed from disposal of Short-Term State, Local Government and Corporate Bonds would become liable to VAT by ��.

Capital Gains TaxCapital Gains Tax �CGT� is governed by the Capital Gains Tax Act CAP C�, LFN �� CGTA��. CGT is charged on gains accruing to any person on the disposal of assets. Recently, the Lagos Internal Revenue Service �LIRS� issued a public notice appointing employers as its agent, for the purpose of deducting and remitting CGT from capital sum received for compensation for loss of office, in line with section �� of the Personal Income Tax Act.

Stamp DutiesStamp duties is governed by the Stamp Duties Act CAP S�, LFN �� the Act�� and it is chargeable on documents. In ��, the Federal Government through the Central Bank of Nigeria issued a directive that all Deposit Money Banks �DMBs� and Financial Institutions �FIs� should commence the charging of N�� stamp duties on all eligible transactions i.e. receipts given by any Bank for service rendered in respect of electronic transfer and teller deposit of N�,�� and above. This excludes transfer f rom sel f to sel f and withdrawals�transfers from savings accounts. This was in order to improve on non � oil revenue.There have subsequently been two decided cases since this directive, by the Federal High Court in �� and the Court of Appeal in ��, nullifying this directive based on its inconsistency with the Stamp Duties Act. Despite the decided cases, some banks still charge this amount against their customers� account, till date.

Withholding Tax Withholding tax is an advance payment of income tax, but it becomes a final tax if it is deducted from interest, royalty, rent or dividend payable to non-residents.

Recent Tax Developments in theFinancial Sector

Over the years, operators in this sector have been saddled with the responsibility for the above taxes with varying degree of complexities and complications being experienced, in response to changes in tax regimes or administrations. Below are some of the recent tax developments in the financial sector:

FIRS Tax SubstitutionIn the second half of ��, the FIRS in its bid to clamp down on tax defaulters, had resolved to exercise its powers to appoint collection agents, as specified in section �� of the FIRS Establishment Act �FIRSEA�, ��. It issued written directives to commercial Banks, appointing them as its collection agents with instructions to place a lien on the bank account of some customers, who according to FIRS have defaulted in their tax obligation to the Federal Government. The

bank accounts were to remain frozen until the specified outstanding tax liability is remitted to FIRS.This approach has negatively impacted on the activities of the Banks as well as their affected customers.

Though, the Federal Inland Revenue Service is empowered by the tax laws to appoint any person or entity as its agent for tax collection purpose, it is pertinent that due diligence be carried out on the suspected companies before this right is exercised. On the contrary, a substantial number of the affected companies are registered tax payers whose tax returns were filed up to date and were unaware of any outstanding tax liabilities as at the time of the lien.While Section �� of CITA and Section �� of the FIRSEA empowers FIRS to appoint anyone as agent and the FIRS� power of tax substitution is unquestionable, there are some salient questions that beg for answers:

I. Can FIRS exercise this power without raising an assessment on the taxpayer as required under Section �� and �� of CITA�ii. Can FIRS enforce collection of a tax liability that was hitherto unknown to the taxpayer�iii. Where FIRS met the conditions in Sections �� and �� of CITA, can FIRS deny a taxpayer its guaranteed right of objection, in line with section �� of CITA�iv. Where an assessment has not been raised on a taxpayer, can the Bank validly execute the FIRS instruction under Section �� of CITA and �� of FIRSEA�

The experience in recent times, is a situation where FIRS exercised its substitution power, without raising prior assessment on the taxpayer. This has so far generated lot of controversies on the legality of FIRS� action. The Banks on the other hand are in a dilemma, as they have to comply with the directive of FIRS to place a lien on their clients� bank accounts, in line with the tax laws but are also uncertain on the legal basis of making the demanded payment to FIRS. This has resulted in serious operations disruption and reputational damage for the companies, especially those not in default. In our view, the power of substitution should only be exercised after an assessment which has been raised on a tax payer has become final and conclusive. The Banks also have the right to object whenever such directives are issued by FIRS, in line with section �� of CITA.

Increased Tax-exempt Incomes from Investment in Treasury Bills and BondsThe financial sector has played a major role in providing funding to government at every level. The reliance of government on domestic borrowings to fund budget deficits in recent times has increased the level of bonds and treasury bills issuance. Banks and other financial institutions are major participants in this market and the returns from these lending has remained key contributor to their reported earnings. Prior to the issuance of the Companies Income Tax �exemption of Profit� Order ��, only the interest income earned from investment in Federal Government Bonds was exempted from tax while Section � of CITA imposed tax on any profit or gains arising from trading on these securities. This line of income was a major source of tax revenue to government �in billions of naira� in times past.However, with the introduction of the Companies Income Tax Order ��, all forms of income from Bonds �Federal, States, Corporate and Supranational� became exempted from tax for ten �� years, apart

In 2018, the FIRS appointed Commercial Banks as collec�on

agents to clamp down on tax defaulters

�

FIRS Tax Revenue ��

Oil Sector ��

Non-Oil Sector ��


from the tax exemption for government bonds with an indefinite timeline. Consequently, most of the benefiting businesses have been paying taxes based on minimum tax or tax on excess dividend, in line with sections �� of CITA, respectively. Though, the idea was to encourage participation in lending to government, it also has its effect on the overall economic performance of the country. This is because there is a positive correlation between government borrowing and the interest payable on such borrowing and this has a declining impact on tax revenue.

VAT on Nigeria Stock Exchange CommissionsThe Value Added Tax �Exemption of Commissions on Stock Exchange Transactions� Order, which became effective in July ��, will expire this year. The Order exempted commissions earned on the Stock Exchange transactions from Value Added Tax �VAT� for a period of five �� years, ending on July ��, ��. With the expiration of this order, any commission earned on these transactions from ��th July �� will be liable to VAT. The securities trading companies and fund management firms are expected to be highly affected except if a renewal of the Exemption Order is granted by the Federal Government of Nigeria. The expiration of the Order will have a positive impact on tax revenue for the federal government.

Country By Country Reporting and Transfer Pricing Regulation ��In ��, the FIRS released Nigeria�s Income Tax �Country by Country Reporting� Regulations and Income Tax �Transfer Pricing� Regulations ��. This is in line with the recommendation of the Base Erosion and Profit Shifting �BEPS� project which recommended that signatory countries develop local rules regarding Country by Country Reporting ��CbCR�� and Transfer Pricing to enhance transparency in tax administration. The CbCR regulation will also give effect to the Country-by-Country Multilateral Competent Authority Agreement signed on January ��, ��. The regulation whose objective is to seek information about the global activities of multinational enterprises �MNEs� requires that MNEs with tax presence in Nigeria and whose global turnover is in excess of N�� billion should file certain information about their global operations, with FIRS. The Transfer Pricing Regulations have imposed additional filing and documentation requirements on companies, especially the financial institutions with related entities, while those with international operations have filing and documentation requirement for both CbCR and Transfer Pricing. The CbCR which was first introduced in �� will affect most of the Banks and financial institutions who have related entities outside Nigeria.These Regulations are expected to generate more revenue to the financial sector as well as the tax authority.

In 2018, the FIRS developed a Country by Country Repor�ng Regula�on

to enhance transparency in taxadministra�on as regards to Transfer Pricing

�

Tax Deductibility of Provisions for Doubtful�Bad DebtPrior to the adoption of International Financial Reporting Standards �IFRS� in Nigeria in ��, the CBN Prudential Guideline provides for the basis of making provisions for doubtful and bad debts. The tax authority in turn relied on the Guideline for making their judgement on the allowability or otherwise of the loan loss provisions as a deductible expense for tax purpose, besides the additional documentary evidences the tax payer had to furnish to the tax

officials.With the introduction of the International Financial Reporting Standard �IFRS�, the basis of accounting for provisions for loan loss has become more subjective. This has therefore subjected the issue of loan loss provisions to series of argument with the tax authority. The need to make appropriate loan loss provisioning for reporting purpose and the accompanying task of proving to the satisfaction of the tax authority the accuracy of such provisions, �section ��f � of CITA� are major issues the operators within the financial sectors are confronted with regularly, by virtue of their businesses.The IFRS � on financial Instruments which became effective in Januar y �� also has huge implicat ions for loan loss provisioning�impairment, and financial institutions are expected to comply strictly.

In the first half of 2018,Nigeria’s tax to GDP ra�o

sits at about 6%

Multiplicity of Taxes � LeviesMultiplicity of taxes is a situation where the same tax payer is assessed to tax more than once by the same or different tax authorities, in respect of the same tax base. Businesses in Nigeria, especially financial institutions have been extremely burdened and are crumbling under the weight of tax multiplicity, which has become the order of the day. The various Federal and State tax authorities as well as local governments have embraced an approach of conducting incessant tax audit and investigation exercises on companies, all year long, in respect of various categories of taxes and levies, all in the name of revenue generation. This became more complicated with the appointment of numerous greener-pastures-seeking consultants that represent the authorities, whose commission is based on additional tax liability established.It is so pathetic that in some cases, these tax investigation and back-duty exercises would span over a period of twenty �� years, in respect of which it is natural ly expected that relevant documentations would have been archived by the companies or even discarded. This has been the trend for some years and the defense of the tax authorities has been the provisions of section �� and section �� of the Personal Income Tax Act and Companies Income Tax Act respectively.Some none tax-related government agencies have also joined in the review and tax audits on the financial institutions, in respect of periods already reviewed by the relevant tax authority, on the grounds that they have oversight functions over FIRS, thereby putting more strain on already compliant taxpayers. These agencies include Revenue Mobilization, Allocation and Fiscal Commission �RMAFC�, the Federal Ministry of Justice, the House of Representative e.t.c. The crash in the price of crude oil since �� and the decline in the country�s revenue which resulted in the reduction in States� allocation, is unarguably a major contributor to the aggressive tax system in Nigeria but this is not enough reason to grind thriving or struggling businesses to a halt.On the contrary, compliant taxpayers should be encouraged and rewarded by ensuring simplicity, convenience and certainty of taxes, so that the cost of tax compliance does not continue to be unbearable, because of the need to continually deploy resources to attend to incessant tax issues. On the other hand, tax evaders should be identified, penalized and brought into the tax net. This will ultimately boost the confidence of businesses and investors in our tax system, improve on the ease of doing business in Nigeria and ultimately boost our tax to GDP ratio.

�


The outlook of taxation in Nigeria for �� is dependent on several factors which include but are not limited to the following:

�� Proposed Budget: The proposed budget as presented by the President estimates an aggregate expenditure of N�.��trillion �about �� lower than the �� spending of N�.��trillion�, with a corresponding estimated revenue of N�.��trillion. The budget is expected to be funded substantially from oil revenue estimated at about N�.��trillion, non- oil revenue of N�.��trillion which includes Companies Income Tax and VAT share of

��.�

��.�

��.�

��.�

��.�

��.�

��.�

�,��.�

��.�

��

��.�

Domestic Recoveries and Fines

Grants � Donor Funding

Signature Bonus

Independent Revenue

Customs

Value Added Tax

Company Income Tax

Oil Revenue

Federation Account Levies

JV Equity Restrucuring

Others

�� Revenue Estimate �in N�billion�

FGN revenue of about �.��trillion, amongst others. However, considering the FIRS tax revenue of over N�.�trillion in ��, �� of which emanated from the non-oil sector, the estimated FGN share of CIT and VAT revenue of �.��trillion as per the �� proposed budget does not appear commensurate.

Tax Revenue Trends: The Federal Inland Revenue Service recorded a tax revenue of N�.�trillion in ��, accounting for about �� of the total national expenditure for the year. It was revealed that �� of this collection was from the non-oil sector, validating the Federal Government�s focus on diversification of the Nigerian economy. It will be recalled that the Federal Government had introduced some

voluntary tax compliance schemes which include Voluntary Assets and Income Declaration Scheme �VAIDS� and Voluntary Offshore Assets Regularization Scheme VOARS. VAIDS had recorded a considerable level of success and thus impacted on the tax collection for ��, as a lot of taxpayers would rather regularize their tax status than being exposed or prosecuted, as threatened by the FIRS. The situation is however not the same with VOARS, as the people who dared not to come forward for declaration during VAIDS have neither been exposed nor prosecuted. Other revenue collection measures include the FIRS tax substitution which was introduced in the second half of ��. Consequently, there was a lot of tension and aggressiveness in the Nigeria tax system during the year. The States Internal Revenue Service also doubled up on their tax drive efforts which included sealing up of office premises of taxpayers, before final tax liabilities are agreed upon by both parties on tax audit or investigations, thereby coercing taxpayers to part with huge sums of money hitherto established based on Best of Judgement �BOJ�, in order to have their office premises unsealed.

The FIRS has recently disclosed the Service� revenue target of N�trillion for ��. By implication, except other innovative or creative measures are put in place to bring in tax evaders into the tax net, the aggression and tension in the tax space will increase in ��, in order to meet up with the target and compliant taxpayers will be further burdened. Taxpayers are therefore encouraged to ensure that their tax obligations are up to date and adequate documentations to substantiate transactions are retained for as long as possible, to avoid paying unnecessary tax liabilities.

�� General Election: The cost of preparation and conducting the �� elections has undoubtedly increased the spending of the various levels of government. This also extends to politicians currently in power and others canvassing for various seats, who have invested funds from all angles on campaigns to increase their chances of re-election or emerging winners. There is every possibility that once they emerge winners, some politicians may embark on a mission to recover their investments, in a manner typical of an average politician in Nigeria. We however hope for better governance going forward.

Change in Government: A change in government often comes with cabinet reshuffle and political appointments and re-appointments. Essentially, this creates a level of uncertainty in the tax space as it may result in change in chief tax administrators which would certainly impact on the direction of the Nigeria tax system.

Partner Tax Management � AdvisoryPedabo

Olubunmi Elizabeth Kuteyi � ACA, ACTI, B.Sc


ManagerTax Management � AdvisoryPedabo

Fidelis Chukwu - ACA, ACTI, MNIM, MBA


2019 Tax Outlook

Conclusion & Recommenda�onsTax PayersGenerally, �� is expected to be one with more aggression by the tax authorities, so businesses are advised to be well prepared and ensure their tax obligations are defrayed timely to have a fairly-good year with little or no disruptions to their business operations.

Tax AuthoritiesTax authorities should be more proactive by introducing tax reforms that would encourage voluntary compliance from tax payers. This is a more strategic and sustainable approach to boosting our tax system, strengthening tax payers confidence and generating sustainable tax revenue as opposed to deploying short term tactics for increasing tax collection.

Oil � GasExpert Analysis from Ascension ConsultingOil was first discovered in Nigeria in commercial quantities by Shell-BP at Oloibiri �Yenagoa Province, now Bayelsa State� in ��. At that time, the ownership of mineral resources in Nigeria resided with the British �the Nigerian colonial masters� and was regulated by the Mineral Oil Ordinances of ��. The Nigerian oil and gas industry has been vibrant since the discovery of crude oil in �� by the Shell Group.The Nigerian Oil and Gas Industry has developed, focusing on increasing indigenous participation in the industry. This is reflected through the Nigerian government initiative of increasing Local Content and ensuring that indigenous companies have a greater part in developing oil and gas assets.The current climate of the industry has largely been influenced by the passage of various laws and regulations that are administered by local, national and other government organizations representing the interests of state and country. Through these bodies, the Nigerian Government regulates exploration and production of natural gas and crude oil as a result of the authority provided through the Nigerian Constitution and the Petroleum Act ��PA��, which vests the entire ownership and control of petroleum in the Nigerian Government on behalf of the people of NigeriaAmongst the most notable government institutions are the Ministry of Petroleum Resources �MPR�, Nigerian National Petroleum Corporation �NNPC� and the Department of Petroleum Resources �DPR� which ensure that operations within the industry are regulated to a specific standard.It is with great input from these bodies that various laws and regulations that directly and indirectly regulate the Nigerian oil and gas industry are implemented and monitored. These laws and regulations vary from those applying to the operational aspects, to the fiscal aspects, such as the PA, the Petroleum Profits Tax Act ��PPTA��, the Deep Offshore and Inland Basin Production Sharing Contract Act �DIBPSA� and regulations which have been made pursuant to the PA, such as the Petroleum �Drilling �Production� Regulations ��PDPR�� which regulate operational aspects of the drilling and production of crude oil.

This involves all the activities carried out in the exploration, development and production of crude oil from its natural state. It is essentially referred to as �petroleum operation�, and the companies engaged in these activities are called Exploration and Production �E � P� companies. The income of these companies is subject to tax under the Petroleum Profits Tax Act �PPTA�, ��, as amended.

Upstream Sector of the Oil and Gas IndustryFeatures of the Upstream Sector

Capital IntensiveOperations

UnconventionalAccounting

Methods

Complex TaxReporting/Returns System

High BusinessRisks



The Nigerian Oil Extraction activities keep on moving from one arrangement to the other while the existing arrangement continues as parallel running since �� to date. The current Position is as below

Nigeria OilFiscal Regime

Concessionary�Licensing

ArrangementJoint Venture

Sole RiskOperation Marginal Fields

ContractualArrangement

Risk ServiceContract

ProductionSharing Contract

Hybrid

E�P companies worldwide depend greatly on oil service companies for carrying out almost all aspects of field operations. This is because, in most cases, these E�P companies do not have the technical and engineering know-how required for oil and gas prospecting. Infact, most of the engineering and technical systems required are patented. Also, E�P companies have discovered, over time that it is more economical to engage the services of specialists instead of hiring men, equipment and material on a permanent basis.

Oil Service

All operations involved in the conversion of crude oil produced into usable forms e.g. Premium Motor Spirit �PMS�, kerosene, etc are generally referred to as downstream operations. It also includes activities such as pipelines and storage, petrochemical sales and services, marketing and refinery activities. Companies engaged in these activities are assessed to tax under the Companies Income Tax Act �CITA�, ��, at the rate of �� of assessable profits.

The principal regulators in the downstream sector include the Petroleum Inspectorate of the NNPC, the Department of Petroleum Resources and the Pipeline and Product Marketing Company Limited �PPMC�.

Downstream Sector of theOil & Gas Industry

The oil and gas sector can best be described as the bride of the Nigerian economy. The Nigeran �� budget estimated over �� revenue to be gotten from the Oil � Gas sector. According to energy mix report, A total of �� deals with a combined value of US��.�bn were registered in the upstream oil and gas industry in Q� ��.Although, we are not aware of any Authority that has an accurate net worth of the Nigerian Oil � Gas Industry, but it is evident that the sector is a very valuable sector in Nigeria.

Net worth of the Oil & Gas Industry

The Key Ac�vi�es in the Downstream Sector

Transmission & Conveyance

This involves the transportation of oil and gas to the refinery and gas stations.

Refining

Refining is s imply the break ing down of the hydrocarbon mixture of crude oil into useful petroleum products. This is done through distillation, cracking, reforming and extraction process

The products of the refining process include: PMS, Household Kerosene �HHK�, Aviation Turbine Kerosene �ATK�, Automotive Gas Oil �AGO�, known as diesel etc

Distribu�on & Marke�ng

Distribution and Marketing of refined petroleum products are complementary activities. Distribution involves the transpiration of refined petroleum products from the refineries through pipelines, coastal vessels, road trucks, rail wagon e.tc. .to the storage�sale depo

Market Share Of The Key PlayersUpstream SectorUntil recently, multinational companies �MC� dominated the upstream economy. These companies operate under joint venture arrangements and production sharing contracts with the Federal Government. The MCs, which constitute the major player include: Shell Petroleum Development Company, Exxon Mobil, Chevron, Totalfina Elf and Nigerian Agip Oil Company.However, in recent times, some indigenous E�P companies have sprung up. Under the indigenous arrangement, the Federal Government is usually not involved but reserves the right to participate when it deems necessary. Most indigenous companies operate in conjunction with foreign technical partners, who in most cases are responsible for providing the funds and expertise required. Some of these indigenous operators include Consolidated Oil, Moni Pulo Limited, Solgas Nigeria Limited and Express Petroleum and Gas Company, amongst others

Downstream sectorThere are two groups of operators �marketers in the downstream sector namely: the �Majors� and the �independent� marketers.The Major marketers dominate the marketing of petroleum products in Nigeria. They account for about �� of the total petroleum products sold. These companies include: Agip Nigeria Plc, Mobil Oil Nigeria Plc, Chevron Oil Nigeria Plc, and TotalFina Elf Nigeria Plc.The Majors operate under a trade association called the Major Oil Marketer Association of Nigeria �MOMAN�. They have an edge over the independent marketers in the areas of capital base management, range of products, technical assistance from



foreign partners and experience.The Independent group of marketers consists of indigenous petroleum companies. They operate under the trade name Independent Marketers Association of Nigeria �IPMAN�. The first sets of licenses were issued in �� and today we have over �� companies in this group.Though companies in this group are no threat to the Majors in terms of size, the group is gradually gaining market share in the industry. Some of the well-known IMs include: Zenon, Oando, Honeywell Oil etc.

E & P Taxa�onPPTA PSC �DOIB� CITA

JV

Sole RiskOperator

Marginal Field

PSC

Risk ServiceContract

Tax Rate ��.��

Ÿ Passage of the PIGB: The Petroleum Industry Bill �PIB� which is divided into four parts. The Petroleum Industry Governance Bill �PGIB�, the Petroleum Industry Administration Bill �PIAB�, Petroleum Industry Fiscal Bill �PIFB� and Petroleum Host and Impacted Communities Bill �PHICB�. The PGIB was transmitted to the President by the National Assembly on June �, ��. Stakeholders expressed pessimistic views about the passage of the Petroleum Industry Bill �PIB�, and the ability of the Petroleum Industry Governance Bill to bring about the much needed reform to the industry.

Ÿ The President Assent to the PIB will be a much game changer needed in the industry and it is our view that the outcome of the Presidential election will have much impact on the passage of the PIB because it is a bill sponsored by the National Assembly.

Ÿ Regulatory bottleneck : Stakeholders identified the protracted delays in obtaining the consent of the Minister for the transfer of oil and gas interests, as being a major impediment to attracting further investments in the sector.

Ÿ Non-Clarity of Regulation: Recently the Federal Ministry of Petroleum Resources issued a guideline and information for the establishment of modular refineries in Nigeria. The Federal Inland Revenue Service that will implement the incentive is silent on the pronouncement till date.

Recent Development in the Oil &Gas Industry

Regulation

Ÿ Increased investments in the gas sector: The need to channel further investments into Nigeria�s gas sector was underscored, particularly given the need to increase the utilization of gas to fuel the country�s agriculture, power, and chemical industries.

Ÿ Global divestment of oil assets by International Oil Companies �IOCs�: Following a change in focus from non-renewable to renewable forms of energy, the trend has been for IOCs to lean

Financing

Ÿ Fluctuation of Crude Oil Price: With global oil prices moving around US�� to US�� per barrel, the outlook for the industry remains optimistic, although a form of cautious optimism. Industry players appear more comfortable working with a more conservative floor of US�� per barrel for planning and projections. The Federal government of Nigeria based its �� budget on US�� per barrel.Many stakeholders take a dim view on the possibility of seeing global oil prices rise above US��, considering the increased adoption of green energy technologies to meet global energy demands.

Oil Economics

towards green energy, with a number of IOCs divesting their oil interests and investing heavily in green energy.

Ÿ Increased participation from global oil traders: The previous year also saw an increase in the number global oil traders investing in the upstream and downstream subsectors of the industry. The year saw a number of financing of upstream operations by global oil traders, and equity investments in upstream and downstream companies by global oil traders

Ÿ Effect of drop in oil prices on Nigeria�s banking sector: The drop in global oil prices saw a number of Exploration and Production �E�P� companies in Nigeria defaulting on their loan facilities, thereby forcing restructuring conversations with lenders. These restructurings have however led to restructured facilities that will be more effect on the Company activities.

Ÿ Capacity of local banks to lend to E�P companies: It was recognized that there still appears to be a gap in the capacity of Nigerian banks, as it pertains to their understanding of the industry. Whilst it was noted that lending by local banks to indigenous players is a relatively recent investment activity by Nigerian banks, i t was emphasized that an intr icate understanding of the sector by Nigerian banks was indispensable to successful partnerships between oil and gas players and their lenders.

� � ��

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�,��

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s of b

arre

ls pe

r day

Oil Production Forecast ��-��

Source: OPEC: Annual Statistical Bulletin ��




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Proven Crude Oil Reserves ��-��


Tax Implica�ons in the Oil & Gas Sector

Some of the major tax issues in the Oil and Gas sector to the Tax Payers can be expatiated under the following:Ÿ Revenue and Cost Reporting by Joint Interest Holders;Ÿ Is there PPT for upstream entities that are in pioneer period;Ÿ Should a contractor under a PSC file a separate tax return in its own

name apart from the returns filed for the field�Ÿ Fiscal Terms for Marginal Field Operators;Ÿ Intercompany interest;Ÿ Should the Risk Service Contractors file under PPTA or CITA�Ÿ Gas Utilisation - Associated and Non-associated gas- How is this

taxed� PPT�CIT. What happens if the company is only interested in mining gas and there�s no crude oil� At what point will it be PPT� CIT�

Ÿ Claiming of Capital Allowances by parties in JV arrangement

Revenue and Cost Reporting by Joint Interest HoldersThe FIRS indicated that it will no longer accept joint filings of PPT returns by upstream companies under farm-in and farm-out arrangements unless such is approved by the Minister of Finance as provided in section �� of Petroleum Profits Tax Act �� as amended �PPTA�.In relation to section �� of PPTA, the FIRS has further posited that equity interest rather than economic interest should be the basis for oil revenue and costs reporting for PPT purposes. It insisted that government recognises only equity participation and not economic interest �or whatever nomenclature�.Hence; the financial interest should not be the basis for sharing and�or allocating revenues and preparation of financial reports. Petroleum companies must therefore file returns on their percentage of equity participation even if another company funded all the interest.The question to ask is whether this arrangement affects the net tax that comes to the FIRS. The simple answer is �no� provided that there are no double claims by the parties in the joint venture arrangement. However, the possibility of double claims may not be ruled out. Monitoring various arrangements among parties may create administrative inconveniences to the FIRS. Besides, the FIRS is not bound to honour any arrangement that is not in conformity with extant laws.The current status is that the FIRS� wish on this matter has not seen the light of the day

Should a contractor under a PSC file a separate tax return in its own name apart from the returns filed for the field� The Deep Offshore and Inland Basin Production Sharing Contracts Act �PSCA�, forms part of the tax regime for upstream companies operating in designated deep offshore and inland basins. Under a PSC arrangement, the concession is held by the Nigerian National Petroleum Corporation �NNPC� which partners with other

companies to conduct petroleum operations in the contract area. Parties to the PSC take on the risk of operating the field and are entitled to recover cost �plus profit� when commercial production starts. A party to the PSC is designated as the Operator, to execute petroleum activities on behalf of the parties to the PSC and to perform administrative functions.Going by the provisions of the PSCA, the NNPC is mandated to submit the tax returns prepared by the Operator for each contract area to the FIRS.In practice, the NNPC sometime revises these returns to increase the government take in the form of tax oil payable to the FIRS. Case between Chevron and the FIRS is a typical example of this scenario.The Appellants are two parties in a PSC arrangement with the NNPC, which is operated by another International Oil Company �IOC�, Chevron. However, the Operator is not a party to this suit. The Operator prepared the �� year of assessment �YOA� tax returns for the contract area, and forwarded same to the NNPC for onward submission to the FIRS. These returns were amended by the NNPC before submission. The Appellants were assessed to additional tax via a Notice of Assessment issued by the FIRS, which was based on the tax returns as amended by the NNPC.The Appellants objected to the assessment but the FIRS refused to amend it. Consequently, the Appellants lodged an appeal at the TAT. The Tax Appeal Tribunal �TAT� on �� November �� held that the Federal Inland Revenue Service should accept tax computations prepared by the Contractor of a Production Sharing Contracts �PSCs� in assessing PSC parties to Petroleum Profits Tax

Fiscal Terms for Marginal FieldThere is still a gap Department of Petroleum �DPR� letter on the rate of taxation for the MFO in Nigeria and what was stipulated in the Petroleum Profit tax. The Summary of the DPR letter which is not having backing of the law because it has not been gazetted is

PPT rate

PIA or ITC

Description

��

��

As per PPTAs As per DPR letter

�� or ��.�� withinthe first � years

As shown on slide

Intercompany InterestOn �� September ��, the Tax Appeal Tribunal �TAT� ruled that upstream companies can take tax deductions for interest charges on their related party loans, provided that these loans are obtained at arm�s length. This ruling was issued in a case brought before the TAT by the Nigerian Agip Oil Company Limited �Appellant� against the Federal Inland Revenue Service �FIRS�. Section ��g� of the PPTA provides that interest on intercompany loans are tax deductible, if they are obtained under prevailing market conditions; that is the London Inter-Bank Offer Rate �LIBOR�. This provision was introduced by the Finance �Miscellaneous Taxation Provisions� Decree No. �� of ��.However, this Decree did not expunge Section �� of the PPTA, which appears to outrightly prohibit the tax deductibility of interest on intercompany loans. Section �� has been part of the PPTA since its enactment in ��.

In practice, the FIRS would occasionally allow the deductibility of such inter-company interest charges, provided that the rates are benchmarked against LIBOR, plus a reasonable spread �circa �� to account for in-country risk. In many instances however, the FIRS maintained that this interest was not allowable, relying on Section �� of the PPTA. The FIRS has also argued that the term �inter-company�, refers to transactions between unrelated companies.



Gas UtilisationAssociated and Non- associated gas- How is this taxed� PPT�CIT. What happens if the company is

only interested in mining gas and there�s no crude oil� At what

point will it be PPT� CIT�

Dividend Payment by Upstream Entities that has Gas IncomeSection �� of PPTA excludes any income or dividend paid out of profits already taken into account under PPTA. Ascertainment of profits on Gas

Income that dividend is applied is another area of debate

Income Incidental to Petroleum Operations

How is this determined since there is no incidental income definition in Section

� of the PPTA� E.g. Is Interest income incidental to Petroleum Operations�

Is ��.�� PPT rate applicable to old asset already in production and filing PPT

when it is acquired by another company based on Section �� of PPTA,�

This is a typical issue for the Marginal Field operators

Is it date of oil production or first sale of chargeable oil that determines accounting

period of a company that commences within the year�

Section � of the PPTA gives Minister of Petroleum Resources power to determine this without any

appeal by the parties involved..

Impact On Tax PayersŸ Loss of Confidence in the Relevant Tax AuthoritiesŸ Discourages Investment because of volatility in the rate of returnsŸ Discourages tax planningImpact On Tax AuthoritiesŸ Loss of Revenue due to non passage of PIGB;Ÿ Increase in Litigation disputes with the tax authorities;

Projec�ons For The Year

ContinuousFluctuation in

Crude Oil Prices

Continuous Divestmentby the International

Oil Companies

Continuous delayin the Passage of

PIGB by theNational Assembly

Impact On Tax Payers & Tax Authori�es

Conclusion & Recommenda�onsTAX PAYERSŸ Look at possibility of investing in the Oil � Gas Free Zone;Ÿ To enjoy tax exemption benefitsŸ Persuade the Executive to pass PIGB.

TAX AUTHORITIESŸ Ensure that Online filing platform is working efficiently and

effectively; andŸ For the Oil Service Companies, issue Withholding Tax

�WHT� credit notes on time.

PartnerAscension Consulting Services

Ademola Olanrewaju �FCTI, FCA, MBA, B.Sc.�




HospitalityExpert Analysis from Mazars Tax ArmThe hospitality industry can probably be termed as one of the pioneering commercial undertakings of this world. It is part of the larger business initiative- the tourism industry. This industry supplies a gamut of services ranging from travel arrangements, accommodation facilities, food � beverages to leisure activities; i.e. all requirements of the modern-day traveler, who could be travelling for business, pleasure, vacation, adventure, religious purpose or medical treatment.

The hospitality industry is a service industry. According to Swain � Mishra ��, the hospitality business is based on the culture of serving guests with warmth and care so that they feel comfortable and secure. This industry is one of the largest and most rapidly growing industries in the world, however, it is plagued by some issues truncating the sector�s performance. This write up tends to diagnose these issues and wrap up with some recommendations to ensure the sector performs at its optimal.

Defining the Economic Contribu�ons of the Hospitality SectorTravel � Tourism is an integral part of the hospitality sector also, an important economic activity in most countries around the world. This sector has both direct and indirect economic impact. The direct contribution of Travel � Tourism to Nigeria�s Gross Domestic Product �GDP� in �� was NGN�,��.�bn ��.�� of GDP�. This primarily reflects the economic activity generated by industries such as travel agents, airlines and other passenger transportation. The direct contribution of Travel � Tourism to GDP is expected to grow by �.�� pa to NGN�,��.�bn ��.�� of GDP� by ��In nominal terms, Accommodation and Food Services grew by �.�� year on year in the third quarter of ��. This represents an increase of �.�� points relative to the same quarter of ��, when the growth rate was �.��. Growth was also higher than in the preceding quarter by �.�� points when growth was �.��. The sector�s contribution to nominal GDP was �.�� in the third quarter of ��, slightly lower than the figure of �.�� recorded in the previous year.The real year on year growth rate for this sector in �� third quarter was �.��, higher by �.�� points from -�.�� recorded a year previous. Relative to the preceding quarter, growth rate was �.�� points higher from -�.�� recorded. Quarter on quarter real growth

HospitalityIndustry

Art �Leisure

Travel �Tourism

Food �Beverages

AccommodationFacilities


was ��.��. The sector in third quarter of �� represented �.�� of the real GDP, which was lower by a small margin than the contribution of �.�� recorded in the third quarter of �� but higher than the second quarter �� contribution of �.��.The Arts, Entertainment and Recreation sector was �.�� in third quarter �� year-on-year�, representing a decrease of -�.�� points relative to the same period a year earlier, and a decrease of -�.�� points compared with the preceding quarter. On a quarterly basis, growth was recorded at - ��.��. The activity contributed �.�� to total nominal GDP, lower from the �.�� it contributed in third quarter �� and equally lower than the �.�� it contributed in the preceding quarter of ��. In real terms, the activity grew by �.�� year on year, which was lower than the rate recorded in third quarter �� by -�.�� points, but higher by �.�� points when compared with that of the preceding quarter. Quarter on quarter, growth decreased by -��.�� in real terms. Arts, Entertainment and Recreation contributed �.�� to real GDP in third quarter ��, relatively lower compare with �.�� recorded one year previous and lower from �.�� recorded in the second quarter of ��.That said, it is pertinent to note that there is a gap which needs to be leveraged on in the entertainment sector. Nigeria�s entertainment and media industry revenue witnessed a ��.� per cent growth. This amounted to ��.� billion with �� million of the estimated rise said to be attributable to internet access. This is according to a report by PricewaterhouseCoopers Nigeria. Nollywood, which is currently the third largest in the world after Hollywood and Bollywood, has internet access revenue accounting for ��.� per cent of the absolute growth.The PwC report stated that a ��.� per cent compounded annual growth rate �CAGR� is anticipated by ��, with revenue reaching US��.� billion in that year.In Nigeria, you can arguably posit that there is yet to be a synergy between the hospitality and entertainment industry. This is a minus for both industries because the country is losing out from a major revenue loop. Although both sectors can exist independently, however, if they synergize, it will have great and huge positive impact on the country�s GDP.The hospitality sector generated �,��,�� jobs directly in �� .�� of total employment� and it was forecast to grow by �.�� in �� to �,��,�� excluding commuter services�. It also includes, for example, the activities of the restaurant and leisure industries directly supported by tourists. By ��, Travel � Tourism will account for �,��,�� jobs directly, an increase of �.�� per annum over the next ten years.

However, the rate of growth of the sector has been very slow given some bottle-necks that has greeted the sector.The deplorable state of Nigeria�s hospitality sector is confirmed by the

Challenges of Nigeria Hospitality Sector

It is believed; indeed, that legislation is the foundation on which any industry is built. It is in view of this the Federal Government introduced The Nigerian Tourism Development Corporation Act established the Nigerian Tourism Development Corporation �NTDC� as the statutory authority empowered to promote, develop and regulate tourism and hospitality businesses in Nigeria. NTDC is also required by statute to among other things, encourage people living within and outside Nigeria to take their holidays in Nigeria, in addition to encouraging the provision and improvement of tourism amenities and facilities in Nigeria. It is also the statutory responsibility of NTDC to register, classify and grade tourism, hospitality, travel agencies and tour operators� establishments in Nigeria. The Hotel Inspectorate Division of NTDC is charged with this responsibility of registering, classifying, grading and monitoring Hotels and other Hospitality businesses in Nigeria. Annexed to the NTDC Act is the Hospitality and Tourism Establishments �Registration, Grading and Classification� Regulations. NTDC has the power to suspend or revoke a certificate of registration. The exercise of this power can however be appealed against, administratively and judicially.All the thirty-six �� States in the Federal Republic of Nigeria are required to have a State Tourism Board. Each State Tourism Board has the responsibility of assisting NTDC in the implementation of the promotion and development of tourism, in its entirety in that State, to the benefit of the entire Federation of Nigeria.Each Local Government Area in each of the thirty-six �� States of the Federal Republic of Nigeria also has established for them, statutorily, a Local Government Tourism Committee �LGT Committee� which has the responsibility of recommending to the NTDC Tourism Board, tourism projects in that local government area for the enhancement of tourist attractions, the preservation and maintenance of monuments and museums, among other functions.

Government Contribu�on to theDevelopment of the Hospitality Sector

World Economic Forum�s Travel and Tourism Competitiveness Index where the country ranked �� out of �� countries. Nigeria�s ranking, compared to other African peers such as Kenya �ranked ��th� and South Africa ��rd�, shows that the nation�s tourism sector is highly uncompetitive and underdeveloped. A review of the sector�s contribution to GDP in the past decade has shown that its largest contribution was in ��. At that time, travel and tourism directly contributed about �.�� to GDP. Subsequently, the number has fluctuated between �.�� and �.��. This decrease coincides with the insecurities associated with the violent terrorist group, Boko Haram. The hospitality sector is also constrained by low income and inadequate inf rast ruc ture i .e . t ranspor t , logist ics and accommodation. The number of Nigerians living in poverty stands at �� million �� of the population�. This poses a strong challenge to domestic tourism as the average Nigerian considers it a luxury to travel within the country.

In 2017, the Hospitalityindustry directly employed

1,219,000 (1.8% of totalemployement)

The hospitality sector is alsoconstrained by low income andinadequate infrastructure with

62% of the popula�on living in poverty

�


The decline in oil revenues with declining infrastructural facilities that are unable to match an over-populated State, has led to the Lagos State Government and few other states to passing into Law the Hotel Occupancy, Restaurants and Event Centre Consumption Tax Law. Below are some of the tax issues peculiar to the hospitality industry:

The Consumption TaxThis Law imposes a five per cent �� tax on all goods and services consumed in Hotels, Restaurants and Events Centres� situated within the territory of such state.Despite the five per cent �� charge being excluded from being charged on the existing five per cent �� Value Added Tax charge �and service charge�, establishments in the Hospitality, Tourism and entertainment industries are opposed to this tax on legal and cost-of-doing business grounds. The five per cent �� consumption tax, which excludes the existing charge on VAT and service charge, is charged on the consumer of goods and services in hotels, restaurants and events centres which operate within the territory where such law applies. The Owner, Manager or Controller of these kinds of business establishments are mandated to collect this tax on behalf of the State Government and remit the tax collected to the State Internel Revenue Service �IRS�.All Hotels, Restaurants and Events Centres affected by this Law must within a period of thirty �� days of the commencement of this Law or the commencement of the business of the operators of such an establishment, register with the State IRS for the application of the provisions of this Law.All consumption tax collected must be reported and remitted to the State IRS on or before the ��th day of each calendar month. Failure to make a return or effect a remittance, or where a return or a remittance are not substantiated by the record of the business establishment concerned, the State IRS may use its best of judgement to estimate the amount of the consumption tax payable for the relevant period, and the estimate must be paid by the collecting owner�agent within twenty-one �� days of the service of the order on the collecting owner�agent.

Section �� of the VATA provides that �a taxable person shall render to the Board, on or before the ��st day of the month following that in which the purchase or supply was made, a return of all taxable goods and services purchased or supplied by him during the preceding month in such manner as the Board may from time to time, determine.�The above section would appear to support accrual basis of accounting for VAT and implies that VAT should be accounted for on every transaction made in the preceding month, whether or not payment has been made or received. Also, the section appears to suggest that VAT charged on transactions of a taxable person�, should be paid to FIRS on or before ��st day of the following month.On the other hand, Sections ��-��, �� -�� and �� appear to create the basis for accounting for VAT on cash basis. Section �� of the VATA stipulates that �a taxable person shall pay to the supplier, the tax on taxable goods and services purchased by or supplied to him� and Section �� provides that �a taxable person shall on supplying taxable goods or services to his accredited distributor, agent, client or consumer, as the case may be, collect the tax due on those goods or services at the rate specified in section � of the Act�. The tax collected under Section �� is referred to as output tax under VATA. In addition, Section �� of the VATA states that the VAT payable will be the net of output VAT and the VAT paid �input VAT�, where allowable.

Applicable Taxes in the HospitalitySector in Nigeria

�Value Added Tax �VAT�The Value Added Tax Act �VATA or the Law�, �� governs the administration of VAT in Nigeria. VAT is levied at each stage of the production chain at �� of the value of the taxable good or service� supplied, but it is eventually borne by the final consumer, being a consumption tax.The VATA contains provisions which appear to support both the cash and accrual basis of accounting for VAT. The accrual basis requires taxpayers to account for VAT upon issuance of an invoice without involving the transfer of cash. On the other hand, the cash basis requires taxpayers to account for VAT on the basis of cash received.

It can be inferred from the above provisions that where a taxable person has not collected any output VAT, it does not have to remit any VAT to Federal Inland Revenue Service �FIRS�. Thus, implying that accounting for VAT could be based on VAT collected from customers and VAT paid to vendors.In practice, the basis adopted by taxpayers usually depends on the approach that best suits the nature and quantum of their business operations. A lot of Nigerian companies account for VAT on accrual basis due to the simplicity of this method and the fact that it aligns directly with basic accrual accounting. However, this may have implication for such companies� cash flow management strategies as they may have to borrow money to pay VAT where distributors are yet to settle invoices raised by such companies. Further, there is the risk of over remitting VAT under this basis particularly where a debt becomes bad and VAT element of such bad debt is never adjusted against future VAT filings returns.Few companies adopt the cash basis of accounting for VAT especially those with small operations. This basis however requires reconciliation between the turnover per account and actual money received and tracking of input VAT as well.Though FIRS has been known to prefer the accrual basis of VAT remittance, for obvious reasons, the cash basis for accounting for VAT is more aligned with the realities of doing business in Nigeria. Most companies have payment cycles which span beyond the �� days ultimatum provided in the VATA �typical payment cycles range from �� to �� days�. Where a taxpayer does not receive payment for

The VAT returns must be filedon or before the 21st day of the

month following that in which thetransac�on was made.

Due Date for Filing VAT Returns

A five per cent consump�on taxis levied on all goods and servicesconsumed in Hotels, Restaurants

and Events Centres' situated withinthe territory of such state

�


Posi�oning for Future GrowthThe hospitality sector in Nigeria will experience a compound annual increase of �.� percent in the next five years; supported by i n v e s t m e n t g r o w t h i n i n f r a s t r u c t u r a l e x p a n s i o n , t h e PricewaterhouseCoopers �PwC� Hotel Outlook for ��-�� has projected. Available hotel rooms across the country has been estimated to rise to ��,�� in ��, from �,�� in ��, a growth ranked the largest expansion of any country in the report.The outlook, having studied hotel business trend in five African markets including South Africa, Nigeria, Mauritius, Kenya and Tanzania, projects that hotel room revenue for the markets will increase at a �.� percent compound annual rate to N�.� trillion in �� from N�� billion in ��.Considering the improvements in local economy, Nigeria is expected to be on accelerated growth pedestal for the forecast period, with additional hotels spurring higher patronage. The opportunities are aplenty for this industry to enjoy further growth albeit at a more modest pace. However, as we continue to see there are also a number of challenges facing each country. This is an industry that is reactive to the smallest change in political, regulatory, safety and sustainability matters.On the other hand, Travel and Tourism is expected to rise between ��-�� at �.�� per annum to N��,��.�bn, representing �.�� of GDP in ��.In view of the above, it is obvious that the hospitality industry contributes and will continually contribute to the country�s GDP more especially, if the Government can actualize the merging of the entertainment sector with existing industry.The Taxes and Levies �Approved List for Collection� Act, �� also does not accommodate State Governments enacting for their own States, a separate Consumption Tax. The Supreme Court decision in Attorney General of Ogun State v. Alhaja Ayinke Aberuagba �� NRLR �part �� held that a State Law on consumption tax might be void on the ground of covering the field where identical legislations, without any inconsistency on the same subject matter, were made by a State and by the Federal Government. In such a situation, the State Law must give way to the Federal legislation. However, the Ogun State Sales Tax Law was declared null and void by the Supreme Court in this case because the Law imposed a tax on goods and services brought into the State which was a matter of inter-state trade and commerce which is within the exclusive legislative power of the Federal Government.

Conclusion & Recommenda�onsNigeria�s Hospitality industry is a very viable sector which tends to contribute greatly country�s GDP. Also, been one of the largest sector in any country�s economy, it has the capability to absorb high number of unemployed. Albeit, to achieve this, Federal Government need to come up with policy�ies� with respect to the hospitality industry which will encourage more foreign investors and also encourage more expansion and growth in the industry.

By this, it will definitely impact positively, the country�s economy.

Principal PartnerMazars Consulting

Yemi Sanni MSc,FCA,FCIPA,FCTI


supplies made� services rendered before the deadline date of rendering VAT returns, there may be a need for the tax payer to source for funds elsewhere, in order to fulfil its VAT obligations.

VAT vs. Consumption TaxTo prevent multiple taxation and the anarchy associated with it and for the survival of businesses, the old Sales Tax Act was abrogated and, in its place, Value Added Tax �VAT� was introduced for application to the entire federation �and states� of Nigeria. VAT, which is also a consumption tax, is charged and paid on the supply of all goods and services other than such goods and services which are expressly exempted under the VAT Act.VAT, like the Lagos State Consumption Tax, is charged at the flat rate of five per cent �� of the goods or services enjoyed by the ultimate consumer. Unlike the Lagos State Consumption Tax which is solely for the benefit of the Lagos State Government, VAT is administered by the Federal Government of Nigeria Agency, the Federal Board of Inland Revenue �FBIR�, with the proceeds of VAT being distributed under an agreed formula by the �� States of the Federation of Nigeria. It has been contended that firstly, VAT as presently administered, is against the principle of federalism and secondly that its distribution formula is extremely inequitable in the light of the fact that a large percentage of VAT collected in Nigeria is from businesses situated in Lagos State.The Taxes and Levies �Approved List for Collection� Act, �� also does not accommodate State Governments enacting for their own States, a separate Consumption Tax. The Supreme Court decision in Attorney General of Ogun State v. Alhaja Ayinke Aberuagba �� NRLR �part �� held that a State Law on consumption tax might be void on the ground of covering the field where identical legislations, without any inconsistency on the same subject matter, were made by a State and by the Federal Government. In such a situation, the State Law must give way to the Federal legislation. However, the Ogun State Sales Tax Law was declared null and void by the Supreme Court in this case because the Law imposed a tax on goods and services brought into the State which was a matter of inter-state trade and commerce which is within the exclusive legislative power of the Federal Government.


Over the years, a lot has been said about the Real Estate Industry in Nigeria, an industry with so much potential, yet scarcely scratched. The origin of the real estate industry dates to the early ��s. Prior to the enactment of the Land Use Decree in ��, there were several laws which guided the ownership, sale and administration of lands in the country. We had the customary laws which varied according to different traditions, then there was the English Received Laws, and other local legislations. In ��, the Land Tenure Act was enacted to manage all interests that affected land ownership in Northern NigeriaMeanwhile a different story unfolded in Southern Nigeria as there was no defined tenure system applicable to the communities. Most of the land was owned absolutely by private individuals, families who inherited them from their forefathers, a few were community owned. These individuals and families had absolute authority with no recourse to a higher authority. The government only exercised control over relatively small areas which it had acquired for its own use. Therefore, land could be acquired through purchase or as gifts because title was vested in Landowners and not the government.The Land Use Decree�s critical objective was to create an effective management of lands in Nigeria by ensuring a system where the government has enough authority over the acquisition, transfer of land and landed properties. This solved many land disputes due to arbitrary price fixing and forceful take-over by the government reduced drastically. It also encouraged a system where both the state as well as private individuals owned lands, thus eliminating a developing socio-economic inequality in respect to land ownership.Since the Land Use Decree�s �now Act� introduction, other housing policies have been formulated to complement it, such as the Housing Finance Policy of �� and Housing Fund Act was also introduced in ��.

Real EstateExpert Analysis from Drudge Consulting Tax Arm

Economic Growth and Contribu�on to GDPThe real estate sector has had a minimal contribution to GDP, recording negative growth rate since �� Q�.

The chart shows the real estate sector�s contribution to GDP over the last two years on a quarter by quarter basis. The report which was released on Tuesday ��th of February showed that the sector has continued to stay in its negative growth region. In other words, the sector is still experiencing a recession despite the economy at large exiting recession since the second quarter of ��.

In nominal terms, the report shows that as at Q� ��, the sector grew by �.��, higher than the growth rate reported for Q� �� by �.�� points, and higher by �.�� points when compared to the Q� ��.

On an annual basis, growth rate was �.�� in ��, lower than the �.�� recorded in ��. Quarter-on-quarter, the sector growth rate was �.��, while its contribution to nominal GDP in Q� �� and for the whole of �� stood at �.�� and �.�� respectively, slightly lower than the comparable periods in ��.

In real terms, growth recorded in the sector in Q� �� stood at -�.��, higher than the growth recorded in Q� �� by �.�� points, but lower by ��.�� points relative to Q� ��. Quarter-on-quarter, the sector grew by �.�� in the fourth quarter ��. It contributed �.�� to real GDP in Q� ��, higher than the �.�� it recorded in the preceding quarter but lower than the corresponding quarter of ��, and accounting for �.�� of total real GDP in ��.


Prior to �� when the country fell into recession, the real estate sector used to be Nigeria�s �th largest contributor to GDP and a potential goldmine for investors, but this fell short as the economy grew. With Nigeria coming out of recession in ��, �� was predicted to be a year of recovery for the real estate sector, it however ended up being a slow year as shown in the recent reports released by the NBS.

Several developers complained of many promises coming into the market either for sale or lease without any takers in sight. The effect of the upcoming �� elections are already being felt as there is growing uncertainty around the corner. Several projects stalled at the feasibility stage and the stock market is already feeling the bite of pre-election frenzy with stock prices falling drastically due to panic selling by shareholders.

Real Estate Sector (Past and Present)

Average Cost of Buying a House in Lagos

High Average Low��

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Average Cost of Renting a House in Lagos

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The above is a pictorial representation of the average cost of buying and renting an apartment in Lagos. High represents Ikoyi, VI and its environs, Average represents, Gbagada and Yaba, while Low are areas within the Alimosho axis

As evident from the diagram, the cost of both buying and renting an apartment in Lagos fell from �� to �� but remained static in ��. While the fall in prices in �� can be attributed to the sector�s recovery out of recession, the situation in �� is hard to explain as it was generally expected that businesses would have picked up during the year.

Probable reasons however can be as a result of the increasing difficulty for investors to access long-term capital majorly due to high interest rates on loans. These have over time proven to be huge impediments to investment in the sector. The multiplier effect of this is felt by buyers and lessees in exorbitant costs of purchase and rent.

As is the situation with many other sectors in the country, �� poses a great deal of uncertainty to the real estate sector. The outcome �the peaceful or otherwise nature� of the elections will determine a lot of things in �� as investors generally adopt an overly cautious approach during elections. Some foreign investors are forecasted to pull their funding during such period to mitigate any political risks that might lead to a loss of investments during the year. This might imply a dry first quarter as the Presidential and Gubernatorial positions elections have been slated for February and March respectively. Another factor, linked to the elections, is the usual trend of change in policies if a new party comes to power. New policies adopted by a new political tenure may have unforeseen detrimental effects on various sectors.

Despite this, the general expectations from land owners and property developers is an increase in the price of rent and cost of land, as the inflation rate is likely to go up leading to more money in circulation and an increase in demand.

Projec�ons for the Year (2019)

Conclusion & Recommenda�onsThe government should clamp down on the personal income taxes of property owners. Most of the income earned from the sale of these properties go untaxed as the current scheme doesn�t have the right system to ensure that individuals declare and remit the exact amount earned on other incomes not directly related with their places of employment.

Same goes for the tax on the capital gains of sales and transfers of properties. A lot of property owners avoid paying the �� CGT to the FIRS or the �� charged by the Lagos state government.

Tax ExpertDrudge Consulting

Uchechukwu Onyegide



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