The Tax Man is coming, are you ready?

Sooner than later the tax man is going to knock on your doors, guess what Nigeria is changing. Technology is changing everything.

In the not too distant future, your phone number, Passport number, BVN, voters’ number etc will all be merged, and the authorities will be able to view all your transactions. It will not matter how many companies you have so long as you use any of the above services, they will be able to track you.

Rather than scare you this post seeks to inform and educate you and show what you need to do to prepare for the tax man. You don’t have to read everything at once, rather start from the question that best addresses your concern.

Please put your comments below and leave any questions you may have for the Tax expert.

Q1.  Please introduce yourself?

My name is Ayotunde Fasoro. I lead a tax practice that provides professional tax and business advisory services to companies. Before starting my practice in 1995, I had worked for four years in the Tax Division of Arthur Andersen & Co (Now KPMG Professionals). We also provide audit and other accounting services.

Q2. Why should an SME bother about paying taxes?

An SME should expect to pay its fair share of taxes for the following reasons:

- Paying taxes is a statutory requirement with legal provisions that prescribe penalties for default. It could prove more expensive when the initiative to demand the tax is exercised by the taxing authority rather than voluntary compliance by the SME.

- Taxes paid to government supply needed resources to provide the public infrastructure that supports the business of the SME

- Paying taxes give the payer a voice to hold the government accountable.

- When an SME pays taxes, it projects the image of an organization that believes in following due process and is prepared to embrace good corporate governance rules. It shows corporate responsibility.

Q3. What taxes are applicable to SMEs

Taxes applicable to SMEs fall in 2 broad categories:

1.   Taxes Directly Borne by the SME: These taxes are levied on the business Income of the SME and borne by it. They are:

a)   Company Income Taxes (CIT) - This tax is levied on the operating profits of companies. When the SME is a Limited Liability Companies, this Tax is collected by the Federal Inland Revenue Service (FIRS).

b)   Personal Income Tax/Self Employed Tax: When the SME is a non-incorporated body, this tax levied on its business income, is collected by the State Internal Revenue Service (SIRS) where the SME is doing business.

2.   Taxes not borne by SME but Paid for Others. These will include:

a)   Pay As You Earn (PAYE): This tax is the portion employees of an SME are expected to pay to the state they reside in.

However, the SME has a duty to deduct it from its employee salaries before paying them. These PAYE deductions are payable to the states the employees reside in.

b)   Withholding Taxes: This tax is payable by vendors of SMEs from payments received. However, the SME is saddled with the responsibility of withholding the tax before paying vendors. These are then remitted to FIRS and SIRS, depending on whether the vendor is a limited liability company or not.

c)   Value Added Tax (VAT): This tax is payable on taxable goods and services that are exchanged for good consideration.

The SME is expected to register for VAT and include it on its invoice to customers. It is also expected to pay VAT to its vendors.

Where the SME is not the ultimate consumer of the product, any VAT paid by it can be recouped and passed on its consumer.

Where the VAT paid to a vendor was on a product ultimately consumed by the SME, then it will be borne as an expense by it. This difference between the VAT collected from customers and that paid to vendors is payable to the FIRS on a monthly basis.

These are the major taxes applicable to SMEs. There are still others.

Q4. Is there a difference between an enterprise and a limited liability (LTD) company when it comes to the issue of taxes?

In certain instances, the tax treatment is given to an SME may depend on whether it is a limited liability company or not. For example, Income Taxes of LTDs are paid to the FIRS, while those for enterprises are payable to SIRS of the state the SME us located.

The withholding tax rates applicable to vendor payments could differ depending on whether it is LTD or not. E.g. withholding tax rate applied on payments to a consultancy that is an enterprise is 5%, but if the same consultancy was a limited liability company, the rate would be 10%.

Furthermore, when computing the Income Taxes, the profits of an enterprise are assumed to belong to the proprietor and thus taxed in his/her hands under Personal Income Tax rules, while the profits of the Limited liability company is distinct from that of its owners and are taxed separately under Company income tax rules.

Q5.On numerous occasions SMEs come to us saying that they have been in business for years and have not been paying their taxes, now they want to do the right thing, but they are afraid that the penalties may put them out of business. What would you advise them to do?

 Tax Authorities generally have powers to inquire into tax affairs of taxpayers retrospectively for 5 years preceding current year. Where taxes are discovered to have been underpaid, the Tax Authorities are empowered to demand payment of the shortfalls together with penalties and interests.

The prospects of this kind of scenario playing out may discourage SMEs that have defaulted in the past from complying going forward.

My advice would be for such SMEs to embrace compliance with tax regulations, but they should do so with the assistance of a good and reputable tax consultant. The general approach would involve doing an internal assessment of additional tax exposure for the opened years and approaching the Head of the Tax station to discuss your situation and desire to do things right going forward.

Q6. For those SMEs that can’t handle the hassle, what can they do?

If you can engage a tax consultant to guide you, I will recommend you do that. However, if you are unable to secure the services of a tax consultant, schedule a meeting with the Head of the tax station or Tax Controller to discuss your situation directly.

Where you require room to pay your tax debt in instalments, you can put forward a proposal to the Tax Controller. You should note that though the Tax Authorities wants to collect the maximum tax from taxpayers, they are also interested in the survival of the business so it can pay more future taxes.

Q7. Every day we hear in the news that the Govt is raising taxes etc, what exactly is the position and which taxes should SME’s focus on.

On the contrary, the government has not significantly raised any taxes in recent years. There could be some levies/charges that may have increased over time, those were most likely due to the increase in bases used (e.g. home values) and not due to rate increases.

When an SME pays higher income taxes, it is more likely due to an increase in its income or more correct application of tax rules, than any increase in the tax rate.

The government issued an Act that states all the taxes and levies which a taxpayer should expect (Taxes and Levies (Approved List for Collection) Act No. 21 of 1998).

 It also clarifies which level of Government is empowered to collect them (Federal, State or Local Govt). I will advise that an SME review that particular schedule to ascertain the taxes or levies applicable to it.

Some of the most common taxes are listed below:

- Company Income Tax: For Ltd liability companies. This tax return is generally expected within 6 months of company year end and is sent to FIRS.

- Pay As You Earn (PAYE): these are monthly tax deductions from employees to be remitted by the employer to SIRS by the 10th day of the month following deduction. 

- Direct Tax Assessment: This is a personal income tax that is applied on Sole Proprietors, self-employed professionals, directors, etc who are not counted as employees. It is usually assessed once a year after the end of the year in question and it is payable to the SIRS. 

- Withholding Tax: This tax is not a separate kind of tax, but an advance payment of Income Tax by the person bearing the burden. SMEs are expected to withhold taxes as specified rates from payments due to certain of their vendors before paying them. Such withheld taxes are due for remittances to the relevant authorities before the 21st day following the deduction.

- Value Added Tax: SMEs are expected to register for VAT irrespective of the nature of their operations. Where they provide taxable goods or services, they are expected to add a 5% VAT to the invoice value. The difference between the VAT they collect from their customers and the one paid to their vendors is payable to the FIRS not later than the 21st day of the month following the transactions.

-  Business Premises Levy: This is a levy payable to the state in which the SME is located. It is paid once a year.

- Land Use Charge: This was introduced by some states in place of tenement rates and is payable once a year. It is usually based on the value of the house. This may be paid by the landlord or the business occupying the property.

These are some of the key taxes and levies for SMEs to pay attention to. They are however not exhaustive. Kindly refer to the Act containing the comprehensive list.

Q8. Do you have any final word for SME regarding this matter of taxes?

It is cheaper, in the long run, to be in full compliance of tax laws. When taxes are paid as at when due, the burden on your cash flow is spread out. You are also able to avoid having to pay a minimum of 30% additional liabilities in penalties and interests for defaulting in taxes.

You should also note that many of the taxes are not your own burden. The SME is only appointed as an agent of govt to collect those taxes. It is a mere administrative burden, not a tax burden. However, failure to discharge this administrative burden will make it your substantive tax burden plus accruing penalties and interests.

An SME can only hide from complying with tax rules for as long as it remains too small to arouse the interest of the Tax Authorities. The moment you Business grows to visible level; the Tax Authorities can review your tax affairs retrospective for 5 years.

Thus, it pays to start complying with tax regulations when your business is still small so that when you have grown to a visible height, your 5-6 years of tax affairs could be clean. It would take a visionary, forward-looking entrepreneur to embrace this advice.

Conclusion

“It would take a visionary, forward-looking entrepreneur to embrace this advice.”

I guess this is what it boils down to are you visionary? do you see your business growing? Then take the first step to put your books in order.

You can contact us if you need a tax consultant.