TAX SERIES BY ENIOLA – FINAL SEASON 10!
THE TAX TWENTY
Enny Money was once like YOU. Every tax talk was spent wondering what in the world was being discussed.
Every person who liked and talked tax was looked at like some weird creature that derives pleasure in calculations and hard stuff.
Now she’s Tax balling. Every tax thing ‘issa goal’. Be like Enny Money.
Start by understanding basic tax terms with her!
- Taxable Income: Enny Money earns 200,000 naira monthly, sells hair extensions by the side and receives allowance from her parents once in a red moon. All these add up to her Total/Gross income.
After the Taxman deducts all the amounts allowed to be deducted by the tax law from her Total income, the amount remaining that is subjected to Tax is her Taxable Income.
- VAIDS: Enny Money doesn’t like trouble, you know. She heard the Government was calling all Tax prodigal children back home to be forgiven for Tax sins and to ‘go and evade tax no more’.
Father Federal Government called the forgiveness stuff – Voluntary Asset and Income Declaration Scheme (VAIDS).
The name is fancy but the intention of Father FG is clear. All the running away from the Taxman and irregular filing of tax returns would cease. Enny Money would willingly declare her income sources and assets.
She starts living a regular tax life with no fines, penalties or interest on default of past payments.
The VAIDS Vindication ended on June 30th though.
(Please click here to view our TSE discourse on the VAIDS Litmus Test).
- Chargeable Assets: Enny Money acquired a piece of land in Oshodi two years ago because her Land Law lecturer back in University – Dr Oni, told her that assets always appreciate and this is the way forward.
When Enny Money will sell/dispose of this piece of land in the nearest future, she will pay capital gains tax on the land because the value will have increased by then.
So, the land is a chargeable asset as it becomes subject to capital gains tax where it is sold or disposed of in any other manner as long as there is a change in its value.
(Please click here for our TSE discourse on Capital Gains Tax).
- Tax holiday: Enny Money wants to invest in a company – Life is Eazi Ltd, being formed in Nigeria which will manufacture cars that run on water.
The company might be entitled to pioneer status and granted a tax holiday which means for three to five years it won’t be subject to payment of any tax.
This will allow Life is Eazi Ltd. grow and attract investors.
- Allowable deductions: Enny money, the tax lawyer with the side-chick hair extension business has multiple sources of income. Not all this income is subject to income tax. The expenses or items that are allowed to be subtracted from her total income are allowable deductions.
They reduce the amount of her income that will be finally subject to income Tax.
That simply means they reduce the amount of Tax she eventually gets to pay.
- Capital allowance: Life is Eazi Ltd. in number 4 above will resume paying tax when the Tax holiday is over. Part of the allowable deductions that can be claimed is Capital allowance.
Money spent to invest in the business for e.g. industrial buildings, vehicles, research etc. are called Qualifying Capital Expenditure (QCE). Capital allowance is granted on QCE so that with time, Life is Eazi Ltd. can recover the money spent on investing in the capital assets.
This obviously makes life easy for Life is Eazi Ltd.
- BEPS: Aka Base Erosion and Profit Shifting.
Fast forward 5 years, Life is Eazi Ltd. has blown and Enny Money’s investment in the company did not enter Sambisa Forest.
Life is Eazi Ltd. commences business in other countries and business keeps booming.
Life is Eazi Ltd. then starts taking advantage of the dissimilar tax laws in these countries to avoid paying up to the normal tax rate it would have paid if it didn’t try to sly the law.
These actions erode the tax bases (taxable income) of the countries where these actions happen, i.e. the Taxmen in these countries collect reduced amounts as Tax. Base erosion is done by shifting profits artificially to Life is Eazi Ltd. branches in countries with low/zero-tax rates.
Worthy of note is that there exists 15 Action Plans created by the Organization for Economic Co-operation and Development and the G20 countries (OECD/G20 Countries) to equip governments with instruments to tackle tax evasion, avoidance, profit shifting among other things.
- Transfer (Mis) Pricing: Transfer/Mis Pricing is one of the ways BEPS is carried out. It is a form of Tax Avoidance/Evasion.
The branches of Life is Eazi Ltd. in various countries can engage in transfer of goods and services to each other at certain prices.
The Life is Eazi Ltd. branch in Country A where Tax Rate is high sells goods to another branch in Country B where the Tax Rate is low at a price very much lower than the standard price.
The Taxable income on this low-priced transaction is thus lower than it would have been if the goods were sold at the standard price because the company makes lesser profits.
So, in this Country A with a high tax rate, the Company claims low profits and a smaller amount is paid as Tax.
This is how Transfer/Mispricing is engaged in so that the branches in countries where tax rates are low make very high profits while branches in countries where Tax rates are high make very low profits.
Life is Eazi Ltd. will then gain more money overall because of this Transfer/Mispricing, to the detriment of the Taxman.
(Please click here for our TSE discourse on Tax Evasion and Avoidance).
- Zero Tax: The hair extension side-chick business of Enny Money has graduated. Now she’s Foreign, she’s international.
She pays Input VAT when she buys raw materials to enable her export the hair extensions. The exports are subject to Zero Tax.
This means she would not collect Output VAT on the supply of the goods for export.
Since Zero is less than any Input Tax Enny Money paid for the supply the goods in the first place, she is perpetually entitled to a refund of the Input Vat from the FIRS (Federal Inland Revenue Service).
This system is put in place to encourage non-oil exports and boost the economy.
(Please click here for our TSE in-depth discourse on VAT).
- Tax Exempt: Enny Money is always having ideas on how to make more money. She decided to invest in treasury bills, government bonds and corporate bonds.
The interests she gains from all three are Tax Exempt. This means that they are free from Tax. They are not recognized as Taxable.
The Taxman doesn’t get beeps on his radar whenever these three are involved.
- Tax Returns: As Enny Money has followed the path of the VAIDS Redemption, Tax Returns are always filed by her in accordance with the law.
The Tax Return is the tax form(s) used to report her income and file her taxes with the LIRS (Lagos Inland Revenue Service).
It allows her calculate her tax liability and remit payments or request refunds from the LIRS/FIRS depending on the tax paid.
- RTA: Relevant Tax Authorities are the jagabans. Our Taxmen. They administer our Federal and State Taxes.
The Federal Inland Revenue Service (FIRS) collects, accounts for and administers all taxes for the Federal Government.
The State Internal Revenue Service (e.g LIRS) ensures effective and optimum tax collection in the States. The RTA also enforce Tax penalties.
- Best of Judgement: BOJ is the assessment based of the RTA based on what they think is the true estimate of Enny Money’s Income Tax from her status and other circumstances.
BOJ is made when the RTA thinks that a Taxpayer has under-declared or under-paid his/her taxes.
Enny money has however become a good Taxpayer after going the VAIDS way so the RTA got nothing on her!
- CbCR: Country by Country Reporting is a disclosure by companies of tax figures and other financial data on a country by country basis.
Action 13 of the OECD/G20 BEPS Action Plans provides guidance on transfer pricing documentation and the templates for Country-by-Country-Reporting.
The FIRS released the Income Tax (CbCR) Regulations, 2018. The Regulations seek to tackle tax evasion, avoidance and enhance transparency in the administration of Taxes in Nigeria
- Distrain: Enny Money’s property was once distrained by the LIRS to enforce payment of tax due by her. Distrain simply means seizing one’s property to obtain money owed.
The LIRS guy who came to distrain even told her that she was lucky he didn’t distrain her goods (hair extensions) and other chattels.
Luckily, the money was paid before they exercised their power to sell the distrained property to recover the money owed.
Now Enny Money has gone the VAIDS way and she’s Tax-Clean!
- Taxable Persons: Enny Money, Ahmed Musa, Leon Balogun, Falz the Bahd Guy and everyone hustling, doing business in Nigeria are Taxable Persons.
People who don’t live in Nigeria (including those who ran away), but who still derive income from Nigeria are Taxable Persons.
Companies like Life is Eazi Ltd. that operate in Nigeria are liable to pay Tax.
Thus means that they make income or profits that can be taxed by the RTA.
Educational institutions, government ministries etc. are not Taxable persons.
- ‘Not at arms-length’ Transactions: Life is Eazi Ltd. engaged in Tax Avoidance/Evasion in number 8 above by selling at below the standard price to another Life is Eazi Ltd. branch in Company B where the tax rate is low so that the higher profits would be subject to low Tax.
In the end, Life is Eazi Ltd. made more profit than it would have made if it remained on the path of righteousness.
The act of Life is Eazi Ltd. selling at a price lower than the standard price translates to it engaging in a ‘Not at arms-length’ transaction.
This is because the connection/relationship between the two sister branches was put into consideration and so the price sold was substantially reduced.
It’s the same way Enny Money would sell hair extensions to her sisters for lesser prices while she would sell at the standard price to any random person who orders.
- ‘At arms-length’ Transactions: If Life is Eazi Ltd. sells the same goods as in Number 8 to a random company – We Will Win the World Cup Ltd., the price will be the standard price as there is no familiarity, collusion, undue influence or pressure between them.
They are just two independent parties intending to get the best deal possible.
These kinds of transactions make the Taxman happy as there is likely to be reduced level of tax evasion/avoidance aka more money for the Taxman.
- Tax to GDP Ratio: An increase in Nigeria’s Gross Domestic Product (GDP) means there is increased development in Nigeria.
Increase in development means increase in average income earned per person in a given year.
Increase in income will lead to increase in Tax collected.
So the Tax to GDP ratio is one of the methods used to assess a country’s development and is calculated by dividing the tax revenue collected by the Government from the GDP of that country.
Where development is low and tax evasion/avoidance is high, the Tax to GDP Ratio will be low.
FIRS Chairman Babatunde Fowler has reportedly said that Nigeria has no business with a 6% Tax to GDP ratio. The number is set to be increased to 15% by 2020 through VAIDS.
- Tax Clearance Certificate (TCC): Enny Money had a document issued by the RTA to show that her Tax affairs are in order.
Corporate Bodies like Life is Eazi Ltd. are also issued a TCC after due rendering of annual returns to the RTA.
The TCC is relevant for numerous transactions by both individuals and Corporate Organizations in Nigeria. The transactions include applying for a loan, applying for certificate of occupancy, contesting for public offices, etc.
With a fair knowledge of the above, a random basic Tax discussion can be partaken in without one feeling like the world is a sad place.
I wish every such person a delightful conversation and ‘may the forces be with you’!
Akinoso Eniola is a Tax and Litigation Enthusiast, a Fellow of the Obama Young African Leaders Initiative and the National Matching and International Relations Coordinator for AIESEC in Mauritius. She writes stories and articles to contribute to her AIESEC-cultured love for the SDG’s and to bring pertinent issues in Nigeria to light. The Tax Series by Eniola is her latest initiative to stimulate interest in Taxation.