Nigeria: Is It A Tax Or A Levy?

Last Updated: 28 August 2014
Article by Taiwo Oyedele

The Black's Law Dictionary defines a tax as a charge, usually monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue. Most broadly, the term embraces all governmental impositions on persons, property, privileges, occupation, and enjoyment of the people, and includes duties, imposts, and excises.

On the other hand, a levy in this context is defined by the Webster Dictionary as an amount of money that must be paid and that is collected by a government or other authority.

If the above broad definitions are anything to go by, then one can erroneously conclude that a levy is a tax and a tax is a levy. However, the truth is that this may not always be the case. But you may ask – how does it matter?  Well it matters especially from a tax accounting and reporting perspective. The distinction will impact on how and when to recognise a liability, contingent or otherwise, to pay a levy. 

Nigeria has adopted the International Financial Reporting Standards (IFRS) as the basis for preparing financial statements by reporting entities. The International Accounting Standards Board (IASB), the body under which IFRSs are produced, also has a committee that provides clarifications and interpretations on grey areas of accounting standards. This committee is known as the International Financial Reporting Interpretation Committee (IFRIC). 

In May 2013, the IASB issued IFRIC Interpretation 21 on Levies which takes effect from 1 January 2014. IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government whether or not the timing and amount of the levy is certain. For the purpose of IFRIC 21, a levy is an outflow of resources embodying economic benefits that is imposed by governments (including government agencies and similar bodies) in accordance with laws and/or regulations.  However, it does not include income taxes (covered by International Accounting Standard 12 Income Taxes), fines and other penalties, liabilities arising from emissions trading schemes and outflows within the scope of other Standards. A levy should not be confused with a charge or a fee payable to government to acquire an asset, or for the rendering of services such as water treatment or waste disposal. 

Based on IFRIC 21, there must be an obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. The Interpretation clarifies that 'economic compulsion' and the going concern principle do not create or imply that an obligating event has occurred. In other words, it is not appropriate to accrue for a liability to pay a levy simply because the entity must pay the levy in order to continue in business in the future.

IAS 12 states that income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity. Specifically, the major distinction between income taxes and levies is that the former is based strictly on taxable profit while the latter is payable without regard to taxable profit. 

There are numerous levies in Nigeria that fall into the scope of IFRIC 21. Some of such levies include:

  • Local content levy based on the Nigerian Oil and Gas Industry Content Development Act calculated as a percentage of contract sum
  • Niger-Delta Development Commission (NDDC) levy based on the NDDC (Establishment etc) Act and calculated as a percentage of annual expenditure budget
  • Cabotage surcharge based on the Coastal and Inland Shipping (Cabotage) Act calculated on the contract fees
  • Industrial Training Fund (ITF) levy based on the ITF Act as a percentage of payroll cost
  • Pioneer status service charge based on the Pioneer Status Incentive Regulations as a percentage of projected tax savings.

Impliedly, the above levies should not be accounted for as part of tax expense in the income tax line immediately after "Profit Before Tax (PBT)". Rather, they should be accounted for as part of general expenses or be capitalised along with the related assets as the case may be. Only outflows of economic benefits imposed by legislation which are calculated based on taxable net margin can now be treated as income tax.

There are however situations where the obligation behaves both like an income tax within IAS12 and a levy within the scope of IFRIC 21. For example, in respect of the Minimum Tax, the law requires a payment of minimum tax whenever there is no net taxable margin or the net taxable margin gives rise to tax that is less than the minimum tax. It appears reasonable that the minimum tax should be treated as a levy (and therefore expensed) where a company has no taxable profit. On the other hand if the taxable profit is less than the minimum tax, there should be a split between income tax and levy.

Also, there is ambiguity created by legislation in some cases. An example of this is a situation where the legislation on income taxes deems the net taxable margin based on an item that is closely related to profit such as dividend. For example, a company can be subject to additional income tax on the excess of dividend distributed from the profit of a particular year above the taxable net margin of the same year determined based on general tax rule. In this regard, the dividend is deemed to be the taxable net margin. Although required by the income tax legislation, the income tax assessed based on profit distribution should be regarded as a levy within the scope of IFRIC 21.

Similarly, income tax payable by a non-resident company in Nigeria may be levied on a percentage of turnover through the deemed profit mechanism whereby taxable profit is deemed to be 20% of income without considering actual expenses. Such a deemed profit tax could be considered as a levy but in substance it is an income tax to the extent that it represents actual net margin of the company otherwise any excess is a levy.

A major issue regarding the timing of recognition will be encountered where there is no clear indication in the various laws as to when the levies are due or payable and if they are triggered by an event. A good example here is the NDDC levy which imposes a three percent charge on the total annual budget of oil producing (including gas processing) companies operating in the Niger-Delta. The triggering event is the annual budget but there is no timeline for all affected companies to draw up their budgets. Therefore, a practical solution would be to view this as an annual cost and therefore match the cost against revenue of relevant period notwithstanding that the trigger is the annual budget. In practice, the levy cannot be avoided by the failure to prepare a budget. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Taiwo Oyedele
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.