The federal tax authority in Nigeria, the Federal Inland Revenue Service (FIRS), will be introducing Tax Account Codes (TACs) from 1 January 2025 to enhance the filing and review of tax returns submitted by taxpayers. This initiative is part of the FIRS' continuing efforts to align Nigeria's tax system with global best practices, improving efficiency, and boosting revenue generation.
What are TACs?
TACs, as conceptualized by the FIRS, are unique codes assigned to various items and transactions in a company's financial statement. They serve as digital tags that enable both taxpayers and the tax authority to categorize items in the financial statements in a systematic way, facilitating the assignment of specific attributes to items of revenue, cost, assets, and liabilities presented in the financial statements of a company.
Based on preliminary information shared by the FIRS, TACs would be integrated into all FIRS' tools, including TaxProMax. Details of the code categories and numbers would be shared with taxpayers progressively before the implementation date. While there has been no mention of integrating TACs into taxpayers' ERP systems, we believe that the overall goal of the FIRS' digital transformation journey is to create an integrated tax system between taxpayers and the tax authority, enabling real time tax administration.
Objective of the TACs
As explained by the FIRS during the initial public presentation of this initiative, the primary objective is to enhance data centricity and analytics. By enabling structured segregation of financial data, TACs will provide the FIRS with the data to perform certain types of analytics and gain better insights into the financial performance of taxpayers across board. It should facilitate the implementation of risk-based tax audit management and allow the FIRS design predictive and prescriptive analytics models to enhance corporate income tax administration and collection in Nigeria.
By promoting uniform reporting across companies in several industries, TACs make it easier for tax authorities to identify trends, track tax liabilities, and conduct more efficient audits. This, in turn, could help reduce instances of tax fraud and tax evasion, creating a more transparent tax environment. TACs could provide policymakers with deeper insights into the distribution of tax burdens and the financial health of various sectors.
During the public presentation, some taxpayers expressed concerns that this initiative could impact their self-assessment rights as provided by various income tax laws. These concerns stem partly from experiences with the FIRS' TaxProMax portal, where the system's classifications might interpret financial items as allowable/taxable or disallowable/non-taxable, solely based on the FIRS' judgment. Such a situation could signal a shift back to a government-assessment model, replacing the self-assessment framework currently in place. Adopting this model would require amendments to existing tax laws. However, the FIRS clarified in the presentation that tax computations generated by TaxProMax will not be binding on taxpayers.
Optimizing digital data collection
The TACs initiative is similar to the eXtensible Business Reporting Language (XBRL) used by tax authorities in other countries, such as the United States IRS and the Netherlands' Dutch Tax and Customs Administration. XBRL is a digital reporting standard used to standardize the way financial data is reported and shared across various platforms and regulatory bodies.
A major advantage of XBRL over TACs is that it requires minimal manual intervention from taxpayers in providing tax data. Once a taxpayer's financial statement is prepared, it can easily be converted to XBRL format with the help of an XBRL tool. This format is machine-readable; hence it enables the automatic reading, processing, analysis, and storage of financial data. This automated processing helps tax authorities make faster, more informed decisions and quickly respond to changes in compliance requirements. TACs, on the other hand, requires manual input by the taxpayers and does not have this machine-readable feature. This means more manual work might be necessary for gathering, processing, and analyzing data.
Another key advantage is its extendable nature. Each item in an XBRL document is assigned a tag, which provides metadata describing the nature of the item (e.g., revenue, expense, asset, etc.). This tagging system allows for detailed analysis of financial statements, enabling tax authorities to examine not only the reported values but also their relationships (e.g., whether an item is part of current assets or non-current liabilities). In contrast, TACs provide more limited insights, focusing mainly on the categorization of taxable items, but lacking the detailed descriptive ability of XBRL tags.
However, implementing XBRL requires a robust IT infrastructure and extensive training for both tax officials and taxpayers compared to TACs. This can lead to higher initial costs and a longer learning curve, particularly for small and medium-sized enterprises (SMEs) or organizations without the required technical expertise. TACs, by contrast, are simpler to use and more cost-effective for entities that do not require the advanced functionality offered by XBRL. Notwithstanding the above, it is essential to recognize that each country's path toward modernizing its tax system is shaped by its unique economic and social context, and Nigeria's approach will need to account for these factors to ensure success.
What does this mean for taxpayers?
Based on the implementation plan, the FIRS will commence the activation of the TACs from January 2025. Therefore, taxpayers are encouraged to plan for the rollout of the initiative proactively and aggressively, given the very limited time. Some recommended steps to do this include:
Understand the TACs initiative: Taxpayers should familiarize themselves with TACs and its impact on tax compliance. They should understand how TACs will categorize their financial statements and the new reporting rules that will apply. Also, taxpayers should attend any of the stakeholder meetings with the FIRS which should be held before the roll-out commences and provide feedback on sector-specific challenges. Their input will help tailor TACs to reflect the realities of all industries, making the system complete and more effective.
The need for taxpayers to engage with tax experts to better understands the impact of this initiative on the business and its financial systems cannot be overemphasized.
Sensitize current financial systems/Enterprise Resource Planning solutions (ERP): Since tax attributes would be assigned to TACs developed for items of income, expenses, assets and liability, the tax treatment of these items will be determined solely by the code used, rather than the nature of the item itself. For instance, if transactions related to unrealized foreign exchange gains are erroneously classified as part of the realized foreign exchange gains by the financial system, the FIRS' TaxProMax system would simply assess the gain to tax. Correcting such an error could require a lengthy reconciliation with the FIRS, which could have been avoided with proper classification.
Therefore, taxpayers need to proactively sensitize their current financial system, especially items of income and expenditure, to ensure accurate classification and posting of transactions and to avoid unnecessary tax exposures. This also ensures that the data FIRS uses for analytics is accurate. The sensitization process may require the merging or elimination of certain general ledger codes for simplicity. For multinational companies operating in Nigeria, this process would require engagement with their global IT teams.
In the medium to long term, taxpayers may need to upgrade/amend their financial systems/Enterprise Resource Planning (ERP) solutions to enable seamless integration with FIRS' digital tax systems. This may necessitate working with software providers or IT departments to ensure that their accounting systems are updated to accommodate new tax categorization rules.
Budget for the transition: The transition to TACs may involve initial costs, especially for businesses needing to upgrade IT infrastructure, software, or hire consultants. Taxpayers should budget for these changes and ensure that they have the financial resources to handle the transition without disrupting their core operations.
Conclusion
The adoption of TACs has the potential to significantly improve Nigeria's tax system. Some of the imperatives for the success of this initiative include:
- Clear leadership support for the initiative. Often, initiatives instituted by one administration are not carried forward by a new administration.
- Capacity building for both tax officials and taxpayers to ensure they understand and implement TACs effectively.
- Establishing a reliable IT infrastructure is also essential. The FIRS must address current issues with the e-filing system, particularly TaxPro Max, and invest in hardware, software, networks, and cybersecurity. Likewise, businesses and individual taxpayers must upgrade their IT systems to ensure seamless integration with the FIRS's system.
- Pilot program as it is an effective way to test the system before full-scale implementation. These programs can help to identify potential issues and make necessary adjustments. They also provide an opportunity to gather feedback from taxpayers and make improvements based on their experiences.
- Regularly monitoring the impact of TACs on tax compliance, revenue generation, and taxpayer satisfaction is germane. Insights gained from this process should be used to make informed adjustments to policies, procedures, and regulations.
In conclusion, the path towards implementing TACs in Nigeria may be a challenging yet rewarding one. Although a disruption in taxpayers' activities may occur in the short run, Nigeria can successfully modernize its tax system with strategic planning, inclusive stakeholder engagement, and a commitment to continuous learning. A phased implementation approach is more practical. Gradually rolling out TACs can help ensure that the new system integrates smoothly without overwhelming existing resources. This method allows for adjustments based on real-time feedback and minimizes resistance to change by giving stakeholders time to adapt.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
