1. Tax Controversies
1.1 Tax Controversies in This Jurisdiction
In Nigeria, tax controversies could arise from several scenarios following various interactions between the taxpayer and the relevant tax authority (RTA), which could be either the Federal Inland Revenue Service (FIRS) or the State Internal Revenue Service (SIRS). These instances include the following.
Tax Assessment/Self-Assessment
Under Nigerian law, all taxable persons, including individuals that are not under the Pay-AsYou-Earn (PAYE) system (applicable to individuals in employment) and companies, are required to submit a self-assessment to the RTA. Typically, when a taxable person submits their selfassessment along with audited accounts, the tax authority has the following options:
- it can accept the audited accounts and filed return, and then make an assessment based on these documents or other documents requested during an audit; or
- it can reject the return and issue a best-ofjudgement assessment to ascertain the taxpayer's profits, tax position and tax liability.
Additionally, the RTA can conduct a best-ofjudgement assessment on a taxable person who has failed to submit a return if it believes that the taxpayer is liable to pay taxes.
Tax controversies typically arise as follows.
Pre-audit stage
The RTA notifies the relevant taxpayer of an impending audit and requests copies of necessary documents in advance.
Field audit or desk review stage
The RTA reviews the received documents. If it is a desk review, the RTA officials can decide based on the documents, without visiting the taxpayer's office. For field audits, the RTA officials visit the taxpayer's office, request copies of documents, interview staff members and discuss key issues or findings.
Post-audit
After the field audit or desk review, the RTA will typically issue an audit report summarising its findings and inviting the taxpayer to respond. The taxpayer has the right to respond to those findings and, if found acceptable (following correspondence and meetings), the RTA could (but not in all cases) issue a letter of intent (LOI) to assess the taxpayer to additional taxes. It is at this point that a tax controversy arises.
For assessment of additional tax, a time limitation applies during the assessment year or within six years after the initial year of assessment, if the RTA discovers or believes at any time that a taxpayer has not been assessed to tax or has been assessed to a lesser amount than applicable. This time limitation with respect to additional assessments does not apply in cases of fraud, wilful default or neglect.
Where the taxpayer disputes the RTA's assessment, the taxpayer can apply to the RTA by way of notice of objection in writing to review or revise the assessment made upon it. A tax dispute arises when the tax authority does not agree with the taxpayer's objection and issues a notice of refusal to amend (NORA).
Some tax controversies could arise when a taxpayer pre-emptively applies to the court to interpret certain provisions of tax law, especially if they oppose a position taken by the RTA in a circular, guideline or other form of communication.
1.2 Causes of Tax Controversies
In the authors' experience, most tax disputes arise from companies' income tax (corporate tax) and value-added tax (VAT). This is because these are priority areas for the FIRS during tax audits and usually have the most basis for contention. From an income tax standpoint, most issues involve revenue recognition, deductibility of certain costs and expenditures, and transfer pricing. From a VAT standpoint, most issues involve remittances, the applicability of VAT to certain transactions, and responsibility for VAT.
The values involved vary from as low as NGN2 million to tens of billions of Naira in some cases, as there are no thresholds that determine the adjudication of tax disputes.
The authors also find that considerably more disputes are arising from decisions of various SIRS with respect to personal income tax and withholding tax (WHT), and see this trend increasing as states move to increase tax revenue.
1.3 Avoidance of Tax Controversies
Tax controversies can be mitigated through the following.
Obtaining Legal and Tax Counsel
The first step to avoiding tax controversies is to obtain guidance on proposed transactions, implementing certain tax planning strategies and business model reviews.
Adopting a Robust Tax Compliance Framework
Proper documentation and following a robust tax compliance framework helps mitigate tax controversies.
Voluntary Disclosures and Remediation
If errors are identified in tax filings and/or remittances, a taxpayer should disclose these voluntarily and agree with the tax authorities on remedial options.
Avoiding Aggressive Tax Planning
As tax authorities are increasing the adoption of substance-over-form doctrines stemming from GAARs, taxpayers should avoid tax-planning schemes that lack commercial substance and are intended solely to obtain a tax benefit.
Monitoring Legislative and Policy Developments
Taxpayers should stay informed about international and domestic legislative and policy developments that could impact them, and factor these into their tax strategy.
1.4 Efforts to Combat Tax Avoidance
Nigeria has consistently aligned its tax system with global best practices. For example, the country has implemented the Organisation for Economic Co-operation and Development's (OECD) recommendations on Base Erosion and Profit Shifting (BEPS), leading to the introduction of:
- significant economic presence rules;
- transfer pricing regulations;
- controlled foreign company rules (in the proposed tax bill that will become effective later in 2025);
- advance pricing agreements; and
- country-by-country reporting (CbCR) guidelines.
In addition to enhancing tax administration, the authors have found that adherence to the FIRS' guidelines reduces incidences of additional tax assessments, effectively reducing tax controversies.
Some grey areas have continued to cause controversies – for instance, the obligations of constituent entities of a multinational enterprise (MNE) in relation to certain disclosure requirements under the CbCR guidelines, and disputes over transfer prices, especially in loan relationships.
1.5 Additional Tax Assessments
A taxpayer has 30 days from the receipt of the disputed decision of the RTA to appeal to the Tax Appeal Tribunal (TAT) for redress. In filing the appeal, the taxpayer could encounter certain hurdles, either at the point of filing or at the hearing of the appeal, and these are discussed below.
The deposit of tax assessed as a condition precedent for lodging an appeal or seeking a judicial review of an additional assessment is not novel in Nigerian tax jurisprudence. Paragraph 15(7) (c) of the Fifth Schedule to the FIRS Act empowers the TAT to require the taxpayer to deposit an amount with the FIRS before the taxpayer's appeal is heard. This amount should be equal to either the tax charged on the appellant for the previous assessment year or half the tax charged in the current assessment under appeal, whichever is lower. Additionally, the taxpayer must include a sum equal to 10% of this deposit. If the taxpayer fails to comply with this order, the assessment being appealed will be confirmed, and the taxpayer will forfeit any further right to appeal that assessment. The order to deposit the tax assessed is not automatic – the FIRS has to prove to the satisfaction of the TAT that:
- the taxpayer has, for the year of assessment concerned, failed to prepare and deliver returns required to be furnished under the relevant provisions of the tax laws;
- the appeal is frivolous or vexatious, or is an abuse of the appeal process; and
- it is expedient to require the appellant to pay an amount as security for prosecuting the appeal.
In addition, Order III Rule 6(a) of the Tax Appeal Tribunal (Procedure) Rules 2021 (the "TAT Rules") mandates taxpayers to deposit 50% of the disputed tax amount into an account designated by the TAT as a condition precedent to filing an appeal and adhere to an affidavit of compliance with the requirement. A strict interpretation of the provision has resulted in the TAT registries refusing to accept the filing of appeals not accompanied by an affidavit that the deposit had been made. As an administrative solution, the TAT permitted the filing of appeals without the affidavit but heard preliminary objections by the FIRS' legal counsel on the matter, often seeking a dismissal of the appeal for non-compliance with the requirement.
In hearing one such preliminary objection in the case of Emenite Limited v FIRS (TAT/ SEZ/012/2021), the TAT examined whether the mandatory security deposit requirement under the TAT Rules conflicted with the discretionary requirement under paragraph 15(7) of the FIRS Act, given that the TAT Rules are a subsidiary legislation that derive their validity and force from the FIRS Act. The TAT decided that the provisions of the TAT Rules mandating a 50% security deposit as a condition precedent for lodging an appeal was inconsistent and invalid, and proceeded to hear the appeal on its merit.
In addition, Order V of the Federal High Court (FHC) Tax Appeal Rules 2022 (the "FHC Tax Rules") requires a taxpayer appealing a TAT decision to the FHC to deposit the judgment sum in an account in the name of the Chief Registrar of the FHC as a condition for prosecuting an appeal. The Chief Judge of the FHC is empowered under Section 254 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) to make rules for the practice and procedure of the FHC. Particularly for tax matters, Section 17(5) of the FIRS Act empowers the Chief Judge of the FHC to make rules of procedure in respect of tax appeals. An appeal under Nigerian law does not operate as an automatic stay of execution of judgment, which means that the judgment creditor is expected to take advantage of the judgment. Hence, a stay of execution of money judgment would usually be granted on the condition that the judgment sum be deposited in an interest-yielding bank account pending the appeal. In this instance, the mandatory security deposit requirement of the judgment sum simply codifies the general principle that the courts would rarely grant an unconditional stay of execution of money judgment. In effect, Order V provides for an automatic conditional stay of execution of the TAT's judgment being appealed against.
In another case, Joseph Bodunrin Daudu SAN v Federal Inland Revenue Service (FIRS) (Suit No FHC/ABJ/TA/1/2021), the FHC struck down provisions that required taxpayers to pay security deposits before filing appeals at the TAT and the courts. These provisions were deemed to infringe upon taxpayers' constitutional right to a fair hearing, and were consequently declared null and void.
2. Tax Audits
2.1 Main Rules Determining Tax Audits
Tax audits are initiated or could be triggered based on varying factors. While not particularly provided for under the tax statutes, it is typical for the tax authorities to conduct risk profile assessment, industry assessment and compliance status assessment in initiating a tax audit. For instance, companies and taxpayers that have persistently failed to file tax returns or that have reported losses for multiple years without a clear-cut justification would likely trigger the initiation of a tax audit by the tax authorities.
In addition, taxpayers who have not bn audited for a long time are more likely to be audited at some point. The tax authorities are likely to initiate tax audits on companies in certain high-risk industries such as oil and gas, telecommunications (telecoms) and financial services. In recent times, the FIRS has appointed most telecommunications companies and banks as VAT collection agents. There has been a recent rise in the audits of these companies to ensure compliance with VAT collection and remittance.
It is also more likely for a taxpayer with prior compliance issues or ongoing tax disputes to fall under the watchful eyes of the tax authorities.
2.2 Initiation and Duration of a Tax Audit
A tax authority can initiate a tax audit to verify a taxpayer's compliance with various tax laws such as the Companies Income Tax Act (CITA), VAT Act, Personal Income Tax Act (PITA) and Capital Gains Tax Act (CGTA). A tax audit can be initiated under the following circumstances:
- self-assessment confirmation – a tax audit can be initiated to verify the information provided in the self-assessment return filed by the taxpayer;
- routine audits – a tax authority can conduct a routine tax audit on a taxpayer to determine the extent of its compliance;
- third-party information – the tax authority can act on a credible report of a third party regarding a taxpayer's compliance with its tax obligation to initiate an audit; and
- risk profiling – a tax authority can initiate an audit if it observes red flags, such as unusual financial transactions, persistent losses being reported, or other non-compliance indicators.
The duration of a tax audit may vary depending on factors such as the complexity of the taxpayer's operations, adequacy and compliance with the delivery of information required.
In relation to the statute of limitations of a tax audit, the CITA, PITA and CGTA provide that the tax authority can assess a taxpayer for additional tax where it is of the opinion that the taxpayer has not been assessed or has been assessed at a lesser amount than that which ought to have been charged; such additional assessments must be made within the year of assessment or six years after the expiry of the year of assessment. Additional tax assessments typically arise from an audit, which means that the tax authority can only audit the last six years of assessment (excluding the year of the audit for income taxes). For income taxes, the tax authority can only go beyond the six-year rule in the case of fraud, wilful default or negligence, which they must prove exists before extending the audit period beyond six years, as held by the TAT in Delta State Board of Internal Revenue v Ecobank (TAT/SSZ/005/2020).
Limitation periods for taxes must be stated in the legislation; no such periods are stated in the VAT Act and certain laws that impose other levies. The Stamp Duties Act stipulates a limitation period of five years.
Once an audit has been initiated within the sixyear period, the limitation period is automatically suspended. This means that it does not matter how long it takes for the audit to be completed; additional assessments arising from the audit will be payable unless they are disputed.
2.3 Location and Procedure of Tax Audits
Tax audits under Nigeria's tax procedure and practice consist of two methods: field audit and desk review.
The field audit is a form of audit where the tax authority conducts an audit on the taxpayer's business premises. It involves the review and inspection of the physical records, software records and financial systems of the taxpayer to determine the compliance of the taxpayer with its tax obligations. The tax authority officials also interview the taxpayer's personnel during field audits.
The desk review involves the review of the taxpayer's information at the tax authority's office based on the documents submitted by the taxpayer.
Across all levels, the tax authority relies on both physical and electronic records; however, with the increasing digitalisation and automation of companies' operations and financial records, tax authorities have had to rely on electronic records and can also demand the accounting software of the taxpayer to determine tax compliance.
2.4 Areas of Special Attention in Tax Audits
Some of the key areas and matters for tax auditors' attention include:
- timeliness of tax filings and payments – ensuring compliance with statutory filings such as CIT, VAT, WHT and PIT within the due dates prescribed under the law;
- accuracy of tax returns and declarations – eliminating misclassification of income, deductions and expenses; and
- maintaining tax-specific documentation – ensuring proper bookkeeping and adequate record-keeping of transactions, including invoices (eg, intra-company-related transactions), agreements, etc.
2.5 Impact of Rules Concerning CrossBorder Exchanges of Information and Mutual Assistance Between Tax Authorities on Tax Audits
The authors have not inferred a connection between increased access to financial information by the FIRS and an increase in tax audits in Nigeria. Since signing the Common Reporting Standard-Multilateral Competent Authority Agreement (CRS-MCAA) in August 2017 and publishing the Income Tax (Common Reporting Standards) Regulations in 2019, most reporting financial institutions have complied with their obligations to report certain financial information; the authors therefore expect that the FIRS has had access to significant financial information but cannot assess the extent to which it has utilised that information.
The authors are aware that the FIRS and the UK HMRC have signed a collaboration agreement on capacity development, but are not aware of any joint tax audits conducted by the FIRS and other competent authorities.
2.6 Strategic Points for Consideration During Tax Audits
From the taxpayer's perspective, the outcome of every successful audit exercise is dependent on how the taxpayer quickly identifies gaps in its reporting and documentation, possible red flags and remedies for defects. The strategic steps that should be taken include the following.
Pre-Audit Preparation
The taxpayer must always ensure that all tax filings, financial records and relevant documentation are prepared accurately and are readily available. The taxpayer must conduct internal health checks to identify possible risks, discrepancies and areas of non-compliance. In relation to inter-company-related transactions, the taxpayer must ensure that adequate agreements that reflect the nature of services and pricing between related companies are maintained. In addition, supporting documents such as invoices, contracts and tax remittance receipts must be properly stored. In gathering information ahead of audits, it is critical to distinguish information covered by attorney privilege from others, and this could impact the outcome of the audit. For instance, tax planning advice prepared by an attorney is covered by privilege and is not disclosable.
Formal Audit Engagement
The taxpayer is required to engage the services of accountants, tax experts and legal counsel. The taxpayer must always present a consistent position to the tax authorities, maintain transparency, and provide accurate and adequate information to allay suspicion. The taxpayer must comply with statutory deadlines, including timelines, to object to the additional assessment of the tax authority or appeal against the decision of the tax authority.
Handling Potential Tax Disputes
Analysing the position of the tax authority and its consistency with the relevant tax law is key. The taxpayer can object to such an assessment or decision through mutual consultation with the tax authority. Initiating a tax appeal procedure where mutual consultation fails is also important.
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Originally published by Chambers Global Practice Guides
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.
