In the last few years, the international tax space has experienced an unprecedented drive to achieve increased transparency in the tax practices of Multinational Enterprises (MNEs) and individuals in order to curb tax avoidance and evasion. In fact, transparency is one of the pillars on which the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project was developed.
As such, the BEPS project came up with various recommendations geared towards encouraging transparency via increased disclosure of sensitive information by MNEs and individuals. Subsequently, countries have keyed into this initiative and have signed onto various Multilateral Competent Authority Agreements (MCAA), which seek to encourage the automatic exchange of such information among tax authorities.
Nigeria has not been left out of this push for transparency. A major constraint faced by the Federal Inland Revenue Service (FIRS) during the early years of implementing the Transfer Pricing (TP) Regulations was access to relevant taxpayer's information. Thus, it became imperative for the FIRS to put in place mechanisms to ensure access to such information.
Specifically, Nigeria has signed up to the MCAA on the automatic Exchange of Country-by-Country Reports (CbC MCAA), the MCAA on Automatic Exchange of Financial Account Information (AEOI MCAA) and has released two Regulations which give effect to both MCAAs. This has significantly changed the playing field for taxpayers in Nigeria as the disclosure of taxpayers' information has been raised to unprecedented levels.
This article provides an overview of the relevant Regulations, examines their objectives and the potential implications for taxpayers. Country-by-Country Reporting Regulations In June 2018, the FIRS published the Income Tax [Country-by-Country Reporting] (CbCR) Regulations. The main objective of the CbCR Regulations is to provide the FIRS with key information on the global activities of MNE Groups for the purpose of risk assessment.
The CbCR Regulations are only applicable to MNE Groups with a consolidated revenue of ₦160bn and above, if headquartered in Nigeria or the equivalent of €750m if headquartered outside Nigeria.
The compliance obligations for taxpayers include filing of the CbCR Notification form by the financial year-end and the filing of the CbC report by the Ultimate Parent Company (UPE) on or before 12 months after the year-end. Failure to file the CbCR Notification Form attracts a penalty of ₦5m at the first instance and ₦10,000 for every day the failure continues while the penalty for failure to file the CbC report is ₦10m at the first instance and ₦1m for every month the failure continues. The CbC report discloses financial information about the jurisdictions where the MNE operates including related party and third-party revenues, profits and taxes paid and indications of the level of economic activities performed such as number of employees.
The CbC report therefore provides tax authorities with information on where value is created within a group. This information is relevant for the FIRS' risk assessment procedures. Common Reporting Standard Regulations The FIRS introduced the Income Tax [Common Reporting Standard] (CRS) Regulations in September 2019. The main objective of the CRS Regulations is to provide tax authorities with financial information of corporations and individuals required to tackle tax evasion and avoidance.
The CRS Regulations require Reporting Financial Institutions (RFIs), which include depository institutions, custodial institutions, investment entities and specified insurance companies, to file on an annual basis, financial account information on Reportable Accounts (RAs) maintained by the RFI. The information to be reported include interests, dividends, account balance or value, sales proceeds from financial assets etc. This information is to be filed on or before 31 May of the year following the calendar year to which the returns relate.
The CRS Regulations also require RFIs to carry out comprehensive due diligence procedures for both old and new accounts in order to identify an RA. An RA is an account with a closing balance equivalent to $250,000 as at the end of the reporting financial year.
The CRS Regulations have various administrative penalties including the following:
- Failure by a person to comply with duty/ obligation imposed by the Regulations: ₦10 million in the first instance plus ₦1 million for every month the failure continues;
- Failure by an RFI to file information return: a ₦10 million penalty in the first instance plus ₦1 million for every month the failure continues
Unlike the CbCR Regulations which focuses on MNEs, the CRS Regulations widen the compliance bracket to include individuals and companies that meet the threshold. Potential Implications for Taxpayers Following this drive for increased transparency, it is imperative that taxpayers are aware of potential implications to help mitigate the associated risks of non-compliance.
First, the level of information disclosure required of taxpayers has significantly increased. The FIRS is now, armed with sufficient data to perform robust risk assessments to identify taxpayers who may be potential tax avoiders or evaders. Having mentioned the above, it should be noted that the OECD guidance documents state that disclosures, are not for raising additional tax assessments but solely for risk assessment purposes.
As such, taxpayers should expect increased audits and disputes with the tax authorities. As the burden of proof lies with the taxpayers, taxpayers may find it difficult to convince the FIRS that the insight they have gotten from their analysis of data provided did not arise from deliberate avoidance or evasion.
Also, both Regulations provide for humongous penalties for non-compliance with key provisions. These penalties are punitive in nature and aimed at driving positive compliance behaviour. It is therefore instructive that taxpayers update their compliance obligations checklist to include additional obligations provided by these Regulations. Considering the significant risks associated with non-compliance, taxpayers may consider using tax advisors to ensure that they are fully compliant.
Additionally, as taxpayers' compliance requirements and the associated risks are increasing, it is expected that compliance cost will also increase. Compliance costs may include the costs of training employees and upgrading processes and Information technology systems. For example, as the CRS Regulations require that RFIs carry out due diligence on potential RAs, the RFIs may require tax advisors to assist with the implementation.
More so, RFIs may need to invest significantly in equipping its risk and compliance team with adequate human resource capacity and trainings as the CRS Regulations is an expanded version of Foreign Account Tax Compliance Act (FATCA). The process of compliance if not well designed may demand more human resources than the current size of the risk and compliance team.
Similarly, another layer of responsibility in relation to the CRS Regulations is the training of the relationship managers responsible for providing basic education to account holders and managing the account holders' expectations on the potential use of such information. RFIs with obligations to file CRS returns will need to evaluate how best to train relationship managers on how to manage account holders that may be disgruntled by such disclosures.
Lastly, taxpayers must be aware that opportunities for tax avoidance and possible evasion are gradually being eliminated with the recent drive for global tax transparency. Since the FIRS and other tax authorities are privy to previously undisclosed information, the tax authorities may be better equipped to identify and shut avenues for tax evasion/avoidance. As such, taxpayers may proactively have to re-evaluate their material transactions and global tax strategies to reflect increased tax compliance and value creation as risks associated with tax avoidance and/or evasion are mitigated. Conclusion
With the release of the CBCR Regulations and the CRS Regulations, taxpayers are more than ever expected to disclose information that were previously not available to the FIRS at an unprecedented level. As compliance with these Regulations is expected to be complex and resource consuming, it is advisable for taxpayers to liaise with relevant professionals for guidance and support to mitigate undue potential penalty and cost exposures.
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.