TAX APPEAL TRIBUNAL UPHOLDS THE POWER OF THE FIRS TO APPLY TURNOVER ASSESSMENT WHERE A COMPANY DOES NOT HAVE ASSESSABLE PROFIT IN ANY RELEVANT PERIOD

1. Introduction
On February 12th 2021, the Tax Appeal Tribunal, Lagos Zone (in the case of BJ Pumping Service SA Panama V. Federal Inland Revenue Service) held that the FIRS validly applied Turnover Assessment under Section 30 CITA against the Appellant whose assessable profit was nil in the period under review.
The Tribunal also held inter alia that based on the Transfer Pricing (TP) Regulations, Companies affected are expected to file tax returns along with their transfer pricing returns for their Nigerian operations. The filing of Income Tax Returns, without the requisite Transfer Pricing returns is not in accordance with compliance requirements under Section 55 of the Companies Income Tax Act (CITA).

2. Relevant Facts
The Appellant a non-resident company with fixed base, being dissatisfied with the decision of the Respondent expressed in a letter dated 19th September, 2018 rejecting the Appellant’s self- assessment returns along with its audited accounts and tax computations showing its profit and tax liability for the year 2015-2017,commenced this appeal against the Respondent at the Tax Appeal Tribunal, Lagos Zone, to challenge the Respondent assessment on it on a deemed profit basis for the 2015-2017 years of assessment based on the following issues for determination:

(i) Whether by failing to audit the Appellant’s financial statements, refusing to notify the Appellant of the result of its desk review and considering extraneous factors, the Respondent rightly exercised its discretion under Section 30 of the Companies Income Tax Act.

(ii) Whether this Honourable Tribunal has the powers to review the Respondent’s exercise of discretion under Section 30 of the Companies Income Tax Act.

(iii) Whether considering the prevailing economic conditions, 20% of a company’s turnover can be said to be a fair and reasonable percentage for the purpose of determining tax under Section 30 of the Companies Income Tax Act.

3. Contentions of Parties.
• The Appellant contended that the exercise of discretion of the Respondent to impose tax based on a company’s turnover- Deemed Profit Assessment must conform to certain established conditions precedent and principle. The Appellant counsel argued that the mischief Section 30 of the CITA seeks to cure is tax payment avoidance.
• The Appellant further submitted that 20% of a company’s turnover is not reasonable and fair percentage for determining a company’s turnover under Section 30 of the CITA, and having complied with Section 55 of CITA, Section 3(2) of the Federal Inland Revenue Act (Establishment Act 2007, and the Tax Administration ( Self-Assessment) Regulations 2011, the Respondent has an obligation to furnish a taxpayer its findings, investigation or analysis under Section 30, 66 of CITA, Section 8 (1),(d), (e) and (f) of FIRS Act and Section 3 (3) of FIRSE Act Tax Administration ( Self-Assessment Regulations).
• The Respondent in its respective submission, argued that once any of the condition precedent under Section 30 of the Company Income Tax Act occurs, the Respondent is empowered to exercise such powers thereunder, and same must be complied with.
• The Respondent canvassed that notwithstanding the provision of Section 55 of CITA, Section 30 (1) (b) empowered the Respondent to assess and charge on a fair and reasonable percentage of the turnover attributable to a company’s fixed base. The Respondent submitted that Section 30 of CITA is an anti-avoidance provision and to deter companies from either hiding their profit through transactions with related parties or manipulating their accounts to avoid tax.

4. Decisions of the Tribunal
The Tribunal held as follows:

(i) The requirement of the FIRS to accept the self – assessment filed by a tax payer is merely procedural and does not amount to a validation of the authenticity of the returns of a taxpayer, as genuinely representing the true income or tax of the taxpayer. The FIRS is expected to carry out necessary checks or review as prescribed by applicable laws.

(ii) For the FIRS to apply Turnover Assessment under Section 30 of CITA on any company any of following conditions must be present:

o For the year of assessment, the trade or business must produce either no assessable profit; or
o Profit which in the opinion of the FIRS is less than expected to arise from the trade or business; or
o The true assessable profit of the company cannot be ascertained.

(iii) By the admissions of the Appellant’s witness during trial, the Appellant produced no assessable profit/profits which were lower than the expectations of the FIRS. Further to which the FIRS validly applied turnover assessment under 30 of CITA on the Appellant by subjecting 20% of the turnover for the relevant period to tax at the rate of 30%.

(iv) From the transfer pricing (TP)compliance regulations issued by the Nigerian tax authorities requiring Tax Payer’s compliance in their income tax returns, Permanent Establishment (Pes) and Non-Resident Companies (NRCs) are expected to file tax returns along with their transfer pricing returns for their Nigerian operations. A PE or NRC’s tax returns should be (i) Income tax returns filed along with (ii) TP returns. The failure of the Appellant to file the Income Tax Returns, without TP returns do not constitute a complete compliance with the tax returns filing provisions of Section 55 CITA (as amended).

5. Comments
By the decision of the Tribunal, the power of the tax authority to apply Turnover tax assessment under certain conditions is not in dispute. However, what the Tribunal failed to address in its decision is whether the FIRS has power to apply blanket rate of 20% of the turnover of all companies affected to tax at the rate of 30% (giving rise to an effective tax rate of 6%). What the FIRS is authorized to do under Section 30 of CITA is to apply tax at the rate of 30% on a fair and reasonable percentage of the turnover of the company. The law does not prescribe a fixed rate nor is the FIRS authorized to apply the rate of 20% to all categories of companies. The FIRS ought to have been made to justify why it adopted 20% of the turnover of the Appellant.

For more information contact:

Maxwell Ukpebor
MAS TAX and Legal Services
Lofty Heights Maruwa
Lekki 1-Lagos
Maxwell.ukebor@mastaxandlegalservices.com
+234 8039600520