NIGERIAN TAX SYSTEM: STRUCTURE AND ADMINISTRATION

Taxes are established by law in Nigeria. Such tax must have been passed into law through enactment of relevant statute (Act, By-law, decree among others). The tax law establishes the administrative body and specify its tax jurisdiction. Tax structure in Nigeria is tailored towards Nigerian governance hierarchy (Federal, State and Local Government).

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NIGERIAN TAX SYSTEM: STRUCTURE AND ADMINISTRATION

Nigerian Tax Laws

Taxes are established by law in Nigeria. By implication, such tax must have been passed into law through enactment of relevant statute (Act, By-law, decree among others). The tax law establishes the administrative body and specify its tax jurisdiction. Tax laws impose tax at a predetermined rate on specified income, profit, gain, and value of transactions of taxable persons. These laws are amended from time to time in view of meeting present economic situation, complexity of financial transaction, welfare, and social needs.

Structure of Nigerian Tax System

Tax structure in Nigeria is tailored towards Nigerian governance hierarchy (Federal, State and Local Government). Nigeria operates a decentralized tax system where each level of government is independently responsible for the administration of taxes within its jurisdiction. Nigeria generate revenue to fund government expenditure through a pool of taxes from each tier of government. A body is established for taxes due to each tier of government.

Tax Authorities

Federal Inland Revenue Service (FIRS) is the body that is responsible for the administration of taxes that are due to the federal government. The various state boards of internal revenue administer taxes that are due to state governments while the local government revenue committees administer taxes that are due to local governments. However, joint tax board advise, harmonize double taxation, and propose amendment.

Taxes

Companies Income Tax, Education Tax, Stamp Duties, Custom Duties, Excise Duties, Withholding Tax and Value Added Tax are the major taxes administered by Federal Inland Revenue Service, the State Board of Internal Revenue majorly administer Personal Income Tax and Withholding Tax, while Local Government majorly administer levies.

Basis of Tax Administration

Taxes are established by tax statutes which form the basis of tax administration. These tax statutes usually specify the tax rate, due date, basis of assessment, offences, and penalties of the identified taxes.

Tax administration involves the registration, assessment, returns, collection, compliance monitoring, compliance enforcement, sanction, taxpayer’s education and awareness and any other activity that can improve the efficiency and effectiveness of taxation.

  1. Registration of Taxpayer:  Taxpayer registration is done by submitting relevant information as required by relevant tax authority. Taxpayer registration usually precede tax assessment, collection, compliance monitoring and enforcement. Federal Inland Revenue Service (FIRS) and State Board of Internal Revenue register taxpayer for taxes within their jurisdiction.
  2. Assessment of Taxpayers: Tax authorities assess taxpayers to taxes administered by them and they can also reassess tax return rendered by taxpayers. The basis of assessing tax (tax rate, basis period, and tax deduction) are stipulated in tax statute.
  3. Returns: Tax authorities usually require taxpayer to file information as required by relevant tax statute and as further required with them. This is usually on a periodic basis (annually, monthly) or as the need arises.
  4. Tax Collection: Tax collection is the next step after assessment either the taxpayer self-assess himself or is assessed/reassessed by tax authority. Mode of tax remittance is usually determined by relevant tax authority.
  5. Compliance Monitoring: Tax authorities usually monitor tax compliance of taxpayers by assessing their adherence to the provisions of relevant tax statute. This is usually done by tax authorities at their respective offices by checking taxpayer’s file and/or visit taxpayer to obtain further relevant information to complement information at their disposal to assess taxpayer’s compliance with the provision of relevant tax statute.
  6. Compliance Enforcement: Tax authorities compliance can be enforced on taxpayer.

Sanction: Contravention with provision of relevant tax statute may lead to penalty or conviction. Contravention include failure to furnish required information or failure to keep required record, or any other non-compliance with relevant provision of required tax statute.

  • Tax education and awareness: This is usually done through issuance of  tax circulars and other publications to aid taxpayer’s understanding of tax statutes.

 

NIGERIAN TAX SYSTEM: STRUCTURE AND ADMINISTRATION

Imagine paying for a service, settling the supplier’s invoice in full, and moving on with business as usual.

Months later, during a tax review, you discover that you are expected to account for VAT on that same transaction, when the supplier did not charge VAT.

Your first reaction might be: Why am I responsible for VAT when the supplier didn’t charge it?

This question lies at the heart of the reverse VAT debate in Nigeria.

What is Reverse VAT?

Under the normal VAT system, a supplier charges VAT on an invoice, collects it from the customer, and remits it to the tax authority.

Under the reverse charge mechanism, the responsibility shifts from the supplier to the customer. Rather than paying VAT to the supplier, the customer is required to account for and remit the VAT directly to the tax authority.

The objective is to ensure that taxable transactions do not escape the VAT net.

While the concept appears straightforward, its application often generates debate, particularly in three common situations.

Scenario 1: Imported Services from Foreign Suppliers

Consider a Nigerian company that engages a UK consulting firm for advisory services worth N20 million.

The foreign consultant issues an invoice without Nigerian VAT and receives payment in full.

Under the reverse charge mechanism, the Nigerian company is expected to account for VAT on the transaction and remit it to the tax authority.

From the government’s perspective, this makes sense. Since the service is consumed in Nigeria, VAT should be paid in Nigeria.

However, many businesses see it differently.

The argument is simple:

We have already paid the supplier. Why should we now bear the additional responsibility of calculating and remitting VAT ourselves?

This remains one of the most common reverse VAT issues during tax audits.

Scenario 2: Local Suppliers Issuing Invoices Without VAT

The debate becomes more complicated when the supplier is located in Nigeria.

Imagine a local consultant provides services worth N2 million but issues an invoice without VAT. The customer pays the invoice exactly as presented.

Years later, during a tax review, questions arise regarding whether VAT should have been accounted for on the transaction.

Many taxpayers argue that responsibility should rest with the supplier because the supplier issued the invoice.

The tax authority may take the view that VAT on a taxable transaction should not be lost simply because it was omitted from the invoice. The consumer of the goods or services may bear the VAT in respect of the transaction.

This creates a difficult question:

Should the customer bear responsibility for a supplier’s failure to charge VAT?

Scenario 3: Small Businesses Exempt from VAT

Another area of debate involves small businesses that are exempt from VAT payment due to their turnover threshold.

Suppose a large company hires a small business that falls below the VAT threshold.

The small business issue an invoice without VAT because it is legally exempt from charging VAT.

Later, the taxpayers show up and request that the large company pays the reverse VAT on their consumption.

Conclusion

From the government’s perspective, reverse VAT helps protect revenue and ensures that taxable transactions do not escape the tax net.

From the taxpayer’s perspective, it can feel like an additional compliance burden, particularly where the supplier did not charge VAT or was legally exempt from doing so.

What is clear is that reverse VAT is no longer an issue limited to foreign service providers. Businesses must now pay close attention to invoices issued without VAT, transactions involving exempt suppliers, and situations where the responsibility for VAT may unexpectedly shift to them.