Prior 2007, tax refund in Nigeria was not practicable, perhaps because the tax laws did not stipulate modalities for refund. Pursuant to the Federal Inland Revenue Service (Establishment) Act of 2007, a dedicated account from which tax refunds could be made was created. Tax refund monies as may be approved by the National Assembly had thenceforth been credited to this account from the Federation account in line with the annual tax refund budgets prepared by the Federal Inland Revenue Service (FIRS).
In recent times, several taxpayers have received even very huge sums of tax refunds following genuine claims from FIRS. This is a testimony of the efficacy of recent reforms being implemented by the FIRS towards achieving a fair and dependable tax system. Many taxpayers however are yet unable to come forward for claim of tax refunds either due to lack of faith in the veracity of the tax refund system or scare for the precluding tax audit and its daunting process or just sheer unawareness that there are tax refund prospects existing in their current business activities.
Certain triggers for tax refund may include (but not limited) to the following:
- Overstatement of tax amounts remitted online into the tax accounts by the collecting banks
- Tax remittances made with mistaken Tax Identification Numbers (TIN)
- Outstanding input Value Added Tax (VAT) claim resulting from zero rated VAT supplies, supplies to oil and gas companies or government agencies and supplies to enterprises operating within the free trade zones
- Taxes deducted or paid on the supplies aspect of a split contract arrangement
- Excessive tax payments arising from errors or mistakes on the part of the taxpayer in assessing or filing tax returns, or errors arising from wrong bases of tax calculations except where such calculations were based on generally prevailing practice of the FIRS at the time of filing the tax returns.
- Excess of utilizable withholding tax (WHT) credits over current and projected tax liabilities.
No refund mechanism is currently in place at the points of exit from the country on goods purchased by tourists or visitors.
A prerequisite for grant of tax refund claims is the performance of tax audit by FIRS to verify the basis of claim. Given the difficulties, rigors and administrative costs/ inconveniences associated with prolonged tax audit processes in Nigeria, this prerequisite stands in the way of many genuine claims of tax refunds by taxpayers. Sometimes these tax audits run into several months and years of meetings, reconciliations and endless requests for provision of documents by the tax authorities.
The Acting Executive Chairman of FIRS, Sam Ogungbesan, in his recent interview session with Business Day representatives, however, gave hope to taxpayers as he enumerated the current reforms within the Service, targeted at simplifying and reducing the cost of tax audits to the barest minimum for both taxpayers and FIRS. He pointed out that the reforms would ensure that time spent on field and post field reconciliations/ reporting by tax officials would be reduced significantly. Further, the audit, taxpayer service and debt management functions, would henceforth be separated from the regular Integrated Tax Office (ITO) operations and run by very experienced tax officials. This is a comforting development, as time spent on unnecessary arguments over technical issues with inexperienced tax officials would be eliminated.
Section 23 (2) of the FIRS Establishment Act also gives exclusive powers to FIRS to decide who is eligible for tax refund and this decision is subject to such rules and conditions as may be approved by the Board. A reference to ‘such rules and conditions’ immediately begins to create doubts in the mind of a refund awaiting taxpayer as to the possibility of full satisfaction of such ‘conditions’. The clause also creates certain degrees of reservations or lack of faith around the objectivity and straightforwardness of the entire process.
FIRS, nevertheless, has made efforts to describe its initial expectations from any taxpayer seeking to make claims for tax refund. These requirements as published on the FIRS website are as follows:
- The taxpayer must be registered for tax
- The tax refund application letter must state clearly, the precise trigger for the refund, the tax type for which refund is being sought and the period of transactions giving rise to the claim of refund.
- Supporting documents to the stated transactions must be appended to the application letter for submission to FIRS.
When all tax audits and checks are completed, and amount of tax refund is confirmed and approved by the Board, such refund is expected to be made within 90 days of the board’s approval. In practice, the entire process of tax refund may take not less than 6 months to one year to complete. This is very discouraging, given that in developed countries such as UK and US, tax refunds are typically made by the Revenue Authorities within a period range of 3 to 6 weeks after application is made.
These challenges notwithstanding, taxpayers with genuine claims of tax refund are encouraged to follow the lead of several recent beneficiaries of tax refund in Nigeria who took the bold step regardless of the difficulties involved. It paid off eventually, proving that the process of tax refund in Nigeria is very much practicable. In case of doubts by a taxpayer around his or her company’s entitlement to tax refund(s), the help of professional tax advisors may be sought, to carry out a tax refund existence check in order to confirm the viability or otherwise of such claims before further steps can be taken.