(By Ugodre Obi Chukwu)
“ I
started business years back and I am just filing in 2011. In this
scenario, you will have to produce an audited financial statement for
all the years you were in operation as well as a Statement of Affairs
for the years you weren’t (may not be necessary). This is on the
assumption that you have never obtained a tax clearance before. In this
scenario though, be ready to face some penalties from the tax authority
for late filing for all the years you did not obtain a tax clearance
certificate. Penalties are presently about N5,000 for every month in the
years you did not file returns (submit your Financial Statement).“
In this discourse I am going to take
you through a practical way of obtaining a tax clearance certificate
from the Federal Inland Revenue Service. It’s not a one size fits all
solution but large enough to help a Small Company.
Abc Ltd – I just applied to
supply am equipment for a Government Agency. I was told to obtain bring a
tax clearance certificate before I can be considered. I currently do
not have one.
Ugometrics: hmm…these days
government agencies and companies requires long list of documentation
before you can be considered a supplier or contractor. Amongst them is a
Tax Clearance Certificate.
Abc Ltd : so how can I get one
Ugometrics: the process of
obtaining a tax clearance certificate can be different for several
organizations. It all depends on the dynamics of your company. However,
since your company just started business the following steps may be
applicable
Assumptions:
1. Abc Ltd got a Certificate of Incorporation in December 2008
2. It started business in January 2010
3. Has a turnover of N1m
Step 1: If you are yet to do so,
get in touch with FIRS and register your company. The FIRS usually
maintain offices in almost every local government area. So, if your
office is located in Surulere, you will have to register with the
Integrated Office on Bode Thomas. After registration, your company will
be given a Tax Identification Number (TIN). Your TIN will be used for
every tax related transaction you do like vat and WHT. It is however not
to be used for your state related taxes like the ones collected by the
LIRS. This should be your last direct contact.
Step 2. Whatever you do, never
approach a tax man (FIRS official or office) by yourself, it can make or
mar you. At this point you should get a tax consultant. However, the
next steps guide you with what the processes will be.
Step 3. The tax consultant will
ask you questions like when your company was incorporated and when it
commenced business? A company may be incorporated but yet to commence
business. Incorporation simply means you have registered your company
with the corporate affairs commission. Commencement means the date you
started using the company you registered for business. It doesn’t matter
if the business is generating income or not. Once it has a bank account
that shows inflow and outflow of money, it is typically considered to
have started business by the tax man.
Step 4: if your company
commenced business in January 2010 like Abc Ltd and have never filed for
tax then you will be asked by your consultant to provide an audited
Financial Statement (FS) or Statement of Affairs. An FS is a document
that contains the financial state and performance of your business for
the period under consideration. It includes things like your Balance
Sheet and Profit and loss account. I will address different scenarios
Started business in 2011 and Incorporated in 2011:
if your company started business in 2011 then you are not yet due to
pay tax. However, you will have to provide proof to the tax authorities.
Proof will be your certificate of incorporation and your memorandum of
association (MEMAT). At this point you will be registered with the FIRS
and given your TIN. You will be given a tax clearance certificate. So it
is important you register with the FIRS once you commence a business as
you do not pay tax and will be given a tax clearance certificate.
Started business in 2011 but was incorporated years before:
in this scenario you will have to prepare a report called Statement of
Affairs. A statement of affairs is different from an audited financial
statement. It is basically a statement that just shows the Assets and
Liabilities your business has. Every incorporated company has one. For
example, most people register companies with an authorized share capital
of N1m. It simply means the nominal shares in your company is worth N1m
on day in the eyes of the commission. It doestn mean you must provide
that money as equity. As most incorporation typically cost N80k in
Nigeria your statement of affairs can simple be N80k in Cash in Bank
(the asset) and N80k in your equity contribution (Liability). As such
you will provide Statement of Affairs for all the years that your
business had not commenced operations. This too will be prepared by a
Chartered Accountant. A Statement of Affairs is only accepted from
companies that are yet to commence business or are within 18months of
commencement of business (for example, commenced business in Jan 2010.
You have between Jan 2010 to June 2011 to submit Statement of Affairs).
You are likely to pay a “pre-operational” levy of N20k for this scenario
I started business years back and I am just filing in 2011.
In this scenario, you will have to produce an audited financial
statement for all the years you were in operation as well as a Statement
of Affairs for the years you weren’t (may not be necessary). This is on
the assumption that you have never obtained a tax clearance before. In
this scenario though, be ready to face some penalties from the tax
authority for late filing for all the years you did not obtain a tax
clearance certificate. Penalties are presently about N5,000 for every
month in the years you did not file returns (submit your Financial
Statement).
Step 5: Once the Financial
Statement is prepared and signed by the representative of the company
and the auditors, hand it over to your consultant. The Financial
Statement for a company in operation also includes your estimated tax
payable. Your estimated tax payable is the amount of tax you are telling
the FIRS that you are liable to pay. However, this is not usually
acceptable by the authorities as they often make their own computation.
But you should do yours and make it as conservative as possible.
Financial Statement may produce different scenarios in terms of whether you need to pay tax or not. Let us consider some
Scenario 1: Your company’s
profit and loss shows that you made a loss for the period. In this
scenario you may not pay tax for that year. If you have commenced
business within a period of 4 years and made some losses, you may not
need to pay tax for the years that you made the losses. However, you
may pay minimum tax.
Scenario 2. You only presented a
Statement of Affairs. You will not pay tax. However, you will be
charged a pre-operational level. It’s usually N20k as stated above
Scenario 3. Your business
generated profit. You will pay tax on the profit it generates after
deducting expenses that are allowed by the tax authorities. The tax
authorities compute profit chargeable to tax using a different format.
For a company that is already in
operation, it is important that you provide your accountant with enough
information. For example, if your customers regularly deduct withholding
tax from your invoices and you have obtained a tax credit note for
them, the aggregate sum can be used to reduce the final sum your company
will pay to the tax man.
Step 6. Your consultant will
give you several forms to fill. You will be guided as you fill the
forms. However, it is important that you read through the forms as most
of the information you reveal in it are confidential and so you will not
want to give out something that might implicate you because it is
wrong. You will also be told to provide copies of your letter head.
These copies are used for correspondences with the tax authority which
will typically include your application for tax clearance certificate.
You will also need to give your consultant your Certificate of
Incorporation and Memorandum and Articles of Association (often called
MEMAT). You will also give the tax man a copy of the personal tax
clearance certificate of your MD or/and any Director which you will
obtain from the state inland revenue service. For example, in Lagos it
is obtained from the LIRS.
Step 7: Your tax consultant will
then submit your documents with the FIRS. The role of the tax
consultant is very critical as their handling of your case with the
authorities usually determines if the tax man will accept your figures
and give you a certificate on time. In a situation where the account you
prepared is not acceptable to the authorities they can by law use a
Best of Judgement (BOJ) decision to compute the amount of tax you should
pay. This is often a drastic and unfavourable scenario for the tax
payer. However it can be minimized or all together avoided.
Step 8: You will be given a Tax
Clearance Certificate that is signed by an Inspector of Taxes. The tax
clearance certificate is usually for the 3 years preceding your
application. So, for ABC Ltd, they will be given a certificate
reflecting the years 2010, 2009, and 2008.
The cost of a tax consultant differ for
small businesses. However, the can fall between N50k to N100k depending
on the peculiarity of your case.
Note: “You” as used in the discourse above refers to your company. “Tax Man” refers to the Federal Inland Revenue Service.
I hope this helps.
(Source: Ugometrics)
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