Because it is difficult to get dollars, Nigeria has allowed enterprises with outstanding foreign currency tax bills to pay in Naira, giving the organizations the chance to pay cheaper taxes.
The debtors have been granted a one-month deadline by the Federal Inland Revenue Service to settle in local currency.
This was disclosed in a statement titled, “Payment of Outstanding Foreign Currency Tax Liabilities in Naira”, signed by the Executive Chairman of the FIRS, Muhammad Nami.
- Due to the foreign exchange differential, this might be a game-changer and a big incentive for businesses to repay their tax burden by paying lower taxes.
- Nigerian authorities require companies to pay tax in the currency of the transaction. At the expiration of the one-month window, the tax agency “would no longer entertain any such requests” to settle the obligations in naira, it said.
- According to the FIRS, the concession is accessible to all taxpayers with foreign currency liabilities due on or before December 31, 2021, with the exception of enterprises in the upstream oil and gas sector. The naira payment would be based on the official exchange rate on the transaction date and/or when the tax is payable, according to the statement.
What this means
- The FIRS stated that the applicable rate shall be the Investors and Exporters (I&E) The official foreign exchange rate of the Central Bank of Nigeria (CBN).
- The exchange rate at the I&E window fell on Friday to close at N416.67/$1, while the exchange rate at the parallel market is trading around at N580/$1.
- Since payment of outstanding foreign currency tax liabilities to pay in Naira, the companies have a chance to pay cheaper taxes due to the difference in the exchange rate market.
- For example, if a foreign company was owing $1 million in taxes, it is would only have to pay N416,670,000. Instead of paying N580,000,000.
- This change in policy would save the company about N163 million that could be used for other activities.
What experts are saying
The new strategy, according to Pascal Nkwodimmah, Financial Manager at Opera NG, is significantly needed due to the severe scarcity of dollars to pay taxes.
“Due to the paucity of dollars, we’ve been having trouble paying our dollar taxes. This is a dilemma for businesses and governments, and the move to solve these concerns is welcomed.”
The only corporations that would benefit from the new legislation, he claims, are those who have a dollar surplus.
“Because of the paucity of dollars to meet tax responsibilities, I believe that only enterprises with excess dollar reserves would benefit financially from this decision, while others with less than ideal surplus will see it as a lifeline.”
Nkwodimmah also stated he would be more comfortable to have the one month limit extended.
“Until the dollar scarcity problem is resolved this policy should be maintained in my view,” he added.