Nigeria’s Federal Inland Revenue Service (FIRS) may not have the financial and administrative capacity to provide adequate tax refunds to deserving entities, according to a recent report by PricewaterhouseCoopers (PwC).
The report reveals that the FIRS has a history of falling short in meeting refund demand, as evidenced by the number of processed applications.
In 2019, the FIRS processed 284 applications, totaling N211.3 billion and $18 million, however, only 192 of these applications were approved, with a total payment of N23.6. The budget funding for that year was N25 billion.
Similarly, in 2020, 242 applications were processed, amounting to N52.5 billion, $6.4 million, and EUR57.4, with only 125 approved applications and a total payment of N27.8 billion made. The budget funding was the same as the previous year.
In 2021, the number of applications increased to 385, worth N57.4 billion, $838.1 million, and EUR56.5k However, only 45 applications were processed and paid, with a total payment of N18.4 billion only paid. The budget funding for that year was N25 billion.
The report further indicates that the value of tax refund applications received by the FIRS increased by almost 10% from 2020 to 2021, with each year’s applications exceeding the budget amount of N25 billion.
A N25 billion limit
This suggests the ministry only has a budget of N25 billion annually to pay for tax refunds.
The report also states that there is no data driving the fixed budget amount of N25 billion, despite the increase in demand cases, which may cast doubt in the minds of taxpayers about the FIRS’s willingness to provide refunds.
The payment of approved refund applications is subject to the availability of funds released to the FIRS in the annual budget/appropriation. This raises the question of whether the government has made adequate provisions to cater to situations where the approved refunds exceed the budget.
Legal Provision for tax refund
The Federal Inland Revenue Service Establishment Act 2007 (FIRSEA) stipulates that refunds can be made to taxpayers for overpayment of tax after a proper audit has been carried out.
A taxpayer may request a refund for various reasons, including mistaken tax identification numbers, withholding tax deductions in excess of income tax payable, input VAT exceeding output VAT, or other computation or payment errors.
The Finance Act 2020 introduced a requirement for the Accountant-General of the federation to set up a dedicated account, funded for the sole aim of refund payment and managed by the FIRS. The FIRS is also responsible for preparing an annual tax refund budget to be approved by the National Assembly.
However, these introductions have slightly strengthened the regulatory framework for tax refunds in Nigeria, although they are being implemented marginally and cannot achieve the objective of an efficient tax refund administration. The report highlights that refunds should be based on facts and not on a budget.
Administrative Challenges
On the administrative level, the report noted that the tax audit process in Nigeria is rigorous, lengthy, and expensive, and tax refund applicants often end up with liabilities that exceed the refund requested.
The FIRSEA does not specify a timeframe within which tax refund audits must be concluded, resulting in a low level of commitment from the tax authority to finalize such audits. In many tax refund cases, audits are delayed for years without significant progress or accountability, resulting in taxpayers losing the time value of money.
The report identifies the inherent distrust between taxpayers and the FIRS as a root cause of administrative difficulties in tax refunds in Nigeria. The FIRS assumes that taxpayers are unwilling to comply with tax laws, and as a result, takes a confrontational approach to tax audits. On the other hand, taxpayers do not trust the government due to the perceived lack of transparency and public accountability.
“At the root of the administrative difficulties of tax refunds in Nigeria, is the inherent distrust between taxpayers and the FIRS. The FIRS assumes that taxpayers are unwilling to comply with tax laws; hence the tax authority takes a confrontational approach to tax audits. On the other hand, taxpayers do not trust the government due to the perceived lack of transparency and public accountability.”
The report explains that the government needs to bridge the trust gap with taxpayers by showing fairness in tax administration, especially in the prompt payment of refunds.
Flawed Accounting treatment
Another key issue in obtaining refunds is public finance and accounting for refunds.
The FIRS typically recognizes all taxes received as revenue to the government, treating withholding tax (WHT) collected as revenue, instead of recognizing it as an advance payment of Companies Income Tax (CIT), which is a liability until the taxpayer utilizes or forfeits the WHT.
This practice results in overstated revenue or unrealistic revenue expectations, exacerbating the FIRS’s resistance to granting refunds.
Finally, PwC recommends that tax refund payments should not exceed 12 months after verification. Taxpayers should maintain relevant documentation to aid refund requests and conduct a tax health check before applying for refunds.
The FIRS should adopt a proper revenue recognition mechanism and commercial interest should apply to late payment of refunds. The report emphasizes that an efficient refund system is critical for Nigeria’s business environment and encourages foreign investment and participation.
