Federal Inland Revenue Service (FIRS) moves to restrict carry forward of WHT credits

Federal Inland Revenue Service (FIRS) moves to restrict carry forward of WHT credits

Overview

The FIRS recently denied some companies seeking to utilise withholding tax (WHT) credit notes carried forward from prior years against their 2016 income tax assessments. The position communicated by the FIRS is that only the WHT credit notes relating to the year of assessment (YOA) being filed will be granted. In addition, the FIRS directed taxpayers with unutilised WHT credits relating to prior years to apply for a refund which would require a tax audit.

Analysis

Before 2007, there was no clarity in the Companies Income Tax Act (CITA) on carry forward of WHT credits. However, in practice, the FIRS allowed companies to carry forward their WHT credits and utilise them against future income tax assessments. In 2007, CITA was amended to clarify that WHT credits can be carried forward indefinitely and utilised against future income tax. In this regard, Section 81(7) was introduced through the amendment to give taxpayers a choice between getting a refund of excess credit or utilise the credit against future tax liability. Although Section 81(7) wrongly referenced the old sections 60 to 63 rather than 78 to 81 relating to deductions at source, this cannot be used as a justification to deny taxpayers of their legal right.

Given the challenges associated with obtaining tax refunds from the FIRS, the directive for taxpayers to apply for refunds rather than utilise their credit against future taxes is against the clear wordings and intent of the law. It simply means taxpayers should source for cash to settle their tax liabilities notwithstanding their outstanding WHT credits with the FIRS. This move is capable of creating distrust in the system and may discourage voluntary tax compliance if the ability to obtain benefit for advance taxes paid is subject to additional bureaucratic procedure. This will not only lead to inefficiency on the part of the FIRS but increased compliance cost on the part of taxpayers.

The Takeaway

It seems the FIRS is seeking to increase their reported tax collection given that refunds are not offset against revenue collected for federation account reporting purposes. In any case, the FIRS does not have the power to restrict the utilisation of WHT credits outside the provisions of the law. Therefore, affected taxpayers have the right to challenge this position through all available legal means.

Source PwC.