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Taxation of Professional Service Providers in Nigeria

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Taxation of Professional Service Providers in Nigeria
  TAXATION OF PROFESSIONAL SERVICE PROVIDERS IN NIGERIA 1.   INTRODUCTION 1.1.   Taxation is as controversial as it legal, civic and compulsory. Its advents into every society were welcomed with riots if not wars and bloodletting, 1  viewed  with suspicion, and tax authorities hated from time immemorial. However, despite its controversial- and sometime “mystique” -nature, taxation has always been and will continue to be part or every civil and modern society. This nature of taxation was aptly captured by the famous statement by Benjamin Franklin when he stated emphatically that: In this world nothing can be said to be certain, except death and taxes. 2   . Even before this, other   famous authors have recognised the inevitability of taxation. Thus Daniel Defoe 3 , in 1726 stated that " Things as certain as death and taxes, can be more firmly believed.  We can therefore say that taxes are here to stay-maybe for eternity or as long as government still needs revenue to carry out its responsibilities. 1.2.   The importance of taxes to the government cannot be over emphasised. Taxes are veritable sources of revenue for the government. Apart from this, they are also tools for redistribution of wealth-one of the means through which government takes from the pockets of the haves to provide for the have-nots. They are also effective tools for economic management and consumer control (e.g. the so called sin taxes like VAT and Excise Duties) The importance of taxes can also be appreciated in the fact that it is entrenched in the basic laws of the states with various laws regulating the imposition and administration of  various taxes. Moreover, breach of statutes are not only frowned upon but  visited with strict sanctions. It is therefore imperative that taxpayers should be properly acquainted with the nature and administration of taxes applicable to them to enable fulfill their duties under tax laws and not sanctioned for tax evasion since the principle that ignorance is not an excuse still holds true. 1.3.   Unfortunately, experience has shown that taxation has remained a mysterious and complex matter for taxpayers in Nigeria including the educated ones. Issues ranging from calculating and determining the actual taxable portion of the profits made, when payment of tax is due, the means and mode of 1  Introduction of taxes in England, USA and Nigeria were all greeted with different forms of resistant. In Nigeria, imposition of tax led to the famous Aba Women Riot and the attendant destruction of lives and properties. 2  ,in a letter to Jean-Baptiste Leroy, 1789, which was re-printed in The Works of Benjamin Franklin  , 1817: 3   The Political History of the Devil  ,  payment, the rights of the taxpayer, where to get information and engagement  with tax authorities continue to befuddle taxpayers. Surely something as ancient and eternal as taxation should be a familiar matter even to the unlearned and unlettered. One of the missions of this work is to educate taxpayers particularly professional service firms, on the issues enumerated herein. Taxpayers can generally be categorized into natural persons and companies. Every individual, taxable persons, group or companies are mandated under the relevant or applicable tax laws to pay taxes on their incomes or profits to the government through the relevant tax authorities. Professional service providers form part of taxpayers also mandated under the  various Nigerian Tax Laws to pay their taxes in Nigeria. The focus of this work is to educate professional service providers or professional services on the tax aspects of their businesses. 2.   DEFINITION OF TERMS AND CONCEPTS 2.1.   Tax as a concept does not lend itself to easy definition. Neither does any legal concept for that matter. The attempt to define tax has thrown up various definitions . The New Webster’s Dictionary of English Language 4   defines “tax” simply as a charge imposed by governmental authority upon property, individual, or transactions to raise money for public purposes. Another definition of tax can be found in the   lack’s Law Dictionary in which tax is stated to be a charge, usually monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue. The dictionary further describes tax as embracing all governmental impositions on the person, property, privileges, occupations, and enjoyment of the people, and includes duties, imposts, and excises. 2.2.    Just like every definitional attempts, these definitions suffer from some deficiencies. For example, the first definition is not perfect in that it defines taxpayers as only individuals. Although tax is imposed on individuals, taxpayers can also include families and communities. With respect to the second definition, tax is not only about public revenue as already hinted earlier, but also include economic planning and control of consumer behaviour. Moreover,  while all taxes are imposed by the government, not all impositions by the government constitute taxes. The government may impose certain payment on the citizens for one reason or the other which are not taxes. Thus the fees paid by a person to obtain driving licence is not a tax. Also, imposition of fine by the government either for an offence or other legal breaches does not constitute tax. This makes it imperative to differentiate taxes from other similar imposition by the government According to a learned author: 4  College Edition, Surjeet Publications, India, Page 1574  To press home our definition of a tax, we should attempt a practical analysis of what is and what is not a tax. To start with, a fine or penalty is not a tax, not even when the fine is imposed by a tax statute. Also a charge imposed for a particular service rendered or for goods sold is not a tax. For instance the charge by Lagos State Government for the Ministry of Transport (MOT) Certificate does not qualify as a tax. Neither is water rate. Furthermore, a tax is not the same as a debt, although an undischarged tax liability may be statutorily the same as a debt due to government. A voluntary payment, donation or contribution is not a tax, not even when it is made for a public purpose 5   2.3.   The above exposition is necessary in understanding the real meaning of tax as different from other similar concepts. This understanding is very important as different consequences follow failure to pay tax from failure to pay a non tax imposition. 2.4.   There have also been judicial definitions of tax by the courts. Thus tax was also defined in the Australian case of Matthews v. Chicory Marketing Board 6  as a compulsory exaction of money by a public authority for public purposes, or taxation is raising money for the purpose of government by means of contributions from individual persons.´ Furthermore, tax was defined by Thomas M. Cooley, in his book The Law of Taxation as the enforced proportional contributions from persons and property, levied by the state by  virtue of its sovereignty for the support of government and for all public needs. 2.5.   The above definitions, though not perfect, are adequate for the purpose of this paper as they both capture the fundamental features of taxes which are that: a.   taxes are imposed by the government b.   they are payable by person from their profits, income or properties c.   It is for public purposes including but not limited to revenue. Professional Service Providers are firms or Individuals who provide specialized service. They can also be defined as an industry of technical or unique functions performed by independent contractors or consultants  whose occupation is the rendering of such services. Examples of professional services 5  Adeola Rahman Ipaye: Overview of theTax Environment: Issues and Challenges, CITN Nigerian Tax Guide and Statutes, LexisNexis 2 nd  Edition 2010 page 2 6  [1939]60 CLR 263 at 276  include those of: accountants, actuaries, appraisers, architects, attorneys,  business consultants, business development managers, copywriters, engineers,  funeral directors, law firms, public relations professionals, recruiters,  researchers, real estate brokers, translators and medical centres. While not limited to licentiates (individuals holding professional licenses), the services are considered "professional" and the contract may run to partnerships, firms, or corporations as well as to individuals 7 . Legal Nature of Professional Service Providers  2.6.   One distinct legal nature of professional service providers with far reaching tax implications is that they are usually registered under the law as business names 8 . This differentiates them from companies or corporate bodies that are regarded under the law as artificial persons with separate corporate personality. The personalities of firms of professional services are not separate from the individuals or partners who registered the firms as a business name. Thus firms of professional services do not enjoy separate corporate personalities from the professionals that registered them. The outcome of this is that firms are generally subject to those taxes and tax laws that are basically applicable only to individuals/natural persons as opposed to those applicable to companies or corporate bodies. Thus professional service firms are basically taxed through their partners, members or principals. 3.   LEGAL FRAMEWORK FOR TAXATION OF PROFESSIONAL SERVICE PROVIDERS 3.1.   As already hinted, professional service firms, by virtue of their legal nature and structure are generally taxable under the tax laws applicable to individuals as opposed to those applicable to corporate bodies. In Nigeria, taxes on professional service providers may be direct or indirect and may be imposed on individual members of the firm, on assets of the firm and on transactional basis. In Nigeria, the tax laws applicable to professional services firms are as follows: a.   The Constitution of the Federal Republic of Nigeria 1999 9  b.   The Federal Inland Revenue Service(Establishment) Act 10  c.   Personal Income Tax Act 11 . d.    Value Added Tax Act 12   7 8  PART B of the Companies and Allied Matters Act Cap C20 Laws of the Federation of Nigeria 2004 9  See Constitution of the Federal Republic of Nigeria (Promulgation) Act Cap C23 Laws of the Federation of Nigeria 2004 10  Cap F36 Laws of the Federation of Nigeria 2004 11  Cap P8 Laws of the Federation of Nigeria(LFN) 2004(as amended)  e.   Capital Gains Tax Act 13  f.   Stamp Duties Act 14  3.2.   The 1999 Constitution is the fundamental and organic law of Nigeria and establishes the institutions and apparatus of government, defines the scope of governmental sovereign powers, and guarantees individual civil rights and civil liberties. The 1999 Constitution it is that gives life to the various tax laws in Nigeria. It also creates the taxing powers of the various levels of government in Nigeria. The Constitution itself also contains some tax provisions. The  Personal Income Tax Act personal income tax   on the income of all Nigerian citizens or residents who derive income in and outside Nigeria. Value Added Tax is imposed by t he Value Added Tax Act on the net sales value of non-exempt, qualifying goods and services in Nigeria. Capital Gains Tax   –  imposed under the Capital Gains Tax Act is a tax   on capital gains derived from sale or disposal of chargeable assets while Stamp Duty as it relates to professional firms, is imposed by the Stamp Duties Act on instruments executed by individuals and corporate entities in Nigeria. The Land Use Charge Laws imposes taxes, such as property tax and other such taxes imposed on land or landed property under the  various states’ laws . It is usually a flat charge imposed on every taxable person typically within a State under the relevant enabling state law 4.   CONSTITUTIONAL PROVISIONS ON TAXATION 4.1.   The importance of taxation to Nigeria and the need for its citizens to pay their taxes is well emphasised in the 1999 Constitution which declares that it shall be the duty of every citizen to declare their income honestly to appropriate and lawful agencies and pay their tax promptly 15 . Furthermore, the Constitution while recognizing the fundamental right to ownership of properties provides that the constitutional right to ownership of property shall not be construed as affecting any general law for the imposition or enforcement of any tax, rate or duty. 16  The Constitution by this provision therefore recognises that taxation shall be one of the exceptions to right to ownership of property. However, a veiled implication of the provision is that taxation should basically be statutory. Thus the exception recognises that there is a requirement for a “law” for “the imposition or enforcement of any tax, rate or duty” as  an exception to the right to ownership of property. 12 Cap V1 Laws of the Federation of Nigeria 2004   13  Cap C1 Laws of the Federation of Nigeria 2004 14  Cap S8 Laws of the Federation of Nigeria 2004 15  Section 24(f) of the 1999 Constitution. 16  Section 44(2)
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