The deadline looms. On March 31, 2018, the Nigerian Voluntary Asset and Income Declaration Scheme (VAIDS) – a time-limited opportunity for taxpayers to regularise their outstanding tax liabilities status over several years, without punitive measures – will expire.
The deal offered by the Federal Inland Revenue Service (FIRS) alongside other tax authorities is simple. In exchange for fully and honestly declaring previously undisclosed assets and income, taxpayers will receive amnesty on overdue interest and penalties – with an assurance of not facing criminal prosecution. With a target of recovering US$1 billion (NGN 305 billion) in overdue taxes, the FIRS has reeled in NGN20 billion so far, from corporates alone.
But in the rush to beat deadlines, taxpayers may do well to first seek professional advice on the allocation of their resources, in order to effectively minimise tax burdens. Here are six legitimate strategies to consider before filing those taxes:
- Trusts & Inheritance Tax: A trust is basically a structure that allows a person or company to hold an asset for the benefit of others. The creator of the trust is the ‘settlor’. The person or company who controls the asset is the ‘trustee’, and those who benefit are the ‘beneficiaries’. The assets held in a trust can include cash, property, shares, benefits of life insurance, businesses and business premises. The ‘settlor’ sets out the specific rules as to how these assets should be managed in a document called the trust deed.Assets held in a trust (particularly in an irrevocable trust) are no longer legally owned by the settlor, who then cannot be taxed for the income that the assets generate. Establishing a Trust facilitates a tax-free transfer of assets (as an inheritance) to a beneficiary. When the assets have successfully been transferred into a trust, they are no longer subject to Inheritance Tax. Beneficiaries of a Trust will also not require probate or the payment of probate fees nor would they suffer the delays inherent in such bureaucratic processes. In most cases, assets held in a trust are difficult to attach in legal suits by creditors or lawsuits, so they are ideal for protection against business or personal disputes.
- Tax Loss Harvesting: Another advantage of holding assets in a Trust is the ability to “harvest” a loss. Tax loss harvesting is the practice of selling a security that has experienced a loss, with which investors are able to offset taxes on both gains and income. In Nigeria, tax-loss harvesting can be done when one holds multiple companies in a group structure. The losses of one of the companies within the group can be used to offset the group tax liability that is based on another profitable company within the group structure.
- Corporations & Special Purpose Vehicles (SPVs): An SPV is a ‘subsidiary’, sponsored by a corporation to fulfill a particular purpose, such as the isolation of an activity, asset or operation from the rest of sponsor’s business. SPVs are designed for various tax benefits (on-shore and off), and mostly help protect main assets should the parent company be faced with financial pressure, like bankruptcy. In addition, SPVs are commonly used to own a single asset, along with associated permits and contract rights (such as an apartment building or a power plant), which allow for easier transfer of assets that would have been otherwise non-transferable or difficult to transfer.
- Invest in Fixed Income Securities: In Nigeria, one of the tax exemptions that you can enjoy is the tax waiver issued through the Debt Management Office in 2010, in which government approved a waiver of taxes on all categories of issued bonds, Federal, subnational, corporate and supranational bonds, Mortgage-backed Securities, and Asset-backed securities. This exemption was formalized through the Companies Income Tax (Exemption of Bonds and Short Term Government Securities Order, 2011. The exemptions would remain valid till January 2022.
- Voluntary Funding of RSAs: It may make sense to continuously fund your retirement savings account (‘RSA’) with your pension fund administrator since contributions are made on a pre-tax basis. Aside from the statutorily required contributions, you may make additional voluntary contributions to your pension account which may remain tax-free, if retained in the RSA for a number of years. The result is that your taxable income is lower, and the amount of income tax you owe for that year will also be reduced. Because this is a tax-deferred account, you generally do not pay income taxes on any earnings on your investments until you withdraw funds, usually at retirement.
- Other Tax Savings: You may also reduce your personal tax liability by taking advantage of certain personal expenses. You may, for instance, be able to reduce your taxes through life insurance premium payments or through mortgage payments as well. These are tax-deductible expenses. It is important to note that this does not apply to securities/share investments in Nigeria at the moment.
Please seek professional advice/counsel before making Tax decisions For more Tax management strategies and other financial or wealth management advice, please contact ARM Investment Managers: firstname.lastname@example.org