In this article I am going to take you through a practical way of obtaining a tax clearance certificate from the Federal Inland Revenue Service. It’s not a one size fits all solution but large enough to help a Small Company.
Abc Ltd – I just applied to supply am equipment for a Government Agency. I was told to obtain bring a tax clearance certificate before I can be considered. I currently do not have one.
Ugo: these days government agencies and companies requires a long list of documentation before you can be considered a supplier or contractor. Among them is a Tax Clearance Certificate.
Abc Ltd : so how can I get one
Ugo: the process of obtaining a tax clearance certificate can be different for several organizations. It all depends on the dynamics of your company. However, since your company just started business the following steps may be applicable and we will explain using some assumptions;
2. It started business in January 2010
3. Has a turnover of N1mStep 1: If you are yet to do so, get in touch with FIRS and register your company. The FIRS usually maintain offices in almost every local government area. So, if your office is located in Surulere, you will have to register with the Integrated Office on Bode Thomas. After registration, your company will be given a Tax Identification Number (TIN). Your TIN will be used for every tax related transaction you do like vat and WHT. It is however not to be used for your state related taxes like the ones collected by the LIRS. This should be your last direct contact.
Step 2. Approach the tax office to get your company registered. It is often advisable not to approach a tax office without the company of a competent tax consultant. However, the next steps guide you with what the processes will be.
Step 3. The tax consultant will ask you questions like when your company was incorporated and when it commenced business? A company may be incorporated but yet to commence business. Incorporation simply means you have registered your company with the corporate affairs commission. Commencement means the date you started using the company you registered for business. It doesn’t matter if the business is generating income or not. Once it has a bank account that shows inflow and outflow of money, it is typically considered to have started business by the tax man.
Step 4: if your company commenced business in January 2010 like Abc Ltd and have never filed for tax then you will be asked by your consultant to provide an audited Financial Statement (FS) or Statement of Affairs. A Financial Statement is a document that contains the financial state and performance of your business for the period under consideration. It includes things like your Balance Sheet and Profit and loss account. I will address different scenarios
Started business in 2011 and Incorporated in 2011: if your company started business in 2011 then you are not yet due to pay tax. However, you will have to provide proof to the tax authorities. Proof will be your certificate of incorporation and your Memorandum of Association (MEMAT). At this point you will be registered with the FIRS and given your TIN. You will be given a tax clearance certificate. So it is important you register with the FIRS once you commence a business as you do not pay tax and will be given a tax clearance certificate.
Started business in 2011 but was incorporated years before: in this scenario you will have to prepare a report called Statement of Affairs. A statement of affairs is different from an audited financial statement. It is basically a statement that just shows the Assets and Liabilities your business has but still has to be signed by an external auditor. Every incorporated company has one.
As such you will provide Statement of Affairs for all the years that your business had not commenced operations. This too will be prepared by an accountant and signed by an external auditor. A Statement of Affairs is only accepted from companies that are yet to commence business or are within 18months of commencement of business (for example, commenced business in Jan 2010. You have between Jan 2010 to June 2011 to submit Statement of Affairs). You are likely to pay a “pre-operational” levy of N20k for this scenario
I started business years back and I am just filing in 2011. In this scenario, you will have to produce an audited financial statement for all the years you were in operation as well as a Statement of Affairs for the years you weren’t (may not be necessary). This is on the assumption that you have never obtained a tax clearance before. In this scenario though, be ready to face some penalties from the tax authority for late filing for all the years you did not obtain a tax clearance certificate. Penalties are presently about N5,000 for every month in the years you did not file returns (submit your Financial Statement).
Step 5: Once the Financial Statement is prepared and signed by the directors of the company and your external auditors, hand it over to your consultant. The Financial Statement for a company in operation also includes your estimated tax payable. Your estimated tax payable is the amount of tax you are telling the FIRS that you are liable to pay. However, this is not usually acceptable by the authorities as they often make their own computation. But you should do yours and make it as conservative as possible without evading tax. Make sure you read through and engage your tax consultant to ensure that all your allowances and available tax incentives were utilized in computing tax paid. Tell your accountant to provide you with a list of all allowances and go through it with them.
Financial Statement may produce different scenarios in terms of whether you need to pay tax or not. Let us consider some
Scenario 1: Your company’s profit and loss shows that you made a loss for the period. In this scenario you may not pay tax for that year. If you have commenced business within a period of 4 years and made some losses, you may not need to pay tax for the years that you made the losses. However, you may pay minimum tax.
Scenario 2. You only presented a Statement of Affairs. You will not pay tax. However, you will be charged a pre-operational level. It’s usually N20k as stated above
Scenario 3. Your business generated profit. You will pay tax on the profit it generates after deducting expenses that are allowed by the tax authorities. The tax authorities compute profit chargeable to tax using a different format.
For a company that is already in operation, it is important that you provide your accountant with enough information. For example, if your customers regularly deduct withholding tax from your invoices and you have obtained a tax credit note for them, the aggregate sum can be used to reduce the final sum your company will pay to the tax man.
Step 6. Your consultant will give you several forms to fill. You will be guided as you fill the forms. However, it is important that you read through the forms as most of the information you reveal in it are confidential and so you will not want to give out something that might implicate you because it is wrong. You will also be told to provide copies of your letter head. These copies are used for correspondences with the tax authority which will typically include your application for tax clearance certificate. You will also need to give your consultant your Certificate of Incorporation and Memorandum and Articles of Association (often called MEMAT). You will also give the tax man a copy of the personal tax clearance certificate of your MD or/and any Director which you will obtain from the state inland revenue service. For example, in Lagos it is obtained from the LIRS.
Step 7: Your tax consultant will then submit your documents with the FIRS. The role of the tax consultant is very critical as their handling of your case with the authorities usually determines if the tax man will accept your figures and give you a certificate on time. In a situation where the account you prepared is not acceptable to the authorities they can by law use a Best of Judgement (BOJ) decision to compute the amount of tax you should pay. This is often a drastic and unfavourable scenario for the tax payer. However it can be minimized or all together avoided.
Step 8: You will be given a Tax Clearance Certificate that is signed by an Inspector of Taxes. The tax clearance certificate is usually for the 3 years preceding your application. So, for ABC Ltd, they will be given a certificate reflecting the years 2010, 2009, and 2008.
The cost of a tax consultant differ for small businesses. However, the can fall between N50k to N100k depending on the peculiarity of your case.
Note: “You” as used in the discourse above refers to your company. “Tax Man” refers to the Federal Inland Revenue Service.
I hope this helps
Ugo Obi-chukwu “Ugodre” is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder of Nairametrics and blogs regularly on the website.
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