Tax authorities in Nigeria can assess businesses for tax based on assumed income where taxpayers fail to file returns and disclose their actual financial position, tax experts at tax stream.com have warned.

The warning was contained in the 15th instalment of a tax compliance series titled: “Estimated Billing, But This Time For Tax,” which explained how the Best of Judgement Assessment mechanism can be applied to businesses that fail to comply with their filing obligations.

The commentary stressed that tax compliance is a legal obligation, noting that dissatisfaction over the utilisation of tax revenues does not constitute a justification for tax evasion or failure to file tax returns.

The tax experts said, every income-earning individual and business in Nigeria, including foreign companies selling to Nigerian customers, is required to disclose its income and file applicable tax returns with the Nigeria Revenue Service (NRS) and relevant State Internal Revenue Service.

The obligation, it noted, applies even where a taxpayer is exempt from paying tax or has recorded a loss during the period.

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The experts explained that Nigeria operates a self-assessment system under which taxpayers are expected to disclose their commercial activities, income, expenses and other relevant financial information when filing their returns.

However, where a taxpayer fails to file returns, the tax authorities can invoke a Best of Judgement Assessment to determine the taxpayer’s likely income and tax liability based on available information.

The expert cited a case in which a business reportedly recorded more than N200 million in inflows through its business bank account but failed to file returns explaining the nature of the transactions.

While such inflows could represent loans, capital injections or funds held on behalf of clients rather than actual business revenue, the failure to provide proper records and disclose the nature of the transactions could leave the taxpayer exposed to an assessment based on the assumption that the inflows constituted taxable revenue.

The commentary also warned that businesses could face significant exposure where they fail to substantiate their actual profit margins.

It said tax authorities may apply an assumed profit margin where taxpayers fail to provide adequate records showing their actual costs and profits. This could result in businesses being assessed on profits higher than those they actually earned, even where their true margins were significantly lower or the business made a loss.

The expert also highlighted Value Added Tax (VAT) compliance as another major area of risk.

According to the commentary, businesses that are required to collect VAT but fail to do so may eventually be required to bear the tax from their own resources when the authorities assess their transactions.

Businesses that collect VAT but fail to remit it could similarly face demands for the outstanding tax, alongside applicable penalties and interest.

The expert noted that the situation could become more complicated where businesses fail to disclose the nature of their sales, as some goods and services may be exempt or zero-rated while others are subject to VAT.

Beyond the underlying tax liability, non-compliant taxpayers could face additional penalties for late filing and unpaid taxes.

The Taxstream commentary warned that penalties and interest can significantly increase the cost of outstanding tax liabilities, while separate penalties may apply where taxpayers fail to submit returns within prescribed deadlines.

For example, it stated that late VAT filing could attract a N100,000 penalty for the first month of default and N50,000 for each subsequent month, with similar filing obligations applying to withholding tax and Companies Income Tax.

The expert said the growing availability of financial and commercial information to tax authorities means that businesses can no longer rely on limited visibility to avoid their tax obligations.

According to the commentary, the widening tax net and increased use of technology are giving tax authorities greater capacity to identify business activities and assess taxpayers.

It therefore urged individuals and businesses to strengthen their tax compliance systems by maintaining proper books of account, filing returns on time and seeking professional tax advice where necessary.

The commentary also pointed to technology as a means of reducing the cost and complexity of compliance, recommending automated tax management tools to help businesses track their obligations, calculate liabilities and meet filing deadlines.

It concluded that as enforcement intensifies, businesses that fail to maintain proper records and comply with tax filing requirements risk paying substantially more than they would have paid through timely and accurate self-assessment.