TAXATION

The importance of taxation in any economy cannot be overemphasized, and its effects remain significant. It helps greatly in the redistribution of income and gives the government funds that it can use to finance public services such as provision of adequate national security, public infrastructure, social security services, power, a network of roads and a host of other social amenities. The ability of the state to generate a substantial amount of revenue from taxes opens up opportunities for it to provide public services and improve the economy.
In Nigeria, all persons in employment, individuals in business, non residents who derive income from Nigeria as well as companies that operate in Nigeria are liable to pay tax.
Some taxes are payable to the Federal Government (and administered by Federal Inland Revenue Service), some are payable to the State Governments and some to Local Governments. They include:

 

PART A- Corporate Income Tax (CIT)

The relevant legislative provisions governing the taxation of corporations in Nigeria state that corporate income tax (CIT) is payable on the profit of a company accruing in, derived from, brought into or received in Nigeria. Other than companies engaged in petroleum services operations, the applicable legislation governing the taxation of companies carrying out business in Nigeria is the CIT Act. The legislation has undergone several amendments to date, and with a business environment that is ever-changing and dynamic, more amendments are being proposed. Consequently, a company is chargeable to tax in its own name or in the name of a principal officer, attorney, factor, agent, receiver, liquidator or its representative(s) in Nigeria. Resident companies are liable to CIT on their worldwide income, while non-resident companies are subject to CIT on their Nigerian-sourced income.

The CIT rate is 30% and is assessed on a preceding year basis (i.e., tax is assessed on profits for the accounting year ending in the year preceding assessment). Investment income paid by a Nigerian resident to a non-resident is considered to be sourced in Nigeria and subject to withholding tax at source, which serves as the final tax. In respect to business profits, a non-resident firm that has a fixed base or a permanent establishment in Nigeria is taxable on profits attributable to that fixed base, and as such is required to register for CIT and file tax returns. Any withholding tax deducted at source from its Nigerian-sourced income is available as an offset against the CIT liability.

 

Below are companies subject to the Companies Income Tax:

  1. Companies resident in Nigeria, with the exception of companies engaged in petroleum operations.

  2. Foreign companies that earn their income from Nigeria.

  3. Company limited by guarantee or organizations engaged in profit making activities other than promotion of their primary objects

  4. Liquidator, receiver or agent of liquidator or receiver of any taxable company or organization


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Small Businesses & Tax

A Nigerian company is eligible to be taxed at a rate of 20% of its total assessable profits for the first five years of assessment if it is engaged in the following activities:

  • Manufacturing or agricultural production;
  • Mining of solid minerals; and/or
  • Wholly export, and from which its trade and earning total gross sales (turnover) of less than N1m for the year.


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The time limit may be extended by two years where the company can provide evidence of good records and management and has remained in the sectors already mentioned. This concessional rate of tax is not applicable to a firm that is formed to acquire the whole or part of a trade or business previously carried on by another company.

 

Tax Identification Number (TIN)

The tax identification number (TIN) is a unique identifier for an individual or a company for the specific purpose of tax remittance. The TIN number is prepared by the tax office and issued to individuals or registered business / incorporated companies for proper identification and verification.

As a business or individual, TIN is important because that is what shows that you are a registered tax payer in Nigeria, and as you know that tax payment is made compulsory, every company, business, individual must have their own unique tax identification number. After completion of registration with the tax office, the entity or individual is issued a TIN.

The TIN processing by the various tax offices should not take more than 5 working days, however, it may take longer based on the back and forth as mentioned above and also the various tax offices having to struggle with backlogs of requests and capacity deficiency with respect to treating TIN requests.

However, with Gomez Corporate Consult LTD, you can be assured of 3-5 working days with your VAT letter issued by MSTO as evidence.

 

Pre-Operational Levy (POL)

Where an enterprise has not commenced business after at least six months since its incorporation date, it shall, for each year it obtains a tax clearance certificate (TCC), pay the following levies:

  • N20,000 for the first year; and
  • N25,000 for every subsequent year before a TCC is issued.


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Minimum Tax Basis

An enterprise may be charged a minimum tax if in any year of assessment the ascertainment of total assessable profits from all the revenue sources of a company results in any of the following consequences:

  • A loss;
  • No tax payable; and/or
  • Tax payable which is less than the minimum tax.


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Minimum Tax Rates

Where a company’s turnover is N500,000 or less and the company has been in business for a minimum of four calendar years, the minimum tax to be levied and paid shall include the following:

  • 0.5% of gross profit;
  • 0.5% of net assets;
  • 0.25% of paid-up capital; and
  • 0.25% of turnover of the company to the tune of N500,000.


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Whichever is the highest and where the company’s turnover exceeds N500,000, the minimum tax will still be calculated as stated above, plus 0.125% of turnover in excess of N500,000.

 

Minimum Tax Exemptions

The foregoing provisions on minimum tax are not applicable to:

  • A company that is carrying on agricultural trade or business;
  • A company with at least 25% imported equity; and


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Any company for the first four calendar years of its commencement of business.

 

Tax Clearance Certificates (TCC)

Whenever the Board is of the opinion that tax assessed on profits or income of a person has been fully paid or that no tax is due on such profits or income, it shall issue a tax clearance certificate to the person within two weeks of the demand for such certificate by that person, and if not, it shall give reason for the refusal, Section 101 (1) of CIT Act.

Any ministry, department or agency of Government or any commercial bank with whom any person has any dealings with respect to some transactions as specified in Section 101 (4) , shall demand from such person a tax clearance certificate of three years.

 

PART B- Tertiary Education Tax

The tertiary education tax, which is governed by the Tertiary Education Trust Fund (Establishment, etc.) Act 2011, imposes an education tax at a rate of 2% on the assessable profits of companies registered in Nigeria. The Federal Inland Revenue Service (FIRS) is charged with responsibility for the assessment and collection of tertiary education taxes from all companies. The assessment of a company for the purpose of the tertiary education tax is done at the same time as the company is being assessed for CIT or petroleum profits tax.

While the tertiary education tax does not include provisions for matters relating to the assessment and collection of the tax, the provisions of the CIT Act and Petroleum Profits Tax Act relating to the assessment and collection of CIT and petroleum profits tax, as the case may be, shall apply mutatis mutandis to that matter. The tertiary education tax is due and payable within 60 days after the FIRS has served the notice of assessment.

 

Offences & Penalties

Failure to pay the tertiary education tax on the due date (i.e., within 60 days from the date of service of the notice of assessment for the company) attracts a 5% penalty of the tax unpaid. In addition to the penalty of 5%, the following fines shall be applied:

  • For first-time offenders there may be a fine of N10,000 or imprisonment for a maximum term of three years; and
  • For second or subsequent offenders there may be a fine of N20,000, imprisonment for a term of five years or both.


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Where a company is found to have committed an offence under the Education Tax Act, every director, manager, secretary or other similar officers of the company shall be considered guilty of that offence and liable for punishment, unless he or she can prove that the act or omission constituting the offence took place without his or her knowledge, consent or connivance.

 

PART C- Personal Income Tax (PIT)

The legal basis for this tax can be found in the provisions of the Personal Income Tax (PIT) Act 104 of 2011. Every taxpayer in Nigeria is liable to pay tax on the aggregate amount of his or her income, whether derived from within or outside Nigeria. The salaries, wages, fees, allowances, and other gains or benefits given or granted to an employee are chargeable to tax. Under the act, employers are deemed to be agents of the tax authority for the purposes of remitting taxes deducted from salaries due to employees.

However, the residency of a taxpayer determines the extent of a taxpayer’s liability in Nigeria. A person’s place of residence, for this purpose, is defined as a place available for his or her domestic use in Nigeria on a relevant day, excluding hotels and guesthouses. A person is deemed resident in Nigeria if he or she resides in Nigeria for 183 days in any 12-month period; however, expatriates holding residence permits are also liable to tax in Nigeria even if they reside in the country for less than 183 days in any 12-month period.

Once residence can be established, the tax authority of the state in which the taxpayer has his or her place of residence or principal place of business is the authority to which tax is owed. PIT is made up of direct assessment for self-employed persons and enterprises, and the pay-as-you-earn (PAYE) programme for salary earners.

PAYE (Pay As You Earn)

PAYE is a method of collecting personal income tax from employees’ salaries and wages through deduction at source by an employer as provided by the relevant sections of the PIT Act (Section 81 of PIT Act Cap P8 LFN 2011). It is also referred to as employees’ tax, which is the tax required to be deducted by an employer from an employee’s remuneration paid or payable. The due date for remitting PAYE is the 10th day of every month following the month of deduction.

Section 81(2) of the PIT Act requires every employer to file a return with the relevant tax authority for all emoluments paid to its employees. Furthermore, the act requires that they must be filed no later than January 31 of every year with respect to all employees for the preceding year. Section 81(3) prescribes a penalty on conviction of N500,000 in the case of a corporate entity and N50,000 in the case of an individual where Section 81(2) is breached.

PAYE does not differ from PIT in that the rates used for computation of tax due are the same. The current rates applicable to chargeable income are:

  • 7% for the first N300,000;
  • 11% for the next N300,000;
  • 15% for the next N500,000;
  • 19% for the next N500,000;
  • 21% for the next N1.6m;
  • 24% for income more than N3.2m; and
  • A minimum tax rate of 1% of gross income if the taxable income is below N300,000.


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The PIT Act has defined gross emolument as the aggregate of wages, salaries, allowances (including benefits-in-kind), gratuities, pension, superannuation and any other income derived solely by reason of employment (Section 33(2)). Employee incomes exempted from the tax include:

  • Medical or dental expenses incurred by the employee;
  • Retirement gratuities and compensation for loss of office;
  • The cost of passage to or from Nigeria incurred by the employee;
  • Interest on loans for developing an owner-occupied residential house; and
  • Leave allowance, which is computed as 10% of the annual basic salary subject to a maximum level of N7500 per annum.


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In addition, the sixth schedule of the PIT (Amendment) Act 2011 lists a number of contributions as tax exempt, and these include the following:

  • National Housing Fund contributions;
  • National Health Insurance Scheme contributions;
  • Life assurance premium;
  • National Pension Scheme; and
  • Gratuities.


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Section 36(6) of the PIT Act also empowers the government to assess the income tax of a taxpayer under a presumptive tax regime based on an order published in the national gazette for that purpose. This suggests a continuation of the best judgment assessment regime where a taxpayer makes it practically impossible for the revenue service to do a proper ascertainment of income and assess tax accordingly. Section 52 prescribes a penalty of N50,000 for individuals and N500,000 for corporate entities where the taxable person fails or refuses to keep books of account which in the opinion of the relevant tax authority are required for the purpose of tax assessment.

 

PART D- VAT (Value Added Tax)

Value-added tax (VAT) is an indirect tax placed on the domestic consumption of goods and services, except for those that are zero-rated (not liable to tax), such as food and essential drugs, or goods or services generally exempted by law. It is a consumption tax that is levied on a product or services whenever value is added at each stage in the chain of production and at the final sale.

VAT was introduced into the Nigerian system in 1993 by the federal government through Decree 102 of 1993, while invoicing for tax purposes did not commence until January 1994. This resulted in the abolition of the Sales Tax Decree No. 7 of 1986. The rationale behind replacing the sales tax with VAT was informed by a number of factors, which include the fact that the sales tax was targeted at mostly locally manufactured goods, as well as the fact that the sales tax was very narrow in nature.

 

Goods & Services Liable To VAT

In Nigeria VAT is regulated by the VAT Act 1993, as well as the VAT Amendment Act 2007, which provides that VAT shall be chargeable and payable on all goods and services except those listed in the first schedule to the act, which include the following:

  • All medical and pharmaceuticals products;
  • Basic food items;
  • Baby products;
  • Educational materials, books, etc.;
  • Fertilizer, agricultural and veterinary medicine, agricultural machinery, including associated transportation equipment;
  • All exports (products), excluding non-oil exports, which enjoy zero-rated status;
  • Plant and machinery equipment for use in gas utilisation and downstream operations in the petroleum industry;
  • Plants and machinery equipment imported for use by companies in an export processing zone or free trade zone, provided that 100% of the production of such companies is for export, otherwise tax shall accrue proportionately on the company’s profits;
  • Commercial vehicles and associated spare parts; equipment;
  • Non-oil exports;
  • Goods purchased by diplomats; and
  • Goods purchased for use in humanitarian donor-funded projects.


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Definitions

Humanitarian donor-funded projects include projects undertaken by non-governmental organisations, religious and social clubs, or societies recognized by law as participating in activities that are not for profit and are in the public interest. A “VAT able” person is one who trades in goods and services that are subject to VAT. Every VAT able person is obligated to register for VAT payment. Professionals such as lawyers, architects, accountants, engineers, etc., who provide professional services to their clients are also required to register for VAT. There is, therefore, no threshold for registration.

The VAT Act provides that VAT shall be charged at a rate of 5%. The body responsible for administering VAT is the FIRS. Under the VAT Act, every person conducting business in Nigeria is obligated to register with the FIRS for VAT within six months of commencement of business.

VAT consists of two types of tax: output VAT, which is any VAT collected on behalf of the government, and input VAT, which is any VAT paid to other persons. Where the output VAT in a particular month is more than the input VAT in the same month, the difference is required to be remitted to the government on a monthly basis by the taxable person. Where the reverse is the case, the taxpayer is entitled to a refund of the excess VAT paid. Although in practice, the taxpayer is much more likely to receive a tax credit for excess VAT from the government than to remit the difference.

 

Gomez Corporate Consult LTD is an all encompassing corporate firm with seasoned tax consultants with in-depth knowledge and experiences in the Nigerian corporate tax realm.

 

For all corporate tax advisory, applications & filings, contact us via 08107804290 or 0812794272, mail info@gomezconsult.com and our professionals will be there to assist you.