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Corporate taxes are taxes levied on companies or other legal entities that are doing business in Nigeria. They are usually deducted from a company’s profits. The Nigerian government relies heavily on tax revenue to fund public infrastructure, social services, and developmental projects.
As a result, taxation regulations are an integral part of the Nigerian legal framework. Additionally, compliance with regulatory requirements ensures a fair and transparent business environment, promotes investor confidence, and fosters sustainable economic growth. This article aims to shed light on corporate taxation and regulatory compliance in Nigeria
THE NIGERIAN TAX SYSTEM
There are several taxes mandated by law to be paid by companies doing business in Nigeria. These are:
1. Company Income Tax: This particular tax is governed by the Finance Act 2019 and the Company Income Tax Act. All businesses must pay this annual federal income tax. The rate is set at 30% in Nigeria. The CIT rate is 0% for companies with gross revenue of NGN 25 million or less and 20% for companies with gross revenue greater than NGN 25 million and less than NGN 100 million. Companies may also be required to pay additional state-level income taxes that vary by location.
The due date for filing company income tax include:
2. Capital Gains Tax: This tax is levied on profits from the sale of property, stocks, bonds, etc. The Capital Gain Tax Act is the primary piece of legislation that governs the capital gain tax. It is imposed on businesses by FIRS. Ten percent (10%) of the company gains from the sale of chargeable assets are levied.
3. Petroleum Profit Tax: This applies to businesses engaged in upstream petroleum operations. The Petroleum Profit Tax Act sets the rules for this tax. The tax rate is 50% for petroleum operations under the production sharing contracts; 65.75% for non-production sharing contract operations, paid in the first five years during which the company has not fully paid off all the pre-production capitalized expenditure; 85% for non-production sharing contracts operations after the first five years.[ii] Returns shall be filed within five months after the expiration of the accounting period
4. Withholding Tax: A withholding tax is a tax required by Law to be withheld by a party from each payment made to another contracting party from the income or services rendered. This tax, when deducted and withheld, is required to be remitted periodically to the Government Inland Revenue Service e.g. dividends, royalties, and rent.[iii]
5. Value Added Tax: It is a consumption tax payable on the goods and services consumed by any person, whether government agencies, business organizations, or individuals. The tax payable is five percent (5%) on the supply of goods and services. Returns should be filed on or before the 21st day of the following month whether a transaction took place or not.
6. Industrial Training Fund Deductions: This is governed by the Industrial Training Fund (Amendment) Act, 2011. Every Nigerian company that employs five or more employees or has less than five employees but with a turnover of N50 Million and above is required to contribute 1% of its total sum of annual payroll to the Industrial Training Fund not later than the 1st of April of every year.
7. Education Tax: This tax is imposed on every Nigerian resident company at the tax rate of 2% of all assessable profit for each year of assessment. It is payable within two months of an assessment notice from FIRS. Some companies pay the education tax with their company income tax.
KEY ASPECTS OF REGULATORY COMPLIANCE
1. Tax Registration: Businesses and individuals are required to register with the appropriate tax authorities in Nigeria, such as the Federal Inland Revenue Service (FIRS) or the State Internal Revenue Service (SIRS). Proper registration ensures that taxpayers are identified and assigned unique taxpayer identification numbers (TINs)
2. Tax Filing and Reporting: Taxpayers must file tax returns and report their income, deductions, and tax liabilities accurately and within specified timeframes. Non-compliance with filing and reporting requirements can lead to penalties and sanctions.[iv]
3. Payment of Taxes: Compliance entails paying the correct amount of taxes due on time. Nigerian tax laws prescribe specific due dates for tax payments, and failure to meet these deadlines may result in interest charges or penalties
4. Tax planning and Optimization: While tax planning is legal and encouraged, it should be done within the boundaries of the tax laws to avoid aggressive tax avoidance schemes that may be considered non-compliant.
HOW COMPANIES CAN PLAN FOR TAXATION
1. Understanding Tax Obligations: This is the first step towards compliance with Nigerian tax laws. Individuals and businesses need to identify the specific taxes that apply to their activities. For instance, a company operating in Nigeria would be subject to Company Income Tax, while an individual earning income in Nigeria would be liable for Personal Income Tax. Value Added Tax (VAT) would apply to businesses supplying goods and services to consumers.
It is crucial to know the taxable base, applicable rates, and any available deductions or exemptions for each tax. For example, companies subject to Company Income Tax should know the allowable deductions for business expenses and provisions for capital allowances.
2. Maintain Proper Record: Accurate financial record-keeping is essential for tax compliance and efficient auditing processes. Businesses should maintain detailed records of financial transactions, expenses, sales, and purchases. This documentation includes invoices, receipts, bank statements, and accounting books. This helps in computing accurate tax liabilities.[v]
3. Timely Filing and Payment: This should be filed at the appropriate time to avoid penalties and interest charges.
4. Regular Training and Updates: Tax laws and regulations in Nigeria are subject to change, and staying informed about these updates is crucial for maintaining compliance. Regular training and professional development for tax personnel within businesses can help ensure that they are aware of any new developments and are up-to-date with the latest compliance requirements.
PENALTIES FOR TAX EVASION IN NIGERIA
Tax evasion does not just harm the government; it affects society. Tax evasion generally encompasses a range of activities, from underreporting income to hiding money in offshore accounts.
1. Failure to remit profit may lead to fines, imprisonment, or both based on the severity. For example, for failure to remit CITA, a penalty fee of N25,000 in the first month and N5000 for each month of default.[vi] Failure to remit tax will lead to a penalty of 5% per annum, of the amount of tax remittable to be added to tax for Value Added Tax. The penalty for non-payment of tax is 10% of the tax not deducted or remitted plus interest at the prevailing monetary policy rate of the Central Bank of Nigeria[vii]
INCENTIVES FOR TAX PAYMENT
Companies doing business in Nigeria that pay tax enjoy some incentives from the Federal Government. For example, companies that pay Petroleum Profit Tax enjoy an investment tax credit (ITC) or an investment tax allowance (ITA) of 5% and 50% of their qualifying expenditure. The ITC operates as a full tax credit and does not result in a reduction of qualifying capital expenditure to calculate capital allowances.
There are also special incentives available to oil companies to encourage gas utilization or the development of gas delivery infrastructure. Companies liable to PPT can offset their gas-related capital allowance against their oil production profits. Companies liable to hydrocarbon tax can offset the costs of producing associated gas upstream of the measurement point from their crude oil production profits.
Under the Companies Income Tax Act (CITA), companies engaged in the business of gas utilization in downstream operations can enjoy either:
• an initial tax-free period of three years, renewable for another two years, and after the tax-free period, an annual allowance of 90% for investment in plant and machinery, and an additional 15% investment allowance; or
• an annual allowance of 90% for investment in plant and machinery and an additional investment allowance of 35%.
CONCLUSION
Taxation and regulatory compliance in Nigeria form the backbone of a fair and transparent business environment, facilitating economic growth and development. Understanding the legal landscape and complying with tax obligations is essential for individuals and businesses to thrive in Nigeria’s dynamic economy. By staying informed, seeking professional advice, and maintaining diligent records, taxpayers can navigate the complexities of the Nigerian tax system successfully and contribute to the country’s sustainable growth.
[i] Section 13 of CITA
[ii] Kudiconsult, “Overview of Corporate Taxes in Nigeria”, https://kudikonsult.com/overview-of-corporate-taxes-in-nigeria/>, accessed on 12/01/24
[iii] Section 69-75 of the Personal Income Tax (Amended) Act, 2011, Section 78 of the Company Income Tax(Amended) Act 2007.
[iv] Roqeebah Oyebo, “Taxation and Regulatory Compliance in Nigeria: Navigating the Legal Landscape”, https://www.linkedin.com/pulse/taxation-regulatory-compliance-nigeria-navigating-legal-oyebo/>, accessed on Jan 15, 2024
[v] Ibid
[vi] Section 13, CITA
[vii] Section 74(1) of PITA
Written by Deborah Dada for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com