Benjamin Franklin once said, “We have only two certainties in life which are death and tax”. Taxes are imposed and applicable to both individuals and companies in Nigeria. The Federal Inland Revenue Service (FIRS) collects taxes on behalf of the Federal Government in Nigeria. There are several taxes mandated by law to be payable by companies doing business in Nigeria, which include but are not limited to Company income tax, Stamp duties, Petroleum Profit tax, Capital gains tax, Value-added tax, Personal income tax, Withholding tax, Education tax, Police trust fund levy among others.
COMPANY INCOME TAX
The Company Income Tax Act ( CIT) is the principal law that regulates the taxation of companies in Nigeria. The tax regime in Nigeria is a multi-level tax system, which simply means that taxation is administered by the three tiers of government. The Federal Inland Revenue Service (FIRS) administers or oversees the income tax for companies. Company Income Tax (CIT) is a tax on the profits of registered companies in Nigeria. It also includes the tax on the profits of foreign companies carrying on any business in Nigeria. The CIT is paid by limited liability companies inclusive of the public limited liability companies. Resident companies are liable to corporate income tax (CIT) on their worldwide income while non-residents are subject to CIT on their Nigeria-source income. Company income tax is based on accounting profits adjusted for tax purposes on a preceding-year basis (i.e., tax is charged on profits for the accounting year ending in the year preceding assessment).
COMPANY INCOME TAX RATES
Before the introduction of the Finance Act, Company income tax is charged at the rate of 30%. The signing into law of the Finance Act 2019 introduced a graduated system of tax which requires companies to be taxed based on the Turnover earned for the period under review. Companies are taxed as stated in the table below:
|Small Company||0 – 25 million||0%|
|Medium Company||25 million – 100 million||20%|
|Large Company||100 million and above||30%|
ALLOWABLE DEDUCTIONS UNDER THE COMPANY INCOME TAX ACT
In ascertaining the profits under the CITA, certain deductions are allowable. Section 24 of CITA fully encapsulates the deductions allowable in determining the taxable profits of the company. Section 24 provides that “save where the provisions of subsection (2) or (3) of section 14 or 16 of this Act apply, to ascertain the profits or loss of any company of any period from any source chargeable with tax under this Act, there shall be deduction all expenses for that period by that company wholly, exclusive, necessarily and reasonably incurred in the production of those profit”.
Section 24 further includes the following categories of deductions:
- Interest on the borrowed fund as capital in acquiring the profits;
- Expenses incurred during the year in respect of salary, wages, or other remuneration paid to the senior staff and executives including any benefit or allowance provided for the senior staff and executives which shall not exceed the limit of the amount prescribed by the collective agreement between the company and the employees.
- Expenses incurred for repair of premises, plant, machinery, or fixtures employed in acquiring the profits.
- Bad debts
- Contribution to a pension, provident, or other retirement benefits fund, society, or scheme
- the liability for which was incurred during the period or during any previous period wholly, exclusively, necessarily, and reasonably for such trade or business and which is specifically referable to the period of which the profits are being ascertained
Sections 25 and 25A of CITA also provide for deductions of donations made to funds, bodies, or institutions in Nigeria to ascertain the profits. Section 26 of the Act permits a deduction for research and development, provided such a deduction does not exceed 10% of the profit ascertained before any deductions.
DEDUCTIONS NOT ALLOWED
Section 27 addresses the deductions not allowed in ascertaining a company’s profits. The section provides as follows:
- Capital repaid or withdrawn and any expenditure of a capital nature;
- Any sum recoverable under an insurance or contract of indemnity;
- Taxes on income or profits levied in Nigeria or elsewhere, other than the tax levied outside Nigeria on profits which are also chargeable to tax in Nigeria where relief for the double taxation of those profits may not be given under any other provision of this Act;
- Any payment to a savings, widows and orphans, pension, provident or other retirement benefit fund, society or scheme except as permitted by paragraph (g) of section 24 of this Act;
- The depreciation of any asset;
- Any sum reserved out of profits, except as permitted by paragraph (f) of section 24 or 25 of this Act or as may be estimated to the satisfaction of the Board, pending the determination of the amount, to represent the amount of any expense deductible under the provisions of that section, the liability for which was irrevocably incurred during the period for which the income is being ascertained;
- Any expense of any description incurred within or outside Nigeria for earning management fee unless prior approval of an agreement giving rise to such management fee has been obtained from the Minister;
- Any expense whatsoever incurred within or outside Nigeria as management fee under any agreement entered into after the commencement of this section except to the extent as the Minister may allow;
- Any expense of any description incurred outside Nigeria for and on behalf of any company except a nature and to the extent as the Board may consider allowable.
COMPUTATION OF ADJUSTED PROFIT
Adjusted profit is computed after adding back, disallowed expenses and deducting allowable expenses and incomes exempted. The value derived from this computation is the adjusted profit and at this point, the education tax rate can also be deducted. The education tax rate is 2.5% of the adjusted profit.
After arriving at the adjusted profit, there is a need to compute the taxable profit. Thus, the taxable profit is arrived at after adding the balancing charge to the adjusted profit while subtracting the capital allowance and loss relief. The value derived from this computation is the taxable profit and at this point, the relevant tax rate can be applied.
DUE DATE FOR FILING COMPANIES INCOME TAX RETURNS
Section 55 of CITA addresses the filing of tax returns by a taxpayer to the relevant Tax Authority in a manner prescribed by law and by the laid down administrative procedure. Companies are to file returns within six (6) months from the end of the Company’s accounting year (section 13 CITA).
In a situation where a company fails to file its Income Tax returns as when due, a penalty of ₦25,000 is charged in the first month of default and subsequently ₦5,000 for every other month of default that follows (section 13 of CITA).
PAYMENT OF TAX LIABILITIES
A company is expected to pay its taxes of an accounting period (under a self-assessment regime), within the year of assessment. Where a company cannot make such payments upfront, the company can apply to FIRS in writing to pay its income tax in installments. The maximum number of installments the FIRS may approve is three. Such an application must go with a portion of the tax liability. It is due on or before the due date for filing.
Large companies are granted a bonus of 1% against income tax of future tax years (2% for medium companies) where the income tax is paid 90 days before the due date for filing.
If taxes are not paid as of when due, a penalty of 10% is chargeable on the Income tax liability for the period and interest payment at the prevailing Central Bank of Nigeria monetary policy rate plus a spread of 5%.
A company can use her withholding tax already remitted to the federal government to offset her income tax liability. A withholding tax payment is an advance payment of tax.
For there to be effective enforcement and compliance of tax laws in Nigeria, there is a need for more enlightenment of the general public, companies, institutions, and individuals on tax and tax-related matters. The government of any country funds most of its activities through taxes paid by her citizenry thereby making her citizenry legitimate stakeholders in public governance. Nigeria cannot and should not be an exception in this regard. Corporate citizens are hereby encouraged to pay their taxes and live up to their corporate responsibilities.