Berkeley Legal | Taxation in the Nigerian Corporate Commercial Environment
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03 Dec Taxation in the Nigerian Corporate Commercial Environment

Tax is one of the major sources of revenue in Nigeria and it is administered by the three tiers of government namely;

  • The Federal Government through the Federal Inland Revenue Service (FIRS)
  • State Governments through the State Inland Revenue Service; and
  • The Local Government Council through their Tax Collection Agencies.

For the purpose of this article, we will be discussing the following taxes and the nature of such taxes as it applies to companies and individuals:

  • Companies Income Tax
  • Personal Income Tax
  • Value Added Tax
  • Withholding Tax
  • Education Tax
  • Petroleum Profits Tax

Companies Income Tax (CIT)

This is also referred to as “Corporate Tax”. The Companies Income Tax Act (CITA) LFN 2004 is the relevant law for corporate taxation in Nigeria. Section 9 of CITA provides that every company (whether local or foreign) may be charged to tax in Nigeria on any part of its profits accruing in, derived from, brought into or received in Nigeria, in respect of any trade or business which it carries on. It is paid to the government through the FIRS.

It is the tax charged on the net income of companies incorporated in Nigeria (both private and public limited liability companies) and non-resident companies carrying on business in Nigeria. Such entities are required to pay 30% of the profit earned in the year preceding assessment to the FIRS. This percentage applies to the profit made from anywhere in the world (for resident companies) and profit made in Nigeria (for non-resident companies).

Where investment income is paid by a Nigerian resident to a non-resident, it is perceived as Nigerian income and will be subject to withholding tax, which will stand as the final tax on such income, that is, in place of CIT. Non-resident entities with fixed base or permanent establishments in Nigeria are taxable on the profits attributable to that fixed base.

CIT rate is 20% for small companies engaged in manufacturing or wholly in export with a turnover not exceeding N1 million for the first five years of operation

Personal Income Tax

This is an employee related tax regulated by the Personal Income Tax Act 2011. It is payable by employees of a company to the state where the company is domiciled, through the relevant SIRS.  The tax rate varies from 7% to 24 %, depending on the annual income bands being assessed as shown in the table below:

 Band N PERCENTAGE (%)
First 300,000 7
Next 300,00 11
Next 500,000 15
Next 500,000 19
Next 1,600,000 21
Above 3,200,000 24

 

It is important to note that income bands below N300, 000 attract a tax rate of 1%. The Personal income Tax is typically accompanied by other contributions such as Pension, Group Life Assurance Policy, National Housing Fund, inter alia.

Value Added Tax (VAT)

This is tax charged on the supply of goods and services. It is regulated by the Value Added Tax Act 2004 and it is typically borne by the final consumer. VAT is a consumption tax on economic operations or transactions. The levy is computed at the rate of 5%.

Withholding Tax

This is regulated by the Withholding Tax Regulations 1997 and is applicable to technical services, professional services, construction services, management services, Directors’ fees, contract of supplies, amongst others. It is usually charged at 5% or 10% and it is payable to the FIRS or SIRS, depending on the type of transaction.

Where a transaction is executed with a Business Name (a company registered with the Corporate Affairs Commission) or a private individual, the withholding tax is remitted to the SIRS. Where it involves a Limited Liability Company or a Public Limited Liability Company, it is remitted to the FIRS.

Below is a table showing the rates applicable to different transactions.

Transactions Companies % Individuals %
Royalties 10 5
Contract of Supplies 5 5
Contract of Construction 5 5
Dividend 10 10
Technical Service 10 5
Professional Service 10 5
Consultancy 10 5
Management Service 10 5
Commission 10 5
Rent 10 10
Interest 10 10
Hire, Charter, Lease 10 10
Directors fees 10 10

Education Tax

This is regulated by the Education Tax Act 2004. It is charged at the rate of 2% of the annual assessable profit of a company and is paid to the Tertiary Education Trust Fund through the FIRS. This is a compulsory tax for every company.

These taxes attract penalties for non-compliance which range from the seizure and sale of goods or chattels of defaulting tax payers and in extreme cases this may include their premises in order to recover the defaulted sum or even imprisonment.

Petroleum Profit Tax

This tax is regulated by the Petroleum Profit Tax Act and it is charged on the income of companies engaged in upstream petroleum operation. The tax is levied in place of the Company Income tax which a company ought to pay. The taxable income comprises of proceeds from the sale of oil and related substances used by the company and any other income of the company incidental to its petroleum operations.

Companies operating under Production Sharing Contracts (PSC) with the Nigerian National Petroleum Corporation (NNPC) are charged at the rate of 50%.

Companies engaging in non-PSC operations including Joint Ventures are charged 65.75% in the first five years of operation and 85% after the first five years of operation.

There are a few concessions granted to petroleum companies and they include Capital Allowance and Petroleum Investment Allowance. Capital Allowance includes expenditure on qualifying assets such as equipment, storage facilities, buildings, drilling costs inter alia. Petroleum Investment Allowance covers new investment in assets for petroleum exploration.

It is important to note that the tax policies in Nigeria are ever changing with new incentives being introduced to attract foreign investment and the continual development of existing businesses. The policies are also aimed at encouraging new sectors and businesses.

 

Berkeley Legal offers excellent Tax Advisory Services for existing and new businesses.

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng