Did you know? In Nigeria, once a company is incorporated, it becomes legal entity and is treated under Nigerian law as an artificial person, separate and distinct from its shareholders.
Corporate bodies are charged to tax under the Company Income Tax Act.
However, while Nigerian companies are taxed on their worldwide income, foreign companies are liable only as regards the portion of their profits, which is attributable to business operations carried on in Nigeria.
In addition to the Companies Income Tax, all incorporated companies are required to pay 2% of their assessable profit into an Education Tax Fund. This is charged by virtue of the Education Tax Act.
Where a particular income or profit is chargeable to tax in Nigeria as well as in another country, there is a possibility of the taxpayer getting double taxation relief by way of tax credit under the provisions of the income tax statues. To this end, the Federal Government of Nigeria has negotiated and signed income tax treaties with a few foreign which are intended to boost investment.
For instance, the Industrial Development (Income Tax Relief) Act makes provisions for the grant of relief to pioneer companies. The pioneer status is granted mainly to companies in any industry which in the opinion of the National Council of Ministers, is not being carried on in Nigeria on a scale suitable to the economic requirements of the country.
Also, a company which has incurred expenditure in its qualifying building and plant equipment in an approved manufacturing activity in an Export Processing Zone is granted 100% capital allowance any year of assessment.
This makes the cost of capital acquisition entirely deductible in the year in which the qualifying expenditure was incurred. Another example is in part IV of the Minerals & Mining Decree, (now Act) which gives various tax incentives to operators in the solid minerals mining sector.
Exclusively, the Federal Government imposes both personal and company income taxes. The same government also collects companies’ tax, but it partly delegates the power to collect personal income tax to state governments. In a normal case, personal income tax is thus collected and expended by the state in which the taxpayer is deemed resident in the relevant year of assessment.
However, men of the Nigerian armed forces, officers of the foreign-service, persons resident in the Federal Capital Territory and non-residents pay to the Federal government.
Nigeria ranks among the major oil producing countries of the world and much of its public revenue is generated from the sale of crude oil and natural gas.
All petroleum resources belong to the federal government, hence, companies engaged in petroleum operations are charged to tax under a special legislation, the Petroleum Profit Tax Act (PPTA).
The effect of the Act is however varied by a Memorandum of Understanding (MOU) between the oil producing companies and the Federal Government of Nigeria. Any profit, which is charged to petroleum tax, is exempted from companies’ income tax.
Until 1967, there was no tax on capital gains in Nigeria. In that year however, capital gains taxation was introduced.
The Capital Gains Tax Act, which was enacted for the purpose, was a virtual copy of its English counterpart. It has been retained ever since with only a few amendments.
The Act charges to tax any capital gain individuals and corporate bodies whenever they dispose of assets.
The Federal Government has the exclusive authority to tax capital gains tax to the Federal Board of Inland Revenue; others pay to the tax authorities in their States of residence. Inheritance tax, which was levied by virtue of the Capital Transfer Tax Act, was scrapped in 1996.
Before 1993, Nigeria had a limited form of sales tax, but it has since adopted a very widely based value added tax.
By virtue of the Value Added Tax Act of 1993, all purchasers of chargeable goods and services are expected to pay 5% of the purchase price as tax.
The Value Added Tax Act is federal statue and the tax is administered by the Federal Inland Revenue Service (an arm of the Federal Board of Inland Revenue) on behalf of the Federal, State and Local Governments.
The proceeds are shared among the three tiers of government in accordance with a formula determined from time to time by the Federal legislature.
Apart from VAT, there is also the Sales Tax, which is provided for in the statue books of many states.
The Sales Tax was presumed dead at the advent of the VAT Decree, but Lagos State recently resuscitated its own when it amended the schedule to the Sales Tax Law and showed an intention to commence the collection of the tax. This aroused the interesting issues of which government has the constitutional authority to tax sales transactions within a state.
Another major source of revenue for the Federal Government is customs duty, which is payable by importers of specified goods. This tax is charged solely by the Federal Government and collected through the Nigeria Customs Service. Excise duty was levied on a variety of locally produced goods until 1998 when the tax was abolished. It was however partially reintroduced, with effect from January 1, 1999. The applicable law for customs and excise is the Customs and Excise Management Act.
The Stamp Duties Act imposes tax on a wide range of documents and transactions. Where one of the parties is a corporate body, the tax is payable to the Federal Board of Inland Revenue. Others pay to the State tax authorities.
Apart from those outlined above, there are sundry levies and rates which local governments are authorised to collect. Notable here is the tenement rate payable annually on buildings situated within a particular local government area. This is levied by virtue of Tenement Rate Law of the various states.
There is also a Development Levy payable at flat rate of N100 by individuals to the State governments. When real property is transferred, the relevant State government imposes some charges before the Governor grants his consent in accordance with the Land Use Act of 1978.
It can be seen from this short survey that the Nigerian tax system features a mixture of direct and indirect taxes.
All individuals, groups and corporate bodies that earn income, profits or gains, are affected. Except for tenement rates payable on buildings, there is no tax on the ownership of capital assets per se.
Capital gains tax is charged only when these assets are disposed of at a profit. Virtually all the major taxes are within the exclusive legislative jurisdiction of the Federal Government, but the power to collect is often delegated to the States.
The usual pattern is that federal authorities collect taxes from corporate bodies while States are allowed to collect from individuals and unincorporated groups. Even though local government authorities do not have substantive legislative powers, they charge and collect such rates and levies as may be authorised by a statue of the relevant State government.
Minimum Tax Rates
(1) Individuals- 0.5% of the total income.
(2) Companies- This was introduced in 1990.
- a) Company with the turnover of N500,000 and below and has been in operation for at least four calendar years, minimum tax shall be the highest of:
- 0.5% of Net Asset
- 0.05% of Gross Profit
ii. 0.25% of Turnover
- 0.25% of paid up capital
- b) Where the turnover is above N500, 000 minimum tax shall be the highest of (a) above plus 0.125% of turnover over N500, 000.
- c) Exemption from minimum Tax:
- Company engaged in agricultural business
- Companies with at least 25% imported equity or foreign participation.
iii. All companies in their first four calendar years of operation.
Personal Income Tax Rates:
Chargeable Income Rates Tax Cumulative Income Cumulative Tax
N % N N N
1st 20,000 5 1,000 20,000 1,000
Next 20,000 10 2,000 40,000 3,000
Next 40,000 15 6,000 80,000 9,000
Next 40,000 20 8,000 120,000 17,000
Over 120,000 25
Personal Income Tax exempt level: From N10, 000 to N30, 000
Personal Allowances and Reliefs;
1. a) Personal Allowance:- N5,000 plus 20% of earned income
2. b) Children Allowance: – N2, 500 per child up to maximum of four children.
3. c) Dependent Relative Allowance:- N2,000 subject to a limit of two dependent
4. d) Life Assurance Relief: – Actual premium paid.
5. Capital Gain Tax Rate: – 10%
Company Income Tax Rates: 30%
Note:- With effect from 1995 tax year, small and medium sized companies (turnover of N1,000,000 and above) engaged in manufacturing, agricultural production, mining of solid minerals and companies in wholly shall assessed to tax at the rate of 20% for 3 years from commencement of business
Bolaji Ogungbemi Esq.
(First published on LinkedIn)