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Doing Business in Nigeria -
Tax System
Introduction - Constitution of a Company - Tax System
Part 3 TAX SYSTEM IN NIGERIA
TAX
TERITORIALITY Companies undertaking activities in Nigeria are liable
to tax, except for exemptions given by law. The deduction system is one of global benefit for
companies resident in Nigeria or those which are controlled from Nigeria. Non-resident companies are subject to taxes on income
generated in Nigeria or of Nigerian origin. All income that cannot be linked to
operations undertaken outside of Nigeria is considered as being of Nigerian
origin. Nigerian tax law considers the determining factor to be the place either
where directors or administrators normally meet to determine if the company is
subject to Nigerian tax law. LIST
OF TAXES AND DUTIES LEVIED BY THE NIGERIAN AUTHORITIES Taxes and duties are levied by: -
The federal
government -
The government of
individual federated states -
The local
governments They are published in the Joint Tax Board (J.T.B). DUTIES
LEVIED BY THE FEDERAL GOVERNMENT 1)
Companies tax 2)
Payroll deductions 3)
Tax on oil profits 4)
Value added tax 5)
Education tax 6)
Tax
on earnings 7)
Company stamp duty 8)
Individual income
tax (I.R.RP), due for: a.
Armed forces
personnel b.
Police personnel c.
Abuja residents d.
State diplomats e.
Non residents TAXES
LEVIED BY THE FEDERATED STATE GOVERNMENTS 1)
I.R.P.P a.
Pay As You Earn
(PAYE), b.
Direct taxes, c.
Payroll deductions
(for individuals only), 2)
Tax on earnings, 3)
Stamp duty on
individuals' acts, 4)
Taxes on gaming, 5)
Transport taxes, 6)
Tax on commercial
premises to the amount of 10,000 Nairas the first year, and 5,000 Naira per year
thereafter, 7)
Development
contribution totalling 100 Nairas per year for everyone paying tax, 8)
Tax on street names
in state capitals, 9)
Land tax in state
capitals, 10)
Various market taxes when federated state finances are low. TAXES
LEVIED BY LOCAL GOVERNMENTS 1)
Local authorities
licence, 2)
Land tax, 3)
Alcohol tax, 4)
Slaughter house tax, 5)
Tax on civil state
acts, 6)
Street name tax, 7)
Occupancy of public
domain rights, 8)
Parking rights, 9)
Domestic animals
tax, 10)
Vehicle tax, 11)
Livestock tax, 12)
Tax on shows and private roads, 13)
Radio/television licence fee, 14)
Parking fines, 15)
Household waste tax, 16)
Tax on billboards. TAX
RATES Normal tax rates on companies according to CITA are
30%. However, for companies who have a turnover less than
500,000 Nairas, and operating in the agricultural production sector, mining of
solid minerals the tax rate falls to 20% It is the same for companies whose turnover is less
than 1,000,000 Nairas who operate in the manufacturing and product export
sectors which are protected, benefiting from the same 20% tax rate. It should be noted that this advantage is extended
during a period of 5 years only. Companies that benefit from pionneer
status enjoy, as a result of the allowances made by the Industrial
Development Act (1990), fiscal exemption during their first three years of
operation. The rate of tax on oil profits (Petroleum Profits Tax)
for companies undertaking their business as a Joint Venture (J.V.C.) and with a
Risk Service Agreement is 65% of taxable income on their gross exports during
their first five years of production. Thereafter the rate rises to 85%. Lastly, the taxation rate of companies operating under
Production Sharing Contracts (P.S.C) falls to 50%. (See section on oil taxation
for further information on these principles). COMPANIES
TAX According to the provisions of the Company Incomes Tax
Act (CITA), companies liable to tax must register their financial declaration
and their accounts within six months of closing their company's year. This deadline is extended to 18 months for companies
that are newly incorporated or to six months after the end of their company's
year. Companies that calculate and settle their tax within
the required deadline benefit from a refund of 1% on the amount due as a
sweetener. Submitting statements after the deadline incurs a
delay penalty of 2,500 Naira in the first month and 500 Naira per month
thereafter. The 1% sweetener is also lost. PAYMENT
OF TAX In other cases tax is payable within two months of
notification of the administration's calculation. It can be paid in 6 monthly
instalments. Settlement after the deadline results in a penalty of 10% of the
sum due and late payment interest at bank rates imposed from the moment it
should have been paid. Tax deductions are accorded to societies that have
invested in factory construction and for agricultural sector business activities. TAXATION
OF DIVIDENDS, RENTS AND FEES Net dividends received
(that’s to say after
deduction at source) are not liable to any new taxes. Dividends, rents and fees emanating from a company
whose headquarters are outside Nigeria and repatriated to Nigeria by an
intermediary are exempt from companies tax. INTEREST Interest accrued on deposit accounts of a non-resident
company are exempt from tax on the condition that they are repatriated to
Nigeria by an agreed intermediary. The same is the case with deposit accounts of
open foreign exchange in Nigeria. DEDUCTIBLES Nigerian law allows certain expenses to be deducted on
the condition that they are "entirely, exclusively, necessarily and
reasonably" linked to the fiscal period through the course of which they
have been subjected to turn a profit. The expenses are the following: 1)
Interest on loans, 2)
Rental of premises, 3)
Repairs and
replacements linked to offices, factories, buildings etc used for the business
activities of the company, 4)
Dubious and
unrecoverable debt, 5)
Contributions to
retirement and contingency funds, 6)
Foreign exchange
losses, 7)
Prospecting and
development expenses, 8)
Donations to
accredited bodies. The following are considered as non-deductible: 1)
Capital
reimbursement, 2)
Any sum received as
insurance or an indemnity title, 3)
Taxes on revenues
and income settled in Nigeria or elsewhere in the world, except for provisions
avoiding double taxation, 4)
Payment of pension
plans to non accredited bodies, 5)
Depreciation, 6)
Appropriation of
profits, 7)
Management costs
not authorised by Nigerian authorities, 8)
All costs occured
in Nigeria or abroad with the aim of obtaining management dues unless they have
not previously been authorised by the Nigerian authorities. CAPITAL
GAINS The taxation rate on capital gains on assets is 10%.
This tax can be avoided if during the following twelve months the evidence
of the capital gains are reinvested in similar assets. FICTITIOUS
TRANSACTIONS The Federal Board of Internal Revenue and the Internal
Revenue Boards of the different states have the most extensive powers to annul
transactions they believe to be artificial or fictitious. These authorities can equally declare that a person
assumes the role of agent for tax purposes of any other person. This procedure aims to allow tax to be collected from
an individual who will be considered as the agent of another. TAX
DEDUCTION The Educational Tax Decree (1993) implemented a tax
levied on all companies resident in Nigeria of a sum of 2%. It should be noted that this tax is deductible from
the taxable base by the Petroleum Profits Tax. TAX
TREATIES Nigeria had signed tax treaties which stayed in place
until April 1979 with Denmark, the Gambia, Ghana, New Zealand, Norway, Sierra
Leone, Sweden, the United Kingdom and the USA. These tax treaties have been terminated. Currently Nigeria has signed tax treaties with the
following countries: -
United Kingdom, -
Holland, -
France, -
Belgium, -
Pakistan, -
Canada, -
Romania. These tax treaties aim to avoid double taxation of
companies originating from each of the signatory countries. DEDUCTION
AT SOURCE When a payment must undergo a deduction at source the
debtor of the payment must deduct the deduction at source before discharging any
sum to the creditor and report it to the tax authorities within 30 days. The rate of deduction at source is 10.7% but can fall
to 5%.
The settlement of payment at source avoids settlement
of any other taxes. The fact of not effecting payment at source or
embezzling the amount leads to the application of a financial sanction
equivalent to 200% of the amount due, in addition to interest at an applicable
commercial market rate. The settlement of payment at source is effected: -
Either through the
FBIR by bank transfer when it is due to the federal government (in the case of
commercial companies) -
Or through the
State Board of Internal State Revenue (in the case of individuals) VALUE
ADDED TAX VAT was introduced to Nigerian tax law in 1993 to
replace sales tax and came into force on 1 January 1994. VAT is 5%. The following are excluded from VAT: 1)
Pharmaceutical and
medical products, 2)
Basic foodstuffs, 3)
Educational books
and materials, 4)
Newspapers and
magazines, 5)
Baby products, 6)
Commercial vehicles
and their spare parts, 7)
Medical services, 8)
Exports of any
nature, 9)
Service exports, 10)
Services carried out by the equivalent of people's banks. The 1998 budget added the following articles: -
Factories and
imported machinery to be registered in the Export Processing Zones, -
Factories,
machinery and equipment acquired for the utilisation of gas, in the oil sector, |
