Nigeria

5 Chapter Tax Law

    • Overview of Tax Law.

       

      The Federal Inland Revenue Service is responsible for assessing, collecting and accounting for tax revenue accruable to the Nigerian government. Some of the most important Federal Tax Laws in Nigeria are Companies Income Tax Act, Federal Inland Revenue Service (Establishment) Act, Tertiary Education Trust Fund Act, Income Tax (Authorized Communications) Act, Personal Income Tax Act, Value Added Tax Act, Stamp Duties Act, Taxes and Levies (Approved List for Collection) Act, etc.


      1.1. Law related tax

      1.1.1.     Direct tax.

      Taxes imposed by government agencies levied on individuals and businesses. Some examples are the Personal Income Tax and Corporate Income Tax.

      1.1.2.     Indirect tax.

      Levied on goods or services. Some examples are the Value Added Tax (VAT) and Customs and Excise Duties.


    • Corporate Income Tax

       

      2.1.1.    Who is subject to Corporate Income Tax?

      The corporate Income Tax (CIT) rate is 30%, residents are taxed on their worldwide income and non-residents (i.e. PE) on their Nigerian source Income.

      The CIT is different for small companies in the manufacturing industry and export companies (with a turnover no more than 1 million NGN) the CIT rate is reduced to 20% in the first five years of operation.


      2.1.2.    Non-taxable Income.

      Income from religious or charities or any NGO´s is exempt from tax.


      2.1.3.    Non-deductible expenses.

      Expenses that do not incurred in the production of income.


    • Deductible expenses.

       

      2.2. Deductible Expenses.

      Other types of deductible expenses besides the ones mentioned above are the Sum payable by way of interest on capital borrowed, Rents, expenses incurred in respect of salary and wages, expenses incurred for repair of assets, etc.


      2.2.1.     Organization expenses.

      Law in Nigeria does not indicate if expenses for opening a company are non-deductible but in theory tax authority does not allow them. The tax authority states that the expenses for opening a company are not directly attributable to any taxable income of the company.


      2.2.2.     Bad debt loss.

      If it is incurred by doing business or trading, bad debt is deductible.

      2.2.3.     Travel expenses.

      Reimbursement of expenses incurred by the employee in the performance of his duties, and from which the employee is not expected to make any profit; is considered tax exempt, this can include travel expenses.


    • Real estate

       2.3.1.     Tangible real estate

      [Depreciation cost]


      Qualifying expenditure

      Initial allowance

      Annual allowance

      Building (industrial and non-industrial)

      15 %

      10 %

      Furniture and fittings

      25 %

      20 %

      Plant expenditure (for agriculture)

      50/95 %

      0/25 %

      Mining expenditure

      95 %

      0 %

      Plantation equipment

      95 %

      0 %

      Motor vehicle

      50/95 %

      0/25 %

      Ranching and plantation expenditure

      30 %

      50 %

      Housing estate expenditure

      50 %

      25 %

      Research and development (R&D)

      95 %

      0 %

    • Calculation.

       

      The tax rate is 30% and the profit is charged on profits for the accounting year.


    • Filing of Return/Payment and Refund

       

      The tax year is 12 months after the year basis. Consolidated returns are not permitted, and each company must file a separate return and do it every year on its income for the accounting year.  The return is due within six months after the end of the accounting year.


    • Personal Income Tax

       

      3.1. Resident/non-resident definition.

      A resident is a person that has to be in the country more than 183 days in a year. Residents are taxed on their worldwide income and a non-resident on their income generated from Nigeria.


      3.2. Taxable Income.

      Employment income is usually taxable unless there is an exception. Business profits earned by an individual from trade or profession and other investment income is taxable as well.


      3.3. Non-taxable Income.

      Exempt income is foreign source income of residents from dividends, interest, rents, royalties, fees or commissions earned abroad but exchange into Nigerian currency,

      3.4. Non-deductible Income.

      Expenses that do not incurred in the production of income.


      3.5. Calculation.


      Income Tax

      Rate

      0 –     300 000

      7%

      300 001 – 600 000

      11%

      600 001 – 1 100 000

      15%

      1 100 001 – 1 600 000

      19%

      1 600 001 – 3 200 000

      21%

      Over 3 200 000

      24%



      3.6. Filing of Return/Payment and Refund.

      Each taxpayer must file their own tax return, join returns are not allowed. Residents have to file tax returns unless the employment income does not exceed 30,000 NGN per year. Other individuals pay tax by self-assessment or direct assessment. If the employee is employed full time, the employee is under PAYE system. The employer withholds personal income tax from the employee's salary or wages and pays it to the tax authorities.


    • Value Added Tax.

       

      4.1. Who is subject to VAT?

      All individuals or companies that make taxable supply of goods and services are required to register for VAT within 6 months of the commencement of business and the effective date of the VAT act.

      The rate is 5%, there are zero-rated items such as non-oil exports, goods and services purchased by diplomats or humanitarian projects. And there is an exemption for plants and machinery for use in export processing zones or free trade zones, basic food items and medical products and services.  

       

      4.3. Filing of Return/Payment and Refund.

      Companies have to collect VAT charged on their invoices form their customers, but government agencies and oil and gas companies are required to deduct at source VAT charged by their suppliers and remit it to the tax authority. The tax period is every month. VAT returns and the relevant payment are due in no later than the 21st day after the month of the transaction. There are penalties and fines plus interest hen failing to comply with taxes.


    • Other taxes.

       

      Stamp duties: Written documents relating things between individuals or companies are subject to stamp duties. Examples of documents are Financial transactions, articles of association between companies, statements, deals, bonds, etc. This tax can be charged at fixed rates or ad valorem, the rate is 0.75% on the authorized share capital at incorporation of a company or on registration of new shares. Banks and financial institutions must charge stamp duty tax of 50 NGN on every eligible transaction above 1,000 NGN. (There are exemptions)


      Property taxes: This tax is levied by the state government every year, rates vary depending on the state and location of the property.

      The most important taxes on property are the governor's consent fee and land registration fee (In Lagos this taxes and others, may rise to a total levy of 3% of the fair value of the land). There is also a right of occupancy fee and tenement rates, charged by state and local authorities.


      Capital Gains Tax: The Capital Gains Tax (CGT) rate is 10%, this is taxed to gains accruing to an individual or company on the disposal of chargeable assets. There is no distinction on the term of gains, if its long or short term, and no inflation adjustment to cost. All types of assets, debts, goodwill and foreign currency are subject to CGT.


      Petroleum Profit tax: This tax is applicable to any individual or company exploring for petroleum or producing petroleum. This is a pre-paid tax and the annual tax return has to be submitted to JP Morgan Chase Bank, within five months of the end of each assessment year. The payments are done in two segments.


      Tertiary Educational Tax:

      All companies subject to CIT are subject to the Educational Tax (EDT) as well and has to be submitted with the annual self-assessment income tax to the designated bank. This tax is imposed on every resident company at a rate of 2% of the assessable profit for each year of assessment.  For regular company’s income taxes are not deductible but companies subject to petroleum profit tax, the tertiary education tax is treated as an allowable deduction.  This tax is exempt for non-resident companies.

      National Information Technology Development Fund (NITDF) levy:

      Companies subject to this tax like GSM providers and telecommunication companies, have to pay the levy with their Companies Income Tax. the rate is 1% of pretax profit, and the tax is self-assessed and paid within six months after the accounting year-end. This tax is considered as a deductible expense.


    • Custom Tax

       

      6.1. Overview of Custom Tax.

      For exporting and importing documentation is needed, some consider it can be lengthy, it is regulated by the Federal Government.

      6.2. Export tax.

      Most goods produced in Nigeria can be freely exported but there are some prohibited exports, like raw hides and skins, timber and building materials, raw palm kernels, and unprocessed rubber.

      6.3. Import tax.

      The import duty varies from 5% to 60%, with an average of 12%. Imports are subject to a 7% port surcharge and a 5% VAT.


    • Tax related PE.

       

      7.1. Overview of tax related PE.

      A permanent establishment is considered to be the use of a facility for the sole purpose of storage or display of goods or for the collection of information. About transfer pricing, for regulation purposes a permanent establishment and its head office or other connected taxable persons, is considered a controlled transaction subject to the regulations.


    • Withholding Tax

       

      8.1. Overview of Withholding Tax.

      The filing period of withholding taxes is 21 days after the duty to deduct arose for deductions from the company. This are the withholding taxes applicable to individuals and companies in Nigeria:


      Payments

      For companies

      For individuals

      Dividends, interest, and rents

      10 %

      10 %

      Directors fees

      N/A

      10 %

      Hire of equipment

      10 %

      10 %

      Royalties

      10 %

      5 %

      Commission, consultancy, technical, service fees

      10 %

      5 %

      Management fees

      10 %

      5 %

      Construction/building (excluding survey, design, and deliveries)

      5 %

      5 %

      Contracts other than sales in the ordinary course of business

      5 %

      5 %

    • Transfer Pricing tax.

       

      9.1. Overview of Transfer Pricing Tax.

      Additional guidelines covering applicable transactions, acceptable transfer pricing methods, documentation, advance pricing agreements, and offenses, penalties and dispute resolution are contained within the Income tax (Transfer Pricing) Regulations. Transfer Pricing regulations started in 2002 and apply to transactions between connected taxable persons.



    • References

       

      Companies Income Tax (Last reviewed December 2007)

      COMPANIES INCOME TAX ACT CAP. 60 L.F.N. 1990 ACT CAP. C21 L.F.N. 2004

      http://www.orandcconsultants.com/Downloads/Companies%20Income%20Tax.pdf


      Nigeria, Tax Summaries PWC, 2018.

      http://taxsummaries.pwc.com/


      Types of Taxes In Nigeria, 2018.

      http://ngex.com/business/legal-taxes/commentary


      https://www.ey.com/gl/en/services/tax/worldwide-corporate-tax-guide---xmlqs?preview&XmlUrl=/ec1mages/taxguides/WCTG-2018/WCTG-NG.xml