An Overview of CIT in Nigeria
By Doyinsola Olagunju
WHAT IS COMPANIES INCOME TAX?
Nigeria’s tax laws makes provisions for different categories of taxes, all of which are remitted to the coffers of either the Federal Inland Revenue Service (FIRS), or any of the Internal Revenue Service (IRS) of the thirty-six states of the Federation. The Companies Income Tax is therefore one of the categories of those taxes collected by the Federal government.
The Companies Income Tax is a tax levied on the profits of incorporated bodies in Nigeria. Incorporated bodies in this sense refer to organizations that have undergone the legal process of becoming companies and/or corporate entities in Nigeria.
The Companies Income Tax also includes tax levied on the profits of companies that are carrying on business in Nigeria, but are not resident in Nigeria. The tax is paid by both limited liability companies and public limited liability companies, and it is just one of the different types of taxes usually levied by the government. Usually the tax is also referred to “Corporate tax”.
HISTORY OF NIGERIA’S COMPANIES INCOME TAX
Nigeria's “CIT” was created by the Companies Income Tax Act (CITA) enacted in the year 1979. The law has its origins from the Income Tax Management Act of 1961. Although Nigeria's Companies Income Tax laws has been amended a number of times, the tax is among those collected at the Federal level by the Federal Inland Revenue Service (FIRS).
Over the years, CIT has contributed greatly to the overall revenue accrued by the FIRS with the 2018 statistics showing that Nigeria has already generated N202.16 billion from CIT in the first quarter of the year. This is 30% higher than what was raised in the first quarter of 2017 (N155.57 billion) . The tax is also expected to contribute over 40% to the N5 trillion Naira the FIRS plans to generate from taxes in Nigeria in 2018.
HOW TO CALCULATE CIT
Section 9 of the Companies Income Tax Act (as amended by the Companies Tax Act (Amendment) Act, 2007) states, among other things, that
- Subject to the provisions of this Act, the tax shall, for each year of assessment, be payable at the rate specified in subsection (1) of section 40 of this Act upon the profits of any company accruing in, derived from, brought into, or received in, Nigeria in respect of -
Section 40 of the said Act now states;
- 1) There shall be levied and paid for each year of assessment in respect of the total profits of every company, tax at the rate of 30 kobo for every Naira.
Stemming from the above provisions, Nigeria's company income tax rate is 30% of the taxable profit of a company generated within a given fiscal year. Duly note however, that for the purpose of calculating the taxable profit of a company, the Revenue Service will make use of only the audited account of the company.
ALLOWABLE AND DISALLOWABLE EXPENSES
The guiding principles to determine what to include in the tax computation are the rules of allowable and disallowable expenses, as contained in Sections 24, 25, 26 and 27 of the CITA.
Section 24 of the CITA details clearly the expenses allowed to be deducted, and the way and manner that they can. Allowable expenses are expenses of a company that are wholly, exclusively, necessarily and reasonably incurred in the production of the profits of a company. Examples of expenses that will be allowed by the Revenue in a Companies Tax Computation are as follows;
I) Interest on borrowed money
II) Rent on office
III) Repairs and maintenance
IV) Contribution to approved pension fund
V) Salaries and Wages
VI) Cost to the company of any benefit or allowance provided to the Senior staff and executives (which shall not exceed a certain amount)
VII) Any expenses incurred for the repair of premises, plant, machinery
VIII) Bad debts incurred in the course of doing business
IX) Such other deduction as may be described by the minister by any rule.
Section 27 of the CITA details clearly the deductions that are not allowed. Expenses that are not allowed for tax purposes should be added back to accounting profit (even when they have been charged in the profit and loss account) to arrive at the taxable profit. Examples of expenses that are not allowed for tax purposes are as follows;
1)Capital Withdrawn or repaid or any expenditure of a capital nature
2) Depreciation of assets (Capital allowances are granted instead)
3) All appropriation of profits such as dividends, share issue expenses , formation expenses
4) Payment to unapproved pension scheme
5) All other expenditure that are not incurred to earn the taxable profit.
TOTAL PROFITS OF A COMPANY
Section 27 of CITA defines total profits of any year of assessment as the amount of any assessable profits from all sources for that year, together with any additions for balancing charge that may be applicable, less deductions for loss relief and capital allowance.
Though this definition may seem complex, it could be better appreciated with the following table showing the structure of a typical tax computation.
OTHER NOTABLE TERMS
Minimum Tax Basis - Contained in Section 33 of CITA, this is the minimum tax paid by a company which has
- no total profit,
- whose total profits results in
- no tax payable or
(3) tax payable is less than minimum tax.
Minimum Tax basis is levied and payable by a company for any year of assessment where:
1) In ascertainment of total assessable profits from all sources a loss occurs, or
2) Tax on total profits is less than the minimum tax as determined below;
3) Where turnover is N500,000 or below, minimum tax payable shall be the highest of:
0.5% of gross profits
0.5% of net assets
0.25% of paid-up capital , or
0.25% of Turnover for the year.
Where turnover is above N500,000, minimum tax payable shall be the sum of
Highest factor in (1) above; plus
0.125% of turnover in excess of N500, 000.
EXCEPTION TO MINIMUM TAX
- The minimum tax is not applicable to a company during the first four years of its
- commencement of business;
- It is also not applicable to agricultural trade or business as defined in Section 9 (8) of
- Companies Income Tax Act: and
- It is not applicable to any company with at least 25 per cent imported equity capital.
*Other notable provisions in the CITA include Turnover Basis (as contained in Section 30 of the Act), and Dividend Basis (as contained in Section 19 of CITA).
COMPANY INCOME TAX RATE OF SOME OTHER COUNTRIES IN THE WORLD
United Arab Emirates - 55%
Puerto Rico - 39%
United States - 38.9%
Argentina - 35%
Chad - 35%
Democratic Republic of Congo - 35%
Equatorial Guinea - 35%
Guinea - 35%
Malta - 35%
India - 34.6%
Virgin Islands, U.S - 35%
Venezuela - 34%
Belgium - 34%
Monaco - 33%
Albania - 15.0%
Georgia - 15.0%
Cyprus - 12.5%
Ireland - 12.5%
Liechtenstein - 12.5%
Moldova Republic -12.0%
Oman - 12.0%
Andorra - 10.0%
Bosnia And Herzegovina - 10.0%
Bulgaria - 10%
Gibraltar - 10%
Kyrgyzstan - 10.0%
Macedonia - 10.0%
Paraguay - 10.0%
Qatar - 10.0%
Timor-Leste - 10.0%
Montenegro - 9.0%
Turkmenistan - 8.0%
Uzbekistan - 7.5%
There are are currently 14 countries without a corporate income tax. Most countries without corporate income taxes are small, island nations. Four of the countries are islands known for having no corporate income tax: the Bahamas, the Cayman Islands, the British Virgin Islands, and Bermuda. Bahrain has no general corporate income tax, but has a targeted corporate income tax on oil companies.
RECOMMENDATIONS TO IMPROVING CIT COLLECTION AND COMPLIANCE IN NIGERIA
The Federal Inland Revenue Service is indeed making giant strides as regards bolstering tax revenues in Nigeria. However, it must be said that many a cases of outright tax evasion are still perpetuated by a good number of Nigerian companies. This is possible due largely to a number of factors present in the Nigerian tax collection system. One is the outright connivance by tax authorities and company owners (who happen to be “big men”) to willfully evade taxes. Another is Nigeria’s largely inefficient database system which allows a number of companies to transfer profits to other tax havens like the Bahamas and Seychelles.
Going forward, one advises that the fight against tax evasion be free, fair, and credible, in a way that allows for all companies resident and making profit from Nigeria to be taxed - without fear or favour. Also, our database systems need to be properly updated so that the requisite information needed to track tax defaulting companies will be readily available.