TAX PLANNING & AVOIDANCE SCHEMES IN NIGERIA
According to the Wikipedia, it describes tax by saying “tax (from the Latin taxo) is a compulsory financial charge or some other type of levy imposed upon a taxpayer (an individual or legal entity) by a governmental organization in order to fund various public expenditures”. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxation is a compulsory contribution to state, federal revenue, which is levied by the government on the workers’ income and business profits, or added to the cost of some goods, services, and transactions.
Taxes are unintentional fees imposed on persons or businesses and required by a government unit be it local, state or national. This is done in order to finance government activities and run the country smoothly providing social amenities. In economics, taxes fall on whomever pays the burden of the tax, whether this is the entity being taxed, such as a business, or the end consumers of the business’s goods. It’s never easy to file taxes being a small business owner who already has so many things to worry about. Most of the times, most small business owners will even forget to file their monthly Value Added Tax to the Federal Inland Revenue Service as the end of the month. This cause much problem for small business owners even for those that are engaged with businesses which are not VAT able as they are expected to file a nil VAT and submit to their respective tax station but failure to do this will lead to Federal Inland Revenue Service raising penalty for such businesses.
Business ownership is a complete task of its own even without the accumulation of accounting/tax tasks into the duties expected or to be executed. Hiring a bookkeeper for minor accounting and tax purposes or a tax consultant to do some of these tasks for you is a great step, but even doing that will not relieve you of all the responsibility surrounding your business’ taxation. Research conducted for Forbes shows that in the last 12 years, more than 93% of Micro, small and medium enterprise owners has paid more than their expected tax.
Tax are levied on the citizen to help bring public works and services to live and for the citizen at large. Also, it enables the government to build and sustain the infrastructures used in a country. These are some of the reasons why the government usually tax its individual and corporate occupants’ income and profit. The tax collected is used for the betterment of the economy and all the people living in it the country. In Nigeria and many other countries in the world, taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, capital gains from investment appreciation, dividends received as additional income, payment made for goods and services, etc.
Taxation cannot be said to mean other forms of collections as it has its own distinct characteristics, it doesn’t mean the same as market exchanges, in that taxation does not require consensus and is not by any way directly related to any service offered to people. The government obliges taxation through an implicit or explicit threat of force. Taxation is legally different than extortion or a protection racket because the imposing institution is a government, not private actors. A proportion of the taxpayer’s incomes or money is taken and paid to the government. Payment of taxes at rates levied by the state is compulsory. Tax avoidance is said to be legal and therefore not punishable but tax evasion which is the deliberate failure to pay one’s full tax liabilities is said to be punishable by law. Most governments use an agency or department to collect taxes; in Nigeria for example, we have the Federal Inland Revenue and the different states and local governments to assess and collect tax on behalf of the government. These agencies of the government have different kinds of taxes which are betrothed to them to assess and collect from the citizen.
There are a good number of taxes payable by persons doing business in Nigeria. These include companies’ income tax, personal income tax, capital gains tax, value-added tax, education tax, technology tax, stamp duties, and withholding tax. A Tax Clearance Certificate is issued on to businesses or individual who has filed their tax for three consecutive years doing it as at when taxes are due. This indicates that they have fully paid for three years immediately preceding the current year of assessment. A Tax Clearance Certiﬁcate is usually required as prerequisite for oﬃcial transactions or contracts with Government Ministries, Departments, and Agencies (MDAs).
In tabular form, here are taxes expected of a duly registered company in Nigeria
Now let us consider the key taxes imposed on every company in Nigeria. We shall also look into their rates and probably the legislations regulating them.
|APPLICABLE TAX||TAX RATE||GOVERNING LEGISLATION|
|Companies Income Tax (CIT)||In the 2019 Finance Bill, it was stated that small companies with less that N25 Million turnover will be exempted from CIT, medium company with N25 Million but less than N100 Million turnover will remit 20% while the big companies with over N100 Million turnover will remit 30 % of total profits of the company minus allowable deductions such as capital allowance.||Companies Income Tax Act|
|Capital Gains Tax (CGT)
|10% of gains realized upon sales and disposal of a chargeable asset||Capital Gains Tax Act
|Value Added Tax (VAT)||Value added tax was reviewed from 5% to a 7.5% on the supply of goods and services. This is recording a 50% increase to the initial rate of VAT.||Value Added Tax Act|
|Education Tax (EDT)||It is now governed by Tertiary Education Trust Fund (Establishment, Etc.) Act 2011. It is imposed on all companies registered in Nigeria. The rate of the tax is 2% of assessable profit||Education Tax Act|
Personal Income Tax
Personal Income Tax is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended). The tax is imposed on income of Individuals, Corporate sole or body of individuals, Communities, Families and Trustees or Executors of any settlement.
|CHARGEABLE INCOME||RATE OF TAX|
|First ₦300,000.00||7 %|
|Next ₦500,000.00||15 %|
|Next ₦500,000.00||19 %|
|Next ₦1,600,000.00||21 %|
|Above ₦3,200,000.00||24 %|
Stamp duty is a tax on documents, which is payable by virtue of the Stamp Duties Act, (Chapter S8), LFN 2004 (the “Stamp Duties Act”). The rate of stamp duties depends on the type of document and the value of the transaction evidenced by such a document. When a document is executed between a company and an individual, the stamp duty is payable to the Federal Inland Revenue Service, whereas, where the document is executed solely by individuals, the State Board of Internal Revenue is the appropriate collecting authority. Some examples of stamp duty levies are as follows:
|Taxable Item||Rate of Tax|
|Lease Agreements||16 kobo for every N 200 (0.08 %)|
|Mortgages||75 kobo for every N 200 (0.375%)|
|Incorporation of Limited Liability Company||0.75% of authorized share capital|
Withholding Tax (WHT) is a method used to collect Income Tax in advance. WHT is deducted at varying rates ranging from 5% to 10% depending on the transaction. The due date for filing WHT returns is 21st day of every succeeding month. Penalty for late filing of returns is ₦25, 000 for the first month it occurs and ₦5, 000 for each subsequent month the failure continues to occur.
|Types of Payments||Rate of Tax for Companies (%)||Rate of Tax for Individuals (%)|
|Dividends, interests and rents||10||10|
|Building and construction||5||5|
|All types of contracts and agency arrangements, other than sales in the ordinary course of business||5||5|
|Consultancy and professional services||10||5|
Customs and Excise Duty
The Customs and Excise Management Act (“CEMA”) Chapter C44 LFN 2004 levies customs duty on speciﬁc imported goods and thus empowers the Customs and Excise Management Authority to curb the movement of goods into and out of Nigeria. Any company operating in Nigeria is answerable under CEMA to remit customs duty on all goods which it imports into Nigeria for its operations, for hiring or for sale. The rates range from 5% to 30%, conditional to the kind of goods been imported.
Information Technology Development Levy
The National Information Technology Development Agency (“NITDA”) Act, 2007 imposes on telecommunication companies, cyber companies and internet service providers, pensions managers, banks, insurance companies and other financial institutions, which have an annual turnover of ₦100,000,000 (One Hundred Million Naira) and above, a levy amounting to 1% of their proﬁts before tax. The NITDA Act also empowers the Federal Inland Revenue Service (the “FIRS”) to assess and collect the levy and where a company fails to pay the levy within 60 days of the being served with notice of an assessment, a penalty of 2% will be added to the levy. In addition, failure to pay the levy will attract a ﬁne of not less than ₦1,000,000 (One Million Naira) on conviction.
Tax Hacks available to MSME are:
- Utilize tax filing software.
Small businesses should use tax software to curb any mistake or problem of taxation in the business. Th software will keep to the proper rate and make sure everybody remits.
- Keep close tabs on all receipts.
Receipts create the financial dashboard of how you spent your money throughout the year. Many of those receipts are for goods and services that can be deducted on your taxes, offsetting taxable income. Depending on your business structure, there are specific deductions you can take for certain structures, plus deductions that apply across all structures.
- Pay for your retirement now (and get a payoff later).
A self-employed worker’s taxable income can be reduced by putting additional money toward a traditional retirement account the money isn’t taxed until the funds are withdrawn in retirement. Your tax consultants can pinpoint the amount that makes the most sense for your cash flow, but this is a tax move that pays off both now and later.
- Deduct your home office.
Many small business owners operate from offices at home, but not all of them realize they can deduct expenses related to that home office. These can include insurance, mortgage interest payments, repairs and utilities like internet service.
You do, of course, have to determine what portion of your home is dedicated to running your business (the tax software does the mathematical calculation for you), but this deduction can benefit both homeowners and renters.
- Deduct your car expenses.
The trick here, again, when you’re deducting expenses, is to calculate what percentage of the time your car is being used for work. From there, you can apply that percentage to your overall car expenses.
For this category of deduction, two types are available: the IRS’s standard mileage rate or your actual car expenses (including insurance, gas, and repairs). Figure out which one makes the most financial sense before filing so you can maximize your savings.
- Get your money’s worth from your business equipment.
These will enable business to claim the necessary capital allowance on the purchase of fixed assets as a way to get some relief from heavy tax. Business owner may need to run a business, from an industrial-grade oven to office furniture to computer items.
- Keep an eye out for carryovers.
Some deductions or credits may not be fully used in one tax year and are eligible to be carried over into future years. These can include items like capital losses, net operating losses, home office deductions and charitable contribution deductions.
- Don’t sell your old equipment.
If you want to get rid of property that’s no longer providing ROI to the business, find out whether it would be better to abandon it (an ordinary loss) or to sell it (a capital loss). It will be better not to sell them as this will avoid paying tax called capital gain tax (CGT).
- Pension Payment: Pay more to Pension which is your Retirement Savings Account as this will further reduce your taxable income which you will charge tax on. This will help you conserve your cash to your RSA and you can always get this back once you attain the age of 50. This is a saving grace as provided by Nigerian Pension Law which permits you to do what is called Voluntary contribution.
ABOUT THE AUTHOR
Razaq Adedamola AYENI is a creative, talented and innovative Accountant with consolidated expertise in Accounting, Strategy, digital marketing and business development. He has worked in different industries and this has added to his wealth of knowledge.
He is a highly motivated and positive minded person, a business development expert. He has demonstrated his competence in leadership and mentoring in Matog Consulting & Matthew Ogagavworia & Co. in Ikeja Lagos where he is a Consulting associate and an Audit junior