Double Taxation in Nigeria – All You Need to Know

While it is necessary to pay tax on every income generated in Nigeria, being taxed more than once on the same income is not appropriate. Double taxation always comes at the detriment of the payer. Therefore, it is important to know what causes double taxation and how it can be prevented.

This article discusses the meaning of taxation, how you can prevent double taxation and the regulations guiding it.

What is Double Taxation?

Double taxation simply means paying tax twice or being taxed twice on a single income source. Double taxation occurs when a single income is taxed twice. While double taxation benefits the taxing authorities, the payer is at a loss.

Types of Double Taxation

There are two types of double taxation. They are Corporate Taxation and International Taxation.

1. Corporate Taxation

This type of double taxation occurs when the income of a corporation or company is taxed, and the dividends to shareholders are also taxed.

2. International Taxation

This type of double taxation occurs when a single tax is subjected to two taxes in different countries. The country where the income is generated taxes the income and the country of residence of the payer also taxes the same income.

How Double Taxation Works in Corporations in Nigeria

A corporation or business is seen as an entity and is taxed as such. Also, as a shareholder, you also pay tax on your income. This results in being taxed twice. The justification for this is the fact that you as an entity deserve to pay tax, while your corporation is also obliged to pay tax. Your corporation is taxed on an annual basis while you are taxed when dividends are paid out.

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It is important to note that double taxation in Nigeria is not a deliberate act of Nigerian tax legislation. Nigerian tax authorities always make efforts to ensure that this is prevented as much as they can.

For example, tax authorities make formulations to ensure that incomes generated in corporations are only subjected to a single tax if the corporation follows due processes. However, some loopholes prevent the total eradication of double taxation in Nigerian corporations. As such, it is important to know what to do so as not to fall victim to these loopholes.

How to Avoid Double Taxation in Nigeria

The question is, how can double taxation be avoided. While it is compulsory to pay tax, it is not wise to pay twice. Therefore, you need to know what strategies to put in place to avoid paying double taxes. These are useful tips to help:

  1. Don’t structure your business as a corporation. One way to avoid paying double taxation in Nigeria is by paying attention to how you structure your business. You must look for business structures that have pass-through taxation. These business structures, which prevent you from paying double tax, include sole proprietorship and partnership.
  2. Let your employees be shareholders. Instead of having different shareholders from employees, making yourself and other employees, the shareholders of the corporation will help you avoid double taxation.
  3. Make your shareholders on the payroll as your members of the board of directors. Instead of paying dividends to your employees, choosing other payment options is an effective means of preventing double taxation in Nigeria.

Double Taxation Treaties (DTTs)

There are laws guiding the relationships between one country and another. In the area of trade, the international trade convention gives power to every country to formulate rules and regulations that suit it. One area of focus is the aspect of taxation regulations. This regulation governs how incomes are taxed between different countries, known as double taxation.

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The law in each country is different from one another. This makes it hard to tax income generated from another country other than one’s country of residence. To make sure that this does not cause conflicts between two countries involved or cause double taxation at the detriment of the payer, the need for international agreements arises. With these treaties, one can generate income in another country other than his or her country of residence and avoid double taxation.

Bringing this to the Nigerian context, this formulation makes it double -taxation-free for you as a foreigner who trades in Nigeria or a Nigerian who trades in a foreign country. With this law, you can trade internationally without your income being subjected to double taxation. It is, however, worth mentioning that these regulations do not completely eradicate double taxation in Nigeria but, at least, weigh the chances down.

Typically, every country would tax every income generated in its territory. This means that if you generate your income in Nigeria, the Nigerian taxation policies demand that you pay tax based on your income. Also, your country of residence also demands that you pay tax on your foreign income. This would then lead you to pay more than the necessary tax, a process known as double taxation. However, with these treaties, there are provisions for how your income is taxed and how it benefits both countries.

DTTs and Their Enforcement Process in Nigeria

Besides the prevention of double taxation, DTTs have other objectives, such as eradicating non-double taxation and giving each country primary taxing rights. The treaties also ensure it benefits both countries. It is also worth noting that before any treaty is concluded, each country involved must agree with the drafted terms.

What does the Constitution Say About DTTs?

The Nigeria constitution is not clear on the formulation of double taxation treaties. The two different parts of the 1999 Constitution that make provisions for this formulation are not coherent. While a part of the constitution says that the National Assembly must sign the treaties before they become effective, another part states that the minister of finance may order the effectiveness of the treaties without the concept of other authorities.

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However, this gives the knowledge that every treat needs the backing of certain government authorities to become effective.

Double Tax Arrangements (DTAs) in Nigeria: The Countries Involved

Currently, Nigeria has signed DTTs with thirteen countries, which include:

  1. The United Kingdom
  2. France
  3. Canada
  4. The Netherlands
  5. South Africa
  6. Philippines
  7. China
  8. Pakistan
  9. Mauritius
  10. Romania
  11. Belgium
  12. South Korea
  13. Italy

This means that if you are a resident of any of these countries and generate income in Nigeria, there are regulations on how your income is taxed. Also, double taxation treaties give you access to the rule of law and power in Nigeria.

Mutually Beneficial Treaties

When countries enter into DTTs, the objectives include that both countries benefit from them. However, this is not always so because the treaties seem to favor certain countries than others.

Nigeria, in particular, does not seem to benefit from these treaties as other countries do. It is, therefore, necessary that the Federal Government of Nigeria review its treaties with other countries to check if it is benefiting from the treaties. In a case that Nigeria is not benefiting, then there should be a call for the review of the treaties.

Wrapping up

Paying tax on every income made in Nigeria is compulsory. The challenge is when a single income is taxed twice. This affects the corporation’s and individual’s revenue. With this, it is important to study what causes double taxation and how it can be prevented. This article has provided you with the necessary information needed to prevent your income or business from being taxed twice.