What is Company Income Tax in Nigeria?
Before the colonial masters arrived Nigeria, the pre-colonial people already had a functional tax system whereby farmers and traders paid taxes on their harvests. The Northern region particularly observed this law, and they paid to their rulers.
Over the centuries, the tax law has evolved, in compliance with modern tenets and advancements, which include the writing of the Nigerian constitution.
In the constitution, some of the outlined laws demand that business operators within the country should be taxed, since their activities are taxable. In other words, companies that run stable businesses and rake in steady income must pay tax, as long as they are registered in Nigeria.
The Nigerian tax law makes provisions for different categories of taxes, all of which are remitted to various levels of administrations through the corridors of Federal Inland Revenue Service(FIRS) and Internal Revenue Service (IRS) in all state of the federation.
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State tax has different taxes for different purposes. Examples are;
i. Personal Income Tax (PIT),
ii. Business Premises Tax (BPT),
iii. Development Levy for workers in various organisations,
iv. Withholding Taxes set aside for non-corporation bodies and individuals.
The Federal level taxes have its own classified taxes and they include;
i. Value Added Tax (VAT),
ii. Withholding Tax set aside for Incorporated bodies.
iii. Company Income Tax (CIT).
iv. Education Tax (ET).
An average Nigerian who sees this list of taxes may feel anxious about the amount the government is asking for, however the required percentages on each type are not exorbitant.
In reality, many business owners, both and small ventures, are not complying with tax laws, particularly for small startups. Majority of Nigerian companies are tax evaders, according to reports.
One of such reports obtained from a conducted investigation disclosed that 80% out of the respondents who are startup business owners don’t even know that they have a responsibility to pay tax, meaning they don’t pay at all.
According to a publication from BusinessDay, the money generated from taxes in the country dropped to 76% in 5 years (2012-2016), going down from ₦5 trillion to ₦1.2 trillion.
Corporate Income Tax (CIT) will be in focus in this article and the information contained here will serve as a form of awareness for business operators.
Corporate Income Tax (CIT)
When incorporated organizations in Nigeria make profits from their ventures, they pay tax on such gains, and that act is known as ‘Companies Income Tax (CIT)’. It includes the tax on the profits of non-resident companies carrying out businesses in Nigeria. The tax is paid by limited liability companies and the public limited liability companies. It is therefore popularly referred to as corporate tax.
When was Company Income Tax Created?
CIT was created by the Companies Income Tax Act (CITA) 1979 and has its origin from the Income Tax Management Act of 1961. Though it was amended years after. Corporate Income Tax is among the supervised taxes and it’s collected by the Federal Inland Revenue Service (‘FIRS’). The tax contributes greatly to the revenue profile of the Service. In 2016, the revenue geared towards the Companies Income Tax is N1.877 trillion representing approximately 40% of the total projected tax revenue of N4.957 trillion for the year.
In declaring the Companies Income Tax, audited financial statement are compulsorily needed. This necessitates the involvement of External Auditors to prepare and/or certify the accounts to be submitted. The returns should compulsorily be followed by the tax computations and start up allowance computations on qualifying assets of the company. The requirement for declaration does not differentiate from small, medium or large taxpayers. To many taxpayers therefore, CIT is a complicated kind of tax, hard to comprehend and to agree with.
Why Was Nigeria Company Income Tax Amended?
Company Income Tax Act was amended to grant more incentives for investment in infrastructure. The Company Income Tax Act (Amendment)
In 2015, a bill was passed by the National Assembly to accommodate more organizations that have stakes in public facilities when they begin operations. The bill focused more on providing more incentives to them. In addition, the eligibility threshold was reduced to enable more companies qualify for it. It is not obvious how well these proposed changes are based on empirical data because of the minuscule rejoinder by business ventures since the introduction of the incentive many decades ago.
The expected profits from the incentive should also be used to checkmate the associated cost and revenue loss. It is also important to ensure adequate coordination among government bodies to align different initiatives including the ongoing understandable review of tax incentive regime.
Nigeria Company Income Tax Rates
The CIT rate is 30%
Company Income Tax Rates for Small Companies
Small companies in the manufacturing sector and those that are export-based have a reduced Company Income Tax rate of 20%. This is applicable if they have gotten one million naira and are still within five calendar years of operation as stipulated.
Minimum Tax for Companies
In most cases, companies might end up with no taxable profit for a particular year or with a taxable profit that is less than the stated minimum tax. In a situation like this, a minimum tax becomes the alternative for these companies.
Companies within the first four calendar years of operation, companies with foreign equity capital of at least 25% and also companies in the agricultural sector are excluded from the minimum tax.
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