The concept of Companies Income Tax (CIT) in Nigeria is the company creating a business entity, which is recognized as a legal entity for tax purposes. The business entity could be a sole proprietorship, partnership, or corporation.
What is Companies Income Tax?
Companies Income Tax (CIT), also known as Corporate Tax, is the tax on the profits of registered companies in Nigeria. It also includes the tax on the profits of foreign companies operating their business in Nigeria. This tax is seen as one of the different types of taxes that are usually levied by the government. CIT is paid by both the public limited liability companies and the limited liability companies.
The Companies Income Tax Act
The Companies Income Tax Act (CITA) is the principal law set in place to regulate the tax regime of companies operating in Nigeria. The Nigeria tax law is designed in a way that it makes provisions for different categories of taxes. These tax regime in Nigeria is a multi-level system which means that the three tiers of government administer taxes. The taxes are all administered to the various levels of administrations through the Federal Inland Revenue Service (FIRS) and Internal Revenue Service (IRS) in all Nigerian states.
History of the Companies Income Tax in Nigeria
The CIT was formed by the Companies Income Tax Act (CITA) enacted in 1979. Nigeria Companies Income Tax Laws witnessed a number of amendments in recent years, and it has its origin from the Income Tax Management Act of 1961. In recent years, CIT has been of immense importance and has contributed greatly to the overall revenue accrued by the FIRS as shown by the 2018 report. In the first quarter of the year 2018, Nigeria has generated ₦202.16 billion from CIT, which is 30% higher than what FIRS generated in the first quarter of 2017 (₦155.57 billion).
How to Calculate Company Income Tax (CIT)
As stated in section 9 of the Companies Income Tax Act as amended by the Company Tax Act of 2007, states 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…”
And Section 40 of the Act further states that:
“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.”
Based From the above, the companies income tax rate in Nigeria is 30% of all companies’ taxable profit at any given fiscal year (tax is charged on profits for the accounting year ending in the year preceding assessment). In calculating the taxable profits of any company, the FIRS or State Board of Internal Revenue makes use of only the company audited account for that year.
Allowable Deductions under the Company Income Tax Act
Under section 24 of CITA, certain deductions are allowable in determining the taxable profits of these companies. The Section 24 provides that “save where the provisions of subsection (2) or (3) of section 14 or 16 of this Act apply, to ascertain the profits or loss of any company of any period from any source chargeable with tax under this Act, there shall be deduction all expenses for that period by that company wholly, exclusive, necessarily and reasonably incurred in the production of those profits.”
Section 24 further includes the following categories of deductions:
- The total rent for that fiscal year and the premiums that the liability incurred for the period in relation to any building or land occupied by the company for the sole purpose of acquiring accommodation for the employees of the company.
- Any sum that is payable by way of interest on any fund that was borrowed and used as a source of capital for profits.
- All expenses that are attributed to the maintenance of the director’s remuneration, property that does not exceed ₦10,000 per annum in respect to each director in the case of a property holding company, and the number of directors that will be remunerated shall not exceed three.
- All expenses that are incurred for the repair of premises, machineries, and plants or fixtures that were employed in acquiring the profit
- All the contributions to approved pension fund, provident or any other retirement benefits fund, scheme or society that are approved by the Joint Tax Board.
- Salaries and wages or other remunerations that were paid to the senior executives or staff that shall not exceed the amount prescribed by the collective agreement between the employees and the company
- Bad debts that were incurred in the course of carrying out the business or trade for which profit is ascertained.
- Other deduction as may also be described by the minister by any rule
Section 25 and 25A of the Company Income Tax Act also allows for the deductions of any donation made to fund any institutions or body in Nigeria. Section 26 of the Act permits a deduction in respect to research and development, as long as the deduction does not exceed 10% of the profits ascertained before any deductions.
Under section 27 of the Act, the following deductions are not allowed in ascertaining a company’s profits. Expenses not allowed for tax purposes are added back to accounting profit even when these expenses have been charged in the profit and loss account to reach the taxable profit.Deduction not allowed includes:
- Depreciation of assets
- Capital repaid or withdrawn or any other expenditure of a capital nature
- Other payments to unapproved pension scheme such as savings, orphans and widows, pension, provident or any other retirement benefits fund, scheme or society except as legally permitted by paragraph (g) of section 24 of this Act
- All appropriation of profits which includes share issue expenses, dividends, formation expenses etc.
- Any other expenditures which were not incurred in earning the taxable profit