TAX SERIES BY ENIOLA – SEASON 6 – COMPANIES INCOME TAX (CIT)
EPISODE 1 – ASSURANCE
‘Ever imagined a life without CIT?’
Majority of people reading this will think ‘Ha! Nope.’
It’s interesting then to note that CIT is like the engines of an Airplane, without which it will crash. It is like Vibranium, without which Wakanda becomes commonplace. It is the invisible glue that holds the Tax system in any Country together.
Companies directly or indirectly impact and permeate all Taxes in Nigeria.
If there was no CIT, Taxes like the Personal Income Tax would be terribly evaded. People would find a way to pass all their personal incomes as Company profits which would be exempted from Tax. Petroleum Companies engaged in Downstream Petroleum Operations also pay CIT. The drastic rate at which Tax revenue generated would nosedive would leave the Government shedding blood instead of tears. The Economy would be unbalanced. The Tax system would be in disarray.
Companies Income Tax Rate is also at 30% which is a much needed revenue source for a country like Nigeria with milestones to achieve as regards electricity, basic amenities and infrastructure.
Nowadays, everyone needs some Assurance – Chioma, the FIRS… everybody. Companies Income Tax is an Assurance to the Federal Inland Revenue Service that the ‘jagaban’ taxpayers – Companies, will not do dangerous stuff like majorly evade tax (Please click here for the TSE discourse on Tax Evasion and Avoidance) and that the Companies will not generally put the country in disarray.
A company is also a separate legal entity, an artificial entity with the powers of a natural person of full capacity. As such, like every natural person, it should pay Tax on its income.
EPISODE 2 – COMPUTATION
CIT is governed by the Companies Income Tax Act (CITA) Cap C21 LFN 2004 and administered solely by the Federal Inland Revenue Service.
CIT is taxed on profits of any Company “accruing in, brought into or received in Nigeria” in respect of:
- Any trade or business;
- Rent or premiums;
- Dividends, interests, royalties, discounts, charges or annuities;
- Any source of annual profits not already mentioned;
- Any amount deemed to be income or profit under the CITA;
- Fees, dues and allowances for services rendered; and
- Gains arising from acquisition and disposal of short term money instruments like Federal Government securities, treasury bills, debenture certificates or treasury bonds etc.
Very important to note, as long as it is a Nigerian Company making profits, no matter where it is made on Earth – worldwide income, it will be due for CIT in Nigeria.
So whether a Nigerian Company makes any profit in Madagascar, Wakanda or Rome and whether or not the money smells the shores of Nigeria, the CITA does not care. The profits will be deemed to be “accrued” in Nigeria.
For foreign Companies, where;
- they have a fixed base that makes profit for them in Nigeria or they constantly operate a trade or business through any agent in Nigeria; or
- they constantly maintain a stock of goods in Nigeria from which an agent regularly delivers; or
- there is a contract for surveys, deliveries, installations or construction; or
- there is trade or business or activity between the company and a person controlled by it or who has a controlling interest in it which yield’s arm’s length profit,
profits made from such business or trade or activities carried on in Nigeria is deemed to be “derived” in Nigeria and thus subject to CIT.
There is additional liability on Foreign Companies when they earn interests from loans granted to Nigerian companies.
Interests on Loans are deemed to be Company profits liable to be taxed because the interest is also deemed to be “derived” from Nigeria.
Definitely, not all Company income is Taxable. Income from some types of Companies are exempted from Tax. They include Companies that are:
- Statutory or registered friendly societies;
- Co-operative societies;
- Ecclesiastical, charitable or educational institutions engaging in activities of a public character
- Trade unions; etc,
as long as their profits aren’t derived by a trade or business, they are Tax exempt.
So immediately these exempted companies engage in trade or business, any profits derived will be subject to CIT.
Interestingly, the President has the power to exempt by order, any company or class of companies from all or any of the provisions of the CITA!
Some further deductions are allowed. They are expenses which are “wholly, exclusively, necessarily and reasonably” incurred in production of the Company profits. They include interests on loans, bad debts, rents, premiums, loans, repairs, salaries paid etc.
Also, donations made to public funds or statutory bodies listed in the CITA e.g Red Cross, are allowable deductions as long as the donation was made out of the profit of the company and not its capital.
The donation must not exceed 10% of the Company’s income though but donations to Universities and Research Institutions can be up to 15%.
When a Company makes Losses, CIT relief can also be granted as long as the loss relief granted is not more than the loss of the company.
Allowances are also granted on ‘Qualifying Capital Expenditure’. This is called Capital Allowance. What this means is that a Company is allowed to deduct out of its profits to keep for itself. It won’t be taxed. This will help it gradually recover the money it spent as Capital for the business e.g Industrial buildings, Mining, Manufacturing, Industrial or Construction Plants, Motor vehicles, Research and development, Furniture and Fittings, etc.
Sisi Nene Company will be allowed to deduct money it spent as Capital for its Ankara bag and Shoe making business if the Capital qualifies under the Act.
To qualify, the Capital Expenditure must have been “wholly, exclusively, necessarily and reasonably” incurred for the purposes of the business.
CITA also grants an additional allowance on 10% of the actual expenditure incurred on plant and equipment. This is Investment Allowance.
There are also other Allowances like Rural Investment Allowance – where a company is in a place with no telephone, tarred roads, electricity, no water, etc; and the Export Processing Zone Allowance for companies located in export processing zones; among other allowances, reliefs and incentives.
Some deductions are not allowed. If they were allowed, Taxes would be evaded. They include; Capital repaid or withdrawn, non- quakifying Capital expenditure, sums recoverable under insurance contracts, depreciation of assets, payments to a savings, widows and orphans, pension, provident or other retirement benefits fund etc.
After profits from all sources are added into the Tax basket, the exempted profits, deductions allowed and all allowances like Capital Allowances, Rural Investment Allowance, etc are removed from the basket. The remaining profits in the Tax basket – Taxable Income, are then subjected to Companies Income Tax rate of 30%.
Small Company Tax Rate of 20% applies only to Agricultural, Manufacturing companies and companies engaged wholly in export for the first five years of commencement of business where the turnover is 1 Million Naira or less.
Worthy of note is the Minimum tax. Companies that don’t make taxable profit must pay CIT nevertheless. Where the turnover of the company is below 500,000 and the company has been in business for at least four years, it is liable to pay:
- 5% of its gross profits; or
- 5% of its net assets; or
- 25% of paid –up capital; or
- 25% of turnover of the company for the year, whichever is highest.
Where the turnover is more than 500,000, it is liable to pay the highest of the calculations above plus 0.125%.
Minimum Tax is not required where a company:
- is within its first four calendar years of business;
- has at least 25% of its paid up capital as imported equity; and
- carries on Agricultural trade or business.
CIT is payable in one lump sum on a preceding year basis not later than three months from the commencement of each year of assessment. This means that not later than March 31 of a new year, CIT for the previous year must have been paid.
Returns must be filed with the FIRS not later than six months after the end of the company’s accounting year. A new company must file returns within 18 months of its incorporation or 6 months after its first accounting period, whichever is earlier.
Penalty for late filing of returns is 25,000 naira in the first instance and 5,000 naira for each subsequent month the failure continues.
Penalty for non-payment or late payment is 10% of the amount of Tax payable plus interest at the Monetary policy rate (MPR).
Appeal from grievances or objections on assessments go to the appropriate Appeal Commissioners and then to the Federal High Court.
EPISODE 3 – CITA AND VAIDS
Companies are the geese that lay the golden eggs. The Assurances CIT gives to the FIRS and the stability it brings to the Tax System in Nigeria cannot be undermined.
In light of this, TSE had a recent discourse on Voluntary Assets and Income Declaration Scheme (VAIDS). VAIDS applies to CIT and as such, all companies in Nigeria, excluding those involved in Upstream Petroleum Operations defaulting in filing their CIT returns should seize the opportunity of the VAIDS amnesty period to regularize their tax defaults before June 30.
Akinoso Eniola is a Tax and Litigation Enthusiast, a Fellow of the Obama Young African Leaders Initiative and the National Matching and International Relations Coordinator for AIESEC in Mauritius. She writes stories and articles to contribute to her AIESEC-cultured love for the SDG’s and to bring pertinent issues in Nigeria to light. The Tax Series by Eniola is her latest initiative to stimulate interest in Taxation.