If you’re considering starting a business in Nigeria, either as a local entrepreneur or a foreign investor, tax laws are a very important factor to consider. Many companies in the past have lost a huge fraction of their profits to fines for defaulting tax payments or evading taxes. It is, therefore, necessary to be conversant with existing tax laws in Nigeria in order to prevent any financial embarrassments or unnecessary losses.
Almost all transactions with government agencies and ministries require the tendering of tax clearance certificates (a document which indicates that your company has fulfilled its tax obligations within the period under assessment). The implication of this is that you cannot secure contracts or be allowed to work on projects with the Government if you are a tax defaulter. This goes on to show the significance of taxation in successfully transacting business within the Nigerian economy.
Below is a comprehensive analysis of taxation in Nigeria and the necessary rules, laws, and clarifications. These will help you run your business legally in accordance with the tax laws and regulations in Nigeria.
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To start, here are two basic facts about taxation in Nigeria:
- The Federal Inland Revenue Service (FIRS) is the federal government agency in Nigeria responsible for the administration and collection of taxes.
- Apart from the proceeds from crude oil exports, taxes are a major source of revenue for executing capital projects and the general running of the government at both the federal and state levels.
What Are The Types Of Taxes in Nigeria?
Before we proceed to discuss the kinds of payable taxes, let’s clarify two major tax mechanisms which are often mistaken for tax categories, these are:
1). Pay-As-You-Earn (PAYE) –
This is a tax mechanism by which the personal income tax on salaries paid to employees is deducted by the employer at source (before payment) and remitted to the FIRS.
2). Withholding Tax (WHT) –
WHT is a mechanism by which individuals and corporate bodies are expected to deduct the tax on all their taxable income from payments by other individuals or corporate bodies. These deductions are expected to be remitted to the FIRS within 30 days. Non-resident companies are not exempt from the WHT for all Nigerian sourced payments
Now we move on to the payable taxes category proper:
1). Companies Income Tax (CIT):
This may also be referred to as corporate tax or business tax. This tax is payable by any company resident in Nigeria based on their worldwide income. For companies that are non-resident in Nigeria, the CIT must be paid on all incomes from Nigerian sources. The corporate income tax is 30% of all profits accrued by a company during the year under assessment.
There can be decreases in the rates for low-income companies and other categories. These will be discussed in the next section.
2). Petroleum Profit Tax (PPT):
This tax is paid in place of the CIT by companies operating in the petroleum sector and involved in the extraction and transportation of petroleum products. This tax is 50% of profits for companies involved in Production sharing contracts (PSCs), 65.75% for non- product sharing contracts within the first five years of operation, and 85% for subsequent years.
3). Value Added Tax:
This is a tax of 5% levied off the price of every item sold to customers. It is expected that the seller deducts the VAT and remits it to the FIRS.
4). Tertiary Education Trust Fund Tax:
This is a 2% tax separate from the CIT that is deducted from the profits of every resident company which is geared towards improving the quality of education. Non-resident companies are exempt from this task.
5). Capital Gains Tax:
This is the tax deducted from the profits accrued from the sale of assets and securities by Nigerians. For real estate, the capital gains tax is 10% of the proceeds from the sale of assets regardless of whether they are located in Nigeria or not.
6). Personal Income Tax:
This is the tax deducted from the income of Nigerian residents through the PAYE mechanism previously discussed. This tax ranges from 7% on the first ₦300,000 to 24% for people earning higher than ₦3,200,000. It is important to note that workers living in Nigeria for greater than 6 months are considered tax residents, also, foreigners in possession of a Nigerian residence permit are considered tax residents too.
7). National Information Technology Development Fund (NITDF) Levy:
This tax is applicable to companies in the Information and Communications Technology (ICT) industry. The NITDF levy amounts to 1% of the profits of any company in this industry with a yearly turn over greater than or equal to ₦100,000,000.
More Useful Information
Asides those mentioned above, there are various other tax acts such as Casino tax act, Stamp duties act, Industrial Development (Income tax relief) act, and Industrial Inspectorate act. Some are industry-specific, such as the Associated Gas Re-injection act, deep offshore and Inland Basin Production sharing contracts act, and others that apply to the oil and gas industry. For a complete list of the existing and amended tax laws in Nigeria, visit the FIRS tax laws here.
Before we leave this section, it is important to note that in Nigeria, there are three tiers of Government. These tiers of government are responsible for the collection of the various types of taxes as shown below:
- The Federal Government is responsible for the collection of: Companies Income Tax (CIT), Withholding tax on companies, Petroleum Profit tax, Value Added Tax (VAT), Tertiary Education Trust Fund Tax (TETFUND tax), Capital gains tax, Corporate Stamp Duties, Personal income tax from: Armed forces personnel, Members of the police force, Residents of the Federal Capital Territory Abuja, External Affairs Officers, and non-residents.
- The state governments are responsible for the collection of: Personal income tax of residents through PAYE, Capital gains tax, Casino taxies, Stamp duties, and Road taxes.
- The local governments are not entitled to tax collections in any forms, however, local levies, fines, and license fees are payable to Local government administrations.
Corporate and Business Tax Rates in Nigeria
As already mentioned, the CIT is a flat rate of 30% of the profits accrued by a company within the assessment period (which is the preceding fiscal year). These rates apply to resident companies for their worldwide income, and to non-resident (foreign) companies for all income made within the Nigerian economy. For mid to small range companies with export inclined operations within the manufacturing industry and having a turnover of not more than ₦1,000,000, the CIT is reduced to 20% for the first five calendar years of operations.
For small companies with no taxable profits for the year under review or with taxes that are less than the minimum tax range, there is a provision called minimum tax which is defined as follows: 
- For companies in this category with a turn over less than ₦500,000, the minimum tax is the highest among: 0.5% of gross profits or 0.5% of net assets or 0.25% of the company’s share capital or 0.25% of the company’s turnover for the fiscal year under review.
- For companies in this category with a turn over greater than ₦500,000, the minimum tax will be the highest among all of the aforementioned percentages for the category less than ₦500,000, with the addition of 0.125% of the amount by which the turnover exceeds ₦500,000
I hope through this article you’ve gained a better understanding of the taxation system in Nigeria. Like the saying goes, “the only two certainties in life are death and taxes.” As a foreign investor or national looking into the possibility of participating in the growing Nigeria economy, having a solid grasp on the country’s tax rates and laws is critical to getting off on the right foot.
About The Writer
This is a guest blog post was written by Jon Muller, the founder of Ergonomic trends, in consultation with Mica Bolaji.
Note: This article has been edited for style and substance.
What are your thoughts on this ultimate guide to taxation in Nigeria? Let me know by leaving a comment below.
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