The Company Income Tax Act (CITA) is the primary law that governs company taxation in Nigeria.
Nigeria’s tax system is a multi-level tax system, which means that taxation is handled by three levels of government.
The Federal Inland Revenue Service (FIRS) is in charge of administering or overseeing corporate income taxes.
The Companies Income Tax (CIT) is a tax imposed in Nigeria on the profits of registered businesses. It also covers the tax on earnings earned by international corporations doing business in Nigeria.
Limited liability firms, including public limited liability companies, pay the CIT.
Non-residents are subject to CIT on their Nigeria-sourced income, while resident corporations are subject to CIT on their worldwide income.
Corporate income tax is calculated using accounting gains that have been taxed.
Income Tax Classification of the Assessment
Best of Judgment (BOJ)
This is the method through which the applicable tax authority assesses the tax payable when no financial data or returns have been presented to the tax authority on which to base the assessment.
Because the company’s financial records are untrustworthy, the BOJ method of assessment may be used.
Self-assessment of tax payables
This method of calculating tax payable is based on a system in which a company pays tax in installments and is allowed by the relevant tax authority to estimate the company’s chargeable revenue and tax payable for the assessment year.
Section 53 of the Company Income Tax Act (CITA) of 2011 allows for self-assessment of tax owed.
The currency of assessment
As stated in section 54, this provides for the currency of assessment of tax payable by a firm.
The Act states that, notwithstanding anything in any law to the contrary, an income tax assessment made under sections 52, 53, or 55 of this Act must be made in the currency in which the transaction giving rise to the assessment occurred.
Rates of income tax on companies
For enterprises with a turnover of more than N100 million Naira, the CIT is currently imposed at a rate of 30%. For enterprises with a turnover of between N25 million and N100 million, it is additionally taxed at a 20% rate. The tax is calculated based on the previous year’s earnings.
According to the Finance Act 2019, enterprises with a turnover of less than N25 million are exempt from paying company income tax.
A non-resident firm with a fixed base or a permanent establishment (PE) in Nigeria is taxable on the profits attributable to such fixed base in terms of business profits. As a result, it must register for CIT and file tax returns.
Deductions permitted by the company income tax
There are some deductions that can be made when calculating profits under the CITA. The deductions allowed in determining the company’s taxable profits are fully encapsulated in Section 24 of the CITA.
Section 24 also allows for the following types of deductions:
(a)any amount due as interest on any money borrowed and used as capital in the acquisition of profits;
(b) rent for that period, as well as premiums for which obligation was incurred during that period, in respect of land or building used for the purpose of procuring housing for the company’s employees.
c) in the case of any real estate investment trust expenses related to the property’s upkeep, directors’ salary, which shall not exceed N10,000 per annum in respect of each director, with no more than three directors to be so compensated;
(d) any expenditures or expenses made during the year in connection with senior personnel and executives are paid a salary, wages, or other form of remuneration.
Any reward or allowance offered to senior staff and executives at the company’s expense shall not exceed the amount set forth in the collective bargaining agreement between the company and the employees.
(e) Any costs of repairing the premises, plant, machinery, or fixtures used in obtaining the profits.
(f) Bad debts incurred as a result of the curse of a trade or business have proven to have gone bad within the time for which earnings are being calculated.
(g) Any contribution to a pension, provident, or other retirement benefits fund, society, or plan authorised by the Joint Tax Board under paragraph (g) of section 85 of the Personal Income Tax Act.
(i) any expense or part thereof in the case of earnings from a trade or business
(ii) the liability for which was incurred during that period wholly, exclusively, necessarily, and reasonably for the purposes of such trade or business and which is not specifically referable to any other period or periods, or (ii) the liability for which was incurred during that period wholly, exclusively, necessarily, and reasonably for the purposes of such trade or business and which is not only applicable to any other periods, or
(ii) the obligation for which was incurred during any prior period entirely, exclusively, necessarily, and fairly for the purpose of such trade or business, and which is clearly referable to the period for which profits are being calculated;
Sections 25 and 25A of the CITA also allow for the deductibility of gifts paid to a Nigerian fund, body, or institution for the purpose of calculating profits.
A deduction for research and development is allowed under Section 26 of the Act, as long as the deduction does not exceed 10% of the profit before any deductions.
Deductions are not permitted
Section 27 deals with the types of deductions that aren’t allowed when calculating a company’s profits. The following is provided in this section:
No deduction shall be allowed, notwithstanding any other provision of this Act, for the purpose of determining a company’s profits in respect of-
capital reimbursed or withdrawn, as well as any capital expenditure;
any amount recoverable under an insurance or indemnification contract;
taxes on income or profits imposed in Nigeria or elsewhere, excluding taxes imposed outside Nigeria on earnings that are also subject to tax in Nigeria and for which no relief from double taxation is available under any other provision of this Act;
save as authorised by paragraph (g) of section 24 of this Act, any payment to a savings, widows and orphans, pension, provident or other retirement benefit fund, society or scheme;
the loss of value in any asset;
any sum set aside from profits, except as permitted by paragraph (f) of sections 24 or 25 of this Act, or as may be estimated to the satisfaction of the Board, pending determination of the amount, to represent the amount of any expense deductible under that section, the liability for which was irrevocably incurred during the period for which the income is being calculated;
any expense of any kind incurred within or outside Nigeria for the purpose of generating a management fee unless the Minister has approved the arrangement giving rise to the management fee in advance;
any expense incurred as a management fee within or outside Nigeria under any agreement entered into after the start of this section, except to the extent that the Minister may allow;
any expense incurred outside of Nigeria for and on behalf of any company, unless it is of a nature and size that the Board deems permissible.
Adjusted profit computation
After putting back disallowed expenses and subtracting authorized expenses and earnings exempted, adjusted profit is calculated.
The adjusted profit is the result of this calculation, and the education tax rate can be deducted at this stage. The rate of education taxation is 2% of adjusted profit.
Profits that are taxable
After calculating the adjusted profit, the taxable profit must be calculated. After removing the capital allowance and loss relief, the taxable profit is calculated by adding the balancing charge to the adjusted profit.
The taxable profit is the result of this calculation, and it is at this point that the appropriate tax rate can be applied.
Other taxes, in addition to CIT, may apply to businesses in Nigeria. The Withholding Tax, for example, is paid in advance on contracts that are completed by corporations but is deducted from taxable profits.
Also included is the Value Added Tax, which is levied on a variety of goods and services. Companies operating in Nigeria must also pay Education Tax and Industrial Training Funds.
Small businesses with a turnover of less than N25 million are now totally free from paying company income tax, thanks to the Finance Act 2019.