Understanding Companies Income Tax
Companies Income Tax (CIT) is tax on the profits of incorporated entities in Nigeria. It also includes the tax on the profits of non-resident companies carrying on business in Nigeria. The tax is paid by limited liability companies inclusive of the public limited liability companies. It is therefore commonly referred to as corporate tax.
CIT was created by the Companies Income Tax Act (CITA) 1979 and has its root from the Income Tax Management Act of 1961. It is one of the taxes administered and collected by the Federal Inland Revenue Service (‘FIRS’ or ‘the Service’). The tax contributes significantly to the revenue profile of the Service. In 2016, the revenue target for Companies Income Tax is N1.877 trillion representing approximately 40% of the total projected tax revenue of N4.957 trillion for the year.
In filing for Companies Income Tax, audited financial statement are statutorily required. This necessitates the engagement of External Auditors to prepare and/or certify the accounts to be submitted. The returns should mandatorily be accompanied by the tax computations and capital allowances computations on qualifying assets of the company. The requirement for filing does not discriminate between small, medium or large taxpayers. To many taxpayers therefore, CIT is a complicated kind of tax, difficult to understand and to comply with.
Attempt will be made in this presentation and subsequent episodes of ‘Tax Discourse’ to simplify the subject matter to aid understanding by taxpayers.
Companies Income Tax Distinguished from Other Taxes
The following taxes are commonly mistaken to mean the same as Companies Income Tax. They are covered by distinct legislations, have different tax bases and different taxing rules.
• Personal Income Tax on profits/ incomes earned by unincorporated entities generally, including individuals (e.g. sole proprietors, partners in a partnership business, freelance contractors / service providers, employees, etc.), families and communities, incomes due to a trustee or estate and salary earners. These are taxable under the Personal Income Tax Act (PITA).
• Petroleum Profits Tax on profits of companies engaged in ‘petroleum operations. This is taxable under the Petroleum Profits Tax Act (PPTA). This solely administered by FIRS.
• Capital Gains Tax chargeable on disposal of qualifying assets disposed at gains. The tax is payable by both corporate entities and individuals. The tax is therefore administered by FIRS and the State Internal Revenue Services. They are taxable under the Capital Gains Tax Act (CGTA).
• There are many other levies and dues collected by the States and Local Governments which strictly are not taxes but misconstrued as taxes by the taxpayers because they are collected by Revenue officials especially at the Local Government level.
It is in this light that the taxes and levies collectible by the three tiers of government are re-stated hereunder [in line with the ‘Schedule of Taxes and Levies (Approved list for collection) Act as amended in 2015].
a. Taxes Collected by the Federal Government Through the Federal Inland Revenue Service (FIRS)
1. Companies Income Tax
2. Petroleum Profits Tax
3. Personal Income Tax in respect of:
– Members of the Armed Forces of the Federation;
– Members of the Nigerian Police Force;
– Residents of the FCT; and
Staff of the Ministry of Foreign Affairs and non-resident individuals
4. Capital Gains Tax on corporate bodies and residents of FCT
5. Value Added Tax
6. Education Tax
7. Stamp Duties on bodies corporate and residents of FCT
8. Withholding Tax on companies, FCT residents and non-resident individuals
9. National Information Technology Development Levy
b. Taxes and Levies Collected by the State Government Through the States Inland Revenue Service (SIRS)
1. Personal income tax in respect of: –
– Pay-As- You-Earn (PAYE); and
– Direct taxation (self-assessment)
2. Withholding tax (individuals only)
3. Capital gains tax (individuals only)
4. Stamp duties on instruments executed by individuals
5. Pools betting and lotteries, gaming and casino taxes
6. Road taxes
7. Business premises registration in respect of urban and rural areas which includes registration fees and per annum renewals as fixed by each states
8. Development levy (individuals only) not more than N100 per annum will on all taxable individuals
9. Naming of street registration fees in the State Capital
10. Right of Occupancy fees on lands owned by the State Government in urban areas of the State
11. Market taxes and levies where State finance is involved
12. Land use charge, where applicable;
13. Hotel, Restaurant or Event Centre Consumption Tax, where applicable;
14. Entertainment Tax, where applicable;
15. Environmental (Ecological) Fee or Levy;
16. Mining, Milling and Quarrying Fee, where applicable;
17. Animal Trade Tax, where applicable;
18. Produce Sale Tax, where applicable;
19. Slaughter or Abattoir Fees where State Finance is involved;
20. Infrastructure Maintenance Charge or levy where applicable;
21. Fire Service Charge
22. Property Tax, where applicable;
23. Economic Development Levy, where applicable;
24. Social Service Contribution, where applicable;
25. Signage and Mobile Advertisement, jointly collected by States and Local Governments
c. Taxes and Levies Collected by the Local Governments Through the Local Government Revenue Committees
1. Shops and kiosks rates
2. Tenement rates
3. On and off liquor license fees
4. Slaughter slab fees
5. Marriage, birth and death registration fees
6. Naming of street registration fee, excluding any street in the State Capital
7. Right of Occupancy fees on lands in rural areas, excluding those collectable by the Federal and State Governments
8. Market taxes and levies excluding any market where State finance is involved
9. Motor park levies
10. Domestic animal license fees
11. Bicycle, truck, canoe, wheelbarrow and cart fees, other than a mechanically propelled truck
12. Cattle tax payable by cattle farmers only
13. Merriment and road closure levy
14. Radio and television license fees (other than radio and television transmitter)
15. Vehicle radio license fees (to be imposed by the local government of the State in which the car is registered)
16. Wrong parking charges
17. Public convenience, sewage and refuse disposal fees
18. Customary burial ground permit fees
19. Religious places establishment permit fees
20. Signboard and advertisement permit fees
21. Wharf Landing Charge, where applicable
The rate of CIT is 30%1. This is applied on total profits of the taxpayer. However, minimum tax may be payable by a company making losses depending on the age of the company, industry and equity funding. The Withholding Taxes that were deducted and paid on behalf of the taxpayers are allowed as offset from the computed tax liability. Withholding Taxes in excess of the tax liability is carried forward for future utilisation. However, the taxpayer has the option of refund of the excess Withholding Tax on application to the Service.
Incomes Chargeable to Tax
CIT is payable by all incorporated entities in Nigeria on profits accruing in, derived from, brought into or received in Nigeria. Such profits shall be deemed to accrue in Nigeria wherever they have arisen (worldwide) and whether or not they have been brought into or received in Nigeria. These include profits in respect of any trade or business, rent on use of property, dividends, interest, royalty, discounts, charges, annuities, fees for services rendered and other sources of annual profits or gains.
For non-resident companies engaged in any form of trade or business in Nigeria, the profits shall be deemed to be derived from Nigeria for tax purposes: –
a. If that Company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base;
b. If it does not have such a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorized to conduct on its behalf or on behalf of some other companies controlled by it or which have a controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the Company to the extent that the profit is attributable to the business or trade or activities carried on through that person.
c. If that trade or business or activities involves a single contract for surveys, deliveries, installations or construction, the profit from that contract; and where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the Company and such person in their commercial or financial relations which in the opinion of the board is deemed to be artificial or fictitious, so much of the profit will be adjusted by the board to reflect arm’s length transaction.
TO BE CONTINUED NEXT WEEK.