Over the past three years the Nigerian economy and public finances have been dealt a heavy blow by the fall in oil prices and depleted foreign exchange reserves. With the decline in oil revenue, focus has shifted to taxation as a source of income.
National Tax Policy
A revised national tax policy (NTP) was approved by the Federal Executive Council on February 1, 2017. The NTP is a document which sets broad parameters for taxation and ancillary matters connected with taxation in Nigeria. It is a clear statement on the principles governing tax administration and revenue collection; it provides a set of guidelines, rules and modus operandi that would regulate taxation in Nigeria which all stakeholders in the tax system can subscribe to.
The NTP is a deliberate effort towards entrenching a robust and efficient tax system. In terms of its objectives, one of the major drivers of the NTP is the need to increase Nigeria’s non-oil tax-revenue-to-GDP ratio – currently one of the lowest in the world.
Some of the pivotal provisions of the NTP include a gradual shift towards indirect taxation, a deliberate desire to move up in the ease of paying taxes rankings by 2020, widening of the tax base, and deployment of technology, intelligence and inter-agency collaboration. Various measures aimed at institutionalising taxation cut across the three tiers of government, and include setting up an office of tax simplification and tax policy implementation committee by the Federal Ministry of Finance, establishment of taxation committees by the federal and state parliaments, and creation of special tax courts.
Tax Law & Administration
Broadly, there are three categories of tax authorities:
• Federal Inland Revenue Service (FIRS), which is responsible for corporate taxes;
• State boards of internal revenue for each state, responsible for personal taxes with the Joint Tax Board in a coordinating role in the process; and
• The local government revenue committee at each local government with responsibility for administering various levies and rates. The enabling law in respect of each type of tax will normally contain a provision with regard to the authorities charged with the administration of such tax.
Each of the above-mentioned authorities have their own distinct composition, powers and functions.
Taxation Of Corporate Bodies Other Than Oil Exploring & Production Companies
The Companies Income Tax Act (CITA) governs the taxation of companies in Nigeria other than those involved in oil exploration and production. Companies income tax (CIT) is chargeable on the profits of a company accruing in, derived from, brought into or received in Nigeria.
Company income tax rate is 30% of taxable profits. A lower income tax rate of 20% is applicable to manufacturing or agricultural production companies and companies engaged wholly in exports within the first five years of operation and where the turnover does not exceed N1m ($3530).
Companies are assessed to tax on a preceding year basis. That is, the profit assessed to tax in a given assessment year is determined by reference to the financial statements of the immediate preceding financial year.
Exceptions to this rule are instances where a company commences a new business, changes accounting date or ceases business, where the actual year basis of assessment is applied and certain peculiar considerations. a. Ascertainment of profits and deductions allowed: For the purpose of ascertaining the profits or loss of any company for any period from any source chargeable to tax under CITA, all expenses wholly, exclusively, necessarily and reasonably incurred in the production of those profits are deductible. b. Capital allowances: Capital allowances are granted to companies against taxable income in lieu of the wear and tear for depreciable business assets. Capital allowances are granted on costs incurred for the procurement of qualifying capital expenditure at prescribed rates, which include buildings, plants, office equipment, furniture and fittings, and motor vehicles, etc.
Rates of capital allowances are highest (95%) for expenditure on replacement plant and machinery for mining, agricultural production, industrial plant and machinery, and motor vehicles used for public transportation.
Investment allowances of 10% are available to companies in their first year of acquisition and use of plant and machinery.
Certain business assets, such as factory buildings, furniture and fittings, enjoy capital allowances at lower rates of 25% or 15% (initial) and 20% or 10% (annual), but generally in other cases they are at 50% (initial) and 25% (annual). c. Losses: Loss incurred by a company can be relieved from future profits of the company indefinitely until the actual loss is fully recouped, with two exceptions as follows:
• In the case of insurance companies where the loss may only be carried forward to offset future profits for a maximum period of four years; and
• Loss incurred by a company during the commencement period can be carried forward and relieved against the subsequent year’s assessable profits up to the fourth year from the year of commencement of business. Any portion of the loss that is not relieved during this restricted period may be lost. Also, there are no provisions for losses to be carried back in Nigeria. Therefore, when a company ceases business operations, its unrelieved loss at the point of cessation may not be recoverable. d. Tax-exempt income: Tax-exempt income is an income that ordinarily falls within the purview of CITA (as amended), but is specifically exempted by a provision of CITA or by another valid enactment. Examples of tax-exempt income are:
• Profits derived from exports, provided that the proceeds from the export are repatriated to Nigeria and are used exclusively for the purchase of raw materials, plant, equipment and spare parts;
• Dividend received net of withholding tax;
• Profits of a company’s pioneer business within the pioneer period;
• Income earned by holders of bonds and short-term securities, subject to some criteria;
• Dividends received from a company enjoying pioneer status, subject to some conditions;
• Dividends distributed from profits that have suffered tax; and
• Dividend, interest, rent or royalty derived by a company from a country outside Nigeria and brought into Nigeria through government-approved channels. e. Filing, payment and penalties: Every company must file an annual return, based on its income for the accounting year. The return is due for filing with the tax authority within six months after the end of the accounting year. Audited financial statements, capital allowance computations and other relevant schedules must accompany the return. f. Minimum tax: Minimum tax is levied to ensure that every company pays a certain amount of CIT. It is imposed where a company has no taxable profit or the tax payable is less than the minimum tax computed as follows: The highest of:
• 0.5% of gross profit;
• 0.5% of net assets;
• 0.25% of paid-up share capital;
• 0.25% of turnover up to N500,000 ($1770); or
• 0.125% of turnover in excess of N500,000 ($1770) The following companies are, however, exempt from minimum tax:
• A company carrying on agriculture trade or business;
• A company with at least 25% imported equity capital; and
• Any company for the first four calendar years of its commencement of business. In practice, to be eligible for minimum tax exemption on the basis of having at least 25% foreign equity capital, a company may need to substantiate its claim with a certificate of capital importation. g. Foreign tax credit: Nigeria tax laws allows claim of tax credit in respect of income accruing from Commonwealth countries. Income tax paid in Commonwealth countries is deductible where the income is also subjected to tax in Nigeria subject to certain rules. h. Consolidated returns and group relief: Consolidated returns are not permitted in Nigeria. Each company must file a separate return even if it is a subsidiary of another. Also, Nigerian tax laws do not provide for any group relief or the transfer of losses between members of a group.
Information Technology Levy
Information Technology Levy (ITL) is imposed by the National Information Technology Development Agency Act, 2007 (NITDA) at a rate of 1% of profit before tax.
ITL is payable by telecommunications, insurance, cyber and internet companies, and banks and other financial institutions with turnover of N100m ($353,000) or more.
The tax is usually self-assessed and then payable within six months after the end of the accounting year. ITL is treated as a deductible expense in the computation of a company’s taxable profits.
Taxation Of Exploration & Production Companies
The Petroleum Profit Tax Act (PPTA) governs the taxation of companies involved in oil exploration and production in Nigeria. Petroleum profit tax (PPT) is levied on the profits of a company engaged in petroleum operations during an accounting period. The tax is administered by FIRS. Income for PPT purposes refers to proceeds and value of the chargeable oil and related substances disposed by the company, except gas, plus any other incidental income arising from the company’s petroleum operations.
The type of contract entered into by companies in the oil and gas industry determines the tax regime applicable to them. The income derived by the companies engaged in petroleum operations is assessable to tax at the rate of 85% with some variations, usually lower rates, for companies within the first five years of operation and those involved in a production-sharing contract or agreement. Profit from any activity that does not qualify as petroleum operation is subject to tax at a rate of 30%.
Under PPTA, a company is required to file a return of its estimated tax for an accounting period within two months after the commencement of each accounting period, while instalment payment shall commence not later than the third month of the accounting period.
A revised return of the estimated tax may be submitted if at any time during such an accounting period, the company becomes aware that the initial estimate submitted requires revision.
The final return is to be filed with the tax authority within five months after the end of the accounting period with evidence of payment of the final instalment, where the actual PPT is higher than the estimated PPT.
Taxation Of Individuals
Personal Income Tax Act (PITA) forms the legal basis for the imposition of personal income tax (PIT) on income earned by individuals in Nigeria. PITA vests the administration of PIT on the Joint Tax Board, State Board of Internal Revenue in the respective states and FIRS.
PIT is levied on employment income and any other income accruing in, derived from, brought into and received in Nigeria by individuals (or communities, families, executors, partnerships and trustees).
PIT is calculated at graduated rates ranging between 7% and 24% of individual’s taxable income, with effective tax rate falling below 20% for every category of individual liable to tax in Nigeria.
Nigerian residents are taxed on their worldwide income, while non-residents are taxed only on their Nigerian-source income. a. The residency rule: The rule of residency assists in determining the extent of a taxpayer’s liability to tax in Nigeria as well as the relevant tax authority of such individual for the purpose of collecting taxes due.
Generally, an individual may be deemed to be resident if he is domiciled, resides in, or sojourns in Nigeria. An individual may also be deemed to be resident in Nigeria if he exercises his duties of employment partly or wholly in Nigeria.
Foreign nationals who are employed by a Nigerian company are typically deemed resident as they require work and resident permit to work and live in Nigeria. A foreign national who exercises duty of employment in Nigeria on behalf of an employer outside Nigeria will be considered non-liable to tax in Nigeria if the following three conditions are jointly met:
• The remuneration paid is not borne by a fixed base of the employer in Nigeria;
• The employee is not in Nigeria for a period or an accumulated period of more than 183 days including annual leave and temporary period of absence in any 12-month period within the same or two consecutive years of assessment;
• And the income is subject to tax in another country with which Nigeria has a double-tax treaty. b. Pay-as-you-earn (PAYE): The employer as an agent of the government is responsible for the deduction and remittance of taxes from employment incomes under the PAYE system. All such taxes deducted are to be remitted to the relevant tax authority within 10 days following the month of deduction.
Other individuals pay tax by self-assessment or direct assessment. Joint returns of spouses are not permitted in Nigeria. Failure to comply with the provisions of the law attracts penalty and interest at specified rates. A penalty for late filing is currently charged at 10%, while interest is charged at the ruling bank lending rates. The interest rate currently being applied is 21%.
Every employer is required to file a return for the preceding year showing all emoluments paid to employees, on or before January 31 of every year. Also, individual tax return for each year must be filed within 90 days of the fiscal year (not later than March 31). c. Tax-exempt income: The following are examples of tax-exempt income under PITA:
• Reimbursement of expenses incurred by the employee in the performance of employment duties, and from which the employee is not expected to make any profit;
• Reasonable removal expenses which may or may not include a temporary subsistence allowance incurred by the employer by reason of a change of the employee’s employment;
• Any compensation for loss of employment; and
• Gratuities. d. Deductions & reliefs: Reliefs are granted to a taxpayer, depending on his or her circumstances, to reduce his liability to tax. These reliefs, except for personal relief, can only be granted when it is claimed by the tax payer. The relevant tax authority may require documentary evidence in support of any claim made by taxpayers. The different types of tax reliefs are as follows:
• Consolidated relief allowance (CRA) – This is computed as 20% of gross income plus the higher of N200,000 ($707) or 1% of gross income. Children allowance (N2500, $8.84, per annum per child subject to a maximum of four children) and dependant-relative allowance (N2000, $8.84, in respect of each dependant maintained by the taxpayer subject to a maximum of two dependants) are also available under PITA, although they are often neglected due to immateriality and attempt by some tax authorities to consider only CRA;
• Other deductions allowed – The following deductions are tax exempt when computing taxable income of an individual: ◊ Contributions to the National Housing Fund and National Health Insurance Scheme; ◊ Life assurance premiums; ◊ Employee contribution to an approved pension fund administrator; ◊ Gratuities; and
• Interest on loan for developing an owner-occupier residential house.
Other Employee-Related Contributions
undefined a. Employee Compensation Fund: The Employees Compensation Act (ECA), which repeals the Workmen’s Compensation Act of 2004, is designed to provide an open and fair system of guaranteed and adequate compensation for employees or their dependants in the event of death, injury, disease or disability arising out of, or in the course of, employment. ECA established the Employee Compensation Fund in order to provide safer working conditions for employees in both public and private sectors. Employers are required to contribute 1% of total payroll cost to the fund yearly. b. Pension contribution: Nigeria operates a compulsory contributory pension scheme governed by the Pension Reform Act 2014 (PRA). Under the scheme, an employer is required to make compulsory pension contributions at a minimum of 10% of the employee’s monthly emoluments to the employee’s retirement savings account (RSA).
PRA also require the employee to contribute a minimum of 8% of his or her monthly emoluments to his or her RSA. An employer may choose to be responsible for the employee’s portion of the contribution. c. Industrial Training Fund (ITF): All employers with five or more employees, or fewer than five employees but with minimum annual turnover of N50m ($177,000), are expected to contribute an amount equal to 1% of annual payroll costs to ITF. ITF is used to provide and promote skills acquisition. Contribution to ITF is payable no later than April 1 of the following year.
The employer may obtain a refund of up to 50% of annual training costs if suitable training courses are provided to the employees. d. National Housing Fund (NHF): Employers are required to register their employees with NHF and deduct housing contribution at 2.5% of employees’ monthly basic salaries.
The amount deducted is to be remitted to the Federal Mortgage Bank of Nigeria within one month of making such deduction.
IMMIGRATION REQUIREMENTS: Expatriates travelling to Nigeria either for business, employment or visit must consider the country’s entry requirements and the entry visa that is suitable for the activity intended.
Nigerian companies that have the intention to bring in foreign nationals are required to obtain an approval for an expatriate quota (EQ) for this purpose.
There are various visas that permit individuals to come into Nigeria in line with the purpose of the visit. These include:
• Diplomatic visa;
• Transit visa;
• Tourist visa;
• Business visa;
• Temporary work permit (TWP) visa;
• Subject to regularisation (STR) visa; and
• ECOWAS residence permit. a. Tourist/visitor’s visa: This is a single or multiple-entry visa that is suitable for tourist, general or family visit to Nigeria. It is not valid for employment. b. Business visa: This visa is suitable for foreigners who wish to visit Nigeria for the purpose of business activities such as meetings, trade fairs, exhibitions and investment-related activities. It may be a single or multiple-entry visa; the validity of stay is for an aggregate period not exceeding 56 days. It cannot be renewed in-country, but the duration of stay can be extended. A business visa is not valid for work and employment-related activities.
Business visas are also granted at the point of arrival in Nigeria. Visa on arrival (VoA). VoA is available to frequently travelling high-net-worth investors, business executives and intending visitors who may have difficulty in obtaining visas from the embassy or consulate in their home country. VoA is subject to pre-approval by the Comptroller-General of the Nigeria Immigration Service; applicants are advised to have the approval letter in their possession before travelling. c. TWP visa: TWP visa is a single-entry visa valid for an initial period of two months and renewable in the host country. It is applicable for short-term assignments involving specialised skilled services or related to specific projects, such as
• After-sales installation;
• Commissioning;
• Maintenance and repairs of equipment and machinery; and
• Reviews, audit, trainings and capacity building for Nigerian staff.
Expatriates intending to visit Nigeria on TWP visa may not need to be in the employment of a Nigerian employer for this class of visa to be processed and obtained. However, the host company (duly incorporated in Nigeria) being the beneficiary of the expatriate’s services must accept full immigration responsibilities on their behalf. d. STR visa: STR visa is a single-entry visa valid for three months and is suitable for expatriates coming to Nigeria on a long-term assignment or employment. STR visa is regularised into a residence and work permit upon arrival of the assignee or expatriate in Nigeria and a valid combined expatriate residence permit and aliens card (CERPAC) is obtained. An EQ approval is a pre-requisite for the grant of an STR visa. The expatriate must be in possession of a Nigerian employment or secondment contract. e. ECOWAS residence card: This is applicable to ECOWAS nationals (i.e. foreigners from any of the 16 West African regions that are signatories to the ECOWAS treaty of 1975). It doubles as a work/ residence permit, and such categories of foreigners would not be required to obtain an entry visa to come into the country.
Value-Added Tax (Vat)
VAT is an indirect tax regulated by VAT Act, Cap V1, LFN 2007, as amended (VATA). VAT is administered by FIRS and is charged at the rate of 5%. VAT is chargeable on supply of goods and services in Nigeria (including imported goods), except for items exempted in the first schedule of VATA.
Every taxable person is statutorily required to register for VAT within six months of commencement of business. A taxable person is required to render VAT returns monthly and the returns must be rendered within 21 days after the end of the month being reported on. Failure to submit the returns as and when due, attracts a penalty of N5000 ($17.67) for each month in which the failure continues.
Limited Input VAT claim is available as offset against Output VAT at the point of rendering returns.
Recoverable input VAT is limited to VAT incurred on goods meant for resale or that form part of the stock in trade used in the direct production of new goods on which output VAT is charged.
VAT paid on overhead expenses and capital expenditure is charged to income statement or capitalised together with the cost of assets as the case may be.
WITHHOLDING TAXES (WHT): WHT is an advance payment of income tax and is not a type of tax in itself. WHT paid by resident persons and companies in Nigeria is payment on account of tax.
WHT credit can be used to offset income tax liabilities, except in cases where tax withheld is a final tax, such as tax withheld on interest, dividend, rent and royalty paid to a non-resident company or individual.
The legal basis for WHT rules are contained in the various income tax laws (CITA, PITA, PPTA) and other relevant regulations issued subsequently.
WHT rates range from 5% to 10%, depending on the type of transaction involved and the tax authority responsible for collection.
CUSTOMS & EXCISE DUTIES: Custom duties are levied on goods coming into Nigeria at varying rates, with the lowest rate at 5% and a maximum rate of 70% of import value at each port of entry. They are imposed by Customs, Excise Tariff, Etc. ( Consolidation) Act, Cap. C49, LFN 2007.
A list of excisable items (i.e. wines and spirits, tobacco and cigarettes, alcoholic beverages, etc.) and factories can be obtained from the Nigeria Customs Service.
A common external tariff (CET) is one of the key instruments that is aimed at harmonising ECOWAS member states’ tax regimes and strengthening the bloc’s common members. The ECOWAS CET came into force in Nigeria in January 2015.
Stamp Duties
Stamp Duties Act Cap. S8, LFN 2017 sets out the details of dutiable transactions and applicable duties. Transactions that attract stamp duties include incorporation of companies, and increase in companies authorised share capital, mortgage bonds, debentures and dealing in securities, settlement of estates and conveyance of property, among others. Stamp duty is chargeable either at fixed or ad-valorem rates (i.e., in proportion to the value of the consideration) depending on the class of instrument.
Tax Incentives
Certain tax incentives are usually given to companies to encourage investment in the Nigerian economy. Such incentives include:
• Pioneer status – This is a fiscal incentive that qualifies a company for a tax-holiday period of three to five years, during which it enjoys full tax exemption on profits derived from a particular line of business. Capital expenditure on qualifying assets incurred during the tax relief period is treated as having been incurred on the first day following the tax-relief period. Losses incurred during the period are deemed to be incurred on the first day following the tax relief period and are available for carrying forward indefinitely. Also, dividends paid out of pioneer profits are tax-free in the hands of the shareholders of the company;
• Free trade zones and export-processing zones (EPZs) – All new industrial undertakings including foreign companies and individuals operating in an EPZ, are allowed full tax exemption from federal, state and local government taxes, rates, Custom duties and levies. The profit of a company established within an EPZ or free trade zone is exempt from taxes provided that 100% production of such company is for export, otherwise tax shall accrue proportionately on the profits of the company. Exporters located within the zone are entitled to import, free of Customs duty, “any capital goods, consumer goods, raw materials, components or articles” intended to be used in relation to an approved activity.
• Infrastructure relief – Investment tax relief is available at the following rates to companies who provide basic infrastructure: tarred roads (15%), water (30%), electricity (50%) and 100% for companies who provide all such basic facilities where they do not exist.
• Research and development (R&D) claim – Expenses for qualified R&D are tax deductible to a company, but the amount deducted must not exceed 10% of the company’s total profit for that year of assessment. In addition, companies and organisations engaged in R&D activities for commercialisation shall be allowed a 20% investment tax credit on their qualifying expenditure
• Capital and investment allowances – Capital allowances are claimable on qualifying expenditure at specific rates to recoup 100% of cost of acquiring an asset. An additional investment allowance of 10% is available on qualifying plant and machinery.
• Exemption of profits from exports from income tax provided the proceeds from the exports are repatriated to Nigeria and used exclusively for the purchase of raw materials, plant and equipment and spare parts
• Small and Medium-Sized Enterprises Equity Investment Scheme requires all banks in Nigeria to set aside 10% of their profit after tax for equity investment and promotion of small and medium-sized enterprises.
• Agro-allied incentives are available to stimulate investment in agricultural activities. Import levies have been increased on certain agricultural products, such as wheat flour, wheat grain and brown rice, as incentives to local production.
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