Dear Entrepreneur,
Tax compliance is a crucial aspect of doing business in Nigeria that determines the continuity and reputation of your business. Whether you are a small startup or a big multinational corporation, understanding and following the tax laws is essential to avoid any legal troubles and ensure smooth operations. Tax compliance refers to the act of meeting all the legal requirements set by the government concerning the payment and reporting of taxes. In Nigeria, tax compliance involves both federal and state taxes, and it applies to all types of businesses operating within the country. In this article, we will explore the basics of tax compliance in Nigeria, its importance for Nigerian companies, and key obligations that businesses need to fulfill.
REGISTRATION WITH THE TAX AUTHORITIES
The next thing after registering your business is to identify the relevant tax authority that govern tax compliance. The Federal Inland Revenue Service (FIRS) is responsible for enforcing tax laws in Nigeria. It has the power to audit companies and individuals to ensure they are complying with tax laws. The FIRS also provides guidance and support to companies to help them comply with tax laws. The taxes paid to the Federal Government include company income tax, education tax, stamp duty, value added tax and so on.
There are also tax obligations at the State level, which is governed by the respective State Revenue Services. Some of the taxes paid to the state include personal income tax, business premises levy, development levy and so on.
TAX IDENTIFICATION NUMBER (TIN)
A Tax Identification Number (TIN) is a special number assigned to an individual, a business that has registered, or a corporation for paying taxes. The Tax Authority generates TINs, as they are referred to, to ensure accurate identification, maintain order, and bring more people into the tax system. Typically, the Tax Authority, the Joint Tax Board portal online, or the Federal Inland Revenue Services branch closest to your location will issue the number.
These are some of the benefits of obtaining a TIN:
- Needed for the opening of a corporate account
- Payment of tax, tax clearance and filing of tax annual returns
- Requirement for obtaining export license
- Obtaining a government loan
OVERVIEW OF KEY TAXES IN NIGERIA
- Company Income Tax (CIT)
- Description: CIT is a tax on the profits of registered companies in Nigeria.
- Applicability: Applicable to all corporate entities except those with annual gross revenue less than NGN 25 million.
- Rate Structure: 0% for companies earning ≤ NGN 25 million, 20% for revenue > NGN 25 million and < NGN 100 million, and 30% for revenue ≥ NGN 100 million.
- Capital Gains Tax
- Description: This tax is levied on profits from the sale of capital assets.
- Applicability: Applies to both individuals and companies disposing of assets.
- Tax Rate: Fixed at 10%.
- Asset Types: Includes property, stocks, bonds, and other capital assets.
- Petroleum Profit Tax
- Description: A tax specifically for companies involved in petroleum exploration and production.
- Applicability: Targeted at upstream petroleum operations.
- Sector-Specific Rates: Different rates for production sharing contracts and non-production sharing operations.
- Withholding Tax
- Description: A tax deducted at source from payments made for specific services and remitted to the government.
- Applicability: Relevant to payments like dividends, royalties, and rent.
- Value Added Tax (VAT)
- Description: VAT is a consumption tax levied on goods and services.
- Applicability: Imposed on most goods and services, with specific exclusions and exemptions.
- Tax Rate: Set at 5%.
- Industrial Training Fund (ITF) Deductions
- Description: A mandatory contribution for employee training and development.
- Applicability: Companies with a workforce of five or more, or an annual turnover of N50 million and above.
- Rate: 1% of the total annual payroll.
- Education Tax
- Description: A tax to support the educational sector in Nigeria.
- Applicability: Levied on all Nigerian resident companies.
- Tax Rate: 2% of assessable profits. Often paid alongside Company Income Tax.
FILING OF TAX RETURNS
As part of the requirements for tax compliance, all companies are to file a report containing details of its tax affairs within a certain period. Within six months of the end of their fiscal year on a self-assessment basis, or 18 months after incorporation (whichever comes first), businesses are expected to submit their audited financial statements and tax computations to the FIRS. However, you may ask for a two-month extension for filing tax returns, subject to the FIRS’s discretion.
According to a self-assessment system, Nigerian businesses prepare their annual returns and calculate their tax liabilities before filing their tax returns. However, if the FIRS believes that the filed tax returns are willfully false or that no returns were filed within the allotted time, it may use a best of judgment (BOJ) assessment. For instance, a penalty of NGN 25,000 is assessed for the first month of non-filing Companies Income Tax (CIT) returns and NGN 5,000 is assessed for each additional month of non-filing. A 10% penalty and interest calculated at the commercial rate are applied to late payments of CIT.
When filing tax returns, certain documents are expected to be submitted such as Tax computation for the relevant year of assessment, the audited financial statements for the respective period (this should be in conformity with the International Financial Reporting Standards (IFRS)), duly completed and signed self-assessment form and evidence of remittance of the tax liability (partly or in full).
TAX CLEARANCE CERTIFICATE
In Nigeria, a tax clearance certificate is essentially a statement that an entity does not owe tax during the duration of the certificate. The tax clearance is a certificate of clearance that certifies that an individual has been cleared for a certain amount of time due to the payment of any applicable taxes. Tax clearance certificates are issued over a period of three years. TCC is important and mandatory for the processing of certain permits and licenses such as export license, oil and gas service providers permit as well as obtaining federal government contracts.
APPLICATION FOR TAX CLEARANCE CERTIFICATE (TCC)
After obtaining a TIN, you will be required to fill out a form to request a tax clearance certificate. The application process is online through the TaxPro Max portal and will be accompanied by the necessary paperwork. Only once the company’s audited report has been filed and all unpaid taxes have been paid can the existing companies be issued a Tax Clearance Certificate.
CONCLUSION
Tax compliance is important for Nigerian companies because it helps them avoid penalties and fines from the Federal Inland Revenue Service (FIRS) and other regulatory bodies. It also helps companies build a good reputation with their stakeholders and investors. Companies that comply with tax laws are seen as responsible and trustworthy, which can help them attract more business opportunities. Non-compliance with tax laws in Nigeria can lead to penalties, fines, and even imprisonment. The FIRS has the power to enforce tax laws and can take legal action against companies that fail to comply. Non-compliance can also damage a company’s reputation and lead to loss of business opportunities. It is important to prioritize tax compliance and seek professional advice to ensure accurate and timely fulfillment of their tax obligations.