In this blog, we explained in detail the
number of major taxes individuals and corporate organization pays in Nigeria.
It is mostly taxes manage and levied by Federal government of Nigeria. It is
important to note here that there other several taxes and levis other
governments like state and local government can impose in their locations.
You will also find information on how to
process and obtain tax clearance certificate in Nigeria for individuals, new
registered companies and old registered companies.
Under
current Nigerian law, taxation is enforced by the 3 tiers of Government, i.e.
Federal, State, and Local Government with each having its sphere clearly spelt
out in the Taxes and Levies (approved list for Collection) Decree, 1998. Of
importance at this juncture however are tax regulations pertaining to investors
both foreign and Local.
The
importance of tax regulations cannot be over-emphasized, as most transactions
with any Ministry, department, or government agency cannot be concluded without
evidence of tax clearance certificate.
The following are some of the relevant tax
regulations in the country.
1. COMPANIES INCOME TAX: Tax is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived form brought into or received from a trade, business or investment. Also companies paying dividends to its shareholders are first obliged to pay tax on it’s profits at the companies tax rate. Generally in Nigeria company dividends or other company distribution whether or not of a capital nature made by a Nigerian company is liable to tax at source of 10%, however dividends paid in the form of bonus share or scrip shares to individual share holders are not subject to tax, where also a company is a shareholder in another company then such dividends are excluded from the profits of the company for the purposes of computation of the tax.
2. PERSONAL INCOME TAX: In
PERSONAL INCOME TAX (AMENDMENT) ACT, 2011, every taxpayer in Nigeria is liable
to pay tax on the aggregate amount of his income whether derived from within or
outside Nigeria, the salaries, wages, fees, allowances, and other gains or
benefits, given or granted to an employee are chargeable to tax. The Employers
of labor are deemed to be agents of the tax authority for the purposes of
remitting taxes deducted from salaries due to employees.
However residency of the Taxpayer determines the extent of a taxpayer’s
liability in Nigeria. A person’s place of residence for this purpose is defined
as a place available for his domestic use in Nigeria on a relevant day,
excluding hotels and rest houses. A person is deemed resident in Nigeria if he
resides in Nigeria for 183 days in any 12-month period, expatriates holding
residence permits are liable to tax in Nigeria even if they reside in the
country for less than 183days in any 12-month period. Once residence can be
established, the relevant tax authority of the territory is the tax Authority
in which the taxpayer has his place of residence or principal place of
business.
The following are however exempted from tax: –
Medical or Dental expenses incurred
by the employee;
Retirement gratuities and
compensation loss of office;
The cost of passage to or from
Nigeria incurred by the employee;
Interest on loans for developing an
owner-occupied residential house;
Leave allowance, which is computed
as 10% of annual basic salary subject to a maximum of N7, 500 per annum.
You can find more details about Personal Income Tax in Personal Income Tax in Nigeria – PAYE, Direct & Self Assesment
Taxes
3. VALUE ADDED TAX (VAT):
VALUE ADDED TAX (AMENDMENT) ACT 2007 is 5% of a consumption tax levied at each
stage of the consumption chain, and is borne by the final consumer. It requires
a taxable person upon registering with the Federal Board of Inland Revenue to
charge and collect VAT at a flat rate of 5% of all invoiced amounts of taxable
goods and services.
VAT paid by a business on purchases is known as input tax,
which is recovered from VAT charged on company’s sales, known as output tax. If
output exceeds input in any particular month the excess is remitted to
the Federal Inland Revenue Service (FIRS) but where input
exceeds output the taxpayer is entitled to a refund of the excess from FBIR
though in practice this is not always possible.
A Taxpayer however has the option of recovering excess input
from excess output of a subsequent period. It should be stated at this point
that recoverable input is limited to VAT on goods imported directly for resale
and goods that form the stock-in-trade used for the direct production of any
new product on which the output VAT is charged. Learn more about Value Added Tax (VAT).
4. WITHHOLDING TAX: Nigerian law subjects certain
activities and services to Withholding Tax. This basically means that where
during transactions in any of the specified activities or services, a payment
is due from one person to another, the person making the payment is expected to
deduct tax at the applicable rate and remit it to the relevant tax authority.
This should be done not later than 30 days after the deduction. This provision
can be found in sections 68 to 72 of the Personal Income Tax Decree No. 104 of
1993; Sections 60 to 64 of the Company Income Tax Act (as amended), and Section
51(a) of the Petroleum Profits Tax Act (as amended). Some of these activities
and Services and their current applicable rates include:-
Payment
%Corporate
%Individual/Partnership
Rent
10
10
Construction
5
5
Divident
10
10
Royalties
10
5
Comission
10
5
Professional Fees
10
5
Technical
10
5
Consultancy Fees
10
5
5. CAPITAL GAINS TAX: This accrues on an actual year basis and it pertains to all gains accruing to a taxpayer from the sale or lease or other transfer of proprietary rights in a chargeable interest which are subject to a capital gains tax of 10%, such chargeable assets may be corporeal or incorporeal and it does not matter that such asset is not situated in Nigeria. Where however the taxpayer is a non-resident company or individual the tax will only be levied on the amount received or brought into Nigeria.
Computation
of capital gains tax is done by deducting from the sum received or receivable
from the cost of acquisition to the person realizing the chargeable gain plus
expenditure incurred on the improvement or expenses incidental to the
realization of the asset.
6. EDUCATION TAX: An education tax of 2% of assessable profits is imposed on all companies incorporated in Nigeria. This tax is viewed as a social obligation placed on all companies in ensuring that they contribute their own quota in developing educational facilities in the country.
7. NIGERIAN OIL AND
GAS INDUSTRY CONTENT DEVELOPMENT ACT 2010.
The Nigerian Oil and Gas Industry Content Development Act
(“the Act”) is designed to
enhance the level of participation of Nigerians and Nigerian
companies in the country’s oil and gas industry. With the promulgation of the
Act, the Government has clearly established its intention to increase
indigenous participation in the industry in terms of human, material and economic
resources. The implementation of the Act is expected to significantly change
the current business and operating structure in the Nigerian oil and gas industry,
particularly for the international oil service companies
8. Tax Treaties: Nigeria has a number of tax treaties referred to as “double taxation” agreements with a number of countries, these are designed to ensure that the tax payable in Nigeria on the profits of a Nigerian company being remitted into the country are reduced by the amount of “foreign Tax” paid abroad and vice versa where an overseas company receives profits from Nigeria that have already been taxed in Nigeria. Some of these countries include the UK, France. The Netherlands, Belgium, Canada and Pakistan.
9. NIGERIAN SOCIAL INVESTMENT TRUST FUND (NSITF): This is governed by the NSITF Decree, and requires everybody employed in a Nigerian incorporated company to contribute a certain percentage of their salary to the fund. This contribution is based on the assumption that the maximum basic salary in Nigeria is N48, 000 per annum; Expatriates are excluded from this requirement where they can show proof of a similar contribution in their home country. The rate of contributions is defined as follows, where the contributor is an employee, 2.5% of his salary subject to a maximum of N 1,200 per annum; Where the contributor is an employer, 5% of basic salary subject.
This is governed by the NSITF Decree, and requires everybody employed in a Nigerian incorporated company to contribute a certain percentage of their salary to the fund. This contribution is based on the assumption that the maximum basic salary in Nigeria is N48, 000 per annum; Expatriates are excluded from this requirement where they can show proof of a similar contribution in their home country. The rate of contributions is defined as follows, where the contributor is an employee, 2.5% of his salary subject to a maximum of N 1,200 per annum; Where the contributor is an employer, 5% of basic salary subject.
10. PETROLEUM PROFIT TAX (PPT)
The Petroleum Profit Tax is subject to any resident company or
person in charge of a non-resident company who are exploring for petroleum or
producing it. This also includes any liquidator, receiver, or agent of
liquidator or receiver of any company carrying on petroleum operations in
Nigeria.
Payment Info:
The Petroleum Profit Tax is a type of pre-paid tax. You have to
prepare and submit your annual tax return to JP Morgan Chase Bank, within five
months of the end of each assessment year.
The payment is done mainly 2 segments of 12-13 phases. The
first segment is the estimated annual return paid not later than February of
each year. The tax due is than paid in 12 months installments throughout
the year. In case of the accumulated actual tax exceeds the tax paid a
13th month payment can be paid. If the opposite occurs you will get the refund.
1. Introduction
The purpose of the circular is to provide a general description of the application of the Nigerian tax laws to non-residents and in particular the extent of their liability to Nigerian taxes, as well as the payment procedure.
2. Residence
The concept of residence determines the extent to which the income of a taxpayer is liable to tax under a tax jurisdiction. In Nigeria, a resident person (individual or corporate) is assessable on the global income. This means that the taxpayer is liable to tax on the income or profits “accruing in, derived from, brought into, or received in Nigeria.” It also determines the scope of deductions that may be allowed for the purpose of computing an individual’s chargeable income. For instance, only residents may claim children’s allowance, dependents’ allowance and life assurance allowance.
For income tax purposes, a person may be resident, non-resident or possess dual residence.
2.1 Resident Individual
An individual is regarded as resident in Nigeria throughout an assessment year if he:
(i) is domiciled in Nigeria;
(ii) sojourns in Nigeria for a period or periods in all amounting to an aggregate of 183 days or more in a 12 month period (inclusive of annual leave or temporary period of absence); or
(iii) serves as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria.
2.1.1 Resident Individual and Liability to Tax
(i) The profit of a trade, profession or vocation is liable to tax in Nigeria regardless of the period for which such a trade, profession or vocation has been carried on.
(ii) Employment income is liable to tax on the basis of residence.
2.2 Resident Corporation
A company is resident in Nigeria if it is incorporated in Nigeria.
2.3 Non-Resident
A non-resident corporation or individual is liable to tax only on the profit or income deemed to be derived from Nigeria.
2.3.1 Non-resident Individual
A non-resident individual is a person who is not domiciled in Nigeria or who stays in Nigeria for less than 183 days but derives income or profits from Nigeria. A nonresident individual becomes liable to tax from the day he commences to carry on a trade, business, vocation, or profession in Nigeria. However, he is liable to tax in respect of employment income when he becomes resident.
2.3.2 Non-Resident Corporation
This is a company or corporation that is not registered or incorporated in Nigeria but which derives income or profits from Nigeria. It is to be mentioned here, for the sake of emphasis, that exemption from incorporation does not confer exemption from payment of tax on any company. Every company, resident and non-resident, is liable to tax in Nigeria if its income is liable to tax under the provisions of the Companies Incomes Tax Act. It is also to be pointed out that the Nigerian tax laws do not exempt the income of a branch from tax.
An individual or corporation may have dual or multiple residence status.
2.3.4 Dual Residence of Individuals (Local)
Ordinarily, a resident individual is subject to tax in Nigeria in the State where the individual normally resides. In the case where such an individual has two or more places of residence in Nigeria for income tax purposes, he is subject to tax in the state where he has the “principal place of residence.” The term principal place of residence.” Means, for an individual with:
(i) Pension as the only source of earned income, his usual residence constitutes the principal place of residence.
(ii) Source of earned income other than pension, the place nearest to his usual place of work; and
(iii) Sources of unearned income, his usual residence.
Where the determination of the principal place of residence leads to dispute between two or more tax authorities, the Joint Tax Board determines the tax jurisdiction. In practice, the determining factor is the source of earned income.
2.3.5 Local Dual Residence of a Corporation
The constitutional arrangement in Nigeria vests the taxation of all companies in the Federal tax authority. This does not allow for the dual residence of corporations locally. All corporations wherever located in Nigeria are under Federal tax jurisdiction.
Therefore, the problem of local dual residence of corporations does not arise.
2.3.6 International Dual Residence
The definition of the term “residence” differs from one country to the other. For instance, in Nigeria, the length of stay to qualify a taxpayer as a resident is reckoned within a 12- month period. In some countries, this is reckoned within an assessment year, allowing
for the qualifying period of stay to spilled over two years of assessment. In some other countries (e.g. the USA), the citizen is regarded as resident in the home country whatever the length of stay abroad. This creates the problem of dual residence for the
individual who is regarded as resident in more than one country. For example, he is regarded as resident at the same time in country A where nationality is the basis of residence and in country B where he has stayed for more than 183 days in a 12-month
period and, may be, in his home country where he is away for the less than 183 days in that assessment year.
A corporation may also have the problem of dual residence. For instance, the definition of the residence of a corporation in Nigeria is the place of incorporation. In some other countries, the relevant criterion may be the “place of management” or the “place of
residence of the directors.” In this instance, the Nigerian tax authority would treat the corporation as resident in Nigeria on the basis of the place of incorporation while the tax authority of the other country would regard the same corporation as resident in that
other country on the basis of “place of management.” The Nigerian tax treaties govern the treatment of such cases and affected companies can claim tax credit for the Nigerian tax in their home countries to avoid double taxation.
2.4 Branches and the Parent Company
The tax laws of some countries regard a branch as resident, for tax purposes, in the same country as the parent company and therefore exempt the income of branches from tax. There is no such provision in the Nigerian tax law. A Nigeria branch of a
foreign company is treated as a corporate entity under the law of the land and any income or profit derived by it from Nigeria is taxable here. The only two conditions where a branch may not be so treated are:
(i) if the branch is used solely for storage or display of goods or merchandise; and
(ii) if the branch is used solely for the collection of information.
2.5. Subsidiaries and the Parent Company
A subsidiary is expected to be incorporated in Nigeria and therefore to operate as a separate legal entity from the parent. The foreign equity-participation may now, in certain circumstances, be 100% but such equity-ownership or the control will not affect the residence status in Nigeria once the company incorporates. However, the claim to the contrary by the other country may raise all the problems of dual residence.
2.5.1. Article 4 of the Nigerian Model Double Taxation Agreement spells out the mode of resolving the problem of dual residence between Nigeria and a treaty-country.
2.5.2 The Agreement provides for the criterion of ”place of incorporation” as basis of resolving dual residence of companies. Where this fails, the question is to be resolved by “mutual agreement”.
3. Treatment of Expenses
The Nigerian tax laws do not discriminate between residents and non-residents in the allowance of expenses for the purpose of determining the taxable income. All expenses proved to be incurred for the production of the income are allowable as deductions.
Rent, interest, royalties, management fees, head office expenses and similar expenses are deductible if proved that they are “wholly, exclusively, necessarily and reasonably” incurred for the purpose of the trade or business.
4.0 Profits or Income “deemed to be derived from Nigeria”
Under the old law, the liability to the Nigerian tax on the income from a trade or business of a non-resident company or individual in Nigeria was restricted to that portion of the income attributable to the operations performed in Nigeria. This definition has been found to be inadequate in view of the growing complexities in the nature of commercial operations in Nigeria. The government is in favor of encouraging foreign investment and has therefore decided to state in clear and specific terms which activities of a non-resident company and individual would attract Nigerian tax and to what extent. Recent amendments to the laws have comprehensively defined what constitutes deemed profit or income from a trade or business carried on in Nigeria.
For corporations, the pertinent questions to ask in line with Section 13(2) of CITA CAP C21, LFN 2004 (as amended) are:
(i) does the Corporation have a “fixed base” in Nigeria?
(ii) does the Corporation operate in Nigeria through a dependent agent authorized to conclude contracts or deliver goods or
merchandise on its behalf?
(iii) is the corporation executing a turnkey project in Nigeria? or
(iv) is the operation between the corporation and its Nigerian subsidiary at arm’s length?
Each of these specific circumstances will be treated in turn.
4.1 Fixed Base of Business
If a non-resident corporation has a “fixed base” from which it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria.
The term “fixed base” implies that the place must be easily identifiable and must possess some degree of permanence. It includes:
(i) facilities such as a factory, an office, a branch, a mine, gas or oil well etc;
(ii) activities such as building, construction, assembly, or installation; and
(iii) furnishing of services in connection with the activities mentioned above.
However, two cases are specifically exempted and these include:
(i) facilities used solely for storage or display of goods or merchandise;
(ii) facilities used solely for the collection of information.
4.2 Operation of a Dependent Agent
A non-resident corporation can have two types of agents in Nigeria – an independent agent or a dependent agent. An agent is regarded as possessing independent status when he acts on behalf of a non-resident corporation in the ordinary course of his
business. The status may however change if he devotes his activities wholly or almost wholly on behalf of the corporation.
4.3 The word “habitually” as used in the legislation implies that the operation of the non-resident company must be repetitive. An isolated case will therefore not quality as “habitual”
Where a dependent agent makes an isolated sale of goods on behalf of a principal, that may not necessarily constitute the income from such an operation as deemed profit liable to Nigerian tax. However, where the facts show that the sale of goods on behalf of
the principal or of any company associated to it by the agent is on a regular pattern, this arrangement will conform with the intention of the term “habitually”.
4.4 Profits on a Turnkey Project
A turnkey project is defined as a ”single contract involving survey, deliveries, installation or construction.” The profit on a turnkey project is liable to tax in Nigeria. Such a profit should not be split between the so-called “Nigeria source” and “off-shore” profits but
taxed wholly in Nigeria.
4.5 Transactions not at arm’s length
The tax laws allows the Board to make appropriate adjustment to the profits of Nigerian companies where the following circumstances prevail:
(i) where there is a controlling interest in the Nigerian company;
(ii) the presence of a control of a Nigerian company may be exercised directly or indirectly by a parent company or any other company associated to it;
(iii) the imposition of conditions in the financial and commercial relationship by the controlling interest;
(iv) the conditions imposed must be different from what would obtain between independent parties or in an open market situation;
(v) such relationship and conditions lead to the transfer of goods and services at prices not at arm’s length; and
(vi) consequently, the profits declared for the Nigerian tax are understated.
The ‘imposition of conditions’ or control and influence as mentioned above can move in various appearances like over-invoice of goods and services, packaging of the terms of payment of interest on loans, frivolous charges for management fees, royalty, patent
and rent, convenient shifting of profits between companies or in the allocation of expenses, all with the objective of minimizing, avoiding or evading the Nigerian tax.
When the conditions analyzed above hold, the profit deemed to be derived from Nigeria shall be as determined by the Service. In such circumstance, the Service will carry out comparative cost and price analysis to establish the true market prices and make
necessary adjustments to determine the true profit for tax purposes.
4.6 ”Sales’ Outlet”
The tax law excludes:
(i) “facilities used solely for storage of goods or merchandise”; and
(ii) “facilities used solely for the collection of information” from the facilities that would constitute a fixed base. The use of the word “solely” in the law implies that facilities used exclusively as a representative office would be exempted.
Where, however, a facility is so exempted but such a facility is used for some purposes other than those originally intended, the facility will qualify as a “sales’ outlet” and treated as a fixed base for the non-resident company. The profit arising from such a
sales outlet is taxable.
Example 1
Sweet Home Inc has a representative branch in Nigeria for the display of its products. It was later discovered that sales were regularly conducted from the stock held for the display.
Treatment With the activity of the branch restricted solely to the display of the parent’s products in Nigeria, the branch will retain the status of a representative office and will not be held liable to Nigerian tax. However, with the sales activity of the branch, the status of the branch has changed to a sales outlet and this will turn it into the parent’s fixed base in Nigeria.
4.7 Individuals
The amendment to the tax law has introduced conditions similar to those explained in sub-paragraphs 4.1 to 4.6 above to individuals. In other words, the profits of an individual carrying on a trade or business in Nigeria through a ‘fixed base’ shall be the profit attributable to that fixed base. Therefore:
if the business is through a dependent agent, the profit attributable to that agent;
if the business involves a turnkey project, the profit from that contract; and
if the business is between related persons, the profit that may be determined on arm’s length principle by the relevant tax authority.
4.8 Double Taxation Agreement and The Permanent Establishment Concept
4.8.1 Article 5 of the Nigerian Model Double Taxation Agreement (DTA) spells out what constitutes a permanent establishment (PE). The permanent establishment is the condition for liability to Nigerian tax of business profits made from Nigeria. In other
words, if a company has a permanent establishment in Nigeria, it is liable to Nigerian tax on the profit from trade or business attributable to that P.E. in Nigeria but in the absence of a permanent establishment, the company will not be held to Nigerian tax on
the profits from the source.
4.8.2 The term “permanent establishment” has been defined in the OECD Model
Double Taxation Convention as “a fixed place of business through which the business of an enterprise is wholly or partly carried on” It includes:
(i) the fixed base in paragraph 4.1 above;
(ii) the operations of the dependent agent in paragraph 4.2 above; and
(iii) the sales’ outlet in paragraph 4.6 above.
4.8.3 As pointed out above the existence of a permanent establishment is essential for the determination of liability to tax on business profit in Nigeria. Article 7 of the Nigerian Model DTA has restricted the profit that may be so taxed to what is attributable to the
permanent establishment.
4.8.4 Article 15 of the Nigerian Model DTA makes the establishment of a fixed base in Nigeria the condition for the liability to tax of the income of the professional services of lawyers, architects, doctors, accountants, etc. The concept of “fixed base” is not defined
here, but is generally agreed to have the same meaning as the permanent establishment.
5.0 Turnover Basis of Assessment
This is an alternative to the normal basis of assessment to tax, based on the profit as per the financial statement submitted as part of the taxpayer’s annual returns. Under this basis, the turnover, which is often apparent, is used to ascertain the assessable
profit by applying a reasonable percentage on it.
5.1 The amendments to the tax laws have modified the mode of application of the turnover tax to a trade or business carried on in whole or in part in Nigeria when the following conditions exist:
(i) the trade/business has produced no assessable profits; or
(ii) the assessable profits produced appear less than might be expected to arise from such a trade or business; or
(iii) the true amount of the assessable profits of the company cannot be readily ascertained.
5.2 The same tax treatment applies to both residents and non-resident when the above conditions prevail. The implications of this treatment particularly to the nonresidents are illustrated below:
(i) for a non-resident company or individual with a fixed base in Nigeria, the turnover that can be assessed and charged is only that portion that is attributable to the fixed base. In other words, it will be wrong to base the percentage considered “fair and reasonable” on the total turnover of such a company or individual once a fixed base is established. This means that the first step is to establish the fixed base. The second step is the determination of the turnover attributable to the operations carried on through the fixed base. The final step is to determine the percentage of that turnover considered fair and reasonable.
In practice, it is the industrial ratio or percentage which is compatible with the size and the geographical area of operation that will guide the tax officers in exercising their judgment. However, with effect from January, 1993, attempts have been made to
standardize what is considered to be an acceptable ratio or percentage for certain lines of trade. The prescribed standards are merely a guide which can be changed by management, based on in-depth research, from time to time (see paragraph 5.3 for
more details).
6.0 Building, Construction, Assembly and Installation Projections
In view of the amendment to the laws, the following clarifications on the implications of construction, assembly and installation projects in Nigeria become necessary.
6.1 A Nigerian Project Awarded to a Non-Resident Company but Subcontracted in part to a branch, a subsidiary or an associated company
This is usually a single contract involving survey, supply and construction or installation. The whole profit on the contract will be taxable as a Nigerian profit with the subcontract allowable as an expense but limited to the actual cost to the main contractor.
6.2 Split Contract
This is where there are two distinct contracts of supply and construction or installation.
The tax implication will depend on other facts of the case:
(i) if both contracts are awarded to the same company, the profit on the supply aspect will be subject to Nigerian tax.
(ii) if the company is resident in a treaty country, the liability to tax on the construction, assembly and/or installation aspect will depend on the existence of a permanent establishment in Nigeria for the performance of the activities. The permanent establishment will be determined as follows:
(a) for construction and assembly or building, the existence of a site for more than 3 months or 6 months depending on the DTA;
(b) for installation, the charge for the installation relative to the free-on board sale’s price of the machinery or equipment. If the charge exceeds 10 percent of the sales’ price, the installation site could constitute a permanent establishment in Nigeria.
(iii) if the non-resident company sub-contracts the activities in Nigeria (building, assembly, construction or installation) to a resident company, the tax implication will be the same as those illustrated under paragraphs 5.2 and 5.3 above.
6.3 Project Awarded to a Nigeria Company but subcontracted to a Non-Resident Company
If the main contract is awarded to a Nigerian company which subcontracts the supplies aspect to a non-resident company, the contract will be viewed as single contract as per paragraph 3 above and the profit on it will be liable to tax in Nigeria but with the
expenses of the subcontract allowed at cost of the main contractor.
7. Airlines and Shipping
A non-resident company that carries on the business of shipping and air transportation into Nigeria is liable to tax in Nigeria on the full profits or loss arising from the “carriage of passengers, mails, livestock or goods shipped, or loaded into an aircraft in Nigeria”. The basis of taxation is either:
(i) profit on the transportation business as reflected by the annual account; or
(ii) withholding tax of 2% on Nigerian sales on monthly remittance basis.
However, if sub-paragraph (i) above yields tax less than the 2% of gross sales at the end of the year of assessment, the withholding tax of 2% becomes the final tax.
7.1 The formula for ascertaining the profit element under (i) above is given in the tax law and this is in two parts, one part ascertains what may be called “adjusted profit ratio” of an accounting period before any allowance is made on account of depreciation relief, and the second part ascertained ratio for the depreciation relief. In effect,
The “Adjusted profit ratio” is the ratio that the adjusted profit/loss before depreciation allowances bears to the total sum receivable in respect of carriage of passengers, mails and livestock.
The “depreciation ratio” is the ratio that the depreciation charged in the accounts bears to that same total sum.
7.2 Treaty Situation
Non-resident airlines and shipping companies are exempted from Nigeria tax on reciprocal basis if a double taxation agreement exists between Nigeria and the country of residence of the airline or shipping company. However, if a double taxation agreement exists but the routes is plied by the airline or shipping company of only one party to the agreement the tax chargeable is 1 percent of the sales less refunds and payment of wages/salaries of ground staff.
8. Remittance of Funds out of Nigeria
All non-residents remitting income or profits out of Nigeria are expected to obtain a Tax Clearance Remittance Certificate covering the amount to be remitted. The certificate is to show that relevant tax has been paid on the amount to be remitted or that the amount
is liable to Nigerian tax. It is an offence for any remittance to be made without the Revenue clearance.
8. 1 Application forms for a Tax Clearance Certificate for the purpose of remittance are obtainable free of charge from the relevant tax office.
The payment of withholding tax is in the currency of transaction.
10.0 Capital Gains Tax (CGT)
The taxation of gains accruing from disposal of assets are administered under a separate Act – the Capital Gains Tax Act. Such gains are not taxed as part of income of the beneficiary but taxed separately at the rate of 10% of the net gains.
10.1 Gains arising from the Disposal of shares Gains arising from the sale of shares held in Nigerian Company is not taxable in
Nigeria.
*The withholding tax at the specified rates here is payment on account only. The taxpayer is expected to file tax returns for normal assessment and credit will be given for tax deducted at source.
10.2 Gains arising from Takeovers, Absorptions and Mergers Where share in a company are acquired and such a company is taken over, absorbed by, or merged to another company, the apparent gains from such organization will not be subjected to tax provided:
(i) there is no disposal of such shares by the original holders;
(ii) there are no cash payments for the shares involved;
(iii) the acquired company loses its identity.
11 Employment Income
11.1 Residence is the basis of taxing employment income in Nigeria. If a taxpayer is regarded as resident in Nigeria, his employment income is liable to Nigerian tax. The other conditions are as per paragraph 11.2 below.
11.2 For employment income not to be liable to Nigerian tax, four conditions must hold viz;
(i) the employee must be resident for less than 6 months in any 12-month period;
(ii) the employer of the person must not be resident or have a fixed base in Nigeria; and
(iii) income of the person must conform with the “subject-to –tax” principle.
(iv) The remuneration of the employee is not borne by a fixed base of the employer in Nigeria
11.2.1 Diplomats
Under the Vienna Convention, salaries of diplomatic agents and consular officers are liable to tax only in their home countries. Therefore, the salaries for this class of individuals, who are normally resident in Nigeria and who are otherwise liable to Nigerian tax, are not taxable in Nigeria, irrespective of the resident rule. But, any income other than salaries, which a foreign diplomat may earn from Nigeria will be liable to tax in Nigeria. Nigerian diplomats serving abroad are under the same principle, exempted from tax by their host countries but are taxable in Nigeria in respect of the salaries they may earn abroad.
11.2.2 Nigerians working in Embassies and United Nations Organisations situated in Nigeria
This class of workers is not covered by the Vienna Convention. They are therefore liable to tax in Nigeria. They are required to pay their income taxes to the States where they are resident.
11.2.3 Nigerians working under United Nations Organisations Abroad Such Nigerians fall under two categories for income tax purposes, that is:
(i) if such Nigerians have diplomatic status, they are subject to tax in Nigeria;
(ii) for workers other than those with diplomatic status, they are subject to tax in the country of residence.
12. Tax Jurisdiction 12.1 Local Jurisdiction
S/No
Persons
Relevant Tax Authority
i
Resident Individuals other than officers in the Military, the Police, Officers of Foreign Affairs Ministry
Tax Authority of the State of Residence in Nigeria
ii
Military Officers and the Police
Federal Tax Authority
iii
Abuja Residents
Federal Tax Authority
iv
Non-resident individuals
Federal Tax Authority
v
Resident Companies
Federal Tax Authority
vi
Non-resident Companies
Federal Tax Authority
vii
Foreign Diplomats accredited to Nigeria
Tax Authority of home country
viii
Nigerians Diplomats serving abroad
Federal Tax Authority
ix
Nigerians working in Embassies and UN Organisations located in Nigeria
Tax authority of State of Residence in Nigeria
x
Nigerians with diplomatic status working in UN Organisations
Federal Tax Authority
xi
Nigerians without diplomatic status working abroad
Tax authority of the Country of Residence
12.2 International Jurisdiction
For incomes arising in, or derived from Nigeria, Nigeria has the first right to tax. For incomes brought into Nigeria, credit will be granted for the tax paid in the country where the incomes arises.
13. Further Enquiries
Any request for further information or clarifications should please be directed to the:
Executive Chairman
Federal Inland Revenue Service Revenue House,
15 Sokode Crescent, Wuse Zone 5 Abuja.
GUIDELINES ON THE COLLECTION PROCEDURE FOR WITHHODING TAX (WHT) AND VALUE ADDED TAX (VAT) BY MINISTRIES, PARASTATALS AND OTHER AGENCIES OF GOVERNMENT.
The purpose of this circular is to draw the attention of the general public and especially Ministries, Departments and Agencies of government at federal, state and local levels to the government policy on the collection procedures of Withholding Tax (WHT) and the Value Added Tax (VAT) by government and related establishment. The circular aims to clear some doubt and misgiving about the status, scope, nature and objective of the two tax concept. It also spells out the guideline on the collection procedures for the two tax regimes.
Highlights
The following salient points may be noted:
(i) Withholding tax is not a separate type of tax but a payment on account of income tax and it is available as set-off against future income tax assessments;
(ii) Ministries, departments and agencies of government do not bear the burden of WHT but they merely act as agents of collection of the tax;
(iii) Value Added Tax is a tax on consumption of goods and services;
(iv) As consumers of goods and services, ministries, departments and other agencies of Government pay VAT on their consumption in addition to the contract price of the item consumed by them and the contractor render monthly return, Government Agencies must obtain receipt from FIRS for the VAT paid on behalf of the contractors;
(v) The VAT receipt is used by the contractor to make his monthly output and input VAT return.
(vi) Applicable rates
2. Withholding Tax and Value Added Tax
There is need to draw attention to the fundamental differences between Withholding Tax and Value Added Tax so that the two tax concepts can be clearly understood.
Withholding Tax is an advance payment of income tax and the purpose is to bring the prospective taxpayer to the tax net, thereby widening the income tax base.
When the income, which suffered withholding tax as deduction at source, is finally brought to the notice of the tax authority and appropriate tax is computed, credit is given for the tax deducted. The taxpayer will be required to pay only the balance of the tax due (if any). WHT is meant to curb income tax evasion and it is not a separate tax on its own.
In contrast, Value Added Tax is a separate type of tax. VAT is a consumption tax payable on the goods and services consumed by any person whether government agencies, business organization or individual. The target of VAT is consumption of good and services and unless an item is specifically exempted by law, the consumer is liable to the tax.
Therefore, all agencies of government, religious and other organization and similar person that are normally exempted from income tax are expected to pay VAT on the goods and services consumed by them.
3. Collection arrangement by Government agencies.
a) Withholding Tax.
(i) The rate at which tax is to be withheld on payment for contract of supplies, construction and allied services has been increased from 2.5% to 5% with effect from 1st January, 1995;
(ii) The withholding tax on consultancy fees, technical fees, management fees, director’s fees and fees for services other than those mentioned in subparagraph (i) above remains at 10% when payable to limited liability companies. The applicable rate for such types of payment to individuals and non-corporate bodies is 5%.
(iii) Withholding tax rate for dividend, interest and rent whether paid to companies or individual is 10%. The applicable rate on royalties is 10% for companies and 5% for individuals.
(iv) Withholding taxes on individuals who are non-resident in Nigeria, residents of Federal capital Territory of Abuja, members of the Police & Armed Forces and Foreign Affairs Officers are payable to the FIRS. Withholding taxes on other individuals are payable to the tax authority of the State (State Internal Revenue Service) where the individuals reside.
(v) The term “contract of supplies’’ covers all form of supplies, deliveries or the like through competitive bidding, tender, LPOs or other similar arrangements whether oral or written but does not cover across-the counter cash sales or supplies in the ordinary course of business.
(vi) The currency in which the tax is to be paid is the currency of transaction.
(vii) Withholding taxes are to be paid to FIRS designated collecting banks
The payment should be accompanied with a schedule showing the following details:
name of each contractor;
Taxpayer Identification Number of each contractor;
the gross value of the contract; and
the amount of tax withheld.
(viii) In the case of individuals, sole proprietorship, partnership and other business enterprises which fall within the tax jurisdiction of state Government, payments should be made to the relevant SIRS.
(ix) The time within which the withholding tax is to be remitted to the FIRS is 30 days from the date the tax is withheld or the date the duty to deduct arises, whichever is earlier.
(x) Any default in the implementation of the tax carries heavy penalties.Failure to deduct withholding taxes and failure to remit taxes withheld are punishable on conviction by a penalty of 10% per annum of the tax not withheld or remitted and interest at CBN rediscount rate plus spread to be determined by the Minister of Finance.
(xi) Government will not condone any lapses in the implementation of these directives .It is important to clarify that statutory sanctions will be invoked where any agency of government fails to deduct or deducts at less than the applicable rate or, having deducted, fails to remit the withholding tax within statutory time. Such sanction include the imposition of penalty and interest at commercial rate on the amount not withheld, under –deducted or not remitted, as the case may be. The FIRS also has the statutory power to authorize the Accountant-General of the Federation to withhold such amount together with the accruing penalty and interest from any allocation
due to such government ministry or agency.
b) Value Added Tax.
(i) All government agencies are now to register as VAT agent. They are to make necessary provision for the payment of VAT in their award of contract. The VAT deducted should be remitted to the FIRS at the same time the contract payment is being made to the contractor.
(ii) The submission of evidence of VAT registration by a contractor is now a requirement prior to being allowed to bid for a contract with Ministries, Departments and Agencies of government at all levels.
(iii) VAT is to be paid at FIRS designated collecting banks.
The payment should be accompanied with a schedule showing the following details:
name, address and JTB TIN;
the number and amount on the invoice;
the month of transaction; and
the VAT payable.
(iv) All contractors are still to render VAT returns to the FIRS on the contracts awarded to them by government agencies and necessary adjustment will be made for the output tax collected from the sources to arrive at a net payable or refund – see box 13 of the appendix (Form 002).
The agencies of government referred to in this circular include a ministry, department, parastatal, an institution or any other agency of the Federal, State or Local government.
4. Dual Tax Role of Ministries, Departments and Agencies of Government
For the avoidance of doubt, it is necessary to clarify that the new policy of government imposes dual tax roles on any agency awarding contracts. Such an agency is to act as:
(i) agent of government for the deduction and remittance of withholding tax; and
(ii) agent of government for the collection and remittance of VAT.
This implies that two (2) separate remittances – one for the payment of Withholding Tax and the other for the payment of Value Added Tax.
5. For any further information or clarifications please direct your enquiries to;
Executive Chairman,
Federal Inland Revenue Service,
Revenue House,
15 Sokode Crescent, Wuse Zone 5, Abuja.
Or
Visit our website: www.firs.gov.ng
Email: enquiries@firs.gov.ng
Telephones: 08159490002, 08159490001, 08159490000
WHAT CONSTITUTES ‘TRADE’ FOR TAX PURPOSES: GUIDELINES FOR THE GENERAL PUBLIC
This circular is issued pursuant to Section 8(1)(t) of the Federal Inland Revenue Service (Establishment) Act 2007 which empowers the Service to carry out all necessary actions expedient for the discharge of its functions under the Act, Section 9(l)(a) of the Companies Income Tax Act (CITA) Cap C21 LFN 2004 as amended and Section 3(1 ) (a)
of the Personal Income Tax Act (PITA) Cap P8 LFN 2004 as amended.
The purpose of this circular is to clarify FIRS position on what constitutes ‘trade’ or business for tax purposes. In accordance with the Companies Income Tax Act (CITA),and the Personal Income Tax Act (PITA) any trade is subject to tax under CITA and PITA, even if that trade is carried out by friendly societies, co-operative societies, charitable and ecclesiastical organizations, or trade unions.
1.0 Introduction
CITA states that “any trade or business for whatever period of time such trade or business may have been carried on” shall be subject to Companies Income Tax (Sec.9(1)(a) of CITA). The profits of certain institutions are exempt from tax under CITA, but only in so far as such profits are not derived from ‘trade or business’ (Sec.23). This means that the profits of any organization that are derived from ‘trade’ shall be subject to Companies Income Tax. This raises the question, what exactly constitutes ‘trade’?
A definition of the word ‘trade’ cannot be found in Nigerian tax legislation although an attempt was made in PITA. The interpretation Section of the Fifth Schedule of PITA defines “trade or business” to mean “trade or business or that part of a trade or business the profits of which are assessable under this Act”.
However, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word (see Subheading 2.0). In line with these rulings, ‘trade’ can be regarded as “the business of buying and selling or bartering goods or services”. Furthermore, the one-off nature of an activity in no way invalidates that activity as constituting trade. This interpretation matches the approach in other jurisdictions, namely the UK and USA (see subheading 3.0).
2.0 Case Law in Nigeria
Although no explicit definition of ‘trade’ exists in the law, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word. The most important case is that of Arbico Ltd v. FBIR, {1996} 2 All NLR 303. The plaintiff in the dispute, Arbico, had acquired a plot of land, erected a building, and sold the property at a profit. The company was subsequently assessed for tax on the proceeds of the sale of property The Company objected to the assessment on the basis that the transaction was a one-off and therefore did not constitute ‘trade’. The case was ultimately settled in the Supreme Court. In the ruling the Court laid down two important axioms:
• Firstly, that the word ‘trade’ should be interpreted in its widest sense, in accordance with its common everyday meaning;
• Secondly, that an isolated one-off transaction can still constitute a “trade”.
In line with the ruling of the Supreme Court, the following definition seems to capture the common meaning of the word ‘trade’. Trade is “the business of buying and selling or barter in goods or services”(taken from Black’s Law Dictionary, Eighth Ed. (2004)).
3.0 Treatment in Other Tax Jurisdictions
In considering what constitutes ‘trade’ for tax purposes it is useful to consider how the
issue is addressed in other jurisdictions.
In the UK, as in Nigeria, there is no statutory definition of the word ‘trade’. Her Majesty’s Revenue and Customs (HMRC) relies on case law to formulate a working definition.
HMRC states that “Usually, trading involves the provision of goods or services to customers on a commercial basis”. As in Nigerian case law, “Simply because a venture is a one-off or occasional does not mean that it will not be treated as trading for tax purposes”. It is interesting to note that although the HMRC definition employs the notion
of ‘commercial basis’, HMRC explicitly states that whether or not the profits of an activity are ultimately used for charitable purposes is not relevant for the determination of whether or not that activity constitutes a trade.
In the USA, the Internal Revenue Service (IRS) employs a similar approach to HMRC.
IRS regards ‘trade’ as including “any activity carried on for the production of income from selling goods or performing services”. It is interesting to note how IRS treats the trading activities of an organisation that also carries out tax exempt activities. IRS states that “an activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may, or may not, be related to the exempt purposes of the organizations. In other words, a single organisation can undertake both exempt activities and trading activities. This implies that an organisation cannot argue that none of its activities constitute ‘trade’ just because it undertakes some exempt activities.
4.0 Badges of Trade
In 1955 in England, the Royal Commission on the Taxation of Profits and Income in reaction to whether a statutory definition of trade was necessary, said that “each case must be decided on its own circumstance (1955 Cmnd.9474 para.116) and suggested badges of trade” which they considered to be the major relevant considerations that will
facilitate in determining whether any profit is a taxable trading profit or not. Badges of trade refer to certain indicators that may be used in determining the factual question as whether an activity is trade or not. Case law has expanded it to 9. The badges of trade are:
1. Profit seeking motive. An intention to make a profit supports trading, but by itself is not conclusive.
2. The number of transaction. Systematic and repeated transactions will support ‘trade’. An isolated transaction may also constitute a trade.
3. The nature of the asset. Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or Did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?
4. Existence of similar trading transactions or interests. Transactions that are similar to those of an existing trade may themselves be trading.
5. Changes to the asset. Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?
6. The way the sale was carried out. Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?
7. The source of finance. Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?
8. Interval of time between purchase and sale. Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.
9. Method of acquisition. An asset that is acquired by inheritance, or as gift, is less likely to be the subject of trade.
These ‘badges’ will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade. The weight to be attached to each badge will depend on the precise circumstances.
5.0 FIRS Position
A definition of the word ‘trade’ cannot be found in Nigerian tax law. However, the issue has been addressed in several legal cases, the rulings of which provide some legal certainty regarding how the courts interpret the word. In line with these rulings, ‘trade’ can be regarded as “the business of buying and selling or bartering goods or services”. Where one or more of the criteria on the badges of trade apply, FIRS will treat such transaction as trade. Furthermore, the one-off nature of an activity in no way invalidates that activity as constituting a trade. This interpretation matches the approach in other jurisdictions, namely the UK and USA. The following decided cases are relevant in this regard:
i. In the case of Marlin Vs Lowry (1955)3 All ER 48; 11 TC 297), a person without previous knowledge of linen trade bought a surplus stock of aeroplane linen from government which he sold to the public in small lots. He engaged employees for the re-packaging and embarked on sales” promotion through extensive adverts and campaigns. It was held that he was trading.
ii. In Murray Vs I.R. Comrs (1951, 32 TC 238), where a timber merchant who bought standing timbers in two plantations and could not cut them due to labour cost, sold the rights to cut the timbers to meet his indebtedness. He
was assessed to tax on the profit from the transaction. He contended that the sale was a capital transaction since it was not in the normal course of his business but it was held that the transaction was part of his normal trading as
a timber merchant.
iii. In Burge Vs Pyne (1969, All ER 467), a club proprietor providing facilities for bar, dancing, cabaret, fruit machines and gambling, appealed against the inclusion of his winnings in his assessment. The appeal was dismissed on the ground that the winnings formed part of his regular income from the trade of running the club.
From the foregoing and in accordance with the provisions of CITA, any friendly society, cooperative societies, charitable and ecclesiastical organizations or trade unions that carry out trade as defined and described above would be liable to tax on income derived from such trade.
With a mission to operate a transparent and efficient tax system that optimizes tax revenue collection and voluntary compliance, the Federal Government of Nigeria through FIRS has brought to you, self-service portals at your convenience.
You can now apply for your Tax Clearance Certificate online through The Federal Inland Revenue Service Tax Clearance Certificate Application Portal via their website http://www.firs.gov.ng.
Other services you can also do online are:
1. Verify Tax Identification Number (TIN)
2. Register to get your TCC account
For a new TCC Application
3. Verify Receipt
4. Verify TCC
4. Filing or e-Filing
STEPS ON HOW TO APPLY & DOWNLOAD TCC ONLINE or E-TCC
1. Get to the FIRS TCC Application Portal
The FIRS TCC Application Portal can be accessed at the URL: https://tcc.firs.gov.ng
2. Registration
Before applying for Tax Clearance Certificate, the taxpayer has to first register on the portal. Click on
“Registration” will open a pop up window for selection of taxpayer type.
Note: Clicking on the type (Individual/ Forex/ Corporate) will open the respective registration page.
3. Entering the TIN and clicking on Retrieve button will display the details of the taxpayer. The taxpayer
has to pick the “Date of Incorporation”, check the “I confirm that the above information is correct and
current for further transactions.” Statement and click on Submit button.
A message of successful submission will be displayed with application no.
Simultaneously an e-mail will be sent to the registered e-mail ID containing first time password
and Account Activation link.
Important thing to note: At this stage, you have not made your TCC application. Experience has shown that many taxpayers will stop at this stage and go to FIRS office to complete the application and they will be turn back in many cases.
The taxpayer should login to the portal by entering TIN and the first time password and clicking
on “Login” button. After first login, system would prompt to change password. The taxpayer can set his/ her preferred password and click on Submit button. FIRS portal will open the profile page. Taxpayer details will be displayed under “Profile Details” menu.
Note: Each time a taxpayer logs into the portal, taxpayer information like Tax Office, Name, Address, Email,
Mobile will be automatically updated as pet in TIN Database. The other way to update taxpayer
information is by clicking on the “Click this for Re-validation” button.
4. Apply Tax Clearance Certificate Application (TCC)
The taxpayer can apply TCC after logging into the portal.
Click on Apply TCC will open the TCC application form. The form will be displayed based the taxpayer type.
After filling the required fields and clicking on “Submit” button will submit the application.
1. Nature of Trade/Business: This asks for information about your Trade/Business. Fill this field to proceed.
This field is interactive. Enter a letter and the field will provide you with a list to choose from as
shown below:
2. Turnover of the company in last 3 years in N
3. Particular of previous Tax Clearance Certificate (if Any): If you have any old TCC, provide the details. Fill this field to proceed.
4. Has the Company Paid all assessments raised up to the immediate previous Year of
Assessment.
5. If ‘No’ state the amount outstanding and the Year(s) affected.
6. Any Special arrangement made with the revenue to liquidate the amount outstanding?
If you have an arrangement with the authorities to liquidate the outstanding amount, then answer this, yes.
7. Any other relevant information: Provide all the necessary information, relevant to your Tax Clearance, if any
8. Submitting the TCC Application
Crosscheck all information you provided to be sure of the accuracy and check the checkbox to confirm the information you have provided is correct and the submit button will be activated once the checkbox is checked.
Note: One cannot submit the application form unless the checkbox is checked.
9. Click on activated ‘Submit’ button to submit the application and you will get a system generated Application No. Very important: Preserve Application number for all further correspondences regarding the TCC Application.
When the TCC is ready, you will get an email notification from FIRS.
10. Downloading the Tax Clearance Certificate
You can download your Tax Clearance Certificate by logging into your profile.
Click on ‘Download TCC’ menu will open the Download TCC page. The taxpayer can enter the TCC No. and click on “Download” to download TCC. The TCC will be downloaded in PDF format
