Tax Deductions under the Companies Income Tax Act (CITA)

Tax Deductions in Nigeria

Under the Companies Income Tax Act (CITA), companies can deduct the following expenses to arrive at their taxable profits:

1. Operating Expenses: these include expenses incurred wholly, exclusively and necessarily for the company’s operations like: Salaries, wages and allowances, Interest on borrowing, Repairs and renewals, Rent and royalties paid
2. Capital Allowances: companies can claim capital allowances, which are tax depreciation allowances, on qualifying capital assets used for business purposes such as Industrial buildings and plants, Machinery and equipment, Furniture and fittings, Motor vehicles
3. Tax-Exempt Income: incomes that are specifically exempt from tax, like dividends from other Nigerian companies, can be deducted from total profits.
4. Unrelieved Losses: incomes that are specifically exempt from tax, like dividends from other Nigerian companies, can be deducted from total profits.

TAX CREDITS

Tax credits are amounts of money that can be subtracted from the amount of taxes owed to the government. They are designed to reduce the amount of taxes an individual or business owes, and in some cases, can even result in a refund. Companies that want some deduction in their total tax obligations should take advantage of tax credits. Companies can claim the following tax credits against their final Company Income Tax liability:

1. Withholding Tax Credits: this includes credits for various withholding taxes deducted from the company’s income like Withholding tax on rents, dividends, royalties etc and Withholding tax deducted from contract/service payments
2. Foreign Tax Credits: for Nigerian companies with foreign operations, credits are allowed for income taxes paid on profits from those foreign sources.
3. Specific Tax Credits: certain companies may be eligible for tax credits based on their sector/industry or operations such as tax holidays for companies in industrial-free zones, Tax credit claims for export earnings and Investment tax credits on qualifying capital expenditure

WITHHOLDING TAX

Withholding Tax (“WHT”) ensures that the recipient of a service withholds a percentage of the fee payable to the service provider and remits the same to the tax authorities.

WHT is a tool used to limit tax evasion and to ensure that more taxpayers are captured into the tax net, thereby widening the income tax base. It is deducted at varying rates, ranging from 2.5% to 10% for companies and 5% to 10% for individuals depending on the transaction involved. Withholding Tax was introduced to curb tax evasion by allowing payment to be deducted at source and remitted to the appropriate tax authority – the Federal or State Board of Internal Revenue. Withholding tax for an individual resident in a State is remitted to the SIRS while Withholding tax for companies is remitted to FIRS. Similarly, withholding tax deductions for the following persons are remitted to FIRS: (i) persons employed in the Nigerian Army, the Nigerian Navy, the Nigerian Air Force, the Nigerian Police Force other than in a civilian capacity; (ii) officers of the Nigerian Foreign Service; (iii) every resident of the Federal Capital Territory, Abuja; and (iv) a person resident outside Nigeria who derives income or profit from Nigeria.

The penalty for failure to deduct or remit tax is 10% of the amount not deducted/remitted.

Note that companies are required to submit, in electronic form, a schedule of all their suppliers for the month showing the Tax Identification Number (TIN), address of the suppliers, the nature of the transaction, WHT deducted, and invoice number.

VALUE ADDED TAX

Value Added Tax (“VAT”) is an indirect tax levied on goods and services. The standard VAT rate is 7.5%. It is considered a multi-stage tax because it is levied at each stage of the supply chain where value is added, from initial production to the point of sale. VAT in Nigeria is governed by the Value Added Tax Act and The Finance Act 2023

All goods purchased and services rendered in Nigeria are taxable except those explicitly exempted by the VAT Act. Here are some of those goods and services subject to VAT and they include imported goods, locally manufactured goods, Services such as consulting, engineering, and professional services Rentals and leases Commissions and agency fees

The following are exempt from VAT, Basic food items (e.g. rice, beans, maize), Medical and pharmaceutical products, Educational materials and services, Services provided by charitable organizations, Goods and services purchased for diplomatic purposes.

STAMP DUTIES TAX

Stamp Duties Tax is a type of tax imposed on written or electronic legal instruments such as cheques, receipts, bills of exchange etc. It is regarded as an indirect tax in Nigeria governed by the Stamp Duties Act (SDA) 19 and charged for a stamp or seal applied on a written or electronic document which if executed, makes it a legal document, admissible in any court of law.

According to Section 4(1) of the Stamp Duty Act as amended by S.53 of the Finance Act 2019, the FIRS is the sole regulatory agency for the administration of Stamp Duties in Nigeria. In practice, the administration of Stamp Duties is carried out by the FIRS, FCT and respective State Internal Revenue Services (IRS). The FIRS assesses and collects duties on documents executed between a company and an individual, group or body of individuals while the FCT and States Internal Revenue Service (IRS) assess and collect duties on documents executed between persons or individuals.

CAPITAL GAINS TAX

Capital Gains Tax (“CGT”) is a type of tax imposed on the gains made from the sale or exchange of chargeable assets. It is charged at a flat rate of 10% of the profit made from the sale of qualifying assets. Chargeable assets are wide in scope and they include all forms of properties situated in Nigeria or outside Nigeria. The Finance Act 2023 (the “Act”) signed into law added “Digital assets” as a form of property upon which capital gains tax is payable. Thus, recognized and approved digital assets in Nigeria have become chargeable assets. In essence, gains derived from the disposal of digital assets (whether situated in Nigeria or elsewhere) are now chargeable gains. Digital assets” subject to capital gains tax under the Act, though not statutorily defined, may ordinarily include cryptocurrencies, non-fungible tokens, and other forms of digital assets which are “a digital representation of value or contractual rights which can be used for payment or investment purposes.

TERTIARY EDUCATION TAX

In line with the Finance Act 2023, Tertiary Education Tax is imposed on the income of all registered companies in Nigeria at a rate of 3% of the assessable profit for each year of assessment and it is in turn used to fund projects in tertiary institutions nationwide. For companies subject to Petroleum Profit Tax under the Petroleum Profit Tax Act, tertiary education tax is to be treated as an allowable deduction. For other companies, however, income/profit taxes are not deductible in arriving at taxable income. Tertiary education tax is not tax deductible for companies subject to income tax under the Petroleum Industry Act 2021.

An offence of first instance against the Act attracts a liability on conviction to a fine of ₦1,000,000 or a term of six (6) months imprisonment or both. A second and subsequent offence attracts a fine of ₦2,000,000 or a term of twelve (12) months or both.

THE NATIONAL INFORMATION TECHNOLOGY DEVELOPMENT LEVY (NITDL)

The National Information Technology Development Levy (NITDL) is a type of tax payable by specified companies in Nigeria that have an annual turnover of ₦100 million and above. It is calculated at a rate of 1% of the profit before tax (PBT) of the liable companies. Companies liable to pay the levy include GSM Service Providers and all Telecommunications Companies in Nigeria, Cyber Companies and Internet Providers, Pension Managers and Pension related Companies, Insurance Companies and Banks and other Financial Institutions.

The fund set up by NITDA is for creating a framework for the planning, research, development, standardization, application, coordination, monitoring, evaluation and regulation of Information Technology practices and activities in Nigeria.

LAND USE CHARGE

The Land Use Charge is an annual tax levied on landowners and occupiers of properties in Edo State, Nigeria. It’s a consolidation of several property-related taxes and levies under one single charge for ease of administration and collection, aimed at generating revenue for the state government.

The Land Use Charge incorporates the Ground Rent which is provided for under the Land Use Act; Tenement Rate which is provided for under the Local Government Law; and the Property Tax which is provided for under the Land Use Charge Law.

EXEMPTIONS FROM PROPERTY CHARGE.  

• Religious bodies: Properties owned and occupied by religious bodies and used exclusively for public worship or religious education.
• Public cemeteries and burial grounds: Excluding profit-oriented cemeteries and burial grounds.
• Non-profit educational institutions: Recognized and registered institutions or educational institutes certified by the Commissioner for Finance to be non-profit making.
• Public libraries: Properties used as public libraries.
• Properties specifically exempted by the Governor: Any property specifically exempted by the Governor of Edo State by notice published in the State Government Official Gazette.
• Palaces of recognized Obas and Chiefs: All palaces of recognized Obas and Chiefs in the State.
• Owner-occupied residential properties: Owner-occupied residential properties which is(1) 100 ft. by 100 ft. maximum in a Non-Choice area of an Urban setting (2) 100 ft. by 100 ft. in a Non-Choice area in a rural setting
• Pensioners: Properties owned and occupied by pensioners.
• Community Property which is meant solely for community meetings, activities and events.

PAYMENT

Property owners and occupiers are required to pay the LUC annually, usually by January 31st. Payment can be made online or through designated banks.

CONSUMPTION TAX

Consumption tax is a type of indirect tax. Indirect taxes are levied on goods and services rather than on income or profits. Here are some key characteristics of a consumption tax:

• Paid by consumers: Consumption tax is ultimately borne by the final consumer of a good or service. This is  usually applied at a single stage of the supply chain, typically at the point of sale
• Collected by businesses: Businesses collect consumption tax from consumers and remit it to the government. Section 5 of the law provides that ‘’A person owning, managing or controlling any business or supplying any goods or services chargeable under Section 3 of this Law (referred to in this Law as the “Collecting Agent”) shall collect for and on behalf of the State, the tax imposed by this Law based on the total amount charged or payable by the consumer in accordance with the provisions of Section 4 of this Law.
• Applied to specific goods and services: Consumption tax is typically applied to specific goods and services, such as luxury items, hotel stays, or restaurant meals.

The Edo State Consumption Tax Law is a legislation that regulates the imposition and collection of consumption tax in Edo State, Nigeria. This law is called the “Hotels and Event Centers Occupancy and Restaurant Consumption Law (2011) of Edo State” and is targeted at the hospitality industry to ensure that patrons of such outfits pay to Government a minimum tax of 5% of the total bill of the item or service consumed at these facilities by the customer.  Section 4 of the law stipulates that the rate of tax imposed shall be five per cent (5%) of the total bill issued to the consumer. This Tax applies to the following Hotel and restaurant services, Gaming and betting, Entertainment services, Telecommunication services, and Goods sold in hotels and restaurants

Section 7 of the law provides that within 30 days of the commencement of business, such business must register with the Board for purposes of payment of this tax.

For businesses that seek any contractual relationship with the State Government or any of its Ministries, Departments, Agencies, Parastatals or Local Government Council such businesses must provide evidence shall produce evidence of registration with the Board as a condition precedent.

PENALTIES

If a Collecting Agent fails to file a report and remit taxes collected within the time allowed by Section 8(2) of this Law, that Agent shall, in addition to interest payable under Section 12 of this Law, pay a penalty of ten per cent (10%) of the amount of tax due.

14. Any Director, Manager, Officer, Agent or Employee of the Collecting Agent who fails to comply with the provisions of this Law, shall be guilty of an offence and liable on conviction to a penalty of not more than Six (6) months imprisonment or a fine of Two Million Naira (N 2,000,000.00) or both depending on the size of business.

 WHAT IS TAX CLEARANCE CERTIFICATE

A tax Clearance Certificate is an official document issued by the tax authority to a Taxpayer certifying that the tax assessed on the income of the person for the three years immediately preceding the current year of assessment has been duly paid.

A Taxpayer can demand his Tax Clearance Certificate from the relevant tax authority and the certificate is expected to be issued to him within two (2) weeks of demand or the tax authority should give reasons for the denial, (Section 85 sub-section 1) A tax Clearance Certificate may not be issued to a person who has settled his tax liability but such taxes have not been remitted to the relevant tax authority (WHT and PAYE Tax).

CONCLUSION

Compliance with tax laws is not merely a legal obligation but a fundamental pillar of a functioning society. It ensures that public services, infrastructure, and essential amenities are adequately funded. By fulfilling their tax responsibilities, individuals contribute to the overall well-being of their communities.

Moreover, tax compliance helps to maintain a level playing field for businesses, preventing unfair competition and fostering a healthy economic environment. It also promotes transparency and accountability in government, ensuring that public funds are used effectively and efficiently.

In conclusion, tax compliance is a civic duty that benefits everyone. By adhering to tax laws, individuals can contribute to a more just, equitable, and prosperous society.