Doing Business in Nigeria – Tax System
By Barrister Jacques S. Boedels, 2002 - Armand, Boedels & Associés

FREE ACCESS REPORT

Part 3

TAX SYSTEM IN NIGERIA

TAX TERITORIALITY

Companies undertaking activities in Nigeria are liable to tax, except for exemptions given by law.

The deduction system is one of global benefit for companies resident in Nigeria or those which are controlled from Nigeria.

Non-resident companies are subject to taxes on income generated in Nigeria or of Nigerian origin. All income that cannot be linked to operations undertaken outside of Nigeria is considered as being of Nigerian origin. Nigerian tax law considers the determining factor to be the place either where directors or administrators normally meet to determine if the company is subject to Nigerian tax law.

LIST OF TAXES AND DUTIES LEVIED BY THE NIGERIAN AUTHORITIES

Taxes and duties are levied by:

-         The federal government

-         The government of individual federated states

-         The local governments

They are published in the Joint Tax Board (J.T.B).

DUTIES LEVIED BY THE FEDERAL GOVERNMENT

1)      Companies tax

2)      Payroll deductions

3)      Tax on oil profits

4)      Value added tax

5)      Education tax

6)       Tax on earnings

7)      Company stamp duty

8)      Individual income tax (I.R.RP), due for:

a.      Armed forces personnel

b.      Police personnel

c.      Abuja residents

d.      State diplomats

e.      Non residents

TAXES LEVIED BY THE FEDERATED STATE GOVERNMENTS

1)      I.R.P.P

a.      Pay As You Earn (PAYE),

b.      Direct taxes,

c.      Payroll deductions (for individuals only),

2)      Tax on earnings,

3)      Stamp duty on individuals´ acts,

4)      Taxes on gaming,

5)      Transport taxes,

6)      Tax on commercial premises to the amount of 10,000 Nairas the first year, and 5,000 Naira per year thereafter,

7)      Development contribution totalling 100 Nairas per year for everyone paying tax,

8)      Tax on street names in state capitals,

9)      Land tax in state capitals,

10)  Various market taxes when federated state finances are low.

TAXES LEVIED BY LOCAL GOVERNMENTS

1)      Local authorities licence,

2)      Land tax,

3)      Alcohol tax,

4)      Slaughter house tax,

5)      Tax on civil state acts,

6)      Street name tax,  

7)      Occupancy of public domain rights,

8)      Parking rights,

9)      Domestic animals tax,

10)  Vehicle tax,

11)  Livestock tax,

12)  Tax on shows and private roads,

13)  Radio/television licence fee,

14)  Parking fines,

15)  Household waste tax,

16)  Tax on billboards.

TAX RATES

Normal tax rates on companies according to CITA are 30%.

However, for companies who have a turnover less than 500,000 Nairas, and operating in the agricultural production sector, mining of solid minerals the tax rate falls to 20%

It is the same for companies whose turnover is less than 1,000,000 Nairas who operate in the manufacturing and product export sectors which are protected, benefiting from the same 20% tax rate.

It should be noted that this advantage is extended during a period of 5 years only.

Companies that benefit from pionner status enjoy, as a result of the allowances made by the Industrial Development Act (1990), fiscal exemption during their first three years of operation.

The rate of tax on oil profits (Petroleum Profits Tax) for companies undertaking their business as a Joint Venture (J.V.C.) and with a Risk Service Agreement is 65% of taxable income on their gross exports during their first five years of production. Thereafter the rate rises to 85%.

Lastly, the taxation rate of companies operating under Production Sharing Contracts (P.S.C) falls to 50%. (See section on oil taxation for further information on these principles).

COMPANIES TAX

According to the provisions of the Company Incomes Tax Act (CITA), companies liable to tax must register their financial declaration and their accounts within six months of closing their company´s year.

This deadline is extended to 18 months for companies that are newly incorporated or to six months after the end of their company´s year.

Companies that calculate and settle their tax within the required deadline benefit from a refund of 1% on the amount due as a sweetener.

Submitting statements after the deadline incurs a delay penalty of 2,500 Naira in the first month and 500 Naira per month thereafter. The 1% sweetener is also lost.

PAYMENT OF TAX

In other cases tax is payable within two months of notification of the administration´s calculation. It can be paid in 6 monthly instalments. Settlement after the deadline results in a penalty of 10% of the sum due and late payment interest at bank rates imposed from the moment it should have been paid.

Tax deductions are accorded to societies that have invested in factory construction and for agricultural sector business activities.

TAXATION OF DIVIDENDS, RENTS AND FEES

Net dividends received (that’s to say after deduction at source) are not liable to any new taxes.

Dividends, rents and fees emanating from a company whose headquarters are outside Nigeria and repatriated to Nigeria by an intermediary are exempt from companies tax.

INTEREST

Interest accrued on deposit accounts of a non-resident company are exempt from tax on the condition that they are repatriated to Nigeria by an agreed intermediary. The same is the case with deposit accounts of open foreign exchange in Nigeria.

DEDUCTIBLES

Nigerian law allows certain expenses to be deducted on the condition that they are "entirely, exclusively, necessarily and reasonably" linked to the fiscal period through the course of which they have been subjected to turn a profit.

The expenses are the following:

1)      Interest on loans,

2)      Rental of premises,

3)      Repairs and replacements linked to offices, factories, buildings etc used for the business activities of the company,

4)      Dubious and unrecoverable debt,

5)      Contributions to retirement and contingency funds,

6)      Foreign exchange losses,

7)      Prospecting and development expenses,

8)      Donations to accredited bodies.

The following are considered as non-deductible:

1)      Capital reimbursement,

2)      Any sum received as insurance or an indemnity title,

3)      Taxes on revenues and income settled in Nigeria or elsewhere in the world, except for provisions avoiding double taxation,

4)      Payment of pension plans to non accredited bodies,

5)      Depreciation,

6)      Appropriation of profits,

7)      Management costs not authorised by Nigerian authorities,

8)      All costs occured in Nigeria or abroad with the aim of obtaining management dues unless they have not previously been authorised by the Nigerian authorities.

CAPITAL GAINS

The taxation rate on capital gains on assets is 10%. This tax can be avoided if during the following twelve months the evidence of the capital gains are reinvested in similar assets.

FICTITIOUS TRANSACTIONS

The Federal Board of Internal Revenue and the Internal Revenue Boards of the different states have the most extensive powers to annul transactions they believe to be artificial or fictitious.

These authorities can equally declare that a person assumes the role of agent for tax purposes of any other person.

This procedure aims to allow tax to be collected from an individual who will be considered as the agent of another.

TAX DEDUCTION

The Educational Tax Decree (1993) implemented a tax levied on all companies resident in Nigeria of a sum of 2%.

It should be noted that this tax is deductible from the taxable base by the Petroleum Profits Tax.

TAX TREATIES

Nigeria had signed tax treaties which stayed in place until April 1979 with Denmark, the Gambia, Ghana, New Zealand, Norway, Sierra Leone, Sweden, the United Kingdom and the USA.

These tax treaties have been terminated.

Currently Nigeria has signed tax treaties with the following countries:

-         United Kingdom,

-         Holland,

-         France,

-         Belgium,

-         Pakistan,

-         Canada,

-         Romania.

These tax treaties aim to avoid double taxation of companies originating from each of the signatory countries.

DEDUCTION AT SOURCE

When a payment must undergo a deduction at source the debtor of the payment must deduct the deduction at source before discharging any sum to the creditor and report it to the tax authorities within 30 days.

The rate of deduction at source is 10.7% but can fall to 5%.

The settlement of payment at source avoids settlement of any other taxes.

The fact of not effecting payment at source or embezzling the amount leads to the application of a financial sanction equivalent to 200% of the amount due, in addition to interest at an applicable commercial market rate.

The settlement of payment at source is effected:

-         Either through the FBIR by bank transfer when it is due to the federal government (in the case of commercial companies)

-         Or through the State Board of Internal State Revenue (in the case of individuals)

VALUE ADDED TAX

VAT was introduced to Nigerian tax law in 1993 to replace sales tax and came into force on 1 January 1994.

VAT is 5%.

The following are excluded from VAT:

1)      Pharmaceutical and medical products,

2)      Basic foodstuffs,

3)      Educational books and materials,

4)      Newspapers and magazines,

5)      Baby products,

6)      Commercial vehicles and their spare parts,

7)      Medical services,

8)      Exports of any nature,

9)      Service exports,

10)  Services carried out by the equivalent of people´s banks.

The 1998 budget added the following articles:

-         Factories and imported machinery to be registered in the Export Processing Zones,

-         Factories, machinery and equipment acquired for the utilisation of gas, in the oil sector,

-         Tractors and agricultural materials,

-         Fertilizers,

-         Chemical products for agriculture,

-         Chemical water treatment products.

VAT declarations must be made every month. Default by the taxpayer leads to the application of a fine of 5,000 Nairas per month of delay and default of payment leads to the application of a penalty of 5% plus interest calculated at the rate of interest in force.

NIGERIAN REGULATIONS ON INCOME TAX

The PAYE (Pay as you earn) system was implemented following the Personal Income Tax Decree of 1993. Under Nigerian tax law employers collect tax by deducting it from the salary of employees. The administration charged with income tax is the Joint Tax Board (J.T.B.) and in each state there is a State Board of Internal Revenue.

The obligation to pay tax is determined for individuals by their residence.

According to the Personal Income Tax Decree (PITD) the criteria for residence is "a place available for an individual´s domestic use in Nigeria".

This system therefore excludes hotels or any form of temporary residence. In fact an individual will be considered as a resident of Nigeria if he or she has stayed for more than 183 days in the preceding 12 months.

Expatriates who have a permanent stay permit in Nigeria are liable for tax in Nigeria even if they spend less than 185 days there.

Employers must deduct the amount of PAYE income tax, understood in the broad sense, from the employee. However the following components are excluded:

1)      The reimbursement of all expenses incurred by the employee through his work on which he or she does not make any gain,

2)      Medical and dental expenses of the employee,

3)      Unemployment and retirement pension contributions,

4)      Travel costs to or from Nigeria,

5)      Any amount towards education or training of a child,

6)      The amount of housing allowance provided by the employer, that is 28% of the annual base salary,

                                                               i.     10,000 Nairas when the employee is a resident of Lagos or Abuja,

                                                             ii.     6,000 Nairas when the employee is resident of a state capital,

                                                            iii.     4,000 Nairas when the employee is resident of any other part of the federation.

7)      Transport costs totalling up to 2,436 Nairas per year,

8)      Loan interest on the principal residence,

9)      Retirement and forward planning contributions approved by the JTB,

10)  Indemnities,

11)  Other deductions.

Applicable income tax rates are the following:

The corresponding tax amounts must be transferred within 14 days following the month in which they were deducted.

At the end of each year the employee must present a declaration which shows the deductions made and the amount of taxes paid.

This document must be effected before 14 January of the following year.

The tax administration then establishes a tax clearance certificate which sums up the following information on the previous three years:

1)      Taxable income,

2)      Tax to settle,

3)      Tax settled,

4)      Balance finally due.

TAXATION OF EXPATRIATES

Income earned by expatriates working in Nigeria is liable to Nigerian tax conforming to the requirements of PIT Decree N° 104 of 1993, when:

1)      The employee resides in Nigeria a period of 183 days or more over the course of the preceding 12 months

2)      The employee resides in Nigeria and his activities are entirely carried out in Nigeria.