This article on business structure, corporate tax and tax incentives is a response to the requests from some entrepreneurs and business leaders that participated in a recent seminar I facilitated for some agricultural and manufacturing companies in Lagos. These participants are interested in fully complying with the tax laws, but are also interested in the approaches for optimising their business tax position without stepping into the realms of tax evasion (which is illegal).
The legal structure of a business or a business transaction has the potential to impact its tax exposure. Sole Traders, Sole proprietors and individuals in business partnerships are taxed under the Personal Income Tax Act (PITA), the same tax law that applies to employees working in a company. The tax rates are progressive as the tax rate increases with higher income. Personal income tax is paid to the tax authority in the individual’s state of residence. The tax is also applicable to foreigners who spend a cumulative period of more than 180 days in Nigeria.
Cooperative societies that are registered under the applicable law in Nigeria are also exempted from taxes on the income of the cooperative society.
Companies operating in Nigeria are expected to comply with several tax legislations. Several tax experts have canvassed against the multiplicity of taxes in Nigeria as it makes tax compliance a very strenuous task. This issue of multiplicity of taxes has had a significant impact on the ease of doing business metrics for Nigeria. Incorporated entities, except those in the upstream oil and gas sector, are exposed to the regular companies income tax (CIT) along with other taxes and levies. These other taxes and levies include the education tax, Withholding Tax (WHT), Value Added Tax (VAT), IT Levy, PAYE, Pension, National Housing Fund (NHF), NSITF, ECA, Group life/accident insurance, medical insurance, radio license and TV license.
CIT remains the primary tax legislation for all companies in Nigeria in addition to the Petroleum Profit Tax (PPT) for upstream oil companies. CIT is based on the Companies Income Tax Act (CITA) and is 30% of the assessable profit. Assessable profit is the taxable profit of a company after adjusting for items of income and expenditure that are not “allowable” for tax purposes. For tax purposes, expenses such as depreciation and amortisation charges are “disallowed” in addition to any other expenses that have not been proven by the taxpayer to be wholly, exclusively, necessarily and reasonably incurred for the purpose of the business or trade.
Companies are also entitled to claim some incentives under CITA. “Small businesses” (with an annual turnover of lower than N1 million) in the agriculture, manufacturing and wholly-export oriented businesses are to pay a special income tax of 20% (instead of 30%) in the first five years of commencing the business. I have argued that the definition of “small businesses” should be revised to “companies with turnover less than N100 million” and such companies should have a flat tax rate based on their turnover to reduce the complexity of the tax computations.
Dividends from small businesses are also to be exempted from tax in the first five years. Tax losses incurred by agricultural and manufacturing companies can be carried forward indefinitely until they can be utilised against taxable profits.
There is also the pioneer status legislation, which enables qualifying businesses or products or services to be exempted from corporate income taxes for a specified period, usually between three to five years. Dividends received by a pioneer company along with dividends received from a company subject to PPT, dividend received from small businesses in the manufacturing sectors within its first five years are all exempted from taxes.
Companies in the agricultural industries are granted a 30% tax concession for up to 5 years if they attain a minimum local raw materials utilisation of 80%.
Companies are also allowed to claim capital allowances arising from their investments in properties, plant and equipment as a relief to offset their taxes. The capital allowances to be relieved is a maximum of 66(2/3) % of the assessable profit. However, manufacturing companies are allowed to take full reliefs against their assessable profit. Also, for both agricultural and manufacturing companies, another 10% investment allowance relief is granted in the first year of purchase of plant and machinery used for agricultural production and manufacturing.
In instances where a company is reporting a taxable loss position, CITA requires that a “minimum tax” should be computed and paid. Businesses that are less than five years in operation, companies with a minimum imported capital of 25%, and businesses into agricultural trade or business are all exempted from the tax provision.
The interest income earned by financial institutions on loans granted for agricultural trade or business are exempted from income taxes if the moratorium period is not less than 18 months and the interest rate is not more than the base lending rate of the financial institution at the time the loan was granted. For loans issued for manufacturing goods for export, there must be evidence that 50% of the manufactured goods were exported.
Companies that incur expenditure on electricity, water, tarred road or telephone for the purpose of trade or business carried on by the company at a location which is at least 20 kilometres away from the ones provided by the government can enjoy certain investment tax reliefs for three years, starting from the year in which the capital expenditure was incurred.
As already explained above, there are several tax incentives and tax planning opportunities that companies can use legally to reduce their tax exposures. The validity and success of such tax optimisation schemes are dependent on the quality and consistency of evidential documentation, such as invoices, contracts, bank statements and historical accounting records. As the federal government of Nigeria focuses on tax revenues as a result of the declining oil revenues, tax agencies will increase tax audits and investigations of targeted companies. Hence, business leaders are encouraged to consciously improve their level of tax compliance by remediating any lapse that is identified in a tax health check review that is conducted by an experienced tax advisor.
In conclusion, businesses can legitimately optimize their tax exposures through the proper structuring of their businesses and business transactions. Such arrangements involve careful planning and are not to be done haphazardly. For ease of defending such positions during a tax audit, businesses must ensure that business transactions are clearly structured and properly documented. In the current age, any business that has a vision to be sustainable in any industry, tax compliance is not negotiable.
The content of this article is not exhaustive as it is only meant to generate further discussions amongst business leaders and their tax experts. Hence, do not act or refrain from acting solely based on the content of this article only. Feel free to engage me further on @WFOluyemi on this topic or related issues.