All businesses which operate in and derive income from Nigeria are liable to pay tax. The Nigerian tax system operates a self-assessment regime which allows taxpayers to assess, pay and file tax returns as prescribed in the extant tax laws.
Taxation in Nigeria is based on the three tiers of government as follows:
- The Federal Government through the Federal Inland Revenue Service (FIRS) has jurisdiction over Companies Income Tax, Tertiary Education Tax, Personal Income Tax for non-residents, Capital Gains Tax (on capital gains made by companies), Value Added Tax, Petroleum Profits Tax, Stamp Duties payable on transactions involving corporate bodies.
- The States and the Federal Capital Territory have responsibility for collecting taxes payable by individuals resident in their territories. These include Personal Income Tax, Capital Gains Tax and Stamp Duties on instruments executed by individuals.
- The Local Governments are responsible for miscellaneous taxes, levies and rates, such as tenement rates.
The Nigerian Tax Legislation
Nigeria has a body of laws that provide for the levying of taxes and tax administration in the country.
The following are the existing tax legislation in Nigeria, as at 2016:
- Associated Gas Re-Injection Act
- Capital Gains Tax Act
- Casino Act
- Companies Income Tax Act
- Deep Offshore and Inland Basin Production Sharing Contracts Act
- Federal Inland Revenue Service (Establishment) Act
- Income Tax (Authorised Communications) Act
- Industrial Development (Income Tax Relief) Act
- Industrial Inspectorate Act
- National Information Technology Development Act
- Nigerian Export Processing Zones Act
- Nigeria LNG (Fiscal Incentive Guarantees and Assurances) Act
- Oil and Gas Export Free Zones Act
- Personal Income Tax Act
- Petroleum Profits Tax Act
- Stamp Duties Act
- Tertiary Education Trust Fund Act
- Taxes and Levies (Approved List for Collection) Act
- Value Added Tax Act
Reviews, amendments and modifications to tax legislations are continuous, evolving with global best practices and in keeping with the local socio-economic realities. The review and amendment of tax legislation is in keeping with the formal tax amendment process as provided for in the Nigerian constitution.
Companies Income Tax (CIT)
This is a tax chargeable on all resident and non-resident companies (other than those engaged in petroleum operations) incorporated in Nigeria. Also known as corporate tax, the CIT rate is 30% of the profit earned in the year preceding assessment.
Resident companies are liable to CIT on their worldwide income (profits accruing in, derived from, brought into, or received in Nigeria) while non-residents are subject to CIT on the income derived from their Nigerian operations. A non-resident company with a fixed base in Nigeria is taxable on the profits attributable to that fixed based. Any WHT deducted at source from its Nigeria-source income is available as offset against the CIT liability.
Stamp Duties are basically taxes paid to the Federal or State Government on documents ( also known as instruments for the purpose of the Stamp Duties Act) such as Conveyances on Sale, Bills of Exchange, Promissory notes, Agreements, Contracts or even documents such as Letters and Certificates of Admission, Instruments of Apprenticeship, Insurance Policies etc. The payment of Stamp Duties is backed by legislation, the law being the Stamp Duties Act 1939 (as amended by numerous Acts and various resolutions and contained in Vol 22 Cap 411 LFN 1990). It also provides a list of documents in its Schedule and the duty payable on each of them.
Personal Income Tax (PIT)
The Personal Income Tax is charged on the income of individuals, employees, partnerships and incorporated trustees on the basis of residency and payable to the State Government. The Act requires an employer to deduct and remit its employee income tax under the Pay-As-You-Earn (PAYE) scheme. As such, the employer is required to register with the respective State Board of Internal Revenue (SBIR) to which each employee’s taxes are payable.
Personal income tax rate is applied on a graduated scale on taxable annual income. A Consolidated Relief Allowance shall be granted at a flat rate of N200,000 plus 20% of gross income subject to a minimum tax of 1% of gross income whichever is higher.
Petroleum Profit Tax
Petroleum Profit Tax is levied on the income of companies engaged in upstream petroleum operations in lieu of CIT. The rates vary as follows:
- 50% for petroleum operations under Production Sharing Contracts (PSC) with the Nigerian National Petroleum Corporation (NNPC).
- 65.75% for non-PSC operations, including joint ventures (JVs), in the first five years during which the company has not fully amortised all pre-production capitalised expenditure.
- 85% for non-PSC operations after the first five years.
Tertiary Education Tax
All resident companies are required to contribute 2% of their assessable profits to the Tertiary Education Fund. This tax is usually filed alongside the relevant tax return (PPT or CIT).For companies subject to Petroleum Profit Tax,Tertiary Education Tax is treated as an allowable deduction.
Non-resident companies and unincorporated entities are exempt from Tertiary Education Tax.
VAT is a consumption tax charged at 5% on the supply of taxable goods and services. All taxable persons are expected to obtain a VAT registration certificate, and display their Tax Identification (TIN) on all invoices. Oil and gas companies and government agencies are required to remit VAT on their purchases directly to the FIRS rather than pay it over to their vendors. A non-resident company carrying on business in Nigeria only needs to register for VAT using the address of its local counter-party and include the tax on its invoice. A Nigerian company is expected to remit the VAT directly to the FIRS rather than pay it over to a non-resident company.
Capital Gains Act
This is a 10% tax imposed on capital gains arising from a sale, exchange or other disposal of properties known as chargeable assets. Payable by corporate entities (including pioneer companies) and individuals, this tax is jointly administered by the FIRS and State Internal Revenue Services.
This is an advance payment of income tax which is made on account of the ultimate income tax liability of the taxpayers (individuals and companies). Withholding tax accruing from payments to companies is remitted to FIRS while payments from individuals should be remitted to SBIRs. The under-listed WHT rates are applicable to all resident and non-resident companies and individuals.
Tax Registration Process
The first step to paying taxes for businesses in Nigeria is the registration of such a business. A free Taxpayer Identification Number (TIN) is automatically generated after registering the business, and this enables the business to start paying taxes.
- The TIN is been generated for all registered companies and enterprises. For new business owners, the TIN is generated automatically after incorporating the business.
- Registered businesses that have not obtained or have forgotten their TIN may visit the FIRS TIN Verification System to search for their TIN using their CAC Registration Number or Registered Phone Number. The corresponding business name and the assigned TIN and Tax Office will be displayed.
- Register to file and remit Value Added Tax (VAT) and Withholding Tax (WHT) at the nearest FIRS office. (See the list of FIRS offices in the link below). Note that VAT and WHT returns must be filed not later than the 21st day of the month following the month of transactions.
- File your Companies Income Tax (CIT) returns not later than six months after the end of the accounting year or 18 months after the commencement of business, whichever comes first.
- Register as a corporate entity with the Corporate Affairs Commission (CAC) See Getting Started.
Tax Clearance Certificate
A Tax Clearance Certificate (TCC) is a document that certifies that a company or individual has settled the income taxes due for the three preceding years of assessment. A TCC is a prerequisite for official transactions conducted by a company in the public sector, such as when tendering for government contracts, when remitting foreign exchange through the banks, etc.
Company TCCs are issued by the FIRS; while individual TCCs are issued by the relevant State Board Internal Revenue (SBIR). FIRS and Lagos SBIR issues TCC online (See link below).
Companies need to apply to the relevant FIRS tax office to obtain a TCC.
Investment Incentives in Nigeria
Nigeria has various tax incentives designed to encourage investment in key sectors of the economy and reduce the cost of doing business. Tax based incentives are covered under different laws and in different forms e.g. reliefs, credits, exemptions, allowances, breaks/holidays, drawbacks, etc. Government also provides fiscal concessions through the annual fiscal policy.
In order to facilitate access to these incentives, the Nigerian Investment Promotion Commission (NIPC) in collaboration with the Federal Inland Revenue Services (FIRS) worked with relevant Government Agencies to compile the fiscal incentives and sector-wide fiscal concessions duly approved by the Federal Government and supported by legal instruments. The first edition is based on the 2016 Fiscal Policy and covers 5 sectors, which was published in October 2017.
Under Industrial Development (Income Tax) Relieve Act (IDITRA), companies engaged in industries/products approved as ‘pioneer industries/products’ shall be
(a) granted income tax relief for a period of three years, which can be extended for a period of one year and thereafter another one year, or for one period of two years (Section 10(2)(a)(b) IDITRA);
(b) exempted from paying tax on dividends paid by the pioneer company during the pioneer period to the extent that they are paid out of income exempted from tax (Section 17(3) IDITRA); and
(c) any loss incurred during the tax relief period also deemed to be incurred on the first day following the expiration of the tax relief period and can be carried forward to offset profits after the tax-exempt period.
In addition to this, dividends paid out of pioneer profits are not subject to withholding tax.The updated list of industries /products which qualify for pioneer status can be obtained from the NIPC website www.nipc.gov.ng
What Investors Think
Investors are positive about the tax incentives being offered by the government. However, they believe the implementation of the tax policy can be improved to ensure that more people and businesses pay their taxes.