The Companies Income Tax Act (CITA) 2004 (as amended) provides that companies income tax shall be imposed on the profits of a company derived from trade, rent or premium arising from a right to use property, dividends, interest, royalties, discounts, charges, fees, dues etc. which were accrued in, derived from, brought into or received in Nigeria and are not subject to capital gains tax, petroleum profit tax and personal income tax.
To promote and encourage compliance by companies, the Act as amended by FA 2019 mandates every company to have, and display a Tax Identification Number (TIN) which is to be shown on documents evidencing transactions with other individuals and companies as well as correspondences and documents submitted to the revenue authorities and government ministries, departments and agencies.
Companies incorporated in Nigeria are required to pay companies income tax on their worldwide income while non-resident companies are to remit tax on profits from their Nigerian operations. The CIT is currently charged at the rate of 30% for companies having more than N100 Million Naira turnover, and charged at the rate of 20% for companies with a turnover between N25 Million and N100 Million. The tax is assessed on a preceding year basis (i.e. tax is charged on profits for the accounting year ending in the year preceding assessment). Companies having less than N25 Million turnover are not liable to pay company income tax in line with the Finance Act 2019.
2.0. Allowable Deductions Under CITA
Companies are allowed to deduct costs that were wholly, exclusively, necessarily and reasonably incurred in the production of profits to arrive at its chargeable profit. These deductions include but are not limited to the following:
• interest on loans borrowed and used as capital for the business;
• rent for that period, and premiums, the liability for which was incurred during that period, in respect of land or building occupied to acquire the profits, subject, in the case of residential accommodation occupied by employees of the company, to a maximum of 100% of the basic salary of employees;
• any outlay or expenses incurred during the year in respect of‐
(i) salary, wages or other remuneration paid to the senior staff and executives;
(ii) cost to the company of any benefit or allowance provided for the senior staff and executives, which shall not exceed the limit of the amount prescribed by the collective agreement between the company and the employees and approved by the Federal Ministry of Employment, Labour and Productivity, and the Productivity, Prices and Income Board, as the case may be;
• bad debts incurred in the course of a trade or business subject to the provisions of the law;
• any contribution to a pension, provident or other retirement benefits fund, society or scheme approved by the Joint Tax Board under the powers conferred upon it by paragraph (g) of section 85 of the Personal Income Tax Act, subject to the provisions of the Fourth Schedule to the Act and to any conditions imposed by that Board; and any contribution other than a penalty made under the provisions of any enactment establishing a national provident fund or other retirement benefits scheme for employees throughout Nigeria;
• in the case of the Nigerian Railway Corporation, such deductions are allowed under the provisions of the Authorised Deductions (Nigerian Railway Corporation) Rules;
• companies and other organisations engaged in research and development activities for commercialisation shall be allowed 20% investment tax credit on their qualifying expenditure for that purpose;
• Dividends or mandatory distributions made by a real estate investment company duly approved by the Securities and Exchange Commission;
• Compensating payments that qualify as interest in a regulated securities lending transaction.
3.0. Expenses that are not Deductible
• capital repaid or withdrawn and any expenditure of a capital nature;
• any sum recoverable under an insurance or contract of indemnity;
• taxes on income or profits levied in Nigeria or elsewhere, other than the tax levied outside Nigeria on profits which are also chargeable to tax in Nigeria where relief for the double taxation of those profits may not be given under any other provision of this Act;
• any payment to a savings, widows and orphans, pension, provident or other retirement benefits fund, society or scheme except as permitted by paragraph (g) of section 24 of the Act;
• the depreciation of any asset;
• any sum reserved out of profits, except as permitted by paragraph (f) of section 24 or 25 of the Act or as may be estimated to the satisfaction of the Board, pending the determination of the amount, to represent the amount of any expense deductible under the provisions of that section, the liability for which was irrevocably incurred during the period for which the income is being ascertained;
• related parties’ expenses which are inconsistent with the Transfer Pricing Regulations;
• expenses incurred in deriving tax-exempt income and any allowable deduction under the Capital Gains Tax Act;
• compensating payment to a lender in a regulated securities exchange transaction;
• compensating payment which qualifies as interest made by an agent under a regulated securities exchange transaction;
• any penalty prescribed by a law made by the National or State House of Assembly;
• tax or penalty borne by a company on behalf of another.
4.0. Practical Implications
In practice, expenses incurred in setting up a company are not deductible because they cannot be wholly classified as being incurred solely in the course of making profits for the period for which tax is payable. Also, aside from the deductible expenses, capital allowance is granted to companies on qualifying assets at varying rates. It is calculated on a straight-line basis. The Finance Act 2019 included sums paid as penalties under an Act of the National Assembly as a non-deductible expense while the Finance Act 2020 included sums paid as penalties under a law made by a State House of Assembly.
The essence of taxation is not to stifle business growth. An efficient tax system ensures business continuity while also improving and generating revenue for the government. In Nigeria, the government has consistently allowed tax laws to evolve with the changing times thereby creating an enabling environment for businesses to thrive.