Income tax is payable on taxable income or profits generated by companies from their activities. There are situations where a company’s tax computation results in no tax liability. In such a situation, the company will be liable to tax based on minimum tax. Section 33 (1) of Companies Income Act, Cap C21, LFN 2004 states that “Notwithstanding any other provisions in this Act where in any year of assessment, the ascertainment of total assessable profits from all sources of a company results in a loss, or where a company’s ascertained total profit results in no tax payable or tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed by subsection (2) of this section.” By implication, Minimum tax applies to all companies in Nigeria, especially the small and medium enterprises (SMEs), who in any year of assessment have no taxable profit or whose tax payable is lower than minimum tax computed.
There have been many misconceptions and controversies trailing the introduction of the minimum tax in Nigeria in the recent past. Taxpayers and authorities have differed on the concept and application in practice. These include the use of various and different parameters applied in the determination of minimum tax payable by companies which include turnover of the company, gross profit, paid-up capital and net assets of the company. This approach was cumbersome and in most cases, time-consuming. Arguments stressed that this tax is paid from the equity (paid-up capital) and net assets of the company even when the company is running at a loss; the exemption granted to companies with imported equity of 25% and above did not allow for a level playground when compared with companies with locally sourced equity and more.
Before the amendments introduced by Finance Acts 2019 and 2020, subsection 2 of Section 33 of CITA Cap C21, LFN 2004 defined the basis for the computation of minimum tax in Nigeria as:
(2) For the purposes of subsection (1) of this section the minimum tax to be levied and paid shall- (a) if the turnover of the company is N500,000 or below and the company has been in business for at least four calendar years be‐
(i) 0.5 per cent of gross profit; or
(ii) 0.5 per cent of net assets; or
(iii) 0.25 per cent of paid‐up capital; or
(iv) 0.25 per cent of the turnover of the company for the year, whichever is higher; or
(b) if the turnover is higher than N500,000, be whatever is payable in paragraph (a) of this subsection plus such additional tax on the amount by which the turn‐over is more than N500,000 at a rate which shall be 50 per cent of the rate used in paragraph (a) (iv) of this subsection.
The federal government in light of these controversies have amended the minimum tax regulation in the Finance Acts 2019 and 2020. Section 14 of the Finance Act 2019 amended Section 33 of CITA to introduce a new basis for computing minimum tax, moving away from a combination of equity, net assets and revenue-based approach to a complete revenue based-model. In the amendment, the minimum tax is to be computed at a flat rate of 0.5% of gross turnover less franked investment income. The amendment also deleted the exemptions granted to companies with imported equity of 25% and above and introduced a minimum tax exemption for small companies with a gross turnover of less than N25,000,000.
Section 13 of Finance Act 2020 introduced a further amendment to Section 33 of CIT by providing a 50% reduction in minimum tax rate from 0.5% of gross turnover less franked investment income to 0.25%. This amendment is effective for the Years of Assessment (YOA) commencing from 1 January 2020 to 31 December 2021.
Companies that have no taxable profits for the 2020 year of assessment or whose tax on profits is below the minimum tax are expected to compute their minimum tax based on the amendments of the Finance Act 2020. This implies that companies that have filed their returns for the 2020 assessment year based on the 2019 financial accounting year may be expected to file an amended tax return where their minimum tax for this period is based on 0.5% of turnover. Also, companies that are in their first four calendar years of operation as well as companies engaged in agriculture business, or small companies are exempt from minimum tax. This is equally applicable to non-life insurance companies at 0.25% of the gross premium and to life insurance companies at 0.25% of gross income. Also exempted from the payment of minimum tax are small companies with annual turnover of below NGN25 million (twenty-five million naira),
Other points to note…
Foreign equity is no more a basis for exemption. Businesses with at least 25% foreign equity and indigenous companies have the same exposure to Minimum Tax.
Note that dormant companies are not exonerated from payment of minimum tax in Nigeria. Usually, it is assumed that dormant companies are exempted from the payment of taxes because they are not yet involved in any money-making activity. However, this assumption is not supported by any provision in the tax laws and the tax authorities are making every possible effort to ensure that every registered company in Nigeria is made to comply with tax legislation. It is highly recommended that owners of dormant companies in Nigeria should seek the assistance of registered tax practitioners to ascertain their tax exposures. This is because a company is only exempted from paying taxes in Nigeria in the event of cessation of business.
The Institute expects its members who hold themselves out as tax practitioners to assist in the drive to full compliance with extant tax laws in the country. This places a responsibility on the practitioners, not only to ensure that their clients are compliant but also, to help the companies to ensure that they comply with their company income tax responsibilities before the end of the extended deadline of 31 July 2021.
Secondly, tax practitioners should endeavour to avoid unethical practices as such practices might not go scot-free when eventually discovered.