Hi everyone. I am Barr. Amaka Obizolu, the principal partner of Amaka Obizolu & Co., today we continue our discussion on Nigerian Business Law and Tax System.
Taxation in Nigeria
If you earn an income in Nigeria whether as an individual or a business, its expected that you remit a given amount of your earnings as tax to the government.
The question here is who is a taxable person, and the answer depends on the type of tax exposed to.
Paying your tax as an individual or a company is non-negotiable because tax funds serves as one of the ways the government develops the nation.
Interestingly, over 90% of business owners in the country do not pay tax. However, this is changing in states like Lagos State where the State Government is coming down hard on tax defaulters through its Tax agency, Lagos Island Revenue Services (LIRS).
There are different types of taxes and several laws govern them. Some of these taxes are paid to the federal government through Federal Inland Revenue Services while some are paid to the State Government.
Example of federal government taxes includes – VAT, Company Income Tax, Education tax etc.
State Government Taxes includes – Pay as you earn, Direct tax (directors tax)
Local Government Taxes includes – land use charge and tenements rate.
In situation where you have issues relating to tax, there are departments that you can contact to lay your complaint e.g. a Body of Appeal Commission which is the court of first instance that handles tax appeal cases.
Below are a few major taxes companies are exposed to:
- Capital Gains tax – This is 10% imposed on capital gains arising from a sale, exchange or other dispositions of properties known as chargeable assets.
- Companies income tax – This tax is chargeable on all companies except those engaged in petroleum operation as defined under the PPTA registered in Nigeria, and its been charged at 3% of the taxable profit.
Note that what is deemed to be gained is a definition of law as law decides what seems to be gain, in which case a tax payer will be privileged to have some waived during calculation, and the cause of such waiving is known as a Notional Cost. - Education tax – It is chargeable at the rate of 2% and to be contributed to the education tax fund.
- Personal income tax – This is payable by only individuals and registered businesses and partnership. At this juncture, please bear in mind business tax other than company tax are paid in personal capacity and not otherwise.
- Petroleum tax – This is charged at 85% of the income for companies engaged in petroleum operation.
- Stamp duties – it is chargeable according to scale fixed by the joint tax board.
- VAT – This tax is payable by the consumer at 5% of the net value added based on eligible transactions once consumed.
Exemptions to payment on VAT includes: Educational books, activities of Religious organizations/Incorporated trustees.
The sales tax or VAT is usually paid to the state’s department of revenue. However, if you have a business, you should find out which products are sales tax eligible so that you don’t have to over pay by paying VAT on the wrong items.
As a business, here is how you can calculate your VAT. You can either use the invoice-based method and for the invoice-based method, sales transactions are taxed with the customer been informed of the VAT on the transaction. This is the most widely employed method and it is also expected that all registered businesses possess a VAT registration certificate with the VAT registration number boldly displayed on all invoice.
As a consumer, you can always look out for the VAT registration number to ensure that the VAT being charged is legal.
Employment taxes – if you run or own a business, it is expected that a certain amount of your company’s tax responsibility fall on your employees and you’re expected to file these when submitting your tax returns to the state government.
Have you heard of the word “PIONEER STATUS IN TAX SYSTEM”? It is one of the fiscal incentives and reliefs designed to boost industrial agricultural productions. This is applicable to public company alone whereby they enjoy tax holidays with respect to company income tax. This exemption is granted for a period of 3 years in the first instance and may be extended for a further period of 2 years.
A business desirous of this benefit shall make an application through Nigeria Investment Promotion Council (NIPC) and Ministry of Industry.
However, on the effect of non-payment of Company Income Tax – section 66 of the Act confers on the FIRS the power to seize and sell defaulting tax payer’s goods, chattels as well as their premises in extreme cases in other to recover the amount of tax owed by such tax payers.
It is no longer news that small business owners are expected to pay income taxes like big business owners. As a matter of fact, there are cases where one may even pay additional taxes that are specifically associated with small business operations. But ask any entrepreneur and you’ll find out that most of them don’t want to have anything to do with the tax man.
- Read further: Barr. Amaka discusses Nigeria’s Business Laws and Tax System: What every Business Owner should Know: Part 4
And the interesting thing about this is that the feeling is not limited to Nigerian entrepreneurs, it is the same around the world. However, it is important to know that there are legitimate ways to avoid tax issues as a small business owner and I have decided to bring them to your knowledge.
Here are audit tips every small business owner should know to avoid tax issues
Be accurate in your record.
Your chances of getting audited will be minimized if you keep all your business income and expenses in a business bank account and retain your business expense receipts.
This will not only make it easy for you to prepare your tax return, it will also make it possible for you to have everything you need to back-up your return just in case in you’re is getting audited.
But when you try to inflate your expenses or deflate your income, you’re likely to get a visit from IRS.
Try not report a loss every year.
It has been observed that small businesses that usually report loss year in-year out are often targeted for a tax audit.
And apart from being targeted for a tax audit, your business might be determined by the IRS as a hobby and disallow all your business expense deductions.
Don’t claim a home office if you cannot get a deduction, legitimately.
It is true that when it comes to tax audit, home offices are badly reputed as red flags. Nevertheless, things seem to be changing these days, because you can safely take a home office deduction if your space legitimately qualifies.
And with regards to the requirement, the home office must be a separate room that’s used exclusively for business. Using a desk in the corner of the living room and calling it a home office won’t work.
Be that as it may, there are chances that your home office can still create an audit risk if you have large expenses for maintenance or utilities.
It is also possible for your business to be audited if you claim a home office whereas you have an office space elsewhere.
Don’t pay overly high salaries to employees who are shareholders.
This is not saying that reasonable salaries should not be paid. It is simply saying that paying your executives a high salary can be perceived as a way to minimize corporate profits and therefore pay lower taxes.
When this is seen as the case, chances are your business will be audited because unusually high salaries may open your tax return to scrutiny.
Therefore, it is expected of you to know what a reasonable salary range is for your industry and try to operate within the range.
Pay your estimated small business taxes.
Know what you’re expected to pay and make plans to do so because failing to make these payments can result in penalties as well as increasing your chances for an audit.
If your records are good and you’re quite honest in your tax return then there’s no need for you to fear a tax audit.
However, it is advisable to seek tax advice from an accountant if you’re unsure of the income you should report and the deductions you’re allowed to take.
In view of the above, I hereby come to the end of this presentation.
Thank you all.
Presented by:
Amaka C. Obizolu Mrs. (LL.B, BL)
+234 803 5404 780