The Company Income Tax Act (CITA) is the principal law that regulates the taxation of companies in Nigeria.
The Federal Inland Revenue Service (FIRS) is the only agency empowered to administer companies income tax(CIT) in Nigeria. Thus all CIT returns must go to FIRS.
Companies Income Tax (CIT) is a charge on the profits of companies registered in Nigeria. It also includes the tax on the profits of foreign companies carrying on any business in Nigeria. The CIT is paid by both private and public limited liability companies
Resident companies are liable to corporate income tax (CIT) on their worldwide income while non-residents are subject to CIT on their Nigeria-source income. Corporate income tax is based on taxable profit, derived from accounting profits adjusted for tax purposes.
Types of CIT Assessment
- Best of Judgment (BOJ): Here, the FIRS uses its best of judgment initiative if the tax payer does not have any reliable financial records or no returns were submitted to the tax authority.
- Self-Assessment: Here, the company is allowed to self estimate its tax liability and also pay by installment . Self-assessment of tax payable is provided for under section 53 of the Company Income Tax Act (CITA), 2011.
The Currency of Assessment
This makes provision for the currency of assessment of tax payable by a company as stated under section 54. Under this section, the Act provides that, notwithstanding anything to the contrary in any law, an income tax assessment under sections 52, 53 or 55 of this Act shall be made in the currency in which the transaction giving rise to the assessment was effected.
Company Income Tax Rates
The CIT is currently charged at the rate of 30% for companies having more than N100 Million Naira turnover. It is also 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).
The companies having less than N25 Million turnover are not liable to pay company income tax in line with the Finance Act 2019.
In respect of business profits, a non-resident company that has a fixed base or a permanent establishment (PE) in Nigeria is taxable on the profits attributable to that fixed base. As such, it is required to register for CIT and file its tax returns.
In ascertaining the profits under the CITA, there are certain deductions that are allowable. Section 24 of CITA fully encapsulates the deductions allowable in determining the taxable profits of the company. The Section 24 provides that “save where the provisions of subsection (2) or (3) of section 14 or 16 of this Act apply, for the purpose of ascertaining the profits or loss of any company of any period from any source chargeable with tax under this Act, there shall be deduction all expenses for that period by that company wholly, exclusive, necessarily and reasonable incurred in the production of those profits.”
Section 24 further includes the following categories of deductions:
(a) Any sum payable by way of interest on any money borrowed and employed as capital in acquiring the profits;
(b) Rent for that period, and premiums the liability for which was incurred during that period, in respect of land or building occupied for the purposes of acquiring accommodation occupied by employees of the company.
(c) In the case of any property-holding company
-expenses attributable to the maintenance of the property,
-directors’ remuneration, which shall not exceed N10,000 per annum in respect of each director, and the number of directors to be so remunerated shall in no case exceed three;
(d) Any outlay or expenses incurred during the year in respect of salary, wages, or other remuneration paid to the senior staff and executives. 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.
(e) Any expenses incurred for repair of premises, plant, machinery or fixtures employed in acquiring the profits.
(f) Bad debts incurred in the curse of a trade or business proved to have become bad during the period for which the profits are being ascertained.
(g) 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.
(i) in the case of profits from a trade or business, any expense or part thereof (i) the liability for which was incurred during that period wholly, exclusively, necessarily and reasonably for the purposes of such trade or business and which is not specifically referable to any other period or periods, or
(ii) the liability for which was incurred during any previous period wholly, exclusively, necessarily and reasonably for the purpose of such trade or business and which is specifically referable to the period of which the profits are being ascertained;
Section 25 and 25A of CITA also provide for deductions of donations made to fund, body or institutions in Nigeria for the purpose of ascertaining the profits. Section 26 of the Act permits a deduction for the purpose of research and development, provided such a deduction does not exceed 10% of the profit ascertained before any deductions.
Deductions Not Allowed
Section 27 addresses the deductions not allowed in ascertaining a company’s profits. The section provides as follows:
Notwithstanding any other provision of this Act, no deduction shall be allowed for the purpose of ascertaining the profits of any company in respect of-
- 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 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 benefit fund, society or scheme except as permitted by paragraph (g) of section 24 of this Act;
- The depreciation of any asset;
- Any sum reserved out of profits, except as permitted by paragraph (f) of section 24 or 25 of this 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;
- Any expense of any description incurred within or outside Nigeria for the purpose of earning management fee unless prior approval of an agreement giving rise to such management fee has been obtained from the Minister;
- Any expense whatsoever incurred within or outside Nigeria as management fee under any agreement entered into after the commencement of this section except to the extent as the Minister may allow;
- Any expense of any description incurred outside Nigeria for and on behalf of any company except of a nature and to the extent as the Board may consider allowable.
The taxable profit is arrived at after adding the balancing charge to the adjusted profit while subtracting the capital allowance, balancing allowance and loss relief. The relevant tax rate is applied on the Taxable Profit.
Taxable Profit =Adjusted Profit -Balancing Allowance+ Balancing Charge-Capital Allowance-Loss Relief
Computation of Adjusted Profit
Adjusted profit is computed after adding back, disallowed expenses and deducting allowable expenses and incomes exempted. The value derived from this computation is the adjusted profit and at this point, the education tax rate can also be deducted. The education tax rate is 2% of the adjusted profit.
Computation of Balancing Charge or Allowance
Balancing Charge or Allowance can only occur when an item of plant, property or equipment had been disposed of.
Balancing Charge = Disposal Proceeds – Tax Written Down Value
Where Disposal proceeds > Tax Written Down Value
If Disposal Proceeds < Tax Written down Value, the we have Balancing Allowance
Tax Written Down Value = Historical (Book) Value- Accumulated Capital Allowance
What is Loss Relief?
No tax is due to be paid by a company where loss is incurred except, in the case of minimum tax provision.
– Losses incurred in the preceding year of assessment in any trade or business is to be deducted from current year, adjusted to arrive at assessable profit provided that certain conditions are fulfilled such as:
(a) The aggregated deduction from assessable profit or income in respect of any such loss exceeds the amount of such loss;
(b) The deduction for any year of assessment does not exceed the assessable profits in which the loss was incurred;
– With effect from CITA Amendment in 2007, losses can now be carried forward indefinitely;
- Relief of losses is automatically granted to a company, the grant does not require a formal application;
- The loss from source A should not be relieved against profit from source B.
- Where an aggregated loss exceeds the actual loss incurred in business or trade, the law provides that the amount of loss to be relived should not exceed the actual loss incurred.
- Where a business has ceased operations, and there are still some unrelieved losses, such losses can no longer be carried forward as they are deemed to be terminal losses, and therefore deemed to be permanently lost.