Navigating the complex world of taxes as a small business owner can be overwhelming.
This is why having a good understanding of what taxes you need to pay and how to understand each of them will give you a great foundation to better manage your taxes.
The tax obligations of a business include, but are not limited to, the following:
1. Company Income Tax
A taxable business is expected to register with the Federal Inland Revenue Service within six months of commencement of business. This registration is to pay Company Income Tax, which is charged as a percentage of the profit of an incorporated business during a particular accounting year.
Businesses with turnover of less than N25 million in the year of assessment are exempted from payment of Companies Income Tax. Other liabilities under the Companies Income Tax regime include:
- Tax rate of 20 per cent for medium-sized businesses with turnover between N25 million and N100 million
- Tax rate of 30 per cent for companies that earn over N100 million
- Minimum tax of 0.5 per cent of turnover for all companies (including non-resident companies), except small companies with less than N25 million turnover
- Non-resident companies earning income from advertising, marketing, social media platforms, etc. are subject to tax on profits realised in Nigeria
- Dividends and rental income received by real-estate investment companies are exempt from company income tax, provided 75 per cent of such income is redistributed within 12 months
- Penalty of N50,000 for failure to file within approved time for the first month of default and N25,000 for each subsequent month
- Early payment incentives: deduction of two per cent of tax payable by medium-sized businesses and one per cent of tax payable by large companies, for payments made up to 90 days before the due date
2. Personal Income Tax
This tax is collected by the Internal Revenue Service of the state where the business and/or its employee is domiciled.
It is a charge on the income of an individual, which an employer deducts at source from the gross income of the employee, for remittance to the appropriate tax authority. The liability of an employee is calculated based on Pay As You Earn (PAYE) or self-assessment by the payee.
Personal income tax falls due on January 31 of the next year.
3. Value Added Tax (VAT)
Except for exempted or zero-rated items, Value Added Tax (VAT) is a 7.5 per cent charge on imported services or goods and services produced in Nigeria. VAT is paid by the consumers of the goods or services, not by the business.
Items exempted from VAT include:
- Export goods and services
- Medical services
- Basic food items
- Baby products
- Flour, starch, fruits, live or raw meat, poultry, milk, nuts, roots, salt, vegetables
- Water
- Locally produced sanitary towels
There is a registration threshold of N25 million turnover in a calendar year, meaning that businesses with annual turnover of less than N25 million are exempted from registering for, and filing, VAT returns.
Other provisions relating to VAT include:
- Remittance of Value Added Tax on a cash basis, as the difference between the amount collected and the amount paid in the preceding month
- Penalty of N50,000 for failure to collect or keep proper records and/or remit VAT within approved time, for the first month of default and N25,000 for each subsequent month
A business must register for VAT filing, commencing from the date the first transaction is carried out, or first advertises products for sale, or the first day it delivers or receives a consignment of goods. To register for Value Added Tax, the company will submit an application letter, accompanied by relevant documents, at the nearest office of the Federal Inland Revenue Service.
4. Withholding Tax
This is collected on business transactions involving contracts. It is charged on dividends, commissions, professional fees, royalties, etc. Subject to the nature of the transaction, the applicable rates range between 2.5 and 10 per cent. It is administered by the Federal Inland Revenue Service and the relevant State Inland Revenue Service. Non-compliance attracts penalties.
5. Stamp Duties
Covering electronic documents, stamp duties are one-off charges of N50 on bank transfers of amounts of N10,000 and above. Transfers between owners’ accounts in the same bank are free of charge.
6. Capital Gains Tax
This tax is a levy on the profits made from the sale of assets such as buildings, foreign currencies, debts, copyrights, options, etc., and compensations for loss of employment that exceed N10 million. The charge is 10 per cent of the profit derived from the disposal of the asset. Exemptions are granted for the transfer of assets between related businesses in a restructuring exercise.
Action Steps
The better you understand your tax obligations as a business owner in Nigeria the more equipped you are to efficiently navigate the Nigerian tax system
Contact us to get guidance on how to avoid tax liabilities and optimise your tax strategy to minimise liabilities and maximise benefits.
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