Hello and welcome to another edition of 1st Fiduciary’s Governance and Compliance Digest.
Since the inception of the Digest, we have discussed a range of compliance and governance matters including compliance requirements embedded in the Companies and Allied Matters Act, 2020 (CAMA) for business organizations, the statutory and regulatory framework for free zone entities, the regulatory requirement of the Special Control Unit against Money Laundering (SCUML) for business and non-business organisations referred to as “Designated Non-Financial Institutions” (DNFIs) and the corporate governance regime in Nigeria (see here).
Today, we examine another compliance matter that constitutes a part of the peculiarities of carrying on business in Nigeria: Taxation and Tax Returns.
The Government is a major stakeholder in the businesses carried on by corporate and registered entities in Nigeria. In addition to providing the legislative framework and regulatory oversight, through its regulatory agencies, the Government requires sustainable sources of revenue to fund economic growth and development.
To raise revenues, Governments depends in part, on taxes. Corporate entities carrying on business within the country are required under Law to remit taxes imposed on them. These include Companies’ Income Tax, Personal Income Tax, Capital Gains Tax, Value-Added Tax, Education Tax, Technology Tax, Stamp Duties, and Withholding Tax.
Penalties are imposed, when there is failure to remit the assessed taxes and file the relevant returns as and when due to the Government agencies.
Nigeria’s tax administration system is multi-level and administered by the three tiers of Government – Federal, State and Local Government. Taxes payable to the Federal Government are assessed, collected and accounted for by the Federal Inland Revenue Service (FIRS), while those payable to the State Governments are administered by the State Boards of Internal Revenue (SBIRs) of the respective States of the Federation. Local Governments also administer rates and levies through their various councils.
Tax returns are reports prepared by a taxpayer (either a company or an individual), containing information on their business transactions and relevant attendant tax implications within a given period. Hence, it is not sufficient for business owners to simply register their businesses with the Corporate Affairs Commission (CAC): meticulous attention must be paid to relevant tax obligations that are payable on assessable profits and the rendering of returns to the relevant tax authority, as failure to comply attracts penalties and can result in dire financial implications.
The Companies Income Tax Act (CITA) serves as the principal legislation for the regulation of the taxation of Companies in Nigeria, hence the profits of registered Companies in Nigeria and foreign Companies carrying on business in Nigeria, are subject to Companies Income Tax (CIT). Furthermore, the Federal Inland Revenue Service (FIRS) bears the responsibility of administering and overseeing the income tax for Companies and the relevant tax returns due from the Companies lie to the FIRS.
Having established the foregoing, we discuss the matters that should be noted by newly registered and old businesses with respect to the CIT returns due to the FIRS.
1. CIT Returns Requirements for Going Concerns
Every Company is required to file returns with the FIRS including Companies that are exempted by the law from paying tax for any year of assessment.
This is backed up by Section 55 of the CITA which provides that “every company, including a company granted exemption from incorporation shall, whether or not a company is liable to pay tax under this Act for a year of assessment, with or without notice from the Service, file a self‐assessment return with the Service in the prescribed form at least once a year and such return…”. The “Service” in the quoted Section refers to the FIRS.
The Companies exempted from paying tax include:
- Companies with less than N25 million turnover (i.e., small Companies).
- Foreign Companies that only earned income, in a year of assessment, on which withholding tax is the final tax (Section 55 of CITA, as amended by Section 16 of the Finance Act, 2020).
- Companies engaged in agricultural business.
- Companies in the first four calendar years of business.
The Finance Act, 2020, however, completely exempts foreign Companies that only earned income, in a year of assessment, on which withholding tax is the final tax from filing a tax return in the manner prescribed for that given year of assessment.
- Timeline for Filing CIT Returns
- New Companies – within eighteen (18) months of incorporation or six (6) months of the accounting year end, whichever comes first.
- Old and existing Companies – within six (6) months of the accounting year end.
2. CIT Returns for Dormant Companies and Companies That Report Tax Loss
The assumption by business owners is that Dormant Companies are exempted from the payment of taxes and filing of returns to FIRS because they are yet to commence any money-making business activity. This assumption is, however, contrary to and not supported by any provision in the Finance Act, 2020.
Dormant Companies and Companies which report losses in a year of assessment are not exempted from the payment of minimum tax under the provisions of Finance Act, 2020.
Prior to the introduction of the Finance Act, 2019 and, subsequently, Finance Act, 2020, the following Companies were exempt from minimum tax in accordance with Section 33 (3) of the CITA:
- Companies engaged in agricultural business.
- Companies in the first four calendar years of business.
- Companies with imported equity of at least 25%.
The Finance Act, 2019 amended the referenced Section 33 (3)(b) as follows: “Companies with imported equity of at least 25%” was replaced with “Companies that earn gross turnover less than ₦25 million (hereinafter “small Companies”) in the relevant year of assessment”. The latter category was effectively added to the list of Companies exempted from paying minimum tax.
Minimum Tax:
Minimum tax is payable by Companies that have no taxable profits in a year of assessment or where the ascertained total profits of such company is below the minimum tax at a fixed rate of 0.5% of the gross turnover less franked investment income (Section 13 of the Finance Act, 2020).
Only small Companies, Companies engaged in agricultural business as defined under CITA and Companies in the first four calendar years of business are subject to minimum tax.
Notwithstanding the tax remittance exemption, the Companies mentioned above, and other non-exempted Companies, are obligated to file their tax returns with the FIRS within the specified timeline. A company is only exempted from paying taxes and filing tax returns in Nigeria after the cessation of business.
3. CIT Returns for Companies that have Ceased Business Operations
Where a company ceases its business operations, its assessable profits from the beginning of the accounting period to the date of cessation is subject to Companies Income Tax (CIT).
Section 29(4) of CITA, as amended by section 12 of the Finance Act, 2019, provides that “where a company permanently ceases to carry on a trade or business (or in the case of a company other than a Nigerian company, permanently ceases to carry on a trade or business in Nigeria) in an accounting period, its assessable profits therefrom shall be the amount of the profits from the beginning of the accounting period to the date of cessation and the tax thereof shall be payable within six months from the date of cessation.”
Essentially, such company is required by law to remit the taxes due on its profit and file its tax returns with the FIRS within six (6) months of cessation.
4. Penalties for Late Filing of CIT Returns
In line with the provisions of the CITA, failure to file CIT returns by the due date attracts a late filing penalty of ₦25,000 in the first month and ₦5,000 for every month that the default continues. Also, failure to pay CIT liabilities as and when due attracts a penalty of 10% of the tax due and interest at the prevailing Central Bank of Nigeria Monetary Policy Rate.
5.Tax Remittance and Returns Obligations of a Company
The tax obligations of a company are dependent on its size and the type of business it carries on. Further to being registered with the Corporate Affairs Commission (CAC), a Company’s Tax Identification Number (TIN) is automatically generated and added to the Certificate of Incorporation issued by CAC.
To facilitate and ensure compliance, however, the company is required to submit its incorporation documents with the FIRS to register and activate the TIN for tax remittance and returns purposes.
Some of the general tax obligations are:
- Annual CIT returns to the FIRS regardless of whether business has commenced or not. A Tax Clearance Certificate (TCC) will be issued by the FIRS as evidence of the company’s compliance.
- Registration with the FIRS for Value Added Tax (VAT). It is advised that this should be undertaken within six months of the incorporation of the company. Companies whose goods and services are exempted from VAT are not required to register for VAT or make VAT
- Monthly VAT returns, by the 21st day of each month, provided that the Company has an income of ₦25 million and above. The Finance Act, 2019 (the Act), however, exempts Companies that are dormant and registered after the commencement of the Act from the requirement to file the monthly VAT returns. Dormant Companies that registered with the FIRS before the commencement of the Act may be required to file nil returns.
- Monthly remittance of income taxes on behalf of the Company’s employees (Pay-As-You-Earn (PAYE)).
- Monthly remittance of Withholding Tax (WHT) etc.
For further discussion and assistance with filing any of your organization’s returns, as well as providing you with corporate administration services, please contact us below: