Are You Ready for Companies’ Income Tax?

So, you just started a business and you’re making some dough… Now you’re thinking about incorporating the business so you can finally change your name on LinkedIn to Chairman/CEO DatFreshCompany, Director for Life. Calm down, Investor Funke.

With great power comes great responsibility, and as a law-abiding Nigerian that happens to own a company, one of those responsibilities will be an annual obligation to pay Companies’ Income Tax (CIT).

It makes sense for you to understand what your obligations under the tax laws will be before jumping right in. This way, you will not become part of the horde that will start sweating every time the FIRS mentions “enforcement”. Because they will. They will come and close your office sef.

Do you understand what the tax laws require of Companies in Nigeria? Is your business capable of discharging the tax obligations imposed on companies? Are you ready for Companies Income Tax? Here are some things you need to know.

Every Company in Nigeria must pay income tax

The Companies Income Tax Act is the primary law regulating Companies’ Income Tax (CIT) in Nigeria. It provides in Section 9 that tax will be payable on the profits of any company where that profit accrues in, is derived from, is brought into or received in Nigeria.

How much of a company’s income will be taxed? According to section 40(1) CITA, tax will be imposed at the rate of 30%.

The Finance Bill, which has been passed by the Senate, divides Companies into small companies, medium-sized companies and large companies.

You may be happy to know however that it exempts small companies from Companies Income Tax!

Medium-sized companies are also to be taxed at the rate of 20% instead of the usual 30%.

We wrote about the Finance Bill. Check it out!

The obligation is even greater on Nigerian companies

By the provisions of section 13(1) CITA, Nigerian companies have an even greater responsibility to pay taxes. Generally, taxes will only be imposed on profits that fall within any of the circumstances mentioned above.

For Nigerian companies though, the law is that all their profits are deemed to accrue in Nigeria, no matter where they were derived from and “whether or not they were brought into or received in Nigeria”.

This simply means that even if your shoe selling company found a customer, sold them shoes, received the money and buried it in Antarctica, it will still be liable to pay taxes on dat thing in Nigeria, as if you actually did everything right here in the motherland. I know right! Let us proceed…

How do you go about paying CIT?

An important part of paying CIT in Nigeria is the filing of tax returns. Section 55 of CITA makes it mandatory for every company to file a return every year. The tax return is expected to contain the information on the company’s tax affairs.

What exactly should the returns contain? By Section 55(1) CITA and the International Financial Reporting Standards (IFRS) adopted by the FIRS in January 2013, it should include the following:

• Self-assessment form
• Audited financial statement
• Capital allowance computations
• Schedule of Fixed Assets
• Evidence of payment of the taxes due

The Audited Financial Statement must be signed by two directors of the company. The company’s accounts must also be audited by External Auditors who are qualified members of a recognized professional body (usually ICAN).

As you must have noticed already, the task of filing tax returns is not beans. Most companies rely on tax professionals to help them organize their books, compute the correct taxes, to help them ascertain how they may lawfully reduce their tax burden, file their returns and answer any challenges from the FIRS.

How long do you have to file your CIT returns?

CITA stipulates the applicable periods for filing tax returns in section 55(2). These vary for existing companies and newly incorporated companies.

• For existing companies (those that have been in business for more than 18 months), returns must be filed within 6 months after the end of the company’s accounting year. This means if the company’s accounting year runs from January to December 2019, the returns must be filed before June 31, 2020.
• For newly incorporated companies, the returns must be filed within 18 months from the date of incorporation or 6 months from the end of the company’s first accounting period. So, if the company was incorporated in January 2019, it must file its returns no later than June 31, 2020 or if its accounting runs from January to December 2019, no later than June 31, 2020.

Conclusion

And that’s it, your primer on companies’ income tax in Nigeria. Remember, companies are not a status symbol. You should not rush into incorporating a company unless and until you fully understand what will be required of you.

If you are not entirely sure, reach out to a tax professional to help you better understand the tax implications of setting up a company. You may reach out to us too. Just hold your money as you’re doing the reaching out. We can’t shout.

Peace!

Are you interested in Tax and ready to Talk your Own? Do reach out to the TaxVille with your Tax Pieces – 4 pages max, on any tax-related matter!

Ilamosi nurses an avid interest in Tax regulation and policy. Recently called to the Nigerian Bar, she is a Lawyer, writer and keen researcher. She hopes to contribute to a more efficient tax system in Nigeria in the near future.