It is possible that you have a business or own a company and you pay taxes regularly on its profits. It is also possible that you believe that the year your business or company makes losses as opposed to profits, you would not be required to pay any taxes, since there is no profit that taxes can be applied to. It may interest you to know that the law is out to get you and minimum tax is the solution of the tax authorities for how you will still pay taxes even when you have no profit.
Minimum tax applies where a company in Nigeria has been in business for at least four years and in a particular year:
- The total taxable profits of the company from all sources results in a loss: or
- The total profits produces no tax payable; or
- The total profits produces tax payable that is less than the minimum tax.
Oil and Gas Ltd. has approached Taxville to know how to calculate its minimum tax given its level of profit and losses. Ibrodeen of Taxville tells M.D StarDo that the minimum tax can be calculated in two ways depending on the total income of the company for the year.
According to him, where
the total income of the company for the year is
N500,000 or below. The minimum tax will be whichever is highest out
of (i) 0.5% of gross profit of the
company, (ii) 0.5% of the net assets
of the company, (iii) 0.25% of paid-up capital
of the company; or (iv) 0.25% of the company’s revenue for the year.
He added that if the
total income is above
N500,000, the minimum
tax payable will be the highest of the four rates listed above plus 0.125
percent of the total income that is in excess of N500,000.
M.D StarDo was in severe pains as he realized that the minimum tax is required to be paid out of things that are best left untouched, so that the company will grow. For instance, net assets primarily comprise of equity capital and retained earnings. Equity capital is the amount contributed by people to Oil and Gas Ltd. so that they can become owners/ shareholders. It is the capital at the foundation of the company’s growth. Retained earnings is the profit of the Oil and Gas Ltd. that the board did not distribute to the shareholders but that they left in the business to help it grow. Paid up capital is also the money actually injected into the Oil and Gas Ltd. by shareholders. He was not happy that in the name of collecting taxes, Oil and Gas Ltd. will have to pay taxes on these special monies which should be instead utilized to develop the business.
Enny Money of TaxVille understood his concerns and added that it is also possible that because of accounting rules which provide for “asset revaluation and fair valuation” or investment in subsidiaries, the net assets of a company may appear more than they actually are, causing companies to pay increased minimum taxes that can run into millions of naira.
She however noted that minimum tax is primarily an anti-avoidance provision so that people who intentionally and strategically manipulate their companies profits thinking that they can escape paying any taxes would be in for a shock.
Ibrodeen also made MD StarDo realize that some companies are actually exempt from minimum tax in the law’s way of making them grow. These are companies that have been in business for not more than four years, companies in agricultural trade or business and companies that have at least 25% of imported equity capital.
Mr. Shaku and Mr. Legwork also contacted TaxVille to inquire whether as individuals, they are required to pay minimum tax. They were informed that where they have no taxable income because of large personal reliefs or where their taxable income produces tax payable that is lower than minimum tax, the law requires that they pay minimum tax at a rate of 1% of their total income. The total income here means their total pay before deducting reliefs but after adding other allowances.
Now you know that minimum tax applies to you as an individual, or to your company even where no profit is made. Isn’t it time to gbe bodi e and pay your taxes before the taxman gets you?
Ibrahim Olasunkanmi Aderibigbe just concluded his degree programme at the Obafemi Awolowo University, Ile Ife Nigeria. He studied Law at the University and developed interest in the areas of Taxation and Corporate Law during his fourth and final years at school. While being an undergraduate student, he participated in different Tax events and other events that cut across corporate practice and finance like the Ife Accounting Summits, ACCA Summit etc. He was awarded Second Runner-up of the Olaniran Quadri Memorial Essay Competition in January 2019. Ibrodeen as he is widely known is a young, versatile and hardworking tax enthusiast.