Two brothers were given an equal share of their father’s wealth as he approached his death. They both followed the footsteps of their farther and decided to engage in the art of buying and selling. They soon became successful in their individual endeavors doubling their investments within 2 years. However, as time went by one made more profit than the other despite trading in similar environments.
The younger brother, who hasn’t faired so well recently decided to inquire. He realized, he made pretty much the same turnover as his brother and spent just as much on operating expenses. They both used equity to finance their business and no debts yet his brother made more money than he did.
What he soon realized was that he had not put in so much emphasis in the past to how his taxes should be efficiently managed. Tax, which he always looked as one for the accountants to deal with, was difference between maximizing his earnings. For example, a man who pays tax of N100, 000 on a profit of N150, 000 fairs worse than a man who pays tax of N50, 000 on the same profit of N150, 000.
The Nigerian tax law provides several means by which one can efficiently manage tax.
When you sell an asset, reinvest it into the same class of asset
If your business own assets such as equipment, which it uses for its daily operations, it is possible that you may wish to sell them once the asset are no longer useful to you. In the Capital Gains Tax Act, any profit on disposal of an asset attracts a charge of 10%. However, if the proceeds of the asset sale are utilized to acquire another asset within the same class then tax payable can be deferred as long as the new asset is in use for the business.
Deduct Vat that you pay on your purchases from vat that you receive on your sales
Value Added Tax is paid on certain goods and services as mandated by law. However, for companies who are into selling goods and services, you are allowed to deduct the vat that people charge you for your purchases from those you receive from your invoices. For example, if you it cost you N10m to acquire materials that you need to produce furniture it is likely that you will be charged an extra 5% of the N10m (N500k) as Vat. Consequently, if you sell the furniture for N15m you will charge your supplier N750 vat. When you are remitting to the government you should deduct N500k that you paid from the N750k that you collected giving you a net remittance of N250k only. Most people end up paying the N750k denying them the opportunity of retrieving their cost.
Make sure you collect your withholding tax receipts
Withholding tax (WHT) is paid on contract for supplies, services, director fees, dividends, interest, etc. Whilst withholding tax on director fees and dividends is a final tax, it is an advance payment of tax for contracts on supplies and services as such should be deducted from your income tax. For example, during the year, your clients have deducted a total of N1m from your invoices as withholding tax. In that same year, your tax liabilities have been calculated to be N5m. Before you pay the tax liability of N5m you SHOULD deduct the N1m that had been deducted from your invoices during the year. This is because the N1m is seen as an advance payment of your tax and is kept as a credit for you. But to enjoy this credit you must obtain a WHT credit note from your client. Your client having deducted the money from your invoice MUST provide you with that credit note (after remitting the deduction on your behalf to the FIRS) before you can deduct the N1m
Invest in industries that the government wishes to promote??
The Nigerian Government as a matter of policy usually have certain sectors of the economy which they want people to invest in. To get people to invest in these sectors government usually gives certain incentives. One of such incentive is a Pioneer Status. If a company is given pioneer status then they are exempted from paying income tax for a minimum period of 3years and a maximum of 5 years. So they enjoy free tax status you may have to invest in pioneer industries. Dividends paid out of profits during the pioneer period are also exempted from taxes.
Other tax efficient means of boosting profits are investing in businesses that are wholly export oriented. Donation Money to Organizations listed in schedule 5 of the Company Income Tax Act. Applying for Capital Allowance Certificate to enable you claim capital allowances on the cost of your assets. Ensuring you obtain a certificate of capital importation whenever you borrow money from foreign banks or obtain foreign equity investments. Whilst not tax related it ensures that you purchase dollars at CBN rates should you decide to repatriate.
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