In Nigeria, all persons in employment – individuals who own a business, non-residents who derive income from Nigeria as well as companies that operate in the country – are liable to pay tax. Tax remittance will be a key aspect of your business compliance obligations and understanding the tax system in Nigeria and your state of residence will be important for the success of your business.
It is important for you to know that some taxes are payable to the federal government through the Federal Inland Revenue Service (FIRS), while others are through the state or local government.
Here is a list of taxes you should be aware of before you start your business.
Companies Income Tax (CIT)
Companies Income Tax (CIT) is a tax on the profits of incorporated entities in Nigeria. It also includes the tax on the profits of non-resident companies carrying on business in Nigeria. The tax is paid by public limited liability companies, registered ventures and partnerships.
CIT is administered and collected by the Federal Inland Revenue Service (FIRS) and contributes significantly to the revenue profile of the service.
In filing for CIT, audited financial statements are statutorily required. This requires the services of external auditors to prepare and/or certify the accounts to be submitted.
Stamp Duty Tax
Stamp duty is tax paid to the federal or state governments on documents such as conveyances on sale, bills of exchange, promissory notes, agreements, contracts or even documents such as letters and certificates of admission, instruments of apprenticeship, insurance policies, etc.
You will also be required to pay this tax when registering your company. The legal effect of a document which is duly stamped according to S.19 of the Stamp Duties Act is basically that it will be admissible as evidence in a court of Law.
The federal government has the sole authority to impose charge and collect stamp duties in respect of documents relating to matters between a company and an individual, group or body of individuals. While, the state government, on the other hand, has authority to collect stamp duty in respect of documents executed between individuals or persons at such rates imposed or agreed with the federal government.
This is tax chargeable on all companies registered in Nigeria from chargeable profits as contribution to the Education Tax Fund. All registered companies in Nigeria are required to pay a percentage of their assessable profit into an Education Tax Fund. This tax is charged at 2% of chargeable profits.
Personal Income Tax
This is taxed charged on incomes of persons (which covers individuals, sole proprietorships, communities and families). If you are going to start any type of business, you shall pay tax for each year of assessment of the aggregate amount from every source of your income for the year. This includes profits from your trade or business.
You will be required to register with the State Board Internal Revenue to obtain a Tax Identification Number (TIN) which will enable you remit this tax.
A TIN is an identification number for the person which is used by the Internal Revenue Service in the administration of Tax. A TIN must be furnished on returns, statement and other tax related documents.
Pay As You Earn (PAYE)
If you have staff working for you, they will be required to pay Personal Income Tax through the PAYE system. Under this system, you as the employer will deduct the prescribed tax from your workers’ monthly salaries and pay directly to the Internal Revenue Service through designated banks on behalf of the employee.
The State Board of Internal Revenue and FIRS collect PAYE.
Value Added Tax (VAT)
All small and big businesses that deal with taxable products or services in Nigeria have to pay VAT. It is a consumption tax payable on goods and services consumed by any person, whether government agencies, businesses or individuals. It can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is levied at the rate of 5%.
The VAT system is invoice based and not cash based.
VAT is primarily collected by the seller when any taxable item or service is sold. The seller then nets off the VAT and submits it to FIRS through a designated bank. The bank will immediately issue an e-ticket as evidence of payment.
To collect your original e-receipt, you will be required to present the e-ticket and bank teller as evidence of payment at the tax office.
Withholding Tax (WHT)
This is an advance and indirect source of taxation deducted at source from the invoices of the tax payer. Its main purpose is to capture as many tax payers that may have evaded tax into the tax net.
If your business or company supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. The purchaser is also obligated to obtain evidence of remittance in the form of a WHT credit note on behalf of a supplier.
A WHT credit note will include the following:
- Credit Number
- The name of the tax payer (Purchaser of your goods or services who deducted the tax and remitted on your behalf)
- The name of the beneficiary (Your company or business)
- The deal and nature of the transaction
WHT rates are usually between 5-10%, depending on the type of transaction. Also, the collecting authority for this tax is the FIRS or State Inland Revenue Service.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit obtained from the disposal or exchange of certain kinds of assets.
All companies registered in Nigeria that earn from the exchange or disposal of any form of assets whether in Nigeria or outside are liable to CGT.
CGT is 10% of the profits from sales of the qualifying assets.
Hotel Occupancy and Restaurants Consumption Tax
If you decide to go into the hotel or restaurant business or you operate an event centre, you should be aware of this tax. Any such establishment is expected to pay 5% tax on goods and services consumed by customers.
This tax is paid only to the state government.
It is advisable for you to hire a tax consultant/accountant who understands all the tax requirements to help you correctly prepare returns and calculate payments. This will save you the stress of dealing with tax authorities and paying huge sums in penalties which will may erode your business profit or run the risk of the tax authorities shutting down your business.