Taxes are statutory obligations of every citizen and businesses in a country. It is thus a major factor in determining how much income you keep to yourself either as a business or as an individual.
For example, a man who pays tax of N1000 on a profit of N1,500 fares worse than a man who pays tax of N500 on the same profit of N1,500. How then is this possible you may ask?
The Nigerian tax law provides several means by which one can avoid paying tax or at least reduce paying excessively. This is not to be confused with tax evasion, which is considered illegal in Nigeria. Tax Evasion refers to a deliberate act on the part of a tax payer not to pay tax.
However, tax avoidance is a legitimate way of avoiding tax by exploiting loopholes and provisions in the tax code that allow you to reduce the amount of tax that you pay on your income.
Without much ado, let us look at various forms of loopholes and provisions one can use to avoid tax.
Donate Money to Organizations listed in schedule 5 of CITA
It is quite often that companies donate money to certain organizations and NGO’s. This is considered a good cause and a sign of corporate responsibility. However, ONLY donations to certain organizations are allowed to be excluded from taxable profits. Some of them are The Boys Brigade, Boys Scout, Christian Council of Nigeria, Girls Guide, Any Educational Institution recognized by the law, Islamic Education trust, ICAN, Nigerian Red cross etc. There are about 41 of them as such it is important that you know them. Donations to political parties do not qualify.
When you sell an asset, reinvest it into the same class of asset
If your business owns assets such as equipments that it uses for its daily operations, it is possible that you may wish to sell them once the assets are no longer useful to the business.
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 is utilized to acquire another asset within the same class of asset, the tax payable can be deferred for as long as the new asset is in used. So, assuming you buy a Generator for N2m and decide to sell it a 2 years later for N1m. And it cost you another N200k as selling expenses for the generator, you will be liable to a 10% capital gains tax on N800k which comes to N80k.
With this law, you do not need to pay this N80k immediately provided you spent the N1m or part of it on acquiring a new generator. However, the generator must be acquired 12 months before you made the sale or not more than 12 months after. Please not that if you use the money to buy a car (even if it is for your business) it will not apply.
Deduct Vat that you pay on your purchases from vat that you receive on your supplies
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. For example, if you are into supplies of furniture and it cost you N10m to acquire materials that you need to produce the 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 themselves the opportunity of retrieving their cost. Your business surely does not need this generosity.
Register an NGO (Non Governmental Organisation) or a Trust
Companies Registered as Limited by Guarantee are exempted from paying tax in Nigeria. Churches, Mosques etc fall under this category. In addition organisations that are into charitable causes also fall under this category. Whilst they do not pay taxes, they are not expected to pay dividends to their owners. Also note that transactions made by them that results in a profit can equally be taxed. For example, if they invest in shares and get dividends, they will be taxed 10% withholding tax.
If you want to run an organisation that pays no tax, then consider setting up first as an NGO.
Apply for Capital Allowance Certificate
Companies periodically buy assets which they employ to use in the ordinary course of business. The Assets go through wear and tear and needs to be replaced over time. The wear and tear is a cost the company must bear and as such is written off (expensed) just as you write off other cost such as transport, electricity, water bills etc.
However, how this cost is calculated differ from one business to another and for that reason the tax man does not deduct this cost from your profits before taxing. In its place, is capital allowance which is the tax authority’s way of writing off the cost of wear and tear. To therefore ensure that you enjoy capital allowance, which helps reduce income tax liability, you must obtain a certificate from the Ministry of Industry.
A capital allowance can only be issued to you if you have a Certificate of Acceptance, which is obtained through the Ministry of Trade. There are consultants who can help you obtain this.
Need help obtaining your WHT? Send us an email email@example.com
Make sure you collect your withholding tax receipts
Withholding tax (WHT) is one of the most popular form of taxation in Nigeria. It is paid on contract for supplies, services, director fees, dividends, interest, etc. Whilst withholding tax on director fees and dividends is a final tax, Withholding taxes on contracts of supplies and services is not.
WHT on supplies and services are considered and advance payment on tax and should be deducted from your income tax. For example, during the year a total of N1m has been deducted from your invoices by your clients as withholding tax. In that same year, your tax liabilities have been calculated as N5m. Before you pay the tax liability of N5m you MUST 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 it is kept as 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.
Need help obtaining your WHT? Send us an email firstname.lastname@example.org
Increase the amount you pay as pension
By law, all employees are mandated to contribute 8% of their Basic, Transport and Housing Allowance as pension. That amount when paid as pension is tax deductible (should be deducted from your income before charging you tax). Since pensions are a form of savings for you, anything else you add to your pensions gets deducted from your tax as well. For example, if you increase from 8% to 15% the entire 15% will be deducted. There is also this Voluntary Withdrawal loophole which was previously being exploited by pension fund contributors. It has since been plugged by some tax authorities.
Invest in industries that the government is promoting with tax incentives
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 is also exempted from taxes.
When you borrow money from foreign financial institutions make sure you obtain a certificate of capital importation
Some businesses especially in the oil and gas sectors typically require foreign lines of credit to help supply fund their imports. In Nigeria. Whist this is not necessarily tax, it is important because when you pay back the loans in forex you are entitled to access the funds from the CBN at the official rate. That is huge savings when you consider the disparity between the official CBN rates and the black market rates.
If you are a foreign investor bringing in forex
Foreign Investors who bring in foreign exchange into Nigeria must apply for a Certificate of Capital Importation from the bank within 24hours of transferring the funds. With the CCI the foreign company can legally repatriate funds such as dividends, profit etc
Decide whether real estates are held as inventory or just as assets.
People who are into real estate constructions are usually considered as selling the assets in the ordinary course of business. As such their real estate properties are seen as inventory and not as assets. For example, sale of apartments are considered inventories according to the Nigerian Standard Board. As such you will not pay capital gains tax but income tax of 30%. So, you investing in a real estate you must decide how you want the assets classified.
If you own a hotel
Section 28E of the Company Income Tax Act provides that 25% of income received in convertible currencies derived from tourist by a hotel should be exempted from tax. However this is provided that the income is put in a reserved fund to be utilized within 5 years for the building expansion of new hotels, conference centres and new facilities for tourism development. This law is particular of a huge advantage to hotels situated in high tourist destination spots since they are more likely to attract foreign guests.
Invest through an offshore SPV registered with a treaty country
Certain countries have a double taxation agreement with Nigeria. What that means is that foreign investment coming from companies registered there are given tax concessions. For example, rather than pay 10% on WHT the government charges 7.5%.
Invest in businesses that are wholly export oriented
Dividends and profits obtained from businesses that are wholly export oriented are exempted from being taxed in Nigeria. Implication is that if you are into a business that solely exports the dividends paid out to its shareholder will not be subjected to tax. In addition, if a supplier supplies raw materials that is exclusively required for the manufacture of exports then the profit made by that supplier will also be exempted from tax. However, the export company must provide a Certificate of Purchase of Inputs to the supplier.
If you made losses in the past
If your business had churned out losses in the past, then those losses can be used to reduce taxable profits at periods when profits will be made. If for example you have made an aggregate loss of N1m on the past then in the current year you now make a taxable profit of N1.5m. Rather than being taxed on N1.5m for that year you will be taxed on N500k only thus getting a relief of N1m. This is why it is important to keep proper records and make regular filings of your accounts and annual returns.
These Tax Avoidance methods are not exhaustive but if applied correctly and with the aid of a tax consultant may add good value to a business.
This article originally appeared on Nairametrics on March 31st 2012. It has now been updated to reflect new information.