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Financial Literacy

How to avoid paying excessive taxes in Nigeria

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Avoid paying taxes, Nigeria generates N416.01 billion from Company Income Tax in Q3 2020

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?

READ: Taxes to consider before starting a business

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.

READ: Taxes you should be aware of before starting a business in Nigeria

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.

READ: FIRS tightens noose on deduction of stamp duty, CIT, others 

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.

READ: How the Finance Bill will affect you 

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.

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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.

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READ: Tantalizers suffers loss of N245 million in 2020 9M

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.

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READ: Tax debt: Dwindling fortunes of WEMPCO Steel Mill

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.

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READ: COVID-19: FIRS grants concessions to taxpayers, outlines other measures

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.

READ: Investors gain big on Airbnb, now worth over $100 billion

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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 info[email protected]

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.

READ: Insurance giant, MassMutual buys $100 million worth of Bitcoin

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.

READ: CUTIX Plc posts N1.83 billion revenue in Q2 2020, up by 57.8% Y-o-Y

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 [email protected]

READ: How to scale as a small business on a budget

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.

READ: These banks can now do business with Ekiti MDAs

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.

Nairametrics Research team tracks, collates, maintains and manages a rich database of macro-economic and micro-economic data from Nigeria and Africa. Our analysts share some of the data collated on Nairametrics, using formats such as docs, tables and charts etc. The team also publishes research based analysis as articles on a regular basis.

13 Comments

13 Comments

  1. @Taipan_

    June 26, 2012 at 8:02 am

    Hi Ugo.
    thanks for the writeup. really found this interesting and helpful. May i reblog this? Waiting for your permission/reply. thanks again!

    Taipan.

    • ugodre

      June 26, 2012 at 9:51 am

      Pls go ahead, you have my permission.

  2. Enter your name...

    November 28, 2012 at 1:38 pm

    Thank you for this good treatment. I have a question. How many years’ loss am I allowed to claim back when I start making profit? Also, if I operate in an industry as a pioneer and am given tax holiday even on divident payout, suppose I do not declare any divident in the first 4 years, can I start counting the divident tax holiday from the year I start declaring divident? Thanks

    • ugodre

      November 28, 2012 at 2:46 pm

      Hi,
      Losses can be carried forward indefinitely. Meaning you deduct it from your profits until you have finished utilizing it. As per dividend, in my opinion, pioneer status is on your taxable profits and not your dividends. Meaning, it doesn’t matter whether you declare dividends or not. However, dividends will not be taxed provided it is proved to be partly or wholly paid out from the credit of the S17 account. Meaning, if you declare profits of N10m during a pioneer period and credit it to the S17 account, dividends paid out from that account regardless of when will not be taxed. Pls consult a tax consultant for further information

  3. 1347556844

    June 20, 2013 at 5:11 pm

    This is wonderful.

  4. techy

    October 11, 2015 at 5:57 pm

    Very informative writeup, thank you. How are technology companies doing business through the web/internet taxed in Nigeria? for example, facebok, google, paypal, konga?

  5. Omeka King

    May 19, 2017 at 11:45 am

    Very informative. If a company solely exports, will be company have to pay Company Income Tax (CIT)?
    Thanks.

  6. Anonymous

    March 3, 2018 at 4:23 pm

    Nice.. Very helpful do u have an app for all this?

  7. Anonymous

    March 12, 2018 at 5:15 pm

    Thank you so much for this information. It’s very helpful

  8. Inno

    May 22, 2018 at 2:01 am

    Very informative, great Job.

  9. Anonymous

    April 23, 2019 at 10:36 am

    thank you for this…

  10. Larry Ogunjiofor

    July 12, 2019 at 10:03 am

    Thanks you for this wonderful education on tax. Pls I need help with a tax lawyer that can help me with filling my tax since I am a start up. Any recommendations from you that won’t cost me since I am a start up company. Thanks

  11. Ifeanyi Okeke

    October 13, 2019 at 5:15 am

    A very informative piece.

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Personal Finance

5C’s of creditworthiness: What lenders, Investors look for in a business plan

Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

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Five things to consider before securing a loan

Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.

For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.

The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.

Lenders and investors refer to these criteria as the five C’s of credit.

READ: 5 ways to raise funding for your business

1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.

2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.

READ: How to scale as a small business on a budget

3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.

4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.

READ: 7 Ways to pay for your higher education

5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.

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The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.

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Written by Chukwuma Aguwa

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Personal Finance

Don’t be fooled by COVID-related scams

Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.

This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.

With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.

The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.

Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.

READ: Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

Channels used for COVID-related scams 

There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.

Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.

Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.

READ: China joins WHO vaccine programme as it fills huge gap left by United States

The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.

Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.

Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.

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The place of electronics in COVID-related scams

These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.

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Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.

In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.

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Conclusion

The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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