A company incorporated under the Companies and Allied Matters Act, cap C20 LFN 2004 is accorded a distinct legal personality from its members. Whilst such a company pays tax on all its taxable profits, each member or shareholder pays tax on whatever accrued to him/her by way of dividend.
It must be noted however at this juncture that it is not only local companies that are liable to corporate taxation in Nigeria. In other words, every company (whether local or foreign) may be charged to tax in Nigeria on any part of its profits which are legally connected to Nigeria.
The taxable profit of a company is arrived at by ascertaining the level of its income; determining its allowable deductions; and ascertaining the loss and capital allowances which the company may claim.
Thus, the Companies Income Tax Act cap C21 LFN 2004 Amended in 2007 (hereinafter referred to as Act) provides the legal framework for corporate taxation in Nigeria with the exception of companies engaged in exploration and production of petroleum.
Section 9(1) of the Act provides that for each year of assessment, every company is chargeable with tax upon its profits accruing in, derived from, brought into or received in Nigeria in respect of any trade or business which it carries on. Profits of a company may also be taxed on rents, premiums, dividends, from other companies, interest on investments, fees, dues, allowances, etc.
Notwithstanding, by virtue of section 23 of the Act, certain corporate profits are exempted from taxation. Thus, the profits of a statutory or registered friendly society, a co-operative society, any company engaged in ecclesiastical, charitable or educational activities of a public character and trade unions. These exemptions are not absolute.
The exemptions are subject to a condition that these bodies are not expected to engage in business. Thus, where the profits are derived from a trade or business carried on by the exempted body or institution, they will be regarded as taxable profits. Other companies whose profits are exempted from corporate taxation include:
- Any company formed for the purpose of promoting sporting activities in so far as its profits are wholly devoted to that purpose;
- Any oil company in so far as the profits are derived from petroleum operations and have been subjected to petroleum profit tax;
- Any company established by or under any local government law or edict in any state in Nigeria;
- Any foreign company the profits of which would have been chargeable to tax solely because such profits were brought into or received in Nigeria.
- The profits of any Nigerian company in respect of goods exported from Nigeria, provided that the proceeds from such export are repatriated to Nigeria and are used exclusively for the purpose of raw materials, plants, equipment and spare parts;
- The profits of company whose supplies are exclusively inputs to the manufacturing of products for export, provided that the exporter shall give a certificate of purchase of the inputs of the exportable goods to the seller of the supplies;
- The profit of a company established within an export processing zone or free trade zone; provided that 100% production of such company is for export otherwise tax shall accrue proportionately on the profits of the company.
In ascertaining its profits or loss for a tax period, a company may deduct all expenses for that period which are wholly, exclusively, necessarily and reasonably incurred in the production of those profits.
Such deductible expenses may include interest on borrowed capital, rents, expenses incurred for repairs of premises and machinery, bad debts incurred in the course of trade or business, any contribution to any provident or other retirement benefits fund, society or scheme.
Furthermore, a company may also deduct the amount of any donation made during that period to any fund, body, or institution in Nigeria, namely the public funds, statutory bodies and institutions and certain ecclesiastical, charitable, benevolent, educational and scientific institutions.
The current rate of any company’s tax as provided by section 40 of the Act is thirty kobo for every naira (i.e. 30%) profit. A company which is yet to commence business after six months of incorporation shall pay a levy of N20,000 for the first year and N25,000 for each subsequent year.
Note that where a company disputes its tax assessment, it may apply to the Federal Inland Revenue Service by written objection, to review and revise the assessment. Further appeals may be made to the Tax Appeal Tribunal established under the Federal Inland Revenue Service (Establishment) Act 2007 and either party not satisfied, may thereafter appeal to the Federal High Court.