April 15th is Tax Day in America, the cutoff day to file personal income taxes to the Internal Revenue Service. However, this year in America, Tax Day was moved to May 17th. In Nigeria, Tax Day is March 30th as all tax returns must be filed within 90 days of the end of the fiscal year which ends December. Employers must file a return of all emoluments paid to their employees not later than 31st January of each year.
Let’s talk about tax avoidance, which is the legal use of methods, practices, and procedures to reduce the amount of tax payable in a tax jurisdiction by a business or person. Tax avoidance is usually achieved by claiming large deductions for earned income, and even making targeted purchases and sales of assets to earn a tax credit.
Tax Avoidance must not be confused with Tax Evasion, which is illegally avoiding legal taxes imposed or subjected to by means such as underreporting of income.
Tax is imposed by governments worldwide to not just raise revenues but to also direct consumer spending and preferences in a particular direction. Assuming a nation grows pineapples and imports apples, and the government wants to start to grow apples, it can pass tax law, for instance, reducing taxes on companies that grow apples. Thus, entrepreneurs in that country could dedicate an area of their farm to grow apples and then apply for a deduction for the entire farm. In this case, everyone is happy; the farmers get a tax break on their taxes, and get to use that extra money to invest, the Government stops using its foreign reserves to import apples, and the local economy creates local jobs for apple processors.
You sometimes hear of multinationals not paying a dime in federal taxes. A good example is Amazon, which made $11b in profits in 2018 and paid zero Federal Income taxes. This is because Amazon can carry forward operating losses and receive tax credits for investments. Amazon is arguing that it reinvests its profits back into the economy by buying warehouses and delivery robots as written in the tax code. This is like Tax Holidays enjoyed by companies such as MTN and Dangote Cement. If the tax code did not incentivize investment, would the companies invest so much?
So, deductions exist, how can you take advantage of these tax deductions to retain more of your income for yourself?
Start a business
Do you have a skill or activity you can sell and make income from? If yes, incorporate a business. You can claim expenses incurred in generating income as a deduction on your taxes. E.g., let us say you have a side gig where you have a phone import business, you import phones and sell on your premises to clients. You can thus claim the cost of the air conditioners, the generating set, even the fuel you use to deliver the phones to your clients as business expenses.
If you borrow money from a bank to finance your business, then you can also claim the interest paid to the bank as a business expense. What if you sold on credit and the buyer went bankrupt or died? You can claim bad debts as well. And if you subscribe to, say, a paid podcast to learn about importing and business, you can also claim that as an expense on your taxes.
What about the rent? Is your building occupied to acquire that phone sales income? Then you have a case.
Remember, the government wants you to start a business and be successful because you then hire more workers and consume more items which ultimately generate revenues in the long run.
Make tax-advantaged contributions
In Nigeria, you can contribute to specific schemes and funds and shield that contribution from being taxed. For instance, if you contribute and/or make additional voluntary contributions to your Retirement Savings Account (RSA), that contribution can be deducted from your taxable income, so let us assume you earn N1,000,000 a year and your Effective Tax Rate is 10%, meaning you pay N100,000 in taxes annually. If you make a N100,000 total contribution to your RSA, then your income accessible for taxes is now N900,000, and your taxes will then be N90,000.00. This is an excellent use of tax policy by the government, as they encourage and create long-term savings.
Other schemes offer tax-advantaged deductions on contributions such as the National Housing Fund (NHF) and National Health Insurance Scheme (NHIS).
Buy a house with a mortgage
If you borrow and purchase a home you will live in, then the loan interest you pay is also deductible. This is another great example of a good tax policy; homebuilding is a major contributor to local jobs and taxes.
Buy life insurance for you and your partner
If you buy life insurance and pay a premium, then that premium paid to the insurance company is deductible if made in the year preceding the year of assessment. Again, if you buy a Life Cover of N5 million each for yourself and your partner, and pay N50,000 each as premium in 2019, making a total of N100,000, you can claim N100,000 as a deductible in the tax year 2020.
Donate to charity
Why not donate to a research centre in your Alma Mata? That donation is tax-deductible. Thus, if you endow a Chair to study Cassava Bread at the University of Nigeria with N5 million, that N5 million is deductible subject to 10% of your taxable income. Thus, if you earn N1 million and your effective tax is 10%, and you donate N5 million, you can only claim N100,000 as your tax deduction is a charitable donation to a research centre.
However, whatever you deduct, you will still owe the taxman in Nigeria a minimum tax of 1% of your total income, but if you earn less than N30,000 you are not required to file a federal tax return.
Remember to consult your tax or financial adviser to learn more about applying and receiving tax deductions. It is your right!