The legal framework establishing the Companies Income Tax (CIT) is the Companies Income Tax Act Cap C21, LFN 2007, as amended (CITA). CIT applies only to a business registered as a company and is chargeable on the profits accruing in, derived from, brought into or received in Nigeria in respect of trade, business, rents, premium, dividends, interests, royalties, fees, discounts, charges or annuities.
CIT is charged at 30% of a company’s profit which is calculated in very simple terms as the difference between revenue/income and expenses. A lower rate of 20% is applicable to manufacturing or agricultural production companies and companies wholly engaged in exports within the first five years of operation and where the turnover does not exceed NGN1million.
The profit to be assessed to tax in a year of assessment – is profit of the company for the immediate preceding financial year (i.e. preceding year basis of assessment), except in instances where the company commenced new business in which case it could be assessed to tax on its actual profit for the year/period (i.e. actual year basis of assessment).
However, a company is liable to minimum tax where it is making losses, its total taxable profit results in no tax payable or where tax payable is less than minimum tax. Companies exempted from minimum tax payment are: companies involved in agricultural trade or business, companies with at least 25% imported equity capital or a company in its first four calendar years of commencement of business.
The following key facts on CIT should give you a head start of what to expect and should also provide a good starting point in your journey towards compliance.
1. Profits exempted from CIT
Not all profits earned will be taxed because CITA specifically exempts certain profits from CIT such as profits made by:
- Co-operative, charitable & ecclesiastical societies and organisations; provided the profit is not from trade or business
- Interest on foreign currency domiciliary accounts
- Dividend, interest, royalty and rent brought into Nigeria through government approved channels such as commercial banks and authorized dealers in foreign exchange
- Dividend received from a unit trust
- Profits by companies enjoying pioneer status incentive on their pioneer business and within the pioneer period
2. Allowable expenses for CIT purposes
The tax system is generous as it recognizes that certain expenses would have been used in making profits. Hence, in calculating the tax at 20% or 30%, a taxpayer can deduct such expenses which are wholly, reasonably, exclusively and necessarily incurred for the business. This concept is popularly referenced as the WREN test among tax practitioners. Make sure you use this whenever you have the chance.
Typical expenses that can be deducted in arriving at profit include but not limited to:
- Interests on loan for the purpose of trade or business
- Cost of rent paid by the business for an employee’s accommodation provided it does not exceed the basic salaries of the employee
- Pension fund and gratuity contributions
- Salaries and wages and similar allowances covered by contractual agreement
3. Expenses or deductions not allowed
Even though a taxpayer is able to apply the WREN test in determining allowable expenses, there are some expenses, though expended for business purposes, that would not be allowed to be deducted from income. These expenses are therefore to be added back to profit when calculating CIT. They include, but are not limited to:
- Capital repaid or withdrawn and any expenditure of a capital nature i.e. fixed assets purchased
- Any sum recoverable under an insurance or contract of indemnity but does not include insurance premiums
- Depreciation of any asset
- Taxes on income or profits whether incurred in Nigeria or elsewhere except instances where relief is available for double taxation i.e. double tax treaties, commonwealth income tax relief
In instances where a company is making loss, especially an agricultural business or trade, the loss can be carried forward into the next financial year indefinitely. However, loss incurred in the first tax year of the business cannot be carried forward beyond the fourth tax year. Other restrictions on losses apply to insurance companies which are considered out of the scope of MSMEs.
5. Capital allowance
Capital allowance is the allowance granted at specified rates (as provided in CITA) on qualifying capital expenditure (QCE) such as expenditures incurred on/in connection with plants, equipment, machinery, vehicles, fixtures, buildings, structures, clearing of land for plantation, research & development, and similar items.
There are strict conditions that apply before a company is qualified to claim capital allowance on a QCE. Some key conditions include:
- The tax payer making such claim must own the QCE; and
- The QCE must be used for the purpose of a trade or business and must be in use at the end of the period for which the tax is being computed.
6. Requirements for filing CIT returns
Every company, including those granted exemption from incorporation, whether or not the company is liable to tax, is required to file a return with FIRS.
The following documents are required to be filed in order for the CIT returns to be deemed complete and acceptable by the tax authorities:
- Duly completed self-assessment form
- Audited financial statements
- Tax computations
- Capital allowances computation
- Evidence of payment of taxes due
- Any other information that may be necessary to understand the tax computations
7. Due date for filing CIT returns
CIT returns are due for filing six (6) months after a company’s accounting year-end or financial year-end. However, for new companies, CIT returns should be filed within eighteen (18) months from the date of incorporation or six (6) months after accounting year-end, whichever period comes first.
8. Bonus: Penalty for late filing of CIT returns
As a bonus point, it is important to note that a taxpayer can be exposed to additional cost in the form of penalty where the CIT returns are not filed as and when due. The penalty for late filing the CIT returns is ₦25,000 for the first month of default, and ₦5,000 for each subsequent month the failure continues.