Understanding Minimum Tax
We all look forward to the festive seasons because it brings with it joy, sense of community, great sales, promises of saving huge percentages in cost, and lots of freebies. The season got me thinking about the ‘festive’ things/benefits available in Nigerian tax laws……….and yes they exist and are available to all qualifying taxpayers. One of such is the minimum tax.
Are you excited already? Depending on what side of the divide you are, you may be excited or pretty much still be bummed (PS: no reason to be bummed about taxes, remember that famous saying two things in life are certain: death and taxes).
So let us get into it and see if I can get you excited, or at the minimum interested. Both the corporate and personal income tax laws provide for minimum taxes, but this article is from the Companies Income Tax (CIT) perspective. The statutory CIT rate in Nigeria is 30% except for companies engaged in manufacturing, agricultural production, mining of solid minerals or wholly export trade; and whose turnover is below one million naira for which a reduced rate of 20% rate applies.
Minimum tax is payable by a company in a given year of assessment where a company makes no taxable profit or tax payable less than minimum tax. However, the same section of the CIT Act provides for freebies (no income tax) subject to certain conditions; though it is important to make the distinction between assessable profit/loss, taxable profits and accounting profit/loss. Assessable profit or loss is arrived at after adding dis-allowable expenses and deducting non-taxable/tax-exempt income while taxable profits/total profit is profit derived after loss and capital allowance adjustments.
It is possible therefore to close an accounting year with accounting profit and end up with taxable loss or vice versa. For example, a company that makes a N1 million naira profit but has a high deductible expense/exempt income of N1.5 million will in the end have an assessable loss of (N500,000) thereby triggering the minimum tax provisions. So instead of paying tax at 30% of profit, minimum tax will be computed (given tax loss of – N500,000) as explained below:
Minimum tax is computed as the sum of:
a) The highest of 0.5% of gross profit, or
0.5% of net assets, or
0.25% of turnover of N500,000, or
0.25% of paid-up capital
b) Plus 0.125% of turnover exceeding N500,000
In addition, where your computed tax payable is less than minimum tax, then minimum tax becomes the tax payable – it therefore appears that minimum tax is an anti-avoidance rule. If you hold this view, you are indeed right but don’t lose your jolly spirit just yet because the law provides for freebies (no income tax) subject to certain conditions.
A company would be exempt from payment of minimum tax if:
a) company is in its first four calendar years of commencement of business
b) company is carrying on agricultural trade or business
c) company has at least 25% imported equity capital
I therefore recommend that you review the conditions above to determine if your business can benefit from minimum tax exemption. I also recall reading in financial blogs recently that “So Fresh” secured foreign investment of 360,000 Euros for its business. If this amount represents 25% of her capital, with the evidence of Certificate of Capital Importation (CoCI), the company would be exempt from minimum tax. Please note that the CoCI is the acceptable documentary evidence to support claims of foreign capital and therefore extremely important to process this certificate through your bank (the bank that served as the channel for the funds).
As good as the above sounds, many of us will not be able to take advantage of this benefit simply because we have not put structure to our business.
For instance if you are in agricultural business, is this supported by your Memorandum and Articles of Association (MEMART), do you have financial statements to support the number of years you have been in operation etc. It is only with proper structure that you can attract additional investment like in the example of “So Fresh” above and enjoy certain tax advantages.