Taxation in Nigeria should be one of your focus areas – especially if you are planning on building a legal business entity. Tax laws are one of the crucial factors you should consider when starting a business in any country. Foreign investors looking to extend their branches in the Nigerian soil will have to understand the tax system in Nigeria.
Many local and foreign companies in Nigeria have lost a huge portion of their profit for evading taxes. The owners of these companies may spend some years in jail for failing to abide by the Nigerian tax system.
If you are a budding entrepreneur, a business owner or an investor, you need to know how the Nigerian tax system works before launching your business enterprise.
Often times, Tax defaulters are severely punished and they face all sorts of harassments, embarrassments and financial penalties for defaulting tax payments.
Virtually all financial transactions with government parastatals, agencies and ministries will require you to submit tax clearance certificates.
A tax clearance certificate is a document which indicates that your company or business entity has fulfilled the tax obligations within a given time period. Remember that if you are a tax defaulter, you will not be qualified to work or secure contracts with the Government.
We will provide you with every detail you need to know about taxation in Nigeria. This post will provide insights on how you can run your business legally in line with the stipulations of the entire Nigerian tax system, laws and regulation.
Firstly, these are some basic facts about the tax system in Nigeria:
- Tax defaulters will face stiff penalties when caught or found guilty of defaulting tax rules.
- Tax is a major source of revenue to the Nigerian Government.
- It is the obligation and civic responsibility of every Nigerian to pay his or her taxes to the Government.
- The agency responsible for the administration and collection of taxes in Nigeria is the Federal Inland Revenue Service (F.I.R.S).
- Tax payer’s money is used for the management and administration of the country.
- 1 Tax In Nigeria
- 2 History of Taxation In Nigeria
- 3 Tax laws In Nigeria
- 4 Modern Tax System In Nigeria
- 5 Types Of Taxes in Nigeria
- 5.1 1. Companies Income Tax (CIT)
- 5.2 2. Petroleum Profit Tax (PPT)
- 5.3 3. Value Added Tax (VAT)
- 5.4 4. Personal Income Tax (PIT)
- 5.5 5. Withholding Tax (WHT)
- 5.6 6. Capital Gains Tax (CGT)
- 5.7 7. Stamp Duties (STD)
- 5.8 8. Tertiary Education Trust Fund Tax
- 5.9 9. Pay-As-You-Earn (PAYE)
- 5.10 10. National Information Technology Development Fund (NITDF) Levy
- 6 Tax Rates In Nigeria
Tax In Nigeria
For any country to be run efficiently and effectively, it has to have a piece of machinery in which it uses to generate money for the administration of the country.
In Britain (United Kingdom), there is no availability of natural resources like crude oil, gold, coal. However, the British Government derives a huge portion of its revenue from the taxes paid by the Britons.
The Nigerian federation is abundant in terms of natural resources such as copper, rubber, crude oil, zinc, coal etc. It derives its revenue from the proceeds of the sales and exports of these commodities in international trade.
The money derived from the proceeds of the natural resources is used to execute capital projects, develop infrastructural facilities and administration of the government of the nation from the local, state and federal levels.
Asides the proceeds from crude oil and petroleum exports, government leverage on taxes as a source of revenue to fund and execute projects.
Moreover, taxes are a mechanism used by the revenue to raise money for administration at both the federal and state levels.
Tax payer’s money is also used to pay the salaries of civil servants and government workers. It is equally important that you pay your tax to ensure effectiveness in the civil service and for workers to develop a right attitude to work and be motivated when serving the government.
Apart from Nigeria, the government in other countries depend on the revenue generated from tax to fund projects and provide social amenities for their citizens.
Taxation plays a crucial role in making the resources needed for public investment and infrastructure growth available. Business owners and entrepreneurs have voiced out over the taxation policies and tax management in general.
If you are considering going into the business of trading taxable goods and services in Nigeria, you will need to have tax obligations to run such business effectively.
Why Do People Pay Taxes In Nigeria?
A lot of people are yet to see a good reason why people pay taxes in Nigeria. Literally, taxes are paid because the Government (federal & state) needs the money to run the administration of the country.
Secondly, they have enacted tax laws for people to pay taxes; the law is supreme, no one is above the law and the people are subjected to obey the laws binding Nigeria as a country.
Again, paying taxes is a civic responsibility. The Federal Inland Revenue Service (FIRS) is a vigilant watchdog that is on the trail of any tax defaulter.
If you are a tax defaulter, the FIRS will come knocking at your door and you could possibly face stiff penalties such as huge fines or spend some time in jail.
In 2015, it was recorded that the Federal Government of Nigeria received over ₦3.7 trillion; with more of those taxes coming from Corporate Tax, Personal Income Tax, Tariffs, Payroll Tax and many others.
The Nigerian government uses the money from tax to discharge its duties – providing social amenities, developing the society and country, and also rendering other services that would be of great help to Nigerians.
History of Taxation In Nigeria
The history of taxation in Nigeria is unbeknownst to many people. In fact, the original history of the tax system in Nigeria can be traced to the pre-colonial era, where taxes were paid in the Hausa/Fulani Caliphate. A good example of the taxes is Jangali, which are taxes paid for cattle.
However, there was no formal tax policy in Nigeria during the pre-colonial era. It was the coming of the colonialists that ushered a formal tax policy in Nigeria in the 1930s.
The traditional rulers and chiefs were the authority in charge of collecting taxes and using them. During this period, taxes were collected from primary goods, farm products and cattle.
These traditional rulers tried to make their own tax system, however, none of them was documented in the history books.
Before the coming of the colonial government, there was an existing tax system in Nigeria, particularly in the Northern region.
In the Hausa/Fulani Caliphate, the Emirs and Gwandu and Sokoto established a tax system which ensured that their people made taxes to them.
As at that time, the tax system in Southern Nigeria wasn’t as organized as it was in the North. This is because the South had no centralized system of government, unlike the North, which had a centralized tax system.
In the Eastern part of the country (Igbos), there was nothing like paying of taxes. The Igbos had an egalitarian society, therefore, the system was acephalous. That is, they had no head or authority.
The British colonial government set up warrant chiefs to collect taxes from people, this later played a part in the Aba Women Riots of 1929.
History and Development of Taxation in Northern Nigeria
Northern Nigeria was guided by the Islamic religion, which emphasized on taxation. Hence, they were ruled under the Islam taxation policy.
The Hausa/Fulani Caliphate had various types of taxes. However, these are some of the following forms of taxes under Islam taxation laws.
- Community tax – This tax is imposed on all adult members of the community.
- Isha-Kole – This is a form of tax that is to be paid to the community leaders, traditional rulers or chiefs.
- Kudin-Kasa – This is a tax for land utilization.
- Owo-Ori – This type of tax was paid to the country for the services rendered by individuals.
- Shuka-Shuka – This is a tax for cattle rearers.
- Zakat – This tax is required from all representatives of the Islamic religion. It was made strictly for spiritual, educational and religious purposes.
Still, on the history of taxation in Nigeria, the advent of colonialism in West Africa brought many trading companies and industries in Nigeria. A good example is the Royal Niger Company.
There was a scrabble among European nations for Africa. There was a tug of war between Britain, France and other countries for West Africa.
Great Britain exploited the resources of Africa, particularly by paying taxes, slave trade, crude oil and other natural resources of the African people.
Taxation In Nigeria During The Colonial Era
Many colonial governments tried to introduce and implement their own tax systems in Nigeria. Formally, the British administration in Nigeria started in 1861, with Lagos being the crown colony.
Even with the coming of the British colonial masters, taxation in Nigeria hasn’t gotten a centralized status, hence, it was unorganized.
The First Governor-General of Nigeria, Frederick Lord Lugard was a British colonial administrator in Nigeria in the twentieth century.
Frederick Lord Lugard made plans to centralize, organize and harmonize the tax system in Nigeria by making a proclamation. This proclamation was known as the Stamp Duties Proclamation and it was implemented in 1903.
The Stamp Duties Proclamation of 1903 gave way for the Native Revenue Proclamation of 1906. The Native Revenue Proclamation was implemented in 1906; it was established to make paying of taxes compatible in Nigeria.
Through the Native Revenue Proclamation, Frederick Lord Lugard designed 4 important principles of tax payment. So, if a Nigerian wanted to pay taxes, he/she would go through the following set of questions;
- What to pay?
- Whom to pay?
- Where to pay?
- When to pay?
The Native Revenue Proclamation of 1906 was a formal tax policy which went further to simplify and clarify the taxation policy in Nigeria. The Stamp Duties Proclamation of 1903 and the Native Revenue Proclamation of 1906 became the first in the sequence of tax policies in Nigeria.
Tax laws In Nigeria
The present-day taxation policies in Nigeria dates back to 1914. in 1914, the Nigerian Governor-General, Frederick Lord Lugard amalgamated the Northern and Southern Protectorate in what is today known as Nigeria.
The Northern and Southern Directorate practised the basics of taxation in Nigeria. Also, it further helped to commence the sequence of tax ordinances in Nigeria.
- Proclamation Law 1914.
- Native ordinance 1917.
- The Non-natives Protectorates Tax Ordinance 1931.
- Raisman Commission 1958.
Modern Tax System In Nigeria
The roots of the modern tax system in Nigeria can also be traced to the year 1939 when the Companies Income Tax Ordinance was introduced.
By this time, the government agency for tax issues, the Federal Board of Inland Revenue (FBIR) was created.
Ever since the Federal Board of Inland Revenue (FBIR) was created, the tax system in Nigeria experienced a sequence of changes.
Some of the changes of the tax laws were made as a result of frequent change of government, political instability and others were done to modify the existing tax policy.
During the military regime of General Aremu Mattew Okokiola Olusegun Obasanjo in 1978, the Federal Inland Revenue Service (FIRS) was formed.
It was the Task Force on Tax Administration under the leadership of Alhaji Shehu Musa that created the Federal Inland Revenue Service (FIRS) as the operational wing of the Federal Board of Inland Revenue (FBIR).
Raisman Commission ushered in standardized tax principles in Nigeria. The Federal Government of Nigeria accepted the recommendations of the Raisman Commission.
Later, the recommendations of this Commission were adopted and implemented by the National Government.
These recommendations form part of the tax laws in Nigeria’s Constitution. The constitution to the Income Management Act and the Companies Income Tax Act in 1961.
The complexities and intricacies in tax reforms created the sequence of tax laws in Nigeria. The most recent of these laws include;
- The Personal Income Tax Act of 2004 and;
- The Companies Income Tax Act of 2004.
Types Of Taxes in Nigeria
There are various types of taxes in Nigeria. However, a lot of Nigerians do not know them. Without much ado, here are the common types of taxes in Nigeria. They include;
1. Companies Income Tax (CIT)
The Companies Income Tax can also be referred to as corporate tax or business tax. These are taxes which are paid by any company resident and a non-resident company incorporated in Nigeria.
Basically, you have to pay the Companies Income Tax if you are a company resident and non-resident company formed in Nigeria.
A company resident in Nigeria pays the Companies Income Tax based on its worldwide income while companies that are non-resident in Nigeria pay the Companies Income Tax based on all incomes made from Nigerian sources.
The Business tax is 30% of all profits accrued by a company in a year under assessment.
2. Petroleum Profit Tax (PPT)
You are subjected to pay the Petroleum Profit Tax if you own or run a company that explores or produces petroleum products in Nigeria.
It is an obligatory tax for to resident companies and non-resident companies in the business of exploring petroleum in Nigeria.
It can also be paid in the place of the Companies Income Tax by petroleum companies involved in the extraction, exploration, haulage and transportation of petroleum products in Nigeria.
Typically, the Petroleum Profit Tax is 50% of the profits for companies involved in production sharing contracts (PSCs), 65.75% for companies in non-product sharing contracts within the first five years of business operation, and 85% for subsequent years.
3. Value Added Tax (VAT)
Value Added Tax is widely known as VAT. This is a type of tax which is imposed on buyers. Typically, any consumer, individual, brand or corporate organization who purchases or uses any taxable product or service will also have to pay a tax levy.
Again, the Value Added Tax is a tax of 5% which is collected from the price of every taxable item sold to people. Hence, the seller of the item deducts the Value Added Tax (VAT) sends it to the Federal Inland Revenue Service (FIRS).
4. Personal Income Tax (PIT)
The Personal Income Tax is the commonest type of tax in Nigeria. It is deducted from the income of Nigerian residents via the PAYE (Pay As You Earn) mechanism.
The Personal Income Tax is imposed on entities (taxpayers) or individuals that varies with respective profits or income (taxable income).
Generally, it is computed as the product of a tax rate multiplied by the taxable income. The Personal Income Tax ranges from 7% on the first ₦300,000 to 24% for those earning above ₦3,200,000.
Again, it is equally important to note that workers who live in Nigeria more than 6 months are considered as tax residents. Even immigrants and foreigners possessing a Nigerian residence permit are also considered as tax residents.
5. Withholding Tax (WHT)
The Withholding Tax (WHT) is a form of tax in which individuals, firms and corporate bodies are to deduct the tax on all their taxable income from payments by other firms, individuals or corporate organizations.
The Withholding Tax deductions are also known as advance payments or payments on account of the relevant tax liability which arises from the tax returns of the period concerned.
It is expected that these deductions are remitted to the Federal Inland Revenue Service (FIRS) within 30 days. Non-resident companies aren’t free from the Withholding Tax for all Nigerian sourced payments.
6. Capital Gains Tax (CGT)
The Capital Gains Tax is deducted from the profits accrued off the sale of assets and securities by Nigerian companies. Virtually all companies registered in Nigeria that earn capital gains are liable to pay the Capital Gains Tax.
These taxes are calculated and remitted along with the Companies Income Tax (CIT) to the Federal Inland Revenue Service (FIRS) through designated banks.
For real estate businesses, the capital gains tax stands at 10% off the proceeds of the sale of assets without regards on whether they are located in Nigeria or not.
7. Stamp Duties (STD)
Stamp Duties tax is written documents that relate to things between individuals, companies, organizations or group of soles.
They may include financial instruments like bonds, deals, statements, deals, financial transaction, article of association between companies etc.
8. Tertiary Education Trust Fund Tax
The Tertiary Education Trust Fund Tax is a 2% tax separate from the Companies Income Tax. It is deducted from the profits of every resident company in Nigeria and its purpose of the TETFUND tax is to improve the quality of tertiary education in Nigeria.
These funds are used in renovating and building hostels, libraries, buying students buses and infrastructure development in universities, polytechnics and colleges of education in Nigeria. Non-resident companies do not pay the Tertiary Education Trust Fund Tax.
9. Pay-As-You-Earn (PAYE)
The Pay-As-You-Earn is a tax mechanism where personal income tax on salaries remitted to employees is deducted by the employer before payment and sent to the Federal Inland Revenue Service (FIRS).
10. National Information Technology Development Fund (NITDF) Levy
This is an obligatory tax which is applicable to companies in the Information and Communications Technology (ICT) sector.
The National Information Technology Development Fund levy amounts to 1% of the profits of any ICT company in Nigeria with an annual turnover greater than or equal to ₦100,000,000.
Apart from these types of taxes listed above, it is pertinent to note that there are other types of tax acts which weren’t mentioned above. Tax acts such as the Casino tax act, Income Tax Relief or Industrial Development act and the Industrial Inspectorate act.
Some other tax acts are niched and industry-based like the Inland Basin Production sharing contracts act, Deep offshore and Associated Gas Re-injection act. Moreover, there ate still other tax acts that are obligated to those in the oil and gas sector.
Tax Rates In Nigeria
The tax rates in Nigeria changes from in, hence, ist varies among individuals and companies. You pay taxes in Nigeria based on what you earn, not by the size or type of business you do.
1. Individual Tax
Under this category, Nigerians are obligated to pay 25% of their total worldwide income. On the other hand, foreigners and foreign individuals are obligated to pay 25% of the profit they made in Nigeria only.
2. Corporate Tax
Under this category, Nigerian Companies pay 30% of their worldwide profit. Again, foreign companies are to pay 30% of the profit made in Nigeria only.
The educational charge is placed at 2% of the assessable profit while a 10% withholding tax (WTH) is deducted from the dividend payments to individuals, firms and companies.
Business Tax Rates in Nigeria
Just as mentioned in under the types of taxes in Nigeria, the Companies Income Tax (CIT) is a flat rate of 30% from the profits accrued by a company within assessment period (this is the preceding fiscal year).
The Companies Income Tax (CIT) rates are applicable to resident companies for their worldwide income and to foreign or non-resident companies for all income made in the Nigerian economy.
The Companies Income Tax is reduced to 20% for the first five calendar years of operations of small and mid-range companies with export inclined operations in the manufacturing industry, having a turnover of not more than ₦1,000,000.
Furthermore, there is a provision known as minimum tax for small companies with taxes that lesser than the minimum tax range or with no taxable profits for the year under review. The minimum tax can further be explained as follows:
- Companies in this category with a turnover lesser than ₦500,000, the minimum tax is the highest among 0.5% of net assets or 0.5% of gross profits or 0.25% of the company’s share capital or 0.25% of the company’s turnover within the fiscal year under review.
- Companies in this category with a turnover above ₦500,000, the minimum tax are going to be the highest among all of the previously mentioned percentages for a category below ₦500,000, also with the addition of 0.125% of the total amount by which the turnover surpasses ₦500,000.
Tax Identification Number (TIN)
It is expected that any Nigerian who works with the Government (public sector), or works in the private sector or owns a business intends to start up a business venture in Nigeria should get the Tax Identification Number (TIN).
The Tax Identification Number (TIN) is a unique number which is issued, allocated and distributed to companies and individuals in a bid to identify them as registered taxpayers in Nigeria.
Some firms use fully-verified services to help you in verifying, reserve and protect your identity.
The Tax Identification Number must be furnished on Statement, Returns, along with other Tax-related documents.
Tax Administration in Nigeria
The tax administration in Nigeria is settled in the hands of three tax authorities. The Nigerian Laws specifies three legal entities that can levy the taxes on Nigerians. They include;
- Federal Board of Inland Revenue
- State Inland Revenue Board
- Local Government Revenue Service
Federal Board of Inland Revenue
The Federal Government of Nigeria collects taxes via the Federal Board of Inland Revenue. The Federal Board of Inland Revenue is the agency that manages and supervises the revenue laws that relates to the taxes remitted by the residents of the Federal Capital Territory (F.C.T), Abuja.
Here, the taxes are paid by corporate bodies such as limited liability companies. The Federal Board of Inland Revenue is responsible and accountable to the Federal Government for all taxes collected.
They are responsible for the collection of the following taxes;
- Capital Gain Tax.
- Tertiary Education Trust Fund Tax (TETFUND tax).
- Value Added Tax (VAT).
- Withholding Tax.
- Companies Income Tax.
- Corporate Stamp Duties,
- Personal Income Tax from the External Affairs Officers, Nigerian Police officers, Armed forces personnel, residents of the Federal Capital Territory (Abuja) and non-residents.
State Inland Revenue Board
The State Governments receive taxes via the State Board of Internal Revenue. This agency supervises and administers the Personal Income Tax Act.
However, some state governments have made instituted additional revenue statutes, which they manage. These revenue statutes are responsible and accountable to the State Government for the revenue collected.
The state governments are responsible for the collection of the following taxes:
- Individual capital gains.
- Individual withdrawing.
- Personal Income Tax (PIT) of residents via Capital gains tax, Casino taxies, Stamp duties, Pay As You Earn (PAYE) and Road taxes.
Local Government Revenue Authorities
The Local Government is the last tier of government, also known as the government of the grassroots. The Local Government Revenue Service is the in charge of collecting taxes, fines and rates at the local government level.
The Local Government collects taxes, fine and rates through the Local Government Revenue Committee. The committee is responsible to the Local Government Chairman for all revenue collected. Some of the taxes collected by the Local Government administration include;
- Local Levies.
- Shop rent.
- Rent for public car parks.
- License fees.
It is equally important for businesses and taxable persons to know that they are prompted to prepare and submit annual self-assessment tax returns in 90 days from the start of every calendar year and include the amount of tax payable.
For every assessment year, you’re required to file a return of income with the relevant tax authorities where the taxable person(s) or business resides or is based.
Recently, the Federal Government of Nigeria through the office of the Executive launched the Voluntary Assets and Income Declaration Scheme (VAIDS).
The Voluntary Asset and Income Declaration Scheme (VAIDS) is a time-limited opportunity for taxpayers in Nigeria to regularize their tax status pertaining to previous tax periods and pay outstanding taxes and current taxes as at when due taxes due.
The tax system in Nigeria has come a long way to its present level. However, it is expected that new tax policies will be implemented in the long run. These new tax laws should be modifications of the existing and previous taxation policies.
You are responsible to the authorities for payment of taxes. Excuses will not be accepted if you fail to pay your taxes. Hence, ignorance is not an excuse for the tax. Ignorance is not an excuse for the law.
If you are looking to extend your business into the Nigerian soil, it is equally important for you to know the Nigerian tax rates and laws.
We hope that this article has given you a comprehensive view of taxation in Nigeria. Feel free to leave a comment and share!