Taxation for Dummies (ii)

Suraj Oyewale

The bulk of the revenue of the government of Nigeria comes from direct taxes. Direct taxes, like I explained in the first part of this series , are taxes on income. Income taxes can broadly be divided into personal taxes and corporation (corporate ) taxes. In Nigeria, the corporation taxes can be divided into two: Companies Income Tax and Petroleum Profits Tax. There is also the Education Tax, which is equally based on income. Let’s briefly discuss each of these income taxes.

PERSONAL INCOME TAX (PIT): These are taxes on incomes of individuals, sole proprietorships, partnerships and other unincorporated businesses (e.g ABC & Sons Ventures, XYZ Enterprises etc.). It is governed by the Personal Income Tax Act (PITA), with all the amendments, the latest being that of 2011. Included in the tax net under this Act are those in employment as well as those doing personal businesses inasmuch as the business is not incorporated. For those in employment, their employers are obligated to deduct the tax at source every month and remit same to the government. This arrangement is called Pay As You Earn (PAYE). For businesses, they are to file their PIT returns at the end of each year, deducting their advance tax payments in the form of withholding taxes paid on their transactions during the year, and paying the net tax due to government.

PIT is payable to the state government of the residence of individual or site of that business. It is immaterial which state is the individual’s place of work located. Place of residence is the determinant. This means that a person working in Zenith Bank Head Office in Victoria Island, Lagos, but lives in Alagomeji in Ogun state, will have his PAYE remitted to Ogun state. The defies simple logic that he spends most of his time in Lagos, uses Lagos roads more etc. The law, anyway, is an ass. Penkelemesi Ventures in Ibadan, as another example, will pay its taxes to Oyo state government. For men in armed forces and residents of the Federal Capital, the tax goes to the purse of Federal Government.

The tax rate for PIT progresses with income. First N300,000 of annual taxable pay is taxed at 7%, next is taxed at 11%, next N500,000 taxed at 15%, next at 19%, next N1.6m taxed at 21% and income in excess of N3.2m is taxed at 24%. Taxable pay is arrived at after giving some reliefs and allowances like employee’s contribution to pension and National Housing Fund, life assurance premium, and consolidated relief allowance (20% of gross income plus whichever is higher of N200,000 and 1% of gross income). After these deductions, the rest (taxable pay) is taxed at the rate above. The total tax payable at the end of the computation should not be less than 1% of gross income, else the former is discarded for the latter, which is called minimum tax. The computation is the same whether it is for individuals or unincorporated businesses, only that a business, if it has been paying taxes in the form of WHT before, will have it deducted from its total tax payable. This is why WHT is generally regarded as advance payment of income tax.

COMPANIES INCOME TAX (CIT): This is payable by all companies registered in Nigeria under the Companies and Allied Matters Act (CAMA). This means that any company that is Limited Liability Company (LTD) or Public Limited Liability Company (Plc) is subject to tax under Companies Income Tax Act (CITA). The only exception are companies that engage in petroleum operations, that is, companies operating in the upstream sub-sector of Nigeria’s oil and gas sector. The tax rate is 30% of total profits, or in the case of ‘small companies’, 20%. Small companies as defined by CITA are those engaging in local manufacturing, with turnover of less than one million naira.

Total profit being referred to here is different from the accounting profit reflected in a company’ financial statements. A number of adjustments go into the computation of total profit, which is beyond the scope of this essay. It should also be noted that there are some incentives such as pioneer legislation which, if granted on application, exempts some companies from payment of CIT for the first three years of operation, which is extensible by one or two years. MTN and NLNG are few of the companies that enjoyed this.

Foreign companies that want to operate in Nigeria are required to register under CAMA, which makes them liable to Nigerian CIT. This means MTN, Citibank, Standard Chartered Bank, Nestle, Julius Berger, etc. which are not Nigerian businesses, are fully subject to income tax in Nigeria. However, for a foreign company that is not present in Nigeria, but comes to Nigeria for a transaction e.g training, tax is applicable by way of WHT on the income it earns in Nigeria, subject to double taxation treaty, if any, with its home country.

PETROLEUM PROFITS TAX (PPT): I mentioned earlier that any company operating in Nigeria is subject to Companies Income Tax except those engaging in petroleum operations. Those that engage in petroleum operations are taxable under the Petroleum Profits Tax Act (PPTA). Petroleum operations include oil and gas exploration, production and development activities. This means that oil refining, marketing and servicing activities are not regarded as petroleum operations. Going to specifics, it means Oando Marketing Limited, Total Nigeria Plc (downstream), Kaduna Refinery (KPRC), Schlumberger are subject to CIT, not PPT, because they engage in marketing, refining and servicing respectively. Conversely, Oando Exploration and Production Limited, Shell, Total E&P Limited, Chevron etc . are subject to PPT because they engage in production and exploration activities.

By the nature of the industry (capital intensive) petroleum operations is quite complex as there are various arrangements in the industry such as production sharing contract, joint venture, risk service contract, etc. Tax rate ranges from 50% to 85%, depending on the nature of the operations.

EDUCATION TAX (EDT): Education tax is a product of the agitation for better funding of education in Nigeria by some activist groups, notably Attahiru Jega-led ASUU, in late 80’s to early 90’s. The result was the enactment of the Education Tax Act, which requires all Nigerian companies to pay 2% of their assessable profits as education tax. Assessable profit, the base of EDT, is different from total profit, the base of CIT and PPT. The latter is arrived at after some adjustments to the former, which means assessable profit is usually higher than total profit. For companies taxed under PPTA, the education tax is allowed to be deducted before arriving at total profit to base PPT on. This is a palliative, given the high tax rate in the industry.

EDT, like CIT and PPT, is payable to Federal government and administered by the Federal Inland Revenue Service (FIRS). There is the Education Trust Fund that oversees the disbursement of EDT collected, which is shared between tertiary, secondary and primary school system. The portion that goes to tertiary education is also disbursed to universities, polytechnics and colleges of education in the ratio 2:1:1.