Application of the minimum tax to Nigerian companies

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Friday, July 9, 2021 / 9:19 AM / By CITN / Header image credit: bbc

Overview

Income tax is due on taxable income or profits generated by companies from their activities. There are situations where the calculation of a company’s tax does not result in any tax liability. In such a situation, the company will be subject to a tax based on the minimum tax. Section 33 (1) of the Corporations Income Act, Cap C21, LFN 2004 states that “Notwithstanding any other provision of this Act in which any valuation year, the determination of the total taxable profits from all sources of a company results in a loss, or when the total recognized profit of a company does not result in any tax payable or tax payable less than the minimum tax, it must be withheld and paid by the company on minimum tax as prescribed by subsection (2) of this section. By implication, the minimum tax applies to all businesses in Nigeria, especially small and medium-sized enterprises (SMEs), which in any tax year have no taxable profit or whose income is taxable. The tax payable is less than the calculated minimum tax.


There have been many misconceptions and controversies following the introduction of minimum tax in Nigeria in the recent past. Taxpayers and authorities differed on the concept and the application in practice. These include the use of various and different parameters applied in determining the minimum tax payable by companies which include the company’s turnover, gross profit, paid-up capital and assets. net of the company. This approach was cumbersome and, in most cases, time consuming. The arguments emphasized that this tax is paid out of the equity (paid-up capital) and net assets of the company even when it is operating at a loss; the exemption granted to companies with imported capital of 25% and more did not provide a level playing field compared to companies with local capital and more.

Before the changes introduced by the 2019 and 2020 finance laws, subsection 2 of article 33 of CITA Cap C21, LFN 2004 defined the basis for calculating the minimum tax in Nigeria as follows:

(2) For the purposes of paragraph (1) of this article, the minimum tax to be collected and payable is: (a) if the turnover of the company is 500,000 naira or less and the company is in activity for at least four calendar years beâ € ??

(i) 0.5% of gross profit; or

(ii) 0.5% of net assets; or

(iii) 0.25 percent of the paymentâ € ??capitalization; or

(iv) 0.25 percent of the company’s sales for the year, whichever is greater; or

(b) if the turnover exceeds N 500,000, which is payable in paragraph (a) of this paragraph plus this additional tax on the amount by which the tourâ € ??plus is greater than N 500,000 at a rate which shall be 50 percent of the rate used in paragraph (a) (iv) of this subsection.

In light of these controversies, the federal government amended the minimum tax regulations in the 2019 and 2020 finance laws. Article 14 of the 2019 finance law amended Article 33 of the CITA to introduce a new basis for calculating the minimum tax, moving away from a combination of equity, net assets and income-based approach to a full income-based model. In the amendment, the minimum tax is to be calculated at a flat rate of 0.5% of gross turnover less franked investment income. The amendment also removed the exemptions granted to companies with imported equity of 25% and more and introduced a minimum tax exemption for small companies with gross turnover below N 25,000,000.

Article 13 of the 2020 finance law introduced a new amendment to article 33 of the CIT by providing for a 50% reduction in the minimum tax rate of 0.5% of gross turnover less income from placement franked at 0.25%. This amendment is in effect for Valuation Years (YA) starting from January 1, 2020 to December 31, 2021.

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Regulatory guidance

Companies that have no taxable profits for the 2020 tax year or whose profit tax is lower than the minimum tax are supposed to calculate their minimum tax on the basis of the changes to the 2020 finance law This implies that companies that have filed their returns for the 2020 tax year based on the 2019 financial year may be required to file an amended tax return where their minimum tax for this period is based on 0.5%. of sales. In addition, businesses that are in their first four calendar years of operation as well as businesses engaged in agricultural activity or small businesses are exempt from minimum tax. This also applies to non-life insurance companies at 0.25% of gross premium and life insurance companies at 0.25% of gross income. Small businesses with an annual turnover of less than NGN 25 million (twenty-five million naira) are also exempt from paying the minimum tax,

Other points to note …

Foreign participation is no longer a basis for exemption. Companies with at least 25% foreign equity and local companies have the same minimum tax exposure.

Note that dormant companies are not exempt from paying minimum tax in Nigeria. Usually, it is assumed that dormant companies are exempt from paying taxes because they are not yet involved in gainful activity. However, this assumption is not supported by any provision of the tax laws and the tax authorities do everything possible to ensure that every company registered in Nigeria complies with the tax laws. Owners of inactive companies in Nigeria are strongly recommended to seek the assistance of registered tax professionals in determining their tax risks. Indeed, a company is exempt from tax in Nigeria only in the event of cessation of activity.

Conclusion

The Institute expects its members who present themselves as tax specialists to help it fully comply with the tax laws in force in the country. This places a responsibility on practitioners not only to ensure their clients comply but also to help businesses ensure they are in compliance with their tax obligations before the end of the extended July 31, 2021 deadline.

Second, tax practitioners should strive to avoid unethical practices, as such practices might not be unscathed when they are finally discovered.

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Proshare Nigeria Pvt.  Ltd.
Proshare Nigeria Pvt.  Ltd.
Proshare Nigeria Pvt.  Ltd.
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