By Ademola Adekunbi

Most of the conversation regarding tax in the legal/accounting professions and in public discourse is centred around large organizations that pay large amounts of money as tax (Tax Liability), such as multinational companies.

While this is understandable in that those large amounts form a large part of the country’s tax income, the lack of focus on the tax obligations of small and medium enterprises (SMEs) often lulls them into a false sense of security and nonchalance regarding taxes. More often than not, this continues until they run into serious problems (the various kinds of which we’ll cover later in this piece).

Legal compliance is crucial for any business to succeed. From taxation and data protection to other laws and regulations, staying on the right side of the law can be the difference between building a successful business and seeing it collapse under the weight of legal liability. Understanding the system and your obligations is the first step to compliance, and the following are the most crucial, basic points to bear in mind:

What are the Taxes Payable?

Companies Income Tax (CIT)

CIT is the foremost tax that all companies have to pay in Nigeria, except those in the petroleum industry, where the Petroleum Profits Tax is payable instead. The Federal Inland Revenue Service (FIRS) is responsible for collecting this tax, and it’s calculated based on the taxable profits of the company in the preceding year (certain expenses can be deducted from the actual profits, which reduces the taxable profits and thus the amount of Tax Liability). Prior to the passage of the Finance Act which came into force in January, the rate was generally 30%. Now, the applicable rate depends on the size of the company from a revenue standpoint. Companies with less than a 25 Million Naira turnover in a year are exempt, and companies with more than 25 Million in turnover but less than 100 Million will be taxed at 20%. Larger companies will be taxed at 30%.

Capital Gains Tax (CGT)

CGT applies where there is a sale of one asset from one person or corporate entity to another. The types of property to which it applies are referred to as Chargeable Assets, and they encompass physical and non-physical property such as land, buildings, machinery and intellectual property like patents and trademarks, although there are several exemptions based on the kind of organization and transaction. For instance, the sale of certain securities such as government bonds are exempt, as are gains from mergers and acquisitions, to the extent that no cash payment is made. As with CIT, there is also a provision for certain expenses to be deducted before the computation of the Tax Liability. The rate is usually 10% of the profit made on the sold assets.

Personal Income Tax (PIT)

Often called “pay as you earn” or “PAYE” due to its progressive nature (the rate rises along with your income), this refers to the tax that every individual is expected to pay on their earnings from their employment (including self-employment), whether such earnings are in the form of a monthly salary or wages, or bonuses, allowances or benefits. The rate ranges from 7% to 24%, applied at different tiers of income. Businesses are obligated to deduct the Tax Liability of their staff before remitting the remainder to them, and then paying the total sum for all employees to the relevant Tax Authority (the state revenue service). Self-employed persons have to compute the tax themselves and pay the amount directly.

Value Added Tax (VAT)

Formerly 5%, the VAT rate was increased to 7.5% in the Finance Act, as cited earlier. It is applicable on all goods and services produced within or imported into Nigeria, with the exception of those specifically exempted in the Value Added Tax Act such as products for export, books and educational materials, medical services and pharmaceutical products. The Minister of Finance is also empowered to issue orders to modify aspects of the tax. Unlike CIT and PIT, VAT returns are due on a monthly basis, and must be filed not later than the 21st day of the month following the month in which any taxable transactions occurred.

Stamp Duty

The Stamp Duty Act makes this tax payable on a range of documents and transactions such as bank deposit or transfer, loan agreement, Memorandum of Understanding (MoU) related to land, sales agreement, will, tenancy/lease agreement and all receipts. The Tax Obligation is calculated based on the amount involved in the transaction, and instruments that are required to be stamped under the Stamp Duties Act must be stamped within 40 days after the parties sign the document involved.

Withholding Tax

This is not an actual type of tax, but it’s equally important because it places obligations on companies to collect taxes and remit them on an ongoing basis as opposed to waiting till the end of the year to tally up the figures and pay the total Tax Liability. If your company enters into a contract to purchase some products, for instance, you will have to deduct the tax sum from the invoice, pay it to the Tax Authority and pay the balance to the supplier. Failure to deduct the tax is an offence, as is failure to remit the deducted sum. The implication of this is that tax compliance is a constant process. Leaving it to the end of the financial year is dangerous, as we will highlight later.

Other Taxes

Apart from the taxes highlighted above, there are a range of other taxes which companies may have to pay, depending on the industries in which you operate and other factors including business model, size (based on income), and industry. It is crucial to bear in mind that the list below is not exhaustive, and that they are by no means less important or less dangerous to a company if left unpaid.

1.Customs duties
2.Excise duties
3.Property taxes
4.Police Fund levy
5.National Housing Fund (NHF) contributions
6.Information technology levy
7.Petroleum Profit Tax
8.Education Tax

Consequences of Failure to Pay Taxes

The consequences of not paying your taxes as and when due vary based on the particular tax which you owe. The penalties can range from interest being added to the amount you owe on a continuous basis, or a penalty being levied by the appropriate tax authority. Your business might be sued by the government and your property may be seized to pay off the debt. In addition, you will not be able to get a tax clearance certificate, which is a key requirement for submitting tenders for most contracts both from the government and in the private sector as well.

As officers of the company, you may also be exposed to personal criminal liability under some of the tax laws, with some offences such as making false statements or conniving to evade tax carrying punishments of up to 5 years imprisonment.

Conclusion

Although it might appear that the tax system is very expensive and complicated and would take extensive amounts of time to comply with fully, based on the sheer number of taxes, nothing could be further from the truth. With the help of a professional, you can implement tax planning strategies to minimize your Tax Liability legally. In many cases, you might not have to pay any tax at all based on exemptions in the laws, and you might even be entitled to refunds after paying, in some circumstances. With that, you will be able to focus on scaling your business and reaping the benefits of being fully compliant and free from any negative regulatory actions, apart from the satisfaction of playing your part to better society.

Ademola Adekunbi is a Legal Analyst at Balogun Harold, a law firm in Lagos focused on technology and investments practice. He can be reached at 08137523769.