Companies Income Tax (CIT) is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. Company income tax is one of the most important sources of revenue collection for the Government of Nigeria. In 2016, the revenue target for Companies Income Tax was N1.877 trillion representing approximately 40% of the total projected tax revenue of N4.957 trillion for the year.
CIT is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived from, brought into or received from a trade, business or investment. Also companies paying dividends to its shareholders are first obliged to pay tax on its profits at the companies’ tax rate. Generally, in Nigeria Company dividends or other company distribution whether or not of a capital nature made by a Nigerian is liable to tax at source of 10%. However dividends paid in the form of bonus share or scrip shares to individual shareholders are not subject to tax. Also where a company is a shareholder in another company then such dividends are excluded from the profits of the company for the purposes of computation of the tax. Notwithstanding, companies limited by guarantee, incorporated trustees, Partnerships and foreign companies who do not have a permanent place of business in Nigeria are exempted from CIT.
Companies Income Tax was introduce in 1939 as a source of revenue for the Federal Government of Nigeria. First tax on companies was imposed under the companies Income Tax of 1939. This was to cover the aspect of income tax that was all covered by the Native Revenue Ordinance of 1917 with all its subsequent amendments. In 1940 the income tax ordinance 1940 was promulgated to consolidate the Companies Income Tax ordinance of 1939. Tax under the 1940 was imposed upon any “person” and this expression was defined to include a company.
By 1943, the income Tax Ordinance was enacted for Lagos resident and foreigners including private organizations which took care of some major changes such as the introduction of penalties and failure to file in a return to keep the required accounting records or to furnish any false return which offences are punishable with fine or imprisonment or both.
Chick Fiscal commission preceded the 1954 constitution, which was the first federal constitution In Nigeria recommended that the two taxes imposed under the income Tax Ordinance of 1943 is within the exclusive jurisdiction of the Federal Government. The present tax system in Nigeria has its roots in the Raisman Fiscal Commission recommendation that jurisdiction our companies income tax be exclusive to the Federal Government and that the states except for certain uniform principles should have jurisdiction over personal income Tax. It was in the light of this that the 1960 constitution conferred an exclusive fiscal power upon the Federal Government to impose taxes on the incomes and profit of companies consequently the company’s income tax Act (CITA) 1981 was enacted to repeal the income Tax Ordinance, Cap 85 which itself repealed the income Tax Ordinance of 1943 CITA, 1961 has undergone several amendments hitherto.
1. All trade and business related activities without considering the time for which they have been carried are taxable.
2. Rent and all the premiums that are arising from the company operations are also charged with tax when it comes to Companies Income Tax. In this regard the period of rent is not considered by the government.
3. The dividends that are distributed to the share holders of public limited companies are also taxable. This is the provision 1C of the Companies Income Tax Act where it has also been mentioned that all interests, royalties and discounts are also charged with tax.
4. The source of annual profit that does not fall within the categories mentioned above is also charged with tax.
5. Any amount the company receives in terms of profits according to the provisions that are mentioned within the income tax act is also taxable.
6. All short term fund raising acts performed by the company is also considered to be taxable under this act. It includes Federal Government security, treasury bonds, saving and debenture certificates are also charged under this act.
Section 19 of CITA gives a comprehensive list of income of a company exempted from tax as follows:
1. Profits of a statutory or registered society;
2. Profits of a co-operative society registered under any law relating thereto;
3. Profits of any company engaged in ecclesiastical, charitable or educational activities of public character;
4. Profits of any company formed to promote sporting activities;
5. Profits of a trade union registered under any law relating thereto;
6. Interest received by any company from Federal Savings Bank;
7. Profits of any company engaged in petroleum operations in so far as such profits are taxed under the Petroleum Profits Tax Act.
8. Profits of any company established as a purchase authority by a state to acquire commodity for export from Nigeria from the purchase and sale of that commodity.
9. Profits of any company or corporation established by the law of a state for the purpose of fostering the economic development of that state.
10. Profits of a company other than a Nigerian company which, but for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria.
For non-resident companies engaged in any form of trade or business in Nigeria, the profits shall be deemed to be derived from Nigeria for tax purposes: –
1. If that Company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base;
2. If it does not have such a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorized to conduct on its behalf or on behalf of some other companies controlled by it or which have a controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the Company to the extent that the profit is attributable to the business or trade or activities carried on through that person.
3. If that trade or business or activities involves a single contract for surveys, deliveries, installations or construction, the profit from that contract; and where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the Company and such person in their commercial or financial relations which in the opinion of the board is deemed to be artificial or fictitious, so much of the profit will be adjusted by the board to reflect arm’s length transaction.
The taxable period is the fiscal year, which runs from 1 January to 31 December.
Nigerian companies file their tax returns based on a self-assessment system where the taxpayer prepares its annual returns and determines its tax liability. However, the FIRS may apply a best of judgment (BOJ) assessment where it is of the opinion that the tax returns filed are deliberately misstated or where no returns are filed within the stipulated period.
A company that files its self-assessment within six months after the accounting year-end can apply to the FIRS in writing to pay its income tax in installments. The maximum number of installments the FIRS may approve is three. Evidence of the first installment has to accompany the tax returns filed in order to qualify for the installment payment. However, all payments have to be made not later than eight months after the financial year-end.
Assessments are made on a preceding year basis. This means that the financial statements for a period ended in 2016 will form the basis for the 2017 year of assessment.
Companies are required to register for tax and file their audited accounts and tax computations with the FIRS within six months of their financial year end on a self-assessment basis or 18 months after incorporation (whichever comes first). A company may file an application for extension of filing tax returns for up to two months at the discretion of the FIRS.
Upon registration, a company is issued a TIN, which serves as the company's file number for all federal taxes and future correspondence with the FIRS.
The company must file the following documents with the tax authority on an annual basis:
Tax computation for the relevant year of assessment.
The audited financial statements for the respective period; this should be in conformity with the International Financial Reporting Standards (IFRS).
A duly completed and signed self-assessment form for CIT.
Evidence of remittance of the income tax liability (partly or in full).
Failure to file CIT returns attracts a penalty of NGN 25,000 for the first month and NGN 5,000 for each subsequent month of default. Late payment of CIT attracts a 10% penalty and interest at the commercial rate.
Generally, the tax authority will commence a desk examination of a taxpayer's returns immediately after filing. This may be followed by a tax monitoring exercise whereby tax officers visit taxpayers to conduct an interview and on-site high level review of their tax affairs.
Random or specific tax audit may be carried out usually within six years of filing tax returns. In unusual cases, a back-duty tax investigation may be conducted for more than six years, especially where a tax fraud or willful default is suspected.
Gone are the days when audit process was cumbersome and like a treadmill, FIRS now has an audit style that contains a dashboard for monitoring the progress of tax audits. Altogether there is a timescale of three months from commencement of audit to completion broken into one or two weeks for different activities (field work, initial report, reconciliation meetings, assessment). Colour green, amber, or red are used to indicate if everything is ‘on time’, ‘becoming due’, or ‘overdue’ respectively.
The tax authority may run a tax audit and issue an additional assessment within six years from the relevant tax year. However, the limitation does not apply in the event of a fraud, willful default, failure or neglect by the company.
Finally, reorganization of the current tax system is crucial to bringing about changes in the system in order to generate more revenue and set off an improved tax administration in the country. The impact of the reforms have started to manifest in the form of improved consistency and standards in application of laws and procedures, synchronization of the various types of companies and proper supervision of their activities, reduction in functional duplication and waste, faster service delivery to the tax payers and higher revenue collection.