Fundamentals of Company Income Taxation (CIT)
A company is made up of individuals who by an act of their own volition choose to set up a legal entity for the sake of doing business or operating a business enterprise. We can further say that the legal entity formed by individuals for doing business is called a company. As companies carry out business operations, they are bound to either make profit or loss in a certain accounting period, certain incomes will accrue to the company by virtue of operations due to their existence. An income is simply money received in exchange for providing labour or producing a good or rendering a particular service. An income can either be earned or unearned, a salary earner receives an earned income while a landlord through the collection of rent receives an unearned income showing that money received from investing funds or investments is also an income. A company depending on its business type and model also gets income which should be taxed by the government, this brings us to the issue of Company Income Tax. By way of definition, tax can be simply defined as a compulsory/involuntary financial charge imposed or levied by the government or by a sovereign power on the incomes, profits, goods, services or properties of individuals and companies, trusts and settlements for the purpose of financing public expenditure or as a fiscal tool for controlling the economy.
Company Income Tax as the name goes is simply the tax collected by government on the profits made by a company. Company Income Tax Act (CITA), defines Company Income Tax as tax payable on the profits of a company accruing in, derived from, brought into or received in Nigeria (Section 9 CITA). Company Income Tax is accessed from the profits of companies that were registered or incorporated in Nigeria or companies that are referred to as non- resident carrying out business in Nigeria. For the purpose of tax, a company is said to be non-resident when the control and management of that company is not in the country it is residing or operating in. The tax is paid by limited liability companies inclusive of the public limited liability companies. It is therefore commonly referred to as corporate tax.
BRIEF HISTORY OF COMPANY INCOME TAX
History has it that personal and business taxation were being taxed together or were taxed by the same legal provision, however, the first enactment for Companies Income Tax in Nigeria was done in 1939 by the Companies Income Tax Ordinance. The Ordinance was not very effective as individuals were not brought into tax net and its ineffectiveness led to it being repealed a year after and it gave way to Income Tax Ordinance 1940. The Ordinance was in use until 1961 when another law purpose of exclusive taxation of companies’ income was passed and it became known as the Companies Income Tax Act No. 22 of 1961. After eighteen years of its implementation, it was repealed by the Companies Income Tax Act No. 28 of 1979, several amendments were made that led to the Company Income Tax Act of 1979. At present, the law which governs the taxation of companies (other than companies engaged in petroleum operations) is the Companies Income Tax Amendment Act of 2007
FILING FOR COMPANY INCOME TAX
When filing for Companies Income Tax, the audited financial statement are statutorily required. It is because of the statutory requirement of audited financial statements that External auditors are engaged to prepare or certify the accounts to be submitted or presented to the tax authorities. Every registered company is mandated by the tax authorities to file tax returns within six (6) months after the end of a financial year or accounting year, tax returns here means the company’s audited account as well as its completed self- assessment forms. This is for a company that has already been incorporated or registered, however, for a newly registered company, tax returns are meant to be filed Eighteen (18) months after its registration/incorporation or not later than 6 months after its accounting year whichever is earlier.
RELEVANT TAX AUTHORITY
The Relevant Tax Authority for the purpose of Company Income Tax is the Federal Inland Revenue Service (FIRS). The Federal Inland Revenue Service was formerly known as the Federal Board of Internal Revenue (FBIR) and it was enacted by the Federal Inland Revenue Establishment Act in April 2007 which led to the scrapping of the Federal Board of Internal Revenue.
PERSONS CHARGEABLE TO COMPANIES INCOME TAX
According to Section 47 of the Company Income Tax Act, it says that; A company shall be chargeable to Companies Income Tax: – (a) In its own name; or (b) In the name of a principal officer, attorney, factor, agent or representative in Nigeria; or (c) In the name of a receiver or a liquidator, that is, where the company is in receivership or liquidation or its attorney, agent or representative in Nigeria.
ALLOWABLE AND DISALLOWABLE EXPENSES
According to Section 13 of CITA, certain expenses are allowable by CITA and these are expenses that are WHOLLY, NECESSARILY, EXCLUSIVELY and REASONABLY in the production of the profits that will be allowable as deductions for tax purposes.
Examples of allowable expenses provided for in CITA are:
(a) Interest on money borrowed or employed as capital in generating the profits of the company; (b) Rent and premium paid by the company for the period of assessment in respect of land or building, occupied and used for the purpose of generating the profit; where a building is occupied by the company’s employees as residential accommodation, the rent or premium paid by the company which is chargeable or allowable in company’s account for income tax purposes, is restricted to 100% of the basic salary of such employees;
(c) Salaries, wages, or other remuneration as well as any benefits-in-kind or allowance granted by the company to senior staff and executives within the limits prescribed by collective agreement entered into between the company and its employees and as approved by Federal Ministry of Labour, Employment and Productivity;
(d) Repairs and renewal in respect of premises, plant, machinery or fixtures, implements, utensils or articles employed in acquiring the profit;
(e) Bad debts incurred in the course of trade or business proved to have become bad, during the period and specific provision for doubtful debts;
(f) Research and development expenses incurred by the company for the period including levy payable to National Science and Technology Fund;
According to Section 25 of CITA, certain donations are referred to as Allowable Donations.
In ascertaining the profits or losses of a company chargeable to tax for any period, there shall be deducted, donations made during that period by the company; the conditions for allowing such donations are as follows:
(i) Donations must be made to any of the funds, bodies, institutions in Nigeria contained in the Fifth schedule to CITA;
(ii) Donations must be made out of profit, that is, donations shall not be allowed in circumstances where it will increase the loss of a company or convert its profit into a loss;
(iii) Donations must not be of a capital nature except donation to a university or other tertiary or research institutions; and
(iv) Donations must not exceed 10% of the company’s Total profits for an assessment year before any deduction for donation. In the case of donation to tertiary or research institution, up to 15% of Total profit or 25% of tax payable in the year, whichever is higher.
Allowable Deductions – Research and Development Expenditure
In ascertaining the profit or loss of any company for any period from any source chargeable to tax, there shall be deducted the amount of reserve (provision) made out of the profits of that period for Research and Development. Such provision shall not exceed ten percent (10%) of Total Profit of the company for that year before deducting the reserve/provision.
Companies and other organisations engaged in research and development activities for commercialization shall be allowed 20% investment tax credit on their qualifying expenditure for that purpose.
According to Section 27 of CITA, certain expenses are termed Disallowable expenses, these expenses are not allowed in the ascertainment of total profits.
Examples of such expenses include
(a) Capital repaid or withdrawn and any expenditure of a capital nature;
(b) Sums recoverable under an insurance or contract of indemnity;
(c) Taxes on income or profits, except tax levied outside Nigeria on profits, which are also chargeable to tax in Nigeria and in respect of which double tax relief is not available;
(d) Depreciation – In place of depreciation charged in the accounts, and disallowed, capital allowances on qualifying capital expenditure are granted;
(e) Expenses incurred in earning management fees unless prior approval of an agreement giving rise to the management fee has been obtained from the Minister of Finance; and
(f) Any expense of any description incurred as management fee unless under an agreement for which prior approval of the Minister of Finance has been obtained.
PROFITS/INCOME EXEMPTED FROM TAX
According to Section 23 of CITA, The following profits are exempted from tax;
(i) The profits of any company being a statutory or registered friendly society, in so far as such profits are not derived from a trade or business carried on by such society;
(ii) the profits of any company being a co‐operative society registered under any enactment or law relating to co‐operative societies, not being profits from any trade or business carried on by that company other than co‐operative activities solely carried out with its members or from any share or other interest possessed by that company in a trade or business in Nigeria carried on by some other persons or authority;
(iii) The profits of any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company;
(iv)The profits of any company formed for the purpose of promoting sporting activities where such profits are wholly expendable for such purpose, subject to such conditions as the Board may prescribe;
(v) The profits of any company being a trade union registered under the Trade Unions Act in so far as such profits are not derived from a trade or business carried on by such trade union;
(vi) Dividend distributed by Unit Trust;
(vii) The profits of any company being a body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;
(viii) The profits of anybody corporate being a purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria from the purchase and sale (whether for the purposes of export or otherwise) of that commodity;
(ix) the profits of any company or any corporation established by the law of a State for the purpose of fostering the economic development of that State, not being profits derived from any trade or business carried on by that corporation or from any share or other interest possessed by that corporation in a trade or business in Nigeria carried on by some other person or authority;
(x) Any 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;
(xi) Dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels. For the purpose of this subsection,
“Government approved channels”, means the Central Bank of Nigeria, any bank or other corporate body appointed by the Minister as authorised dealer under the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act or any enactment replacing that Act;
(xii) The interest on deposit accounts of a foreign non‐resident company:
Provided that the deposits into the account are transfers wholly of foreign currencies to Nigeria on or after 1 January 1990 through Government approved channels;
(xiii) The interest on foreign currency domiciliary account in Nigeria accruing on or after 1 January 1990;
(xiv) Dividend received from small companies in the manufacturing sector in the first five years of their operation;
(xv) Dividend received from investments in wholly export‐oriented businesses;
(xvi) The profits of any Nigerian company in respect of goods exported from Nigeria, provided that the proceeds from such export are repatriated to Nigeria and are used exclusively for the purchase of raw materials, plant, equipment and spare parts;
(xvi) The profits of a company whose supplies are exclusively inputs to the manufacturing of products for export, provided that the exporter shall give a certificate of purchase of the inputs of the exportable goods to the seller of the supplies.
(xvii) The profit of a company established within an export processing Zone or free trade zone;
Provided that 100 percent production of such company is for export otherwise tax shall accrue proportionately on the profits of the company.
Tax is imposed on the profits of any company accruing in, derived from, brought into or received in Nigeria.
The taxable profits are those in respect of the following:
(a) Any trade or business for whatever period of time such trade or business may have been carried on.
(b) Rent or any premium arising from a right granted to any other persons for the use or occupation of any property.
(c) Dividends, interest, discounts, royalties, charges or annuities.
(d) Any source of annual profits or gain not falling within the preceding categories. The purpose is to ensure that no taxable profits escape the tax net of the Board.
(e) Fees, dues and allowances (wherever paid) for services.
COMPUTATION OF COMPANY INCOME TAX
The computation of company income tax is premised on the determination of the adjusted and taxable profits. Thus, emphasis will be laid on the computation of company income tax with respect to adjusted and taxable profits.
COMPUTATION OF ADJUSTED PROFIT
Adjusted profit is computed after adding back, disallowed expenses and deducting allowable expenses and incomes exempted. The value derived from this computation is the adjusted profit and at this point, education tax rate can be applied. Education tax rate is 2% of adjusted profit.
COMPUTATION OF TAXABLE PROFIT
After arriving at the adjusted profit, there is the need to compute the taxable profit. Thus, the taxable profit is arrived at after adding the balancing charge to the adjusted profit while subtracting the capital allowance and loss relief. The value derived from this computation is the taxable profit and at this point, the relevant tax rate can be applied. The company income tax rate is 30%.
The following information relates to Matog Nigeria Limited for the year ended 31st December, 2014
Gross Profit b/f 44,847
Profit on sale of investment 48
Dividends received (gross) 1,000
Less other Expenses:
Audit Fee 70
Loan Interest 200
Bad Debts 125
General Expenses 500
Salaries & Wages 10,000
Rent & Rates 1,250
Repairs and Maintenance 400
Staff Welfare 1,000
Motor Running 2,100
Travelling Expenses 1,050
Donation 512 20,895
Net profit 25,000
The following additional information is available:
(a) Bad Debt N
Employee’s loan written off 60
General provision 50
Specific debt 85
Bad debt recovered (70)
(b) General expenses are made up as follows: N N
Sundry expenses (allowable) 145
Luncheon vouchers 147
Subscription: Trade 40
Social club 48
Lease on new premises 60
Customer’s claim 20 80
(c) Repairs and Maintenance:
Decoration of new premises 180
Repairs to plant 50
Renovation of old Factory 170
Political parties 150
Boy’s Scout of Nigeria 63
Society for the blind 50
(e) Capital allowances as agreed with the tax authorities is N1,537
(f) The loan interest shown in the profit or loss account is the interest on loan to a friend of one of the management staff of the company.
Required: (i) Computed the Adjusted Profit; and (ii) Income Tax Liability for 2015 year of assessment.
MATOG NIGERIA LIMITED
(i) Computation of Adjusted Profit for the Year Ended 2016
Gross Profit b/f 44,847
Add: Dividend Received 1,000
Less operating expenses allowed:
Audit fee 70
Bad debts (85 – 70) 15
General expenses 392
(145+ 40 + 40 + 20 + 147)
Salaries & Wages 10,000
Rent & Rates 1,250
Repairs & Maintenance 220
Staff welfare 1,000
Motor running 2,100
Travelling expenses 1,050
Donation (63+ 50) 113 18,335
Adjusted Profit 27,512
MATOG NIGERIA LIMITED
(ii) Computation of Tax Liability for Year Ended 2015
Adjusted profit 27,512
Less Education Tax @ 2% 539
(27,512 x 2/102) 26,973
Less: Capital Allowances 1,537
Taxable Profit 25,436
Tax Liability @ 30% of N25,436 7,631
MATOG NIGERIA LIMITED
Computation of Adjusted Profit for the Year 2008 (Indirect Method)
N’000 N’000 N’000
Net profit b/f 25,000
Add Back Disallowable:
Loan Interest 200
Employee’s Loan 60
General Provision 50 110
Subscription (Social Club) 48
Legal Cost (Lease) 60 108
Repairs and Maintenance:
Decoration to new Premises 180
Political Parties 150
ICAN 250 400 2,561
Less: Profit on Sale of Investment (48)
Adjusted Profit 27,513
OTHER BASES OF COMPUTING COMPANIES INCOME TAX PAYABLE Apart from the above, other bases of determining the income tax payable by a company are as follows:
(a) Minimum tax basis – Section 33 CITA
(b) Turnover basis – Section 30 CITA
(c) Dividend basis – Section 19 CITA
Minimum Tax Basis –
According to Section 33 of CITA,
Minimum tax is levied and payable by a company for any year of assessment where:
(a) In the ascertainment of Total Assessable Profits from all sources, a loss occurs; or
(b) Tax on Total Profits is less than the minimum tax as determined below:
(i) Where revenue is N500,000 or below, minimum tax payable shall any of the following depending on which is higher.
- 0.5% of Gross Profits; • 0.5% of Net Assets; • 0.25% of Paid-up Capital; or • 0.25% of Revenue for the year.
(ii) Where revenue is above N500,000, minimum tax payable shall be the sum of:
- Highest factor in (i) above; plus
- 0.125% of revenue in excess of N500,000
We must also know that minimum tax is not applicable to a company where:
- It is carrying on agricultural trade or business;
- At least 25% of its equity is imported; and
- The company has not been in operations for more than four years (i.e. for the first 4 calendar years of its commencement of business).
Turnover Basis –
According to Section 30 of CITA,
The Federal Inland Revenue Service has the power to use its discretion to assess a company on a fair and reasonable percentage of its revenue on its trade or business. However, this option can be exercised by the FIRS in the situation where the company has; (a) No assessable profits; or (b) Assessable profits which in the opinion of the FIRS, are less than might be expected to arise from that trade or business; or (c) The true amount of the assessable profit cannot be readily ascertained. The above therefore implies that whatever figures are arrived at after the application of a fair and reasonable percentage would be taken to be the Assessable Profit for the assessment year concerned.
Dividend Basis –
According to Section 19 of CITA,
Where a dividend is paid out of profit on which no tax is payable due to:
(a) No assessable profits; or
(b) Assessable profits being less than the dividend paid or proposed, the company paying the dividend shall be charged to income tax at the rate of 30% on the dividend paid/proposed as if it were its Total profit for the Assessment year to which the accounts from which the dividend was declared relate.
Assume that during the year ended 31 December, 2010 Matog Limited paid a dividend of N38 million while its Total profit for 2011 Assessment Year (based on the accounts to 31 December 2010) was N20 million.
Invoking the provision of Section 19 CITA, the Federal Inland Revenue Service would revise the company’s tax liability for 2011 Assessment Year by substituting N38m for the company’s Total profit of N20 million. The implication is that the company pays more tax as the amount due would be revised from N6m (N20m at 30%) to N11.4m (N38m at 30%).
PENALTY FOR VIOLATION
In a situation where a company fails to comply with the provision of law, that company shall be liable to pay penalty for late filing. The company shall pay;
N25,000 in the first month in which the failure occurs; and N5,000 for each subsequent month in which the failure continues.
Company Income Tax. Retrieved from http://www.olumuyiwabasiru.com.ng/index.php/using-joomla/extensions/components/content-component/article-categories/78-demo/slides/82-tax (Accessed on June 10.2014).
ICAN Lecture note. Retrieved from http://www.icanig.org/ican/list/38.pdf (Accessed on June 11, 2019).
National Open University of Nigeria Lecture note. Retrieved from http://www.nou.edu.ng/sites/default/files/2017-10/ACC201.pdf (Accessed on June 13, 2019).
Understanding Company Income Tax (2016, September 1). Retrieved from https://guardian.ng/features/understanding-companies-income-tax/ (Accessed on June 14, 2019).
Ewuzie Obinna is a graduate of Accounting, his interests are Auditing and Taxation. He loves to read and write. He writes from Lagos.
You can reach us on these telephone numbers: 08023200801 or 08075765799, or via email: email@example.com.
Alternatively, you can fill the contact form below