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STARTING A BUSINESS IN NIGERIA AND ITS TAX
IMPLICATIONS
IMPLICATIONS
By : Ose Binitie (osebinitie@gmail.com)
When starting a business, one of the foremost things one might consider
would be what kind of business to incorporate. In contemplating that, tax
implications might be one of the pertinent factors. What is the coolest kind of company to
incorporate with the least amount of tax?
would be what kind of business to incorporate. In contemplating that, tax
implications might be one of the pertinent factors. What is the coolest kind of company to
incorporate with the least amount of tax?
According to an
article, SMEs form the majority of the Nigeria’s economy[1]
and it is thus pertinent for them to be able to carry out effective tax
planning. Whether registered as a company or business name, there are certain
tax incentives available. For companies, tax is 30% regardless of the share capital;
of course it does have to meet the minimum, which is N500, 000. There is however
an exemption from paying tax for the first 18 months.[2]
For business names, the owners of a business are subject to personal income
tax. Companies limited by guarantee and incorporated trustees both enjoy tax
exemptions.[3]
But is this really all there is to tax considerations? Sometimes, it seems like
it is the multinational corporations that can take advantage of their corporate
form to minimise the amount of tax they can pay. This is not so.
article, SMEs form the majority of the Nigeria’s economy[1]
and it is thus pertinent for them to be able to carry out effective tax
planning. Whether registered as a company or business name, there are certain
tax incentives available. For companies, tax is 30% regardless of the share capital;
of course it does have to meet the minimum, which is N500, 000. There is however
an exemption from paying tax for the first 18 months.[2]
For business names, the owners of a business are subject to personal income
tax. Companies limited by guarantee and incorporated trustees both enjoy tax
exemptions.[3]
But is this really all there is to tax considerations? Sometimes, it seems like
it is the multinational corporations that can take advantage of their corporate
form to minimise the amount of tax they can pay. This is not so.
For one,
education tax which is payable at the rate of 2%[4]
is exempted for non-resident companies and educational institutions.[5]
For the latter, it would be best to register your company as one limited by
guarantee. Though it may have a rigorous application process, including the
hurdle of obtaining the Attorney General’s consent, it might minimise the
burden of education tax. In this situation, it is advised to weigh the pros and
cons. In addition, National Information Technology
Development Fund (NITDF) Levy is not applicable to businesses with an annual
turnover of less than N100,000,000[6]
education tax which is payable at the rate of 2%[4]
is exempted for non-resident companies and educational institutions.[5]
For the latter, it would be best to register your company as one limited by
guarantee. Though it may have a rigorous application process, including the
hurdle of obtaining the Attorney General’s consent, it might minimise the
burden of education tax. In this situation, it is advised to weigh the pros and
cons. In addition, National Information Technology
Development Fund (NITDF) Levy is not applicable to businesses with an annual
turnover of less than N100,000,000[6]
Value added tax
(VAT)[7]
is consumption tax placed on a product whenever value is added at a stage of
production and at final sale. Input VAT is paid on raw materials or goods and
services used for production purchases or goods for resale or goods imported
directly for sale, while Output VAT refers to charges by taxable person on goods
and services supplied. Where Output VAT is more than Input VAT, the difference
is paid to Federal Inland Revenue Service, but where Input VAT is more than Output
VAT, the taxable person claims a refund.[8]
This is an incentive for owners of small scale businesses who purchase
materials in their own name, or on whatever corporate structure they adopt to
enable them get this refund.
(VAT)[7]
is consumption tax placed on a product whenever value is added at a stage of
production and at final sale. Input VAT is paid on raw materials or goods and
services used for production purchases or goods for resale or goods imported
directly for sale, while Output VAT refers to charges by taxable person on goods
and services supplied. Where Output VAT is more than Input VAT, the difference
is paid to Federal Inland Revenue Service, but where Input VAT is more than Output
VAT, the taxable person claims a refund.[8]
This is an incentive for owners of small scale businesses who purchase
materials in their own name, or on whatever corporate structure they adopt to
enable them get this refund.
The following
items are exempted from VAT: All medical and pharmaceutical products, basic
food items, books and educational materials, baby products, locally produced
fertilizer, agricultural and veterinary medicine, farming machinery and farming
transportation equipment, plant and machinery imported for use in the Export
Processing Zone or Free Trade Zone, provided that 100% production of such
company is for export, plant, machinery and equipment purchased for utilisation
of gas in downstream operations.[9]
Tractors, plough and agricultural equipment and implements purchased for
agricultural purposes, proceeds from the disposal of Short Term Federal
Government of Nigeria Securities and Bonds, proceeds from the disposal of
Short-Term State, Local Government and (Corporate Bonds including
supra-national Bonds) limited to 10
years with effect from December 2011.[10]
items are exempted from VAT: All medical and pharmaceutical products, basic
food items, books and educational materials, baby products, locally produced
fertilizer, agricultural and veterinary medicine, farming machinery and farming
transportation equipment, plant and machinery imported for use in the Export
Processing Zone or Free Trade Zone, provided that 100% production of such
company is for export, plant, machinery and equipment purchased for utilisation
of gas in downstream operations.[9]
Tractors, plough and agricultural equipment and implements purchased for
agricultural purposes, proceeds from the disposal of Short Term Federal
Government of Nigeria Securities and Bonds, proceeds from the disposal of
Short-Term State, Local Government and (Corporate Bonds including
supra-national Bonds) limited to 10
years with effect from December 2011.[10]
So if you are thinking of starting your business in any of these industries,
you would be saving some costs on equipment, and the cost of remitting these
VAT deductions to the FIRS. You would also be saving your customers extra high
expenses. And if your business is already established in any of these industries,
I take it you know this already!
you would be saving some costs on equipment, and the cost of remitting these
VAT deductions to the FIRS. You would also be saving your customers extra high
expenses. And if your business is already established in any of these industries,
I take it you know this already!
[1] Small and Medium Enterprises (SMEs) and its Tax Implication
<wheretoprintmagazine.com/small-and-medium-enterprises-smes-and-its-tax-implication/>
accessed 8th August 2017
<wheretoprintmagazine.com/small-and-medium-enterprises-smes-and-its-tax-implication/>
accessed 8th August 2017
[2] Section 55 Companies Income Tax Act (CITA) LFN 2004
[3] Ibid, Section 23
[4] Tertiary Education Tax Act (TETA) 2011
[5] PWC, ‘TAT decides on tax exempt status of educational institutions’
(PWC 2015) <https://www.google.com.ng/url?sa=t&source=web&rct=j&url=http://pwcnigeria.typepad.com/files/tax-alert_exemption-of-educational-institutions-from-income-taxes.pdf&ved=0ahUKEwjR8aDPxMbVAhWGaFAKHeCqAe8QFggbMAA&usg=AFQjCNGAOU2r6nT-vg8R5jPtJV3C-jnMFA>
Assessed 8th August 2017
(PWC 2015) <https://www.google.com.ng/url?sa=t&source=web&rct=j&url=http://pwcnigeria.typepad.com/files/tax-alert_exemption-of-educational-institutions-from-income-taxes.pdf&ved=0ahUKEwjR8aDPxMbVAhWGaFAKHeCqAe8QFggbMAA&usg=AFQjCNGAOU2r6nT-vg8R5jPtJV3C-jnMFA>
Assessed 8th August 2017
[6] Section 12, National Information Technology Development Agency Act
2007 CAP LFN 449
2007 CAP LFN 449
[7] Investopedia, ‘Value-Added Tax-VAT’ (Investopedia, 2017) <http://www.investopedia.com/terms/v/valueaddedtax.asp>
accessed 5th August 2017
accessed 5th August 2017
[8] FIRS, ‘Frequently Asked Questions and Answers’(1st edn, FIRS 2017)
[9] First Schedule, Value Added Tax Act, Cap VI LFN 2004
[10] Ibid 7
