Friday July 09, 2021 / 09:19 / By CITN / Header image credit: bbc
Income tax is payable on the taxable income or profits generated by businesses from their activities. There are situations where a company’s tax calculation does not result in any tax liability. In such a situation, the company will be subject to tax on the basis of the minimum tax. Section 33(1) of the Companies Income Act, Cap C21, LFN 2004 states that “Notwithstanding any other provision of this Act that in any year of taxation the determination of the aggregate of the taxable profits of all sources of a corporation results in a loss, or where the total specified profit of a corporation results in no tax payable or a tax payable less than the minimum tax, the corporation shall levy and pay the 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 during a taxable year have no taxable profit or whose tax payable is less than the calculated minimum tax.
Many misconceptions and controversies have followed the introduction of minimum tax in Nigeria in the recent past. Taxpayers and authorities have differences 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 company turnover, gross profit, paid-up capital and net assets. of the society. This approach was cumbersome and, in most cases, time-consuming. Arguments have pointed out that this tax is paid on the equity (paid-up capital) and net assets of the company, even when the company is operating at a loss; the exemption granted to companies whose equity capital was imported was greater than or equal to 25% did not allow a level playing field with companies whose equity capital was of local origin and more.
Prior to the amendments introduced by the Finance Acts 2019 and 2020, Subsection 2 of Section 33 of CITA Cap C21, LFN 2004 defined the basis for calculating minimum tax in Nigeria as follows:
(2) For the purposes of subsection (1) of this section, the minimum tax to be collected and payable shall- (a) if the turnover of the company is N500,000 or less and the company is in activity for at least four calendar years are:
(i) 0.5% of gross profit; Where
(ii) 0.5% of net assets; Where
(iii) 0.25% of income paidequity; Where
(iv) 0.25% of the company’s turnover for the year, whichever is greater; Where
(b) if the turnover is more than N500,000, either all that is payable under paragraph (a) of this sub-section plus such additional tax on the amount by which the turnâ€is greater than N500,000 at a rate which shall be 50% of the rate used in paragraph (a)(iv) of this subsection.
The Federal Government in light of these controversies amended the minimum tax regulations in the 2019 and 2020 Finance Acts. Section 14 of the 2019 Finance Act amended CITA Section 33 to introduce a new base minimum tax calculation, moving away from a combination of equity, net assets and income-based approach to a comprehensive 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 exemptions for businesses with imported capital of 25% or more and introduced a minimum tax exemption for small businesses with a gross turnover of less than N25,000,000.
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 change is effective for Years of Assessment (YOA) beginning January 1, 2020 through December 31, 2021.
Companies that do not have taxable profits for the 2020 tax year or whose profits tax is lower than the minimum tax are expected to calculate their minimum tax based on the changes in the 2020 finance law This implies that companies which have filed their declarations for the tax year 2020 based on the accounting year 2019 may be required to file an amended tax declaration when its minimum tax for this period is based on 0, 5% of turnover. In addition, businesses in their first four calendar years of operation as well as businesses engaged in agricultural activities or small businesses are exempt from minimum tax. This also applies to non-life insurance companies at 0.25% of gross premium and to life insurance companies at 0.25% of gross revenue. Also exempt from paying minimum tax are small businesses with an annual turnover of less than 25 million NGN (twenty-five million naira),
Other points to note…
Foreign shares are no longer an exemption basis. Companies with at least 25% foreign capital and local companies are equally exposed to the minimum tax.
Note that dormant companies are not exempt from paying minimum tax in Nigeria. Usually, inactive businesses are assumed to be exempt from paying taxes because they are not yet involved in any gainful activity. However, this assumption is not supported by any provision of the tax laws and the tax authorities do their utmost to ensure that every company registered in Nigeria is required to comply with the tax laws. Owners of dormant companies in Nigeria are strongly recommended to seek the assistance of registered tax professionals to determine their tax risks. Indeed, a company is only exempt from paying taxes in Nigeria in the event of cessation of activity.
The Institute expects its members who present themselves as tax professionals to contribute to full compliance with the tax laws in force in the country. This puts a responsibility on practitioners, not only to ensure their clients are compliant, but also to help businesses ensure they comply with their corporation tax responsibilities before the end of the extended deadline of July 31, 2021.
Second, tax practitioners should strive to avoid unethical practices, as such practices may not be free of consequences when eventually discovered.
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