Understanding Taxation in Nigeria, An Overview of The Nigerian Tax System 

By Salako, Olufemi Adebayo, ACA 

The British colonial government in April 1927 took measures to enforce and enhance revenue generation with the Native Revenue Ordinance (Amendment). Direct taxation on men was introduced in 1928 without major incidents. However, in October 1929 in Oloko, a town in South Western Nigeria, a census related to taxation was conducted, and the women in the area suspected that this was a prelude to the extension of direct taxation, which had been imposed on the men the previous year.

This led to protests known as the Women’s War. During this time, the tax administrators were traditional chiefs who acted as tax agents. Farm produce and other primary goods were used in lieu of the monetary payment system that we have today. Tax administration has since passed through many modifications and re-conceptions of the current taxing system by the Federal Government of Nigeria under it taxation arm; Federal Inland Revenue Service (FIRS) has since witnessed organisational restructuring.

The enactment of a National Tax Policy improved funding, and legislation, created stronger taxpayer education and dispute resolution mechanism, taxpayer registration and the introduction of the Taxpayer Identification Number (TIN), human capacity building, and automation of key processes, refund mechanism, attention to Double Taxation Agreements (DTA) and the automation of the operations of the service.

The need to develop the non-oil tax as a sustainable source of funding for national development also gained momentum. In collaboration with other agencies like the Corporate Affairs Commission (CAC), and the Central Bank of Nigeria (CBN), The Joint Tax Board has been hard at work to improve the workings of the system.

By law, paying taxes is an obligation required of every individual and entity on earnings as stated in the tax code of the country.

These taxes are paid to the federal, state, and local governments, each of which uses the funds for different priorities and commitments.

The government also uses the revenue so collected to support its people and promote economic growth and also give legitimacy to governance.

Classes of Taxes Levied in Nigeria

Corporate Income Tax (CIT)

Companies resident in Nigeria is required pay corporate income tax (CIT) on their worldwide income while non-residents are subject to CIT on only the profit made from activities in Nigeria.

The tax rate is 30% for large companies. In essence, companies with gross turnover greater than N100 million are assessed on a preceding year basis (PYB) (i.e. tax is charged on profits for the accounting year ending in the year preceding assessment).

Investment income paid by a Nigerian resident to a non-resident is sourced in Nigeria and subject to WHT at source, which serves as the final tax.

For non-resident companies, from countries not covered by a tax treaty, a fixed base rate is adopted. Non-resident digital companies not under tax exemptions and conditions and having a significant economic presence will be subject to income tax in Nigeria on the profit attributable to the taxable presence in Nigeria.

Any company covered under any multilateral agreement to which Nigeria is a party will be treated in the following agreements from the effective date in Nigeria.

The CIT rate for small businesses is 0% for companies with a gross turnover of NGN 25 million or less.

The CIT rate for medium companies per the tax code is 20% for companies with gross turnover greater than N25 million and less than N100 million.

Real Estate Companies that are approved under the Securities and Exchange Commission are exempted from tax on the property-related dome.

Personal Income Tax (PIT)

The tax is imposed on the income of Individuals, Corporate sole or body of individuals, Communities, Families, and Trustees or Executors of any settlement. An individual is entitled to a Consolidated Relief Allowance of N200,000 or 1% of gross income whichever is higher plus 20% of gross income

The rate of the tax ranges from 7% to 24%, depending on the amount of chargeable income. Individuals are subject to a minimum tax of 1% of gross income where the income is less than N300,000 per annum.

The Personal Income Tax is administered by Federal Capital Territory for Abuja residents and States Internal Revenue Service (SIRS) in respect of their residents for all 36 states of the federation. The tax is also administered by FIRS on non-residents, members of the Armed Forces, Police, and Officers of the Nigerian Foreign Service. The due date for filing returns of the tax is 31st March of every year.

The due date for the remittance of PAYE is the 10th day of every succeeding month. An employer is required to file a return of emoluments and tax deducted from the employees in the preceding year not later than 31st January of every year.

Personal income tax administration has not been very effective over the years. This is because only individuals in formal or organized employment pay these taxes as it is usually deducted at source. Many states are beginning to make headway on this with the introduction of technology and the employment of tax personnel who go door-to-door to collect a fixed amount or an amount agreed upon by associations that the individuals belong to.

Petroleum Profit Tax (PPT)

This tax is levied on companies that are involved in upstream petroleum-related business or activity. The PPT rates are levied in the following manner:

• 50% rate is levied for petroleum operations that fall under the production sharing contracts under NNPC.

• 75% rate is levied for non-PSC operations during the first five years of production.

• 85% is applied for non-PSC operations after the first five years of operations and production.

• .Upstream gas profits are taxed at a rate of 30%.

Value Added Tax (VAT)

This is a consumption tax paid on purchased products or rendered services.

The burden of VAT is borne by the final consumer. Unlike Corporate

Income Tax (CIT), VAT is chargeable on goods produced both within and outside Nigeria. However, some goods are specifically exempted from VAT payment by the VAT Act. Examples are non-oil exports. The rate is 5%.

Every taxable business owner is expected to file for their VAT monthly returns not later than the 21st day following the month of transaction.

Withholding Taxes (WHT)

A withholding tax is an income tax paid to the government by the payer of the income rather than by the receiver of the income. WHT deductions are most times referred to as advance income payments. The rate for WHT ranges from 5% to 10% depending on the transaction.

WHT returns must be filed on the 21st day of every subsequent month. Failure to file on the due date attracts N25,000 for the first month of default and N5,000 for every other month the failure continues.

Other Taxes and levies in Nigeria

• Custom Duties: Custom Duties are levied in Nigeria on imported goods and services. They are mostly levied at a rate of 5% to 35%.

• Excise Duties: Excise Duties are levied on products including alcohol, and tobacco at a rate of 20%.

• Property Taxes: Property Taxes are levied in Nigeria, in form of a levy at a rate of 3%.

• Capital Gains Tax: Capital Gains Taxes are levied at a rate of 10% on the disposal of assets.

Police Fund Levy: Under this tax regime, the police fund levy is charged at a rate of 0.005% on the net profit of companies.