Welcome to our comprehensive guide on navigating tax laws in Nigeria.
Taxes play a crucial role in any country’s economy and do not appear out of nowhere; they are fully supported by the law. Understanding these laws is essential for individuals and businesses operating in Nigeria to ensure compliance and make informed financial decisions.
In this article, we will explore the key aspects of the Nigerian tax system, including the types of taxes, tax registration and compliance, incentives and reliefs, common challenges, recent changes, and best practices for tax compliance.
Whether you’re a business owner, taxpayer, or simply interested in understanding Nigeria’s tax laws, this guide aims to provide valuable insights and practical information to help you navigate the intricacies of the Nigerian tax system.
Table of Content
- Introduction
- Overview of the Nigerian Tax System
- Key Tax Laws in Nigeria
- Recent Changes and Updates in Tax Laws
- Best Practices for Tax Compliance
- Conclusion
- Recap
Overview of the Nigerian Tax Laws and System
The Nigerian tax system is governed by a variety of laws and regulations that cover different aspects of taxation.
These laws cover a wide range of taxes, incentives, and regulations that individuals and businesses need to be aware of in order to fulfil their tax obligations and take advantage of available benefits.
Taxes in Nigeria are administered by three bodies across different levels of government namely: the Federal Board of Inland Revenue (administers personal tax of residents of the Federal Capital Territories and Companies Income Tax); the State Inland Revenue Board, which administers individuals personal income; and the Local Government Revenue authorities that administer charges, and levies in their respective jurisdictions.
Key Tax Laws in Nigeria
In this section, we will go into the important tax laws in Nigeria, providing an overview of the regulations that govern taxation in the country.
The following are the existing tax legislation in Nigeria:
- Associated Gas Re-Injection Act
- Capital Gains Tax Act
- Casino Act
- Companies Income Tax Act
- Deep Offshore and Inland Basin Production Sharing Contracts Act
- Federal Inland Revenue Service (Establishment) Act
- Income Tax (Authorised Communications) Act
- Industrial Development (Income Tax Relief) Act
- Industrial Inspectorate Act
- National Information Technology Development Act
- Nigerian Export Processing Zones Act
- Nigeria LNG (Fiscal Incentive Guarantees and Assurances) Act
- Oil and Gas Export Free Zones Act
- Personal Income Tax Act
- Petroleum Profits Tax Act
- Stamp Duties Act
- Taxes and Levies (Approved List for Collection) Act
- Tertiary Education Trust Fund Act
- Value Added Tax Act
Now that we have seen all the tax laws in Nigeria, we will take a deeper look at the most key tax legislation in Nigeria:
Company Income Tax Act (CITA)
The Company Income Tax Act (CITA), Cap C21, LFN 2004 is the main law that controls how companies in Nigeria are taxed. Company Income Tax is a tax on a company’s profits from all its sources. It also applies to foreign companies doing business in Nigeria. Section 1 of the Act sets out the rules for creating the Board, which operates through the Federal Inland Revenue Service. Section 9 of the Act specifies the tax rate on a company’s profits derived from Nigeria. Section 24 allows deductions for expenses incurred in producing those profits, including interest on borrowed capital.
Capital Gains Tax Act
The Capital Gains Tax Act 1990 is the main law for capital gains tax. Companies pay a 10% tax on the gains they make when they sell certain assets or exchange certain interests as provided by Section 2 of the Act.
Common assets subject to this tax include stocks, bonds, precious metals, real estate, and property investments stipulated by Section 6 of the Act. Section 11 explains how to calculate taxable gains from the disposal of assets.
It includes the consideration received minus any excluded amount, plus allowable expenses. Section 26 of the Act allows for some exemptions and reliefs.
Personal Income Tax Act
The Personal Income Tax Act 2011 (as amended) is the law that governs the tax charged on the income of individuals, families, bodies of individuals, and trustees. According to Section 1 of the Act, every taxable person is required to pay the tax to the State Inland Revenue Service where they live.
Section 3 of the Act states that tax must be paid every year on the total income of every taxable person from sources inside or outside Nigeria.
Income exempted from paying Personal Income Tax in Nigeria is covered under Section 19 of the Act. Section 81 of the Act states that employers are required to deduct taxes from their employee’s pay and send the money to the tax authority.
Value Added Tax Act
The Value Added Tax Act 2004 governs the taxes on goods and services sold to the public as provided by Section 2 of the Act. The current VAT rate is 7.5%, as per the Finance Act 2020 amendment.
The Act’s First Schedule lists the goods and services exempt from this tax, including medical and pharmaceutical products, certain exports, baby products, humanitarian initiatives, machinery and equipment for the solid minerals sector, agricultural equipment, basic food items, residential rents, education materials, and books.
Petroleum Profit Tax Act (PPTA)
The Petroleum Profit Tax Act 2004 (as amended) imposes taxes on the income of companies in the upstream petroleum sector in Nigeria. This includes companies involved in crude oil production, and petroleum marketing, as well as survey, drilling, and data collection services.
Petroleum operations are defined as the winning, obtaining, and transportation of petroleum or chargeable oil in Nigeria by a company for its own account. This includes drilling, extracting, and similar operations, but not refining at a refinery.
Under Section 9, the profit of an accounting period is the aggregate of the proceeds of the sale of chargeable oil, the value of chargeable oil disposed of, and any income from petroleum operations.
The petroleum tax is currently 85%, except for companies under the Production Sharing Contract (PSC), which is 50%.
Stamp Duties Act
The Stamp Duties Act LFN 2004 governs taxes on documents. The amount of tax to be paid depends on the type of document and the transaction value, as stated in Section 3 of the Act.
According to Section 4 of the Act, the Federal Government is the only authority allowed to impose, charge, and collect duties on documents related to transactions between a company and an individual, group, or body of individuals. State Governments collect duties on transactions between individuals at a rate agreed upon with the Federal Government.
Withholding Tax
The Companies Income Tax Act and the Personal Income Tax Act require companies or individuals, whether resident in Nigeria or not, to withhold tax from payments for goods and services provided to individuals or companies in Nigeria. Withholding tax must be filed within 21 days after the duty to deduct arose for deductions from companies. This tax is an advance payment of income tax.
Withholding tax is 5% or 10%, depending on the type of payment or nature of the transaction and whether the recipient is an individual or a corporation.
Nigerian tax laws are always being reviewed and updated to align with global best practices and local economic conditions.
Recent Changes and Updates in Nigerian Tax Laws
As times are changing, so is the Nigerian tax landscape. In this article, we highlight some of the recent tax updates in Nigeria recently.
Introduction of CGT on disposal of digital assets
Section 3(a) of the Capital Gains Tax Act (CGTA) has been changed to include digital assets in the list of taxable assets subject to Capital Gains Tax (CGT) when sold. This means that a 10% CGT will now be applied to profits made from selling digital assets.
Tax deductibility of capital losses from chargeable gains
Capital losses from selling an asset can now be deducted from any gains made from selling that same type of asset. This change is part of the amendment to Section 5 of the CGTA.
The Expatriate Employment Levy
In February 2024, the Nigerian Federal Government introduced an Expatriate Employment Handbook which included an Expatriate Employment Levy. The levy requires Nigerian entities engaging resident Expatriates to pay an annual levy and imposes fines for non-compliance. However, the implementation of the Levy was later suspended for further consultation.
Increase in TET rate
Section 1(2) of the TETFA was amended by increasing the rate of TET from 2.5% to 3%. It should be noted that the tertiary education tax rate was recently increased in the 2021 Finance Act from 2% to 2.5%.
The Oil and Gas Companies Order 2024
The Nigerian President issued an Executive Order to provide tax credits, incentives, and allowances for Nigerian Oil and Gas stakeholders. The Order includes tax credit incentives for non-associated gas greenfield developments. It grants an investment allowance of 25% of the actual expenditure incurred on gas utilization for qualifying plant and equipment expenditures in midstream oil and gas projects.
Best Practices for Tax Compliance
Ensuring tax compliance is essential for individuals and businesses alike. One of the best practices for tax compliance is to keep accurate and organized financial records throughout the year. This includes maintaining records of income, expenses, and any relevant documentation for tax deductions.
Additionally, staying up to date with changes in tax laws and regulations is crucial to ensure compliance.
For professional assistance and to ensure 100% compliance with taxes, you can sign up with Taxpal today. You can also book a call with our expert team can provide guidance and support to navigate the complexities of tax compliance, helping to avoid potential issues and penalties.
Conclusion
In conclusion, navigating tax laws in Nigeria might seem difficult but individuals and businesses must stay abreast to ensure compliance and good business decisions. It is also important to stay updated with changes and best practices for tax compliance to ensure smooth operations within the Nigerian tax framework.