Welcome to our ultimate guide on navigating tax laws in Nigeria!
Taxes are the lifeblood of any economy and don’t just appear out of thin air—they’re backed by the law. Knowing these laws is crucial for individuals and businesses in Nigeria to stay compliant and make smart financial choices.
In this article, we’ll dive into the essentials of the Nigerian tax system. We’ll cover types of taxes, how to register and stay compliant, incentives and reliefs, common hurdles, recent updates, and best practices for smooth tax compliance.
Whether you’re a business owner, taxpayer, or just curious about Nigeria’s tax laws, this guide will give you insights and practical tips to help you master the Nigerian tax landscape.
Overview of the Nigerian Tax Laws and System
Nigeria’s tax system is governed by various laws and regulations that outline the different taxes, incentives, and regulations for individuals and businesses.
Three main bodies administer taxes across different government levels:
- Federal Board of Inland Revenue: Manages personal taxes for Federal Capital Territories residents and Companies Income Tax.
- State Inland Revenue Board: Oversees personal income taxes for individuals.
- Local Government Revenue Authorities: Handle charges and levies in their respective areas.
Comprehensive List of Tax Laws in Nigeria
Here’s a rundown of important tax laws in Nigeria, providing a snapshot of the country’s taxation landscape:
- 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
Spotlight on Key Tax Laws in Nigeria
Companies Income Tax Act (CITA)
The Companies Income Tax Act (CITA), Cap C21, LFN 2004, is Nigeria’s cornerstone for taxing companies. It applies to both local and foreign companies operating in Nigeria. Here are some key sections:
- Section 1: Establishes the Board under the Federal Inland Revenue Service.
- Section 9: Sets the tax rate on profits derived within Nigeria.
- Section 24: Allows deductions for expenses incurred in generating these profits, including interest on borrowed capital.
Capital Gains Tax Act
The Capital Gains Tax Act 1990 governs the taxation of capital gains. Companies pay a 10% tax on gains from selling certain assets or exchanging interests. Key points include:
- Section 2: Details the assets and interests subject to capital gains tax.
- Section 6: Lists common taxable assets like stocks, bonds, precious metals, real estate, and property investments.
- Section 11: Explains how to calculate taxable gains, considering the sale price minus any excluded amounts plus allowable expenses.
- Section 26: Provides exemptions and reliefs.
These laws and regulations form the backbone of Nigeria’s taxation framework, ensuring that individuals and businesses understand their obligations and can leverage available benefits.
Personal Income Tax Act
The Personal Income Tax Act 2011 governs taxes on the income of individuals, families, groups, and trustees. Section 1 mandates that every taxable person pays tax to the State Inland Revenue Service where they reside. According to Section 3, tax is due annually on the total income of every taxable person, from both domestic and foreign sources.
Income exempt from Personal Income Tax in Nigeria is detailed in Section 19. Section 81 requires employers to deduct taxes from employees’ pay and remit it to the tax authority.
Value Added Tax (VAT) Act
The Value Added Tax Act 2004 sets the rules for taxing goods and services sold to the public, as outlined in Section 2. The current VAT rate, per the Finance Act 2020, is 7.5%.
The First Schedule of the Act lists goods and services exempt from VAT, 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, educational materials, and books.
Petroleum Profit Tax Act (PPTA)
The Petroleum Profit Tax Act 2004 taxes the income of companies in Nigeria’s upstream petroleum sector. This includes companies involved in crude oil production, petroleum marketing, as well as survey, drilling, and data collection services.
Petroleum operations cover the winning, obtaining, and transporting of petroleum or chargeable oil within Nigeria, but exclude refining. Section 9 defines the profit of an accounting period as the aggregate of the proceeds from the sale of chargeable oil, the value of chargeable oil disposed of, and any income from petroleum operations.
The petroleum tax rate is 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 tax amount depends on the document type and transaction value, as detailed in Section 3. Section 4 states that the Federal Government exclusively imposes, charges, and collects duties on documents related to transactions between a company and individuals, groups, or bodies of individuals. State Governments collect duties on transactions between individuals, at rates agreed with the Federal Government.
Withholding Tax
The Companies Income Tax Act and the Personal Income Tax Act mandate that companies or individuals, resident in Nigeria or not, 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 arises. This tax acts as an advance payment of income tax.
Withholding tax rates are either 5% or 10%, depending on the payment type and whether the recipient is an individual or a corporation.
Recent Changes and Updates in Nigerian Tax Laws
The Nigerian tax landscape evolves constantly. Here are some recent updates:
The Oil and Gas Companies Order 2024
The Nigerian President issued an Executive Order providing tax credits, incentives, and allowances for the oil and gas sector. This includes tax credit incentives for non-associated gas greenfield developments and a 25% investment allowance for qualifying plant and equipment expenditures in midstream oil and gas projects.
Introduction of CGT on Digital Assets
Section 3(a) of the Capital Gains Tax Act (CGTA) now includes digital assets as taxable assets, subject to a 10% Capital Gains Tax (CGT) on profits from their sale.
Tax Deductibility of Capital Losses
Amendments to Section 5 of the CGTA now allow capital losses from asset sales to be deducted from gains made from selling the same type of asset.
Expatriate Employment Levy
In February 2024, the Nigerian Federal Government introduced an Expatriate Employment Handbook, which included an Expatriate Employment Levy. This levy requires Nigerian entities employing resident expatriates to pay an annual fee, with fines for non-compliance. However, implementation has been suspended for further consultation.
Increase in Tertiary Education Tax (TET) Rate
Section 1(2) of the Tertiary Education Trust Fund Act (TETFA) increased the TET rate from 2.5% to 3%. This follows a recent increase from 2% to 2.5% in the 2021 Finance Act.
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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.