5 WAYS TO REDUCE INCOME TAX LIABILITY IN NIGERIA
Dealing with taxes is a nightmare for business owners. In a world characterized by falling oil prices in recent years, taxes have become the new oil, with countries striving for two digits tax-to-GDP ratios.
You probably wonder how this affects your business. What all this means is that business owners will continually face revision in tax rates and a clamp down on compliance. That is, stiffer penalties for default and pretty much zero tolerance for non-compliance.
Bummer, I know. But it is possible to leverage on existing tax laws in Nigeria to avoid taxes (perfectly legal) and/or reduce the income tax liabilities of your business. This is what we call tax planning. Unless you have intentions of defrauding the government—which could land you in jail—you want to arrange your business affairs so that you enjoy maximum allowances, exemptions and reliefs.
Below are 5 ways to legally reduce the income tax liability of your business:
1. Choose the Right Accounting Date for your Business
Accounting date simply means the period (12 months) to which your company prepares its annual accounts. For some this could be December 31 annually (Jan 1 – Dec 31) or it could fall within the year like April 30 annually (May 1 – Apr 30).
Depending on the nature of your business, past trends often helps you decide the right date to choose. The idea is to limit the amount of profit available for tax assessment in the year, and in turn reduce the income tax liability of your business.
There is a simple logic to this. If your business has increasing profit towards the end of the year, then you should pick an earlier date. Likewise, if your business will face falling profits towards the end of the year, then it’s safer to pick a later date. Again, the nature of your business e.g. taking into consideration sales peak and off-peak seasons, will affect your accounting year.
No matter the choice you make now, note that it is possible to change the accounting date of your business. You could contact your accountant for advice based on your company’s information.
2. Take advantage of Incentives—Reliefs and Allowances
The government has been kind enough to offer incentives that exempt or reduce the income tax liabilities of your business… provided you know what they are.
Tax incentives are reduction by the government in tax payment to attract and person or company to invest in a country. They can come as reduction is tax rates, allowances or payment exemption.
Some of the most common incentives are:
- Pioneer Legislation: Covering about 44 industries, this incentive provides tax holiday for a minimum of 3 years and at most 5 years. Pioneer status given to encourage development or establishment of certain industries in Nigeria.
- Investment in economic disadvantaged areas: Attracts 100% tax holidays for 7 years and 5% depreciation over and above the initial capital depreciation.
- Investment in solid minerals: This gets you 3 – 5 years tax holidays; deferred royalty payment depending on the volume of investment; possible capitalization of expenditure on exploration and survey; provision for 100% ownership of mining company; rollover relief on Capital gains Tax and 95% once-for-all capital allowance with 5% retention value until disposal.
- Investment in Tourism: 25% of income from foreign tourists by a hotel is tax exempt, provided that the income gets invested and used within 5 years for the building expansion of new hotels, conference centres and new facilities for tourism development.
- Export-oriented industries: This incentive applies to industries that export not less than 6% of their product. You get 10% concession for 5 years.
- Capital allowance on assets: Capital allowance accounts for wear and tear of fixed assets used within an accounting year in generating income. Accounting profit subjected to tax is cut by applying fixed rates as approved by the tax authorities.
It is to your company’s benefit that you buy fixed assets like office equipment, as they play a significant role in reducing your income tax liability.
3. Plan your Business Expenses
Every business incurs expenditure. If your business is a vehicle, expenses are the fuel that runs the engine. Business expenditure could be either capital or recurrent. Capital expenditures are covered by incentives granted on fixed assets.
Recurrent expenditure like rental expenses, salaries etc. are deductible expenses only when incurred wholly, exclusively, necessarily and reasonably in making profits. This means that any money spent on expenses must be solely for the purpose of the business; a necessity in earning income, and reasonable when compared with earlier years or industry standards.
All expenses fitting into this bracket are fully deducible from income in generating profits assessed to tax.
There are however expenses which are not allowable except they fulfill certain conditions:
- Donations: It’s common for companies to give money for charitable cause to NGO and organizations. However, tax applies unless these organizations are in the approved list as contained in Schedule 5 of CITA. There are about 41 approved organizations e.g. Boys Brigade, Girls Guide, Nigerian Red Cross, ICAN, Boys Scout, Christian Association of Nigeria, Islāmic Education Trust etc.
- Provisions: Allowed only when they are specific and not general.
It’s important to keep in mind the approved expenses and conditions involved in reducing your income tax liability for effective planning.
Related: First steps: How to Start a Business
4. Choose Tax Friendly Investment Options
Investing funds is a good way to raise more income for your business. Certain investment options are tax exempt and a few other attract withholding taxes.
Tax exempt income include interest from borrowings to the government e.g. treasury bills, bonds; and interest on loans received. On the other hand, royalty income, dividend, interest on fixed deposit attract withholding tax at source and exempted from further taxes.
As you see, it’s advisable to invest in government securities like treasury bills as they are not taxable and attract higher rates of return. It may also help to consider sources of finance for your business as you choose between debt finance and equity finance (through shares).
5. Collect your Withholding tax receipts
Withholding tax (WHT) is one of the most common taxes levied in Nigeria. This tax is paid on contract for supplies, services, dividends, interest, director fees, etc. As stated above, withholding tax on directors’ fees and dividends are final; however withholding taxes on contract for supplies and services are not. Usually deducted at source, withholding tax is an advance payment on income and deducted from your income liability.
For example assume you carry out a service to your client attracting a =N=100,000 WHT deduction. Within that same year, your income tax liability is =N= 1m. Deducting=N=100,000 from your calculated tax liability brings the total amount down to =N=900,000.
To claim this deduction you must present a Withholding tax credit note. Your clients must first remit your invoice deductions to the FIRS, before a credit note is given. The credit note stands as an evidence to tax payment. It is therefore necessary that you ask for WHT credit notes from all clients who have deducted withholding tax from you.
This list is by no means exhaustive. But if applied diligently with the aid of a tax consultant, it will add value to your business, impact greatly on your profit and reduce your income tax liability.