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|5 Ways To Reduce Income Tax Liability In Nigeria by scholarsarena: 8:19am On Oct 08, 2017|
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. 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.
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.
CC: lalasticlala, CrazyMan, 1forall
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|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by designVATExcel: 4:47pm On Oct 08, 2017|
Thanks for this. Highly insightful.
One question though under No. 2 Donations and the likes. If a Company, Christian Company, follows the first fruit bible principle, i.e. gives the entire amount received from the first product/ service sale to a church, is this tax exempt?
Also some companies pay tithes every month, can this be treated as non taxable deductions, i.e. can it be deducted from total Income before calculating tax?
Some of these things are confusing.
2 Likes 1 Share
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Ademat7(m): 9:05pm On Oct 08, 2017|
OP are you the writer
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by UjSizzle(f): 11:09am On Oct 19, 2017|
I'm the writer. Wasn't even aware it's on NL.
Should be in Business section though.
@Scholarsarena thanks for sharing
cc Mynd44 Lalasticlala Dominique
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by UjSizzle(f): 11:13am On Oct 19, 2017|
designVATExcel:Donation for religious purposes are allowed only when given to CAN. If it's paid as tithe or first fruits to individual churches, they'll all be disallowed for tax purposes.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by josielewa(m): 11:22am On Oct 19, 2017|
hmmm....dont even know wat 2 say
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Kingdolo(m): 11:22am On Oct 19, 2017|
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by DopeBoss(m): 11:22am On Oct 19, 2017|
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by HAH: 11:23am On Oct 19, 2017|
Very educative, thanks op
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Koolking(m): 11:34am On Oct 19, 2017|
Most Nigerian businesses see WHT as means to save money and reduce vendors cost of goods and services.
They deduct 5% from your invoices and claim WHT deductions, but credit notes takes forever to issue. On investigation, you find out that they don't remit the deductions to govt, rather gather for their businesses.
Wondering if there's a way govt can assist vendors deal with this issue.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Allwility: 11:38am On Oct 19, 2017|
Luxembourg, Monaco, Cayman Island
Click like if you know what I'm thinking.
Share if you don't.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Adesina12: 11:49am On Oct 19, 2017|
Ensure you collect it from them otherwise let them write a separate cheque to board for you to pay along with your service cheque.
Make payment and make a copy of receipt obtained from board and return original to the company, also make sure you collect your copy of the credit note from board
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by FakoMaybach1: 11:51am On Oct 19, 2017|
This is why i have been agitating for tax refund, If Nigeria starts tax refunds like other countries, vendors will make sure the withholding is remitted, cus at the end of the year, u might get some money back. Our country is backward in so many ways
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Tedpgrass: 11:51am On Oct 19, 2017|
Thanks op and UJsizzle for this piece of useful information.
Can you shed some light on this new government.initiative--- taxation identification number... please??
1) Is it any.different to the current system
2) Will it be tagged to bank accounts like BVN
3) what are the implications for people who aren't domiciled... ??double taxation
4) how does it affect or influence VAIDs??
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Koolking(m): 11:57am On Oct 19, 2017|
Thanks for chipping in. it's the people that refuse to move forward due to selfish tendencies.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Silvermoney: 11:57am On Oct 19, 2017|
So after worrying suffering, and hustling day and night about how to make money I should also worry about how to pay tax to the stupidly corrupt and incompetent Nigerian government? God will continue to forbid it. No tax paid, let alone reducing liability.
Let them use their oil money to show us sign of accountability and good governance first. Bloody thieves.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by DirtyGold: 12:00pm On Oct 19, 2017|
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Adesina12: 12:01pm On Oct 19, 2017|
The fact is that you can't runaway from paying tax unless you don't own a company or business
Even as individuals you suppose to pay tax under Pay As You Earn Scheme
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Koolking(m): 12:07pm On Oct 19, 2017|
How do you do that without hurting the relationship? When your customer told you he has remitted and awaiting feedback from FIRS. Same response for years. On probe you found out that it was dishonesty at play.
The FIRS itself is not helping matters, it takes months to process a single remittance. If you don't tip some of their workers, they frustrate the process. Real time and seamless (online) platform would have saved all the headaches but few would be deprived of shady deals.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Nobody: 12:09pm On Oct 19, 2017|
How can you be giving people tips on how to decrease the government income. Infact this is hate speech
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Nobody: 12:14pm On Oct 19, 2017|
do not use signboard for ur company, no tax man go come
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by designVATExcel: 1:07pm On Oct 19, 2017|
Oh thanks, that clarifies it all.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Scholar8200(m): 2:25pm On Oct 19, 2017|
Adesina12:Part of the blame goes to the tax authorities!!! The WHT we remitted in January, at present the Credit notes have not been issued!!!
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by UjSizzle(f): 8:23pm On Oct 19, 2017|
Tedpgrass:1. TIN is not a new initiative. Taxpayers have just been given more awareness in recent times
2. To the best of my knowledge, No. But banks can help new business owners generate TIN.
3. Nigeria is in double taxation agreement (DTA) with a number of countries. In this situation certain reliefs will be granted. In a situation where there is no DTA, commonwealth income tax relief will be applicable for countries within the common wealth and republic of Ireland.
Where neither of this is the case, the country basically charges taxes on income earned in Nigeria only.
4. Like I said, TIN is really just an Identification Number for taxpayers (think of it as the ID number on your passport or national ID card) and has been in existence for a while now. VAIDS scheme was established to bring more elusive taxpayers into the tax net by granting amnesty. Everyone who takes advantage of the scheme will be registered as taxpayers and given a TIN.
Hope this is satisfactory. Sorry for the delay.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by Tedpgrass: 8:28pm On Oct 19, 2017|
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by franchuks(m): 10:08pm On Oct 19, 2017|
Very insightful article boss.... Reminds me of Adv. Taxation of ICAN.
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by davide470(m): 10:14pm On Oct 19, 2017|
UjSizzle:When are we getting married sef?
Nice writeup btw..
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by UjSizzle(f): 12:57am On Oct 20, 2017|
davide470:When you buy the ring
|Re: 5 Ways To Reduce Income Tax Liability In Nigeria by jaybee3(m): 11:18am On Oct 20, 2017|
I'm walking away....from the troubles in my life....i'm walking away
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