All questions

Direct taxation of businesses

i Tax on profits

There are three corporate income taxes: companies' income tax (CIT) pursuant to the CITA, hydrocarbon tax (HT) pursuant to the Petroleum Industry Act (PIA), and Petroleum Profits Tax (PPT) pursuant to the Petroleum Profits Tax Act (PPTA).

Determination of taxable profit

CIT is chargeable on the profits of all companies including profits from crude oil as well as field condensates and natural gas liquids derived from associated gas and on profits from associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil.

Expenses are deductible under the CITA if they are 'wholly, exclusively, necessarily and reasonably' incurred in the making of profits. Donations to charities and educational institutions are deductible up to a prescribed limit. Instead of depreciation, capital allowance is allowed annually at specified rates that can be as high as 95 per cent in the first year.

HT is payable on profits from crude oil as well as field condensates and natural gas liquids derived from associated gas.2 HT is not payable on associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil.3 HT is payable by companies who hold a Petroleum Prospecting Licence (PPL) or a Petroleum Mining Licence (PML) issued under the PIA or to companies who convert their Oil Mining Lease (OML) or Oil Prospecting Licence (OPL) to a PML or PPL, respectively.

Under the PIA, all expenses wholly, reasonably, exclusively and necessarily incurred for petroleum operations are deductible for calculating adjusted profit liable to HT. Under the PIA, all expenses wholly, reasonably, exclusively and necessarily incurred for petroleum operations are deductible for calculating adjusted profit liable to HT. The PIA expressly provides that amounts incurred as bad debt, bank charges, cost incurred by affiliates, arbitration or litigation cost, penalties, payments for gas flare, education tax (EDT), CIT, any income tax and profits tax are not deductible for the purpose of ascertaining the adjusted profit liable to HT.

Companies who opt not to convert their OML or OPL will continue to be charged to PPT until their OML or OPL expires. Under the PPTA, expenses are deductible if they are 'wholly, exclusively and necessarily' incurred in the making of the profits. In addition, instead of depreciation, capital allowance is allowed annually at specified rates.

For the purposes of CIT, HT and PPT, taxable profits are arrived at by aggregating all trading income and then deducting exempt income, allowable expenses, capital allowance and carried-forward losses.

For the purposes of CIT, profits are taxed on an accrual basis. The tax is paid after the tax year (that is, on a preceding-year basis). PPT and HT, however, are paid in advance, in monthly instalments based on forecasts of year-end profits and tax; in other words, PPT and HT are paid on a current-year basis with reconciliation made at the end of the tax year to reflect actual profits made in that year.

Profits of a Nigerian company are deemed to accrue in Nigeria regardless of where they arise. Nigerian companies are therefore subject to CIT on worldwide profits. Profits of a non-Nigerian company are taxable in Nigeria to the extent that they arise (or are deemed to arise) in Nigeria – the CITA prescribes various tests for determining this (see Section IV.v).

The CITA also sets out rules for taxation of a company at commencement of business, on change of accounting date and on cessation. The commencement rules and change of accounting date may lead to double taxation on a company.

Capital and income

Taxable profits consist solely of income or trading profits – these are profits that arise from business or trade. Profits that arise from the disposal of a capital asset are not included in income tax computations but are generally chargeable to tax under the Capital Gains Tax (CGT) Act.

Losses

A company that makes trading losses is entitled to treat them as tax-deductible and to carry forward unrecovered losses indefinitely, even if the ownership of the company changes. Losses cannot, however, be carried back or offset against capital gains.

Rates

The CIT rate is 30 per cent for large companies,4 20 per cent for medium-sized companies,5 and zero per cent for small companies.6 The tax rate for HT is 15 per cent for onshore and shallow waters pursuant to a PPL and 30 per cent for onshore and shallow waters pursuant to a PML.7 PIA does not provide the rate of HT for licences granted over deep offshore areas. PPT is payable at rates that vary between 50 and 85 per cent depending on the nature of the taxpayer's operations. A special rate of 65.75 per cent applies when a company has not yet started the sale or bulk disposal of chargeable oil under a programme of continuous production, and all pre-production capitalised costs have not been fully amortised. The CGT rate is 10 per cent.

Administration

Corporate taxes are administered by a single tax authority, the Federal Inland Revenue Service (FIRS). Every company (including a foreign company) is required to file a self-assessment return with the tax authority at least once a year. The filed return must contain the company's audited accounts, tax and capital allowances computation, and a duly completed self-assessment form. The company may pay the tax due on or before the due date for filing, in one lump sum or in instalments, and forward evidence of payment along with its return. For PPT and HT purposes, at least two returns must be filed. The first is filed early in the tax year and is based on forecasts of profit and tax. The second is filed after the end of the tax year and reflects actual profits and tax. If forecasts change during the year, a company may amend the first return from time to time.

EDT of 2.5 per cent of assessable profits is imposed on all companies incorporated in Nigeria except small companies as defined under the CAMA. Assessment and payment of education tax are done together with the assessment and collection of the CIT or PPT, whichever is applicable.

The Industrial Training Fund Act requires every employer with a staff of five or more, or with an annual turnover of 50 million naira and above, to contribute 1 per cent of its annual payroll to the fund established by the Act. An employer may be refunded up to 50 per cent of the amount contributed if the Industrial Training Fund Governing Council is satisfied that the employer's training programme is in accordance with the fund's reimbursement schemes.

The Employees' Compensation Act directs every employer covered by the Act to make a minimum monthly contribution of 1 per cent of its monthly payroll. The scope of the Act extends to both the public and private sectors with the exception of members of the armed forces; however, staff of the armed forces employed in a civilian capacity are covered by the Act.

The National Agency for Science and Engineering Infrastructure (NASENI) Act imposes a levy of 0.25 per cent on the turnover of companies engaged in banking, mobile telecommunication, ICT, aviation, maritime, and oil and gas with a turnover of 100 million naira and above.

The Nigerian Police Trust Fund (Establishment) (NPTF) Act establishes a Police Trust Fund and mandates companies operating in Nigeria to contribute 0.005 per cent of their net profit to the fund. The FIRS is empowered to administer this levy under the amendments to the NPTF Act. The CITA and the Federal Inland Revenue Service (Establishment) Act will now apply to administration, assessment, collection, accounting and enforcement of the levy.

The Niger Delta Development Commission (Establishment) Act mandates every oil or gas company operating in the Niger Delta area to pay 3 per cent of its annual budget to the Commission for tackling ecological problems in the Niger Delta, where most of Nigeria's oil is produced.

The National Information Technology Development Agency (NITDA) Act mandates telecommunications companies, cyber-related companies, pension-related companies, banks and other financial institutions with an annual turnover of 100 million naira or more to pay a levy of 1 per cent of their profits before tax to the NITDA Fund.

Also, the Nigerian Maritime Administration and Safety Agency imposes a 3 per cent levy on all inbound and outbound cargo from ships or shipping companies operating in Nigeria.

The FIRS has introduced an integrated tax administration system to enhance tax administration. Thus, taxpayers are now able to file tax returns and pay their taxes electronically. This has significantly reduced the complexity, time and cost of paying taxes.

Tax grouping

Nigerian law makes no provision for the tax treatment of a group of companies as one entity. Each company within a group is therefore taxable in Nigeria on an individual basis. Consequently, losses suffered by one member of a group of companies cannot be utilised to reduce the tax liability of another company within the group, but must be carried forward and set off against the future profits of the company that incurred them.

ii Other relevant taxes

In addition to income taxes, Nigerian businesses are also subject to other taxes such as value added tax (VAT) under the VAT Act, CGT under the CGT Act and stamp duties under the Stamp Duties Act.

VAT is levied on the supply of all goods and services with a few exceptions. The rate of VAT is 7.5 per cent, and it is collected by the supplier and remitted to the FIRS, except where the supply is to a government agency or the supplier is a foreign company, in which case the purchaser withholds the VAT and remits it to the FIRS. A taxpayer is allowed to recover VAT incurred in acquiring stock-in-trade or inventory, but not VAT incurred on overheads and administration or on capital assets. VAT arises on the sale of choses in action (or intangible contractual rights). Lagos State has also introduced a 5 per cent consumption tax on hotels, restaurants and event centres.

CGT is charged on the gains arising on the disposal of an asset at a rate of 10 per cent. Gains that are applied towards replacing business assets are exempted from CGT, as are gains arising from the disposal of stocks and shares. Gains arising from the disposal of shares in a Nigerian company for an aggregate consideration of 100 million naira or more in any 12 consecutive months is subject to CGT at the rate of 10 per cent. However, if in the year of disposal of the shares, the proceeds are utilised to acquire the shares of any Nigerian company, CGT is not payable. On the other hand, gains arising from a demerger or spin-off are not exempted even where assets have been moved to entities under the same control and ownership as the transferor. Also, CGT is not payable upon the sale or transfer of assets during a business reorganisation if:

  1. the sale or transfer is to a Nigerian company for the purpose of better organisation of that trade, or business or the transfer of its management to Nigeria; and
  2. the entities are related (i.e., one company has control over the other, or both companies are controlled by some other person, or both companies are members of a recognised group of companies for a minimum period of 365 days prior to the date of the reorganisation).

However, if the transferee subsequently disposes of the assets within 365 days after the date of the transaction, the tax exemptions will be rescinded.

The Stamp Duties Act provides for stamp duty to be paid on instruments and transactions, including electronic transactions. The rates are as contained in the Act and can be as high as 6 per cent of the value of the underlying transaction.