In human history, taxation has always been a touchy issue, both for the taxed and the taxing body. The bible recorded that Jesus was challenged on taxation and the US’s fight for freedom was a direct fallout of excessive tax.
Even though it is widely said that most Nigerians do not pay taxes, for government and private sector workers, the large body of people in formal employment, and of course people with regulated investments like stocks, shares and savings/deposit accounts this is not the case.
Our employers, stockbrokers or banks most often deduct the tax for us. And most of us never realise that we could be paying less. In this article we have examined the tax situation in the country and show how you can reduce your tax burden.
Who should be collecting taxes?
The Nigerian tax law gives each of the three tiers of government the power to collect taxes. Taxes collected by the Nigerian authorities include company’s income tax, petroleum profit tax, personal income tax, withholding tax, education tax, value added tax, stamp duties, and customs duties.
The tax responsibility for each tier of government has been clearly defined by law and is published in the Joint Tax Board (JTB).
The federal government is responsible for:
Value added tax (VAT), education tax, payroll deductions, companies tax, company stamp duty, individual income tax (armed forces and police personnel, Abuja residents, state diplomats, and non-residents).
The state government is responsible for:
Pay As You Earn (PAYE), direct taxes, payroll deductions (for individuals only), tax on earnings, stamp duty on individuals’ acts, taxes on gaming, transport taxes, tax on commercial premises, development contribution, tax on street names in state capitals, land tax in state capitals, various market taxes.
The local government is responsible for:
Local authorities licence, land tax, alcohol tax, slaughter house tax, tax on civil state acts, street name tax, occupancy of public domain rights, parking rights, domestic animals tax, vehicle tax, livestock tax, tax on shows and private roads, radio/television licence fee, parking fines, household waste tax, tax on billboards.
What you should be paying as an employee
As an employed individual, you should be paying personal income tax on your earned income, which is the totality (gross) of your emoluments. The personal income tax or Pay As You Earn (PAYE) is a monthly tax payment, which is usually deducted at source by your employer. The employer must, however, remit deductions promptly to the tax authority not later than the 10th day of the following month (for PAYE deducted for say May, it must have been remitted by June 10 ).
Your gross income includes your basic salary, allowances (housing, transport, entertainment, etc.) and benefits in kind (BIK). BIK might be in the form of an official vehicle, other assets or a rented apartment. About 5% of the original cost of the asset is usually deemed as part of the employee’s taxable income. Thus, a worker who receives a monthly basic salary of N50, 000 plus N50, 000 as allowances, and an official vehicle worth N200, 000 is recognised as earning a gross of N110, 000 (N10, 000 being 5% of N200, 000).
However, according to the Federal Inland Revenue Service, certain parts of your salary are exempted from taxation. These are deducted from your income before PAYE is applied. Below are the exemptions:
Allowable allowances Upper limit of tax exemption
Rent subsidy/Allowance N100,000p/a
Transport Allowance N15,000 p/a
Meal subsidy/Allowance N5,000 p/a
Utility Allowance N10,000 p/a
Entertainment Allowance N6,000 p/a
Leave Grant 10%of annual basic salary
What this means is that for the employee above who earns N1.320 million p/a, N196,000 p/a –assuming the upper limit is exempted from PAYE. Also exempted are personal allowance (N5,000 plus 20% of gross income), child allowance (N2,500 each for four children), dependent relatives (N2,000 each for two widowed or infirm relatives), medical allowance, vehicle maintenance, pension contributions, retirement benefits, and others. If we assume that our 
employee can make claims on all the above benefits:
Personal allowance – 300, 000
Child allowance (4) – 120, 000
Dependent relatives – 48, 000
Medical allowance – 60, 000
Vehicle maintenance – 48, 000
Pension contribution – 99, 000
Retire – 40,000
All annualised.
That is N715,000 exempted plus the other N196,000, making N911,000 of his annual income tax free. The remaining N409,000 is then taxed. Since PAYE is a monthly charge, this translates to about N35,000 taxable income of a monthly salary of N100,000. Using Table 1 above, the worker should be paying about N4, 000 as tax monthly. PAYE is calculated based on income brackets, with the maximum taxable bracket being 25%. See table above.
Self-employed
Self-employed workers are also expected to pay tax. A self-employed person is someone carrying out trade under a partnership or a business name. The tax paid by such an individual is usually on gains/profits from the business or profession. The self-employed worker is required to declare his income from all sources, including from interest, dividends, discounts enjoyed, etc. Thus, a self-employed worker who made a turnover of N1 million in a given year, where N200, 000 is his gain/profit after deductions (interest on loan, rent, repairs/maintenance, business expenses, etc) will be taxed on N200, 000.
The tax law requires an individual who has just registered or incorporated “a company as a business name or a partnership” to register such with the nearest tax office, “in order to open a file for all of your future tax transactions.” To register with the tax office, you need copies of your CAC registration documents. A value added tax (VAT) form is given to you to fill, along with other forms.
Exempted from tax are interest on borrowed money for the business, rent on business premises, bad/doubtful debts, pensions and annuities (not more than 10% of income), money spent on repairs/maintenance of machinery and on business premises (such as electricity, water, paved road, and others – up to a certain percentage, particularly if the business is situated more than 20km from these infrastructures), etc.
Benefits
Some of the benefits to a self-employed/business include getting a first tax clearance certificate without actually paying any tax that first year. To access loans and funds from financial institutions you have to submit a tax certificate. You can also conduct your business without fear of harassment from tax authorities.
Other exemptions in the personal income category are: dividends, royalties, rents, and other forms of income earned abroad by Nigerians. Thus, money earned offshore by doctors, authors, artistes, sports-persons, lecturers, and other professionals are exempted from tax. However, such monies must be brought into the country “in convertible currencies and paid into a domiciliary account in a bank approved by the government.” What this means is that such monies must come 
in recognised foreign currencies like the US dollar, the Euro, the pound sterling or other such currencies and must be lodged with an approved bank in a foreign currency denominated account.
Investment
Another tax liability for an individual is income from investment activities. Trading in stocks/shares, real estate, money market instruments like treasury bills, bonds, etc. also attract tax payments. You pay taxes on rent, interest payments, dividends, capital gains, etc. Some of these taxes are usually deducted or withheld at source, called withholding tax. Withholding tax is income tax paid in advance. For every transaction you make on the capital markets, either buying or selling shares, a certain portion of your money is withheld as tax. Interest on your deposit account is taxed. They are deducted at source, by the body facilitating the income (capital and money market operators). You pay tenement on residential properties you rented out. If there is any capital gain made on the sales of your assets, you are required to pay tax on that. The maximum rate on any of these incomes is 10%.
However, as mentioned earlier, certain types of royalties, interests and other fees are tax exempt. Royalties from abroad lodged in domiciliary accounts are free from tax, so is interest earned on such accounts.
Business
Businesses also have an obligation to pay tax, except if given a tax break. Companies/businesses pay what is called company income tax (CIT). Companies pay a maximum of 30% of their taxable income. For tax purposes, companies in the country are required to file a return within two years of being incorporated or six months after first year-end, depending on which comes first. As a sweetener to encourage timely self-assessments by companies, a rebate of 1% off the tax liability is extended to a company that files on time and by itself. That is, a self-assessed company liable to a 30% tax is allowed to pay 29%. Also, such a company is given the opportunity to offset its tax liability in six installments.
As with personal income tax, the CIT also enjoys certain exemptions, such as capital allowances (initial allowance/annual allowance),iInvestment allowance, and balancing allowance. According to the tax authorities, “Capital allowances are granted for two reasons. First, it is to encourage those who trade, or do business to develop, modernise and equip their businesses. Second, it is a reality that real commercial profit cannot properly be determined without providing allowances for capital wastage.”
Capital allowance
Capital allowances are claimed on assets such as furniture, machinery, plants, vehicles, and others. However, to qualify for such allowances, the tax body has listed three conditions to be satisfied. These are:
•The capital expenditure must be incurred in the basis period (the year of assessment/purchase)
•The capital expenditure incurred must be the qualifying expenditure as defined under Para. I of Schedule 5 of the PITD, 1993
•The capital expenditure incurred must be for the purposes of the trade or business.
Table 3 on page 10 shows the qualifying expenditures and their rates:
Investment allowance
Companies also enjoy investment allowance on spending on equipment/machinery. The allowance, which is calculated on the cost of the equipment for the tax year when the machine is first used, has a 10% maximum allowable. It is, however, not considered in determining the equipment’s tax written down value. Businesses located far from basic infrastructure like water supply, electricity, telecommunications, etc. are also given special exemptions.
Special allowance
Electricity 50%
Water 30%
Road 15%
Telephone 5%
Companies also pay withholding tax
VAT
Value Added Tax or VAT is charged on goods and services. All goods and services in the country are VATable except for medical/pharmaceutical goods and services, basic food items like rice, yam, beans, etc., services by community banks, educational materials such as books, writing items, rulers, laboratory equipment, and others, services by educational institutions, exported goods and services, newspapers, magazines, agricultural equipment, social services like charities, orphanages, elderly homes, religious services, private transactions: sale of personal items, etc. Though the goods/services above are not VATable, their inputs are.
VAT is a single rate tax of 5%. It involves businesses and government working together. Companies, particularly ones dealing in VATable goods and services, are required to obtain a VAT registration number by registering for VAT, usually within a year of their operations. Once this registration is in place, they are expected to collect VAT on behalf of government and remit monthly.
VAT in and VAT out
This is a term usually used to describe VATable inputs and VATable/exempted output. The way it works is that companies pay VAT on VATable inputs (raw materials used in production) and withhold VAT on VATable outputs (goods/services produced from the input). The cost incurred on the input VAT is deducted from returns on VAT on outputs. The difference is then remitted to government. That is, “the tax liability of a VATable organisation is the difference between VAT on output and VAT on inputs.” However, recoverable input VAT is only on “goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged.”
Any other VAT not directly linked to the stock-in-trade cannot be deducted. Also, VAT on capital items, overheads, and general administration cannot be deducted. Except for exporters that can claim credit for VAT paid on inputs, companies cannot claim credit for VATable inputs of non-VATable goods/services.
Government obligation
A VAT registered company is expected to make VAT remittances after the allowable deductions. But where input VAT exceeds the output VAT, government is expected to make a refund. This is often difficult. What usually happens is that when such a situation arises it is carried forward to offset future VAT liabilities of the company.
Tax clearance certificate
A tax clearance certificate is simply a document issued by the tax authorities to individuals and companies in each assessment year to show they have paid their taxes for the year. The certificate reflects the individual’s/company’s taxable income, tax to be paid, tax actually paid, and balance due, if any.
Why you need one
The law requires that citizens/residents pay tax to make money available to government for necessary development. A tax clearance certificate is proof an individual/business has discharged his/its tax obligations.
A tax certificate is required to facilitate political office aspirations, most government appointments, or win government business/contract. It is often required by embassies for visa processing. A tax clearance certificate is needed when sourcing for funds from banks and other financial services institutions.
How to get one
To get a tax clearance, an individual (employee - either by himself or through his employer) must approach the tax authority. He is provided with a form to file the necessary information regarding his income for the assessment year (the last 12 months). In addition, he/she also provides a written declaration showing the deductions from his income made by his/her employer and the amount of tax paid. Once the tax authority is satisfied the declarations are in order a tax clearance certificate is issued.
The self-employed is required, within a year of starting the business, to register his business name or partnership with the nearest tax office, where a file is then opened for all future tax transactions. He does a self-assessment (declare all his incomes from all sources) using the necessary forms. If the tax authority is satisfied a tax clearance certificate is issued.
Companies are also required to file self-assessment tax returns at the close of their accounting year, which then entitles them to a tax clearance certificate.
How to minimise your tax burden
Many taxpayers complain they pay too much while others in the same income bracket pay relatively little. Well, a taxpayer’s tax burden can be reduced, if he knows how.
•Understand the tax law
First, it is important to fully understand the tax law. The law made provisions for tax exemptions, and you can take advantage of these exemptions only if you know and fully understand them.
•Seek clarifications
Pay a visit to your tax office or to your tax officer and seek clarifications where you are confused. Certain portions of the law may be difficult to understand except you are knowledgeable in taxation matters. It is equally smart to seek professional advice/guidance.
•Know your tax obligation
Many of us do not even know what tax(es) we are supposed to pay. It is important to know the type of tax you are expected to pay, as an individual, a group, or as a business. You can be sure of this only by acquainting yourself with the tax law. If you know your obligations then you will know what incentives are claimable and how to claim such.
•Self-assess yourself and be prompt in payment
The tax law makes provisions for “a 1% self-assessment bonus on tax liability” for a new company that files a self-assessed tax returns “within 18 months from the date of incorporation or six months after its first accounting period, whichever is earlier.” Another benefit is that the company gets to spread tax payment over six months. Conversely, delayed payment could earn a taxpayer severe penalties.
•Apply for exemptions
Though the tax law recognises several incentives/exemptions, it does not give them except you want them, and by want it means you apply to the tax authority to claim them. You apply by completing certain forms obtained from the tax authority.
•Avoid payment where possible
The 10% rate on capital gains on assets could be avoided if you reinvest the gains on similar assets within 12 months of making them. For instance, if you sell a property, the capital gain on the transaction should ordinarily attract a 10% tax rate. But if inside 12 months of such sale, you reinvest the gain in another property then the 10% rate is waived.
