Starting a Business in Nigeria - part 2 - Tax registration and tax system

Tax system and compliance.

Tax is a levy imposed by a government on individuals or corporate bodies. Tax system varies from one country to another. Understanding tax system of a country will help you to determine how to go about doing a business in that country. The Nigerian Finance Act of 2021 made or amended some of these tax provisions as follows :

Value Added Tax (VAT)

All goods and services supplied in Nigeria are liable to VAT in Nigeria except goods and services specifically listed in the First Schedule to the Act. To this end, all goods and services consumed or otherwise utilized in Nigeria are subject to VAT. This is in line with the “destination principle” of VAT. Based on this definition of goods and services Software services are VATable in Nigeria except where the turnover of the company turnover is less than N25,000,000.

Under the new law the non resident companies (NRC) must add 7.5% to the local company’s invoice and report same to Federal Inland Revenue Service.

Withholding Tax (WHT)

Any Investment income paid by a Nigerian resident to a non-resident company is subject to WHT at source, and its serves as the final tax. Any WHT deducted at source from its Nigeria-source income is available as offset against the CIT liability save for non-resident companies carrying out PCMT services where the WHT paid at 10% is deemed to be final tax.

Company Income Tax( CIT)

Non-resident company (NRC) are subject to CIT on their Nigeria-sourced income.

The CIT rate is 30% for large companies (i.e. companies with gross turnover greater than NGN 100 million), assessed on a preceding year basis (i.e. tax is charged on profits for the accounting year ending in the year preceding assessment).

Digital Services Tax

Recently the Federal Government has declared that non-resident companies (NRC) are mandated to remit 6% of turnover from digital services provided to Nigerian customers .It also defines NRC as company not registered or incorporated in Nigeria but makes profits or income from Nigeria these include Amazon AliExpress, Twitter, Zoom Inc. and others digital services provided through apps, trading platforms, online ads etc.While this may not exactly fit your business model since it is a retail based i.e B 2 C your software service which is contractual in nature is a B 2 B business model.

Taxes Digital services Partnership ( GGR or Profit share)

VAT Act as agent of FIRS for the collection of 7.5% VAT Pay 7.5% of profit attributable to your taxable presence in Nigeria.

CIT

 6% of turnover 0 % (below N25,000,000)

20%( btw N25,000,000 -N100,000,000)

30%(over N100,000,000)

WHT N/a 10%

Education tax 2%.

Petroleum Profit Tax (PPT)

This tax is governed by the Petroleum Profit Tax Act. It is levied on the profit of each accounting period of companies engaged in the upstream petroleum operations in lieu of company income tax. All companies engaged in petroleum operations are chargeable under the Petroleum Profit Tax Act.

The petroleum profit tax rate is 50% for petroleum operations under the production sharing contracts; 65.75% for non-production sharing contract operations, paid in the first five years during which the company has not fully paid off all the pre-production capitalized expenditure; 85% for non-production sharing contracts operations after the first five years.

Personal Income Tax

This tax is governed by the Personal Income Tax Act(PITA). Below are the schedule of chargeable income and the rate of tax to be paid. It is charged on the income of individuals and sole proprietors etc. To determine the tax rate to be paid, the simplified calculation is the income- expenses and deductions.

It is paid as PAYE (Pay as You Earn) by people in employment, whose employer deducts the tax at source and the option of self-assessment by self-employed individuals, paid directly to the tax authorities. Personal Income Taxes are collected by the various states Internal Revenue Services.

TAX REGISTRATION

After registration of your company, the next thing is to register for Tax Identification Number, known as TIN. Although certificate of incorporation now carries your company's TIN, you need to approach your tax station to regularize your documentation. To this, the following documents are required:

1.  Tax registration form duly filled, signed and sealed.

2.  An application letter seeking to register or regularize your tax registration.

3.  An application letter for VAT registration.

4.  Copies of company incorporation documents.

5.  A utility bill.