COMPANY TAX LIABILITY AND THE MINIMUM TAX RULE; AMENDMENT TO THE PROVISIONS OF THE COMPANY INCOME TAX ACT.

There are two certain things in this life; taxes and death.😃

By virtue of section 42 of the Companies and Allied Matters Act, 2020, upon incorporation of a company in Nigeria, such a company becomes a body corporate capable of exercising all the powers of an incorporated entity.

Significant to the above, Section 24(f) of the Constitution of the Federal Republic of Nigeria (1999) stipulates that one of the duties of a citizen is to declare his income honestly to appropriate and lawful agencies and pay his tax promptly. To this end, one can say that a company incorporated in Nigeria will pass for a corporate citizen who apart from the impositions of the Companies Income Tax Act, owes it as a duty to the Federal Republic of Nigeria to voluntarily file tax returns and remit amount due to the appropriate collecting agency.

Company Income Tax is payable on taxable income or profits generated by companies from their activities. While it is possible for a company not to make taxable profit within a financial year, it is not beneficial to the Government in any way. In-order to ensure that undue advantage is not taken by a taxpayer who is always looking out for loopholes in the law to mitigate his tax exposure, the Companies Income Tax Act has made provision for the payment of minimum tax.

Section 33 (1) of Companies Income Act, (CITA) Cap C21, LFN 2004 states that;

“Notwithstanding any other provisions in this Act where in any year of assessment, the ascertainment of total assessable profits from all sources of a company results in a loss, or where a company's ascertained total profit results in no tax payable or tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed by subsection (2) of this section.”

What this means is that payment of minimum tax is applicable to all companies in Nigeria whether Small, Micro, Medium or Large-scale enterprises who in a particular year of assessment have no profit that can be subjected to tax after allowable deductions might have been made or whose total tax liability is lesser that the minimum tax to be computed under Section 33(2) of the CITA.

Subsection (2) of Section 33 uses various parameters in the determination of the minimum tax payable by a corporate entity thus:[1]

(2) For the purposes of subsection (1) of this section the minimum tax to be levied and paid shall- (a) if the turnover of the company is N500,000 or below and the company has been in   business for at least four calendar years be‐

(i)   0.5 per cent of gross profit; or      

(ii)   0.5 per cent of net assets; or      

(iii)   0.25 per cent of paid‐up capital; or      

(iv)   0.25 per cent of the turnover of the company for the year, whichever is higher; or  

(b)   if the turnover is higher than N500,000, be whatever is payable in paragraph (a) of this subsection plus such additional tax on the amount by which the turn‐over is more than N500,000 at a rate which shall be 50 per cent of the rate used in paragraph (a) (iv) of this subsection. 

          (3) The provisions of this section shall not apply to-

(a). a company carrying on agricultural trade or business as defined in sub-section (9) of section 11 of this Act.

(b). a company with at least 25 percent imported equity capital; and

(c). any company for the first four calendar years of its commencement of business.”

The above however, represent what was obtainable before the introduction of the Finance Acts of 2019 and 2020, respectively, which brought about notable amendments in the parameters and duration used in determining the Minimum Tax liability of a company in an accounting year.

Section 14 of the Finance Act 2019 amended Section 33 of CITA by introducing a new method for the computing minimum tax as opposed to the ones contained in Section 33(2)(a) & (b) of CITA (supra) thus:

          “Section 33 of CITA is amended-

(a)  By substituting for subsection (2), a new subsection ‘(2)’-

‘(2) For the purpose of subsection (1) of this section, the minimum tax to be levied and paid shall be 0.5% of gross turnover of the company, less franked investment income”; and

(b)  In subsection (3), by substituting for paragraph (b), a new paragraph ‘(b)’-

“A company that earns gross turnover of less than N25,000,000 in the relevant year of assessment”.

It is overt that by virtue of this amendment, a general blanket has been made to put the minimum tax payable by any company at 0.5% of gross turnover of a company less franked investment income.[2] The amendment also deleted the exemption granted to companies with imported equity of 25% and above and introduced a minimum tax exemption for small companies with a gross turnover of less than N25,000,000.

Due to the Covid-19 pandemic and the devastating effect recorded by businesses all over the world in 2020, the Federal Government thought it wise to further reduce the minimum tax liability of companies. Section 13 of Finance Act 2020 introduced a further amendment to the already amended Section 33 of CITA by providing a 50% reduction in minimum tax rate from 0.5% of gross turnover less franked investment income to 0.25% thus:

“Section 33 of the Act is amended by substituting for subsection (2), a new subsection (2)-

“(2)” For the purpose of subsection (1), the minimum tax to be levied and paid shall be 0.5% of gross turnover of the company less franked investment income-

Provided, that the applicable minimum tax is reduced to 0.25% for tax returns prepared and filed for any year of assessment falling due on any date between 1 January, 2020 and 31^st December, 2021, both days inclusive.”

As can be gleaned from the amendment reproduced above, the reduction from 0.25% to 0.5% is only effective for the Years of Assessment (YOA) commencing from 1 January 2020 to 31 December 2021 after which the minimum tax reverts to 0.5% unless otherwise stated by the Federal Government.

Therefore, Companies that have no taxable profits for the 2020 year of assessment or whose tax on profits is below the minimum tax are expected to compute their minimum tax based on the amendments of the Finance Act 2020.

Premised on the above, a combination of Section 14 of the Finance Act 2019 and Section 15 of the Finance Act, 2020 will reveal that the only company exempted from paying income tax whether foreign or otherwise or whether taxable profit were made or not, are small companies[3] with annual turnover of below NGN25 million (twenty-five million naira). This exemption does not however, preclude such a small company from filing their tax returns as and when due[4]

CONCLUSION

The above clearly shows that despite the mandate of the Federal Government of to ensure all companies are captured within the tax bracket, the Government is not unmindful of the difficulties facing businesses in Nigeria and has continued to make compromise in-order to ensure that young and striving businesses are not choked with tax liabilities.

REFERENCE MATERIAL

CITN #taxbitontaxthursday: Minimum Tax Application to Nigerian Companies 

 

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[1] This includes the use of a company’s turnover for a particular year or a certain percentage of the gross profit, paid-up capital or net assets  and the duration for which the company has been in business.

[2] Franked investment income is income distributed as dividends to a company from earnings on which corporation tax has already been paid by the distributing company. If ABC company pays franked investment income to XYZ company, XYZ company does not have to pay tax on the income. https://www.investopedia.com/terms/f/franked-investment-income.asp

[3] Section 24 of the Finance Act, 2020 which amended section 25 of the CITA provides: “small sized company” means a company that earns gross turnover of N25,000,000 or less per annum, or as otherwise defined by the Companies Income Tax Act.”. This however, differs from Section 394(3) of the CAMA 2020 which stipulates the following as criteria for being a small company: “it is a private company ; (b) its turnover is not more than N120,000,000 or such amount as may be fixed by the Commission from time to time ; (c) its net assets value is not more than N60,000,000 or such amount as may be fixed by the Commission from time to time ; (d) none of its members is an alien ; (e) none of its members is a government, government corporation or agency or its nominee ; and (f ) in the case of a company having share capital, the directors between themselves hold at least 51% of its equity share capital.”

[4]By the provisions of Part IX of CITA. Companies are required to register for tax and file their audited accounts and tax computations with the FIRS within six months of their financial year-end on a self-assessment basis or 18 months after incorporation (whichever comes first). A company may file an application for extension of filing tax returns for up to two months at the discretion of the FIRS