Company income tax has been distinguished from personal income tax by enacting a separate legislation to cater for it. The legislation is known as Company Income Tax Act 1979 (CITA) as amended. The act defines a company, under section 84, as a corporation established by or under any law (such as the Companies and Allied Matters Act (CAMA) 1990) in force in Nigeria-for instance, or elsewhere.
A Nigerian company is distinguished from a foreign company; the former is liable to company income tax on all its profits wherever they arise, whether or not they have been brought into or received in Nigeria. The profits of the latter, on the other hand, shall be deemed to be derived from Nigeria to the extent to which such profits are not attributable to any part of the operations of the company carried on outside Nigeria. In other words, the profits of a foreign company are taxed to the extent that they are derived from sources within Nigeria. Therefore, this unit shall expose you to the profits that are subjected to tax, ways of ascertaining such profits and persons chargeable to tax.
- describe taxable incomes and profits as specified in the companies income tax act
- itemise allowable and non-allowable deductions in determining adjusted profits for tax purposes
- explain the differences between taxable and non – taxable persons
- discuss the power of the Federal Board of Inland Revenue (FBIR) to appoint an agent for a company who may be asked to pay any tax.
3.0 MAIN CONTENT
3.1 Profits Subject to Tax
Profit can be defined as the surplus of the receipts from the trade or business, over and above the expenditure/expenses necessary for the purpose of earning those receipts. Unless and until you have ascertained that there is such a balance, nothing exists to which the name profit can properly be applied.
In determining whether a particular activity is a trading transaction that gives rise to trading profits, the following factors are given by Arbico/FBIR (1968) in Soyode and Kajola (2006: 284):
- Nature of assets;
- Circumstances of purchase;
- Vocation of taxpayer;
- Number of like transactions;
- The object clause of memorandum and article of association; (f) Length of time property was held by the company;
- Circumstance of sale.
3.1.1 Taxable or Chargeable Profits
Section 8 of CITA imposes tax on the profits of any company accruing in, derived from, brought into or received in Nigeria. The taxable profits under this section are those in respect of the following:
- its gains arising from acquiring or trade or business for whatever period of time such trade or business may have been carried on;
- Dividends, interests, discounts, royalties, charges or annuities;
- Rent or any premium arising from a right granted to any other persons for the use or occupation of any property;
- Fees, dues and allowances (wherever paid) for services;
- Any source of annual profits or gains not falling within the preceding categories. The purpose of this clause is to ensure that no taxable profits escaped the tax net of the board;
- Any amount deemed to be income under a provision of the act, or, with respect to any benefit;
- Any amount of profit from disposing short – term instruments like proceeds arising from a pension or provident fund of the personal income tax act; federal government securities, treasury bills, treasury and savings certificates, debenture certificates and treasury bonds. These taxable profits can be grouped into two broad categories- trading profits and investment income.
3.1.2 Profits Exempted from Tax
The act exempted the profit stated below from tax:
- The profits of a statutory or registered friendly society, provided such profits are not from a trade or business carried on by such society;
- The profits of registered co-operative society provided such profits are not from any trade or business carried on by thatcompany other than cooperative activities solely carried out – with its members or from any share owned or other interest possessed by that company in a trade or business carried on by some other persons or authority;
- The profits of any company engaged in ecclesiastical, charitable or educational activities of a public character, in so far as such profits are not derived from a trade or business carried on by such company. However, where an institution meant for charitable purposes carries on a profitable business, that business is subject to taxation (Soyode & Kajola, 2006);
- The profits of any company formed for the purpose of promoting sporting activities- where the profits are wholly expendable for such purpose, subject to such conditions as the board may prescribe;
- The profits of any company being a trade union registered under any trade union act- in so far as such profits are derived from trade or business carried on by such trade union;
- Dividends distributed by unit trust;
- Dividends derived by a company from another company incorporated in Nigeria. This is subjected to the following conditions.
- The equity participation of the recipient of the dividend in the company paying the dividend is either wholly paid for in foreign currency or by assets brought or imported into Nigeria between not less than 10% of the equity share capital of the company paying the dividend;
- The dividend tax-free period shall commence from the year of Assessment- following the year in which the new capital is brought into Nigeria for the purpose of trade or business.
The tax free period shall continue for five years, if the company paying the dividend is in agricultural business, or engaged in petro – chemicals or liquefied natural gas. The dividend tax free period for any other business apart from the ones mentioned shall be limited to three years. (h) The profits of any company engaged in petroleum operations whose profits are taxable under petroleum profits tax act;
- The profit of any company established by or under any local government law or edit in force in any state of Nigeria;
- The profit of any purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria for the purchase and sale (whether for the purposes of export or otherwise) of that commodity; The profits of any company or any corporation established by the law of the state for the purpose of fostering the economic development of the state, not being profits derived from any trade or business carried on by that corporation or from any share or interest possessed by that corporation in trade or business in Nigeria carried on by some other person or authority;
- Any profits of a company other than Nigerian company, which for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria;
- Dividend, interest, rent and royalty derived by a company from a country outside Nigeria, and brought into Nigeria through government approved channels. Government approved channel means the Central Bank of Nigeria(CBN), or any bank, or other corporate body appointed by the minister as authorised dealer under the foreign exchange act in force at a particular time;
- The interest on deposit accounts of a foreign non-resident company- provided the deposits into the account are transfers wholly of foreign currencies to Nigeria on or after 1st January 1990 through government approved channels;
- Dividend received from investments in wholly export – oriented business;
- Dividend received from small companies in the manufacturing sector in the five years of their operation;
- The profits of any Nigerian company in respect of goods exported from Nigeria, provided that the proceeds from such export are repatriated to Nigeria and are used exclusively of raw materials, plant, equipment and spare parts;
- The profits of a company whose supplies are exclusively inputs to the manufacturing of products for export provided that the exporter shall give a certificate of purchase of the inputs of the exportable goods to the seller of the supplies.
3.1.3 Exemption of Company Profit from Tax by the Federal Executive Council
The Federal Executive Council may exempt by order:
- any company or class of companies from all or any of the provisions of the act; or
- all or any profit of any company or class of companies from any source on ground which appears to be sufficient.
- The federal executive council may, by order amend all or repeal any exemption made by notice or order, in so far as it affects a company.
SELF-ASSESSMENT EXERCISE 1
Discuss how the taxable profit of a company registered in Nigeria is ascertained.
3.2 The Process of Ascertaining Profits
The process of ascertaining the profits of a company for a giving period begins with the preparation of financial statements in accordance with Generally Acceptable Accounting Principles (GAAP) and the provisions of CAMA 1990. Sections 19 & 20 of CITA provide that certain expenses and incomes shall not be included in the computation of profits. This will be discussed shortly.
The accounting profits will therefore, have to be adjusted to obtain the profits for tax purposes. This is called adjusted or assessable profits. Taxable profit is arrived at after the treatment of the following:
(a) loss relief;
(b) capital allowances and balancing allowances;
(c) balancing charge.
3.2.1 Allowable Deductions
For the purpose of ascertaining the profits or losses of any company for any period from any source chargeable to tax under this act, the following expenses wholly, exclusively, necessarily and reasonably incurred in the production of those profits including but without otherwise expanding or limiting the generality of the followings shall be treated as allowable deductions:
(a) Interest paid on money borrowed or employed as capital in acquiring the profits;
(b) Rent paid in respect of land or building occupied for the purpose of acquiring profits, subject in the case of residential accommodation to a maximum of 100% of the basic salary of employees;
(c) In the case of any property–holding company- expenses attributable to the maintenance of the property concerned;
(d) Expenses incurred for the repairs of premises, plant, machinery or fixtures employed in acquiring the profits or for the renewal, repairs, or alteration of any implement, utensils or articles
employed; (e) Bad debts written off and provision for doubtful debts of a specific nature. Any amount recovered in respect of debts written off previously is treated as profits of the year in which such amount was recovered and written back to profit and loss account;
(f) Contribution to a pension, provident or other retirement benefits funds, society or scheme approved by the Joint Tax Board (JTB). Pension funds scheme is a scheme established by the state providing benefits for the old disabled by war or by work; or established by the former employer for employees after long service. Provident fund scheme, on the other hand, is a scheme established by an organisation providing for retirement benefits for the staff or contributors to the scheme;
However, the deduction to be allowed by any company for any year of assessment shall not exceed an amount which is equal to 10% of the total profits of that company for that year, as ascertained before any deduction is made. Companies and other organisations engaged in research and development activities for commercialisation shall be allowed 20% investment tax credit on their qualifying expenditure for that purpose.