By Audu Monday and Sunday Okpeh
Covenant Capital’s Annual Tax Seminar held on 29 July 2017 was an insightful session. We had seasoned tax professionals share their knowledge on the tax environment in Nigeria. One of the speakers, Mr Wale Ajayi, a Partner at one of the ‘Big 4’ Accounting Firms in Nigeria took us through the Nigeria tax regime for SMEs. We have summarized below the insights he shared at the Seminar.
1. What are taxes?
Taxes are the compulsory levies imposed by the government on people, entities, properties and transactions. According to Frederick the Great (18th Century), “no government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.”
A tax is not a quid pro quo payment by the people to the government. English speakers often use the term to mean “a favor for a favor”. The government is obliged to provide public goods, however, it is not meant to be a direct response to payment of taxes.
2. Overview of Nigerian taxes
Even though taxes are payable by individuals and corporate bodies, such taxes are not levied or imposed on such individuals and corporate bodies. Rather, taxes are levied on the incomes and transactions of these individuals and corporate bodies.
Taxes may be direct or indirect and may be imposed on individuals’ incomes, corporate entities’ incomes, assets and transactions.
3. Tax administration in Nigeria
The administration of taxation in Nigeria is vested in various tax authorities depending on the type of tax under consideration.
Broadly, there are three categories of tax authorities; the Federal Inland Revenue Service (FIRS), the States Internal Revenue Service and the Local Government Revenue Committee. The enabling law in respect of each type of tax will normally contain a provision as to the body charged with the administration of the tax.
4. Overview of SMEs
Small and medium enterprises (SMEs) form the core of majority of the world’s economies. The National Policy on Micro, Small and Medium Enterprises defines Small and Medium Enterprise (SME) as “An entity with between 10 – 200 employees and with an asset value (excluding land and buildings) of ₦5million – ₦500million”. They represent 50% of the GDP and employ about 84% of the labor force in Nigeria.
The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) was established in 2003 to facilitate the promotion and development of a structured and efficient Micro, Small and Medium Enterprises (MSMEs) sector that will enhance sustainable economic development in Nigeria.
5. SMEs Tax Incentives
There are a lot of incentives available to SMEs in Nigeria. Some of them are:
(a) Small business incentive
Companies within the SME bracket are charged to company’s income tax at the rate of 20% instead of the conventional 30% for their first 5 years, which can be renewed for an additional 2 years subject to certain conditions.
(b) Free Trade Zone/Export processing zone Incentives
Section 23(1s) of CITA also exempts a company that is established in an EPZ or free trade zone from payment of taxes. In addition, Section 35(i) – (v) provides that, the profit or gain of a 100% export oriented undertaking established within or outside an export free zone shall be exempt from tax for the first three consecutive assessment years subject to certain conditions.
(c) Agricultural business incentive
Companies carrying on agriculture trade or business will not be subjected to minimum tax. There is also exemption for interest on loans granted by a bank to companies engaged in agricultural trade or business, fabrication of any local plant and machinery and providing working capital for any cottage industry established by the company.
(d) Pioneer Status incentive
A company granted pioneer status will not pay income tax for the period stated in the pioneer certificate. The company will however, pay VAT and also render WHT returns. The pioneer company would however file normal income tax returns which would state ‘NIL’ tax liabilities. The Nigerian Investment Promotion Council (NIPC) is statutorily empowered to grant and issue Pioneer status under parameters laid down by the FG. The NIPC grants pioneer status ranging from 3 to 7 years and is conferred on a product(s) and not a company. Tax holiday begins on the date certified as production day.
(e) Gas Utilization Incentives
A company engaged in gas utilization (downstream operations) shall be granted an initial tax free period of three years, and which may be subject to the satisfactory performance of the business, be renewed for an additional period of two years.
6. Strategies for Managing Taxes
Taxes can be managed by an SME using three approaches. These are:
(a) Business process
● Proper Record Keeping – It is required by law to maintain good records. This among other things will discourage the tax authorities from raising best of judgment assessment which most times will be more than what a taxpayer would have paid if records were properly kept.
● Treat FIRS Correspondence/Tax documents as priority – This must be taken seriously and attended to promptly and professionally.
● Business Financing Method – Financing businesses with loan/debt is cheaper than using equity. Interest on loan is tax deductible. This option should be taken advantage of. Care should be taken however that loans are promptly repaid as and when due.
(b) Accounting and Tax Strategy
● Invest in basic tax knowledge. If you want to run a successful SME, then a little knowledge in tax should be considered.
● Engage tax expert. The use of auditors/tax adviser is not an option when preparing and filing returns. This will save the business a whole lot of money
● Take advantage of tax planning opportunities and incentives. Some examples of these incentives has been discussed above.
(c) Voluntary Tax Compliance
● The cheapest form of tax compliance is voluntary/self-compliance. The FIRS operates a self-assessment regime where a taxpayer can assess himself to tax and file returns on that basis.
● Use of tax amnesty. For example, the recent Voluntary Assets and Income Declaration Scheme (VAIDS) initiative by the Federal Government.
We should always remember that nothing is certain except for death and taxes. Taxes are here to stay, they won’t go away. It is not a punishment but our responsibility as citizens. So let’s brace up.