Taxes are statutory obligations of every citizen and businesses in a
country. It is thus a major factor in determining how much income you
keep to yourself either as a business or as an individual.

For example, a man who pays tax of N1000 on a profit of N1,500 fares
worse than a man who pays tax of N500 on the same profit of N1,500. How
then is this possible you may ask?

The Nigerian tax law provides several means by which one can avoid
paying tax or at least reduce paying excessively. This is not to be
confused with tax evasion, which is considered illegal in Nigeria. Tax
Evasion refers to a deliberate act on the part of a tax payer not to pay
tax.

However, tax avoidance is a legitimate way of avoiding tax by
exploiting loopholes and provisions in the tax code that allow you to
reduce the amount of tax that you pay on your income.

Without much ado, let us look at various forms of loopholes and provisions one can use to avoid tax.

Donate Money to Organizations listed in schedule 5 of CITA

It is quite often that companies donate money to certain
organizations and NGO’s. This is considered a good cause and a sign of
corporate responsibility. However, ONLY donations to certain
organizations are allowed to be excluded from taxable profits. Some of
them are The Boys Brigade, Boys Scout, Christian Council of
Nigeria, Girls Guide, Any Educational Institution recognized by the law,
Islamic Education trust, ICAN, Nigerian Red cross etc. There are about 41 of them as such it is important that you know them. Donations to political parties do not qualify.

When you sell an asset, reinvest it into the same class of asset

If your business owns assets such as equipments that it uses for its
daily operations, it is possible that you may wish to sell them once the
assets are no longer useful to the business.

In the Capital Gains Tax Act, any profit on disposal of an asset
attracts a charge of 10%. However, if the proceeds of the asset sale is
utilized to acquire another asset within the same class of asset, the
tax payable can be deferred for as long as the new asset is in used. So,
assuming you buy a Generator for N2m and decide to sell it a 2 years
later for N1m. And it cost you another N200k as selling expenses for the
generator, you will be liable to a 10% capital gains tax on N800k which
comes to N80k.

With this law, you do not need to pay this N80k immediately provided
you spent the N1m or part of it on acquiring a new generator. However,
the generator must be acquired 12 months before you made the sale or not
more than 12 months after. Please not that if you use the money to buy a
car (even if it is for your business) it will not apply.

Deduct Vat that you pay on your purchases from vat that you receive on your supplies

Value Added Tax is paid on certain goods and services as mandated by
law. However, for companies who are into selling goods and services, you
are allowed to deduct the vat that people charge you for your
purchases. For example, if you are into supplies of furniture and it
cost you N10m to acquire materials that you need to produce the
furniture it is likely that you will be charged an extra 5% of the N10m
(N500k) as Vat.

Consequently, if you sell the furniture for N15m you will charge your
supplier N750 vat. When you are remitting to the government you should
deduct N500k that you paid from the N750k that you collected giving you a
net remittance of N250k only. Most people end up paying the N750k
denying themselves the opportunity of retrieving their cost. Your
business surely does not need this generosity.

Register an NGO (Non Governmental Organisation) or a Trust

Companies Registered as Limited by Guarantee are exempted from paying
tax in Nigeria. Churches, Mosques etc fall under this category. In
addition organisations that are into charitable causes also fall under
this category. Whilst they do not pay taxes, they are not expected to
pay dividends to their owners. Also note that transactions made by them
that results in a profit can equally be taxed. For example, if they
invest in shares and get dividends, they will be taxed 10% withholding
tax.

If you want to run an organisation that pays no tax, then consider setting up first as an NGO.

Apply for Capital Allowance Certificate

Companies periodically buy assets which they employ to use in the
ordinary course of business. The Assets go through wear and tear and
needs to be replaced over time. The wear and tear is a cost the company
must bear and as such is written off (expensed) just as you write off
other cost such as transport, electricity, water bills etc.

However, how this cost is calculated differ from one business to
another and for that reason the tax man does not deduct this cost from
your profits before taxing. In its place, is capital allowance
which is the tax authority’s way of writing off the cost of wear and
tear. To therefore ensure that you enjoy capital allowance, which helps
reduce income tax liability, you must obtain a certificate from the
Ministry of Industry.

A capital allowance can only be issued to you if you have a
Certificate of Acceptance, which is obtained through the Ministry of
Trade. There are consultants who can help you obtain this.

Need help obtaining your WHT? Send us an email info@nairametrics.com

Make sure you collect your withholding tax receipts

Withholding tax (WHT) is one of the most popular form of taxation in
Nigeria. It is paid on contract for supplies, services, director fees,
dividends, interest, etc. Whilst withholding tax on director fees and
dividends is a final tax, Withholding taxes on contracts of supplies and
services is not.

WHT on supplies and services are considered and advance payment on
tax and should be deducted from your income tax. For example, during the
year a total of N1m has been deducted from your invoices by your
clients as withholding tax. In that same year, your tax liabilities have
been calculated as N5m. Before you pay the tax liability of N5m you
MUST deduct the N1m that had been deducted from your invoices during the
year.

This is because the N1m is seen as an advance payment of your tax and
it is kept as credit for you. But to enjoy this credit you must obtain a
WHT Credit Note from
your client. Your client having deducted the money from your invoice
MUST provide you with that credit note (after remitting the deduction on
your behalf to the FIRS) before you can deduct the N1m.

Need help obtaining your WHT? Send us an email info@nairametrics.com

Increase the amount you pay as pension

By law, all employees are mandated to contribute 8% of their Basic,
Transport and Housing Allowance as pension. That amount when paid as
pension is tax deductible (should be deducted from your income before
charging you tax). Since pensions are a form of savings for you,
anything else you add to your pensions gets deducted from your tax as
well. For example, if you increase from 8% to 15% the entire 15% will be
deducted. There is also this Voluntary Withdrawal loophole which was previously being exploited by pension fund contributors. It has since been plugged by some tax authorities.

Invest in industries that the government is promoting with tax incentives

The Nigerian Government as a matter of policy usually have certain
sectors of the economy which they want people to invest in. To get
people to invest in these sectors government usually gives certain
incentives. One of such incentive is a Pioneer Status. If a company is given pioneer status then they are exempted
from paying income tax for a minimum period of 3years and a maximum of 5
years. So they enjoy free tax status you may have to invest in pioneer industries. Dividends paid out of profits during the pioneer period is also exempted from taxes.

When you borrow money from foreign financial institutions make sure you obtain a certificate of capital importation

Some businesses especially in the oil and gas sectors typically
require foreign lines of credit to help supply fund their imports. In
Nigeria. Whist this is not necessarily tax, it is important because when
you pay back the loans in forex you are entitled to access the funds
from the CBN at the official rate. That is huge savings when you
consider the disparity between the official CBN rates and the black
market rates.

If you are a foreign investor bringing in forex

Foreign Investors who bring in foreign exchange into Nigeria must
apply for a Certificate of Capital Importation from the bank within
24hours of transferring the funds. With the CCI the foreign company can
legally repatriate funds such as dividends, profit etc

Decide whether real estates are held as inventory or just as assets.

People who are into real estate constructions are usually considered
as selling the assets in the ordinary course of business. As such their
real estate properties are seen as inventory and not as assets. For
example, sale of apartments are considered inventories according to the
Nigerian Standard Board. As such you will not pay capital gains tax but
income tax of 30%. So, you investing in a real estate you must decide
how you want the assets classified.

If you own a hotel

Section 28E of the Company Income Tax Act
provides that 25% of income received in convertible currencies derived
from tourist by a hotel should be exempted from tax. However this is
provided that the income is put in a reserved fund to be utilized within
5 years for the building expansion of new hotels, conference centres
and new facilities for tourism development. This law is particular of a
huge advantage to hotels situated in high tourist destination spots
since they are more likely to attract foreign guests.

Invest through an offshore SPV registered with a treaty country

Certain countries have a double taxation agreement with Nigeria. What
that means is that foreign investment coming from companies registered
there are given tax concessions. For example, rather than pay 10% on WHT
the government charges 7.5%.

Invest in businesses that are wholly export oriented

Dividends and profits obtained from businesses that are wholly
export oriented are exempted from being taxed in Nigeria. Implication is
that if you are into a business that solely exports the dividends paid
out to its shareholder will not be subjected to tax. In addition, if a
supplier supplies raw materials that is exclusively required for the
manufacture of exports then the profit made by that supplier will also
be exempted from tax. However, the export company must provide a
Certificate of Purchase of Inputs to the supplier.

If you made losses in the past

If your business had churned out losses in the past, then those
losses can be used to reduce taxable profits at periods when profits
will be made. If for example you have made an aggregate  loss of N1m on
the past then in the current year you now make a taxable profit of
N1.5m. Rather than being taxed on N1.5m for that year you will be taxed
on N500k only thus getting a relief of N1m. This is why it is important
to keep proper records and make regular filings of your accounts and
annual returns.

These Tax Avoidance methods are not exhaustive but if applied
correctly and with the aid of a tax consultant may add good value to a
business.

Writer: Nairametrics Research Team