{"id":38957,"date":"2017-06-20T10:38:09","date_gmt":"2017-06-20T10:38:09","guid":{"rendered":"http:\/\/localhost:8888\/cregital\/disha\/2017\/06\/20\/msme-tax-101-what-is-cit\/"},"modified":"2017-06-20T10:38:09","modified_gmt":"2017-06-20T10:38:09","slug":"msme-tax-101-what-is-cit","status":"publish","type":"post","link":"https:\/\/msmehub.org\/staging\/6671\/msme-tax-101-what-is-cit\/","title":{"rendered":"MSME Tax 101 – What is CIT?"},"content":{"rendered":"
\n

Companies income tax (CIT) is a type of tax levied on profits of limited liability companies accruing in, derived from, brought into or received in Nigeria. The enabling legislation is the Companies Income Tax Act LFN 2007 (CITA), as amended.<\/p>\n

<\/p>\n

\nCIT applies to both resident companies (companies incorporated in Nigeria) and foreign companies (non-resident companies). Nigerian companies are subjected to tax on worldwide income, i.e. all revenue, irrespective of source. While foreign companies are taxed based on derivation principle, i.e. Nigerian sourced income only.<\/span><\/p>\n

<\/span><\/p>\n

2. Basis of Assessment<\/span><\/strong><\/p>\n

Nigeria’s fiscal year runs from January to December. However, companies are assessed to tax on preceding year basis i.e. profits made during the preceding financial year. For instance, the tax payable in 2017 year of assessment is levied on the profits of 2016 financial year.<\/span><\/p>\n

3. Assessment of Income to Tax<\/span><\/strong><\/p>\n

Taxable Profit <\/span><\/em>– Profit upon which income taxes are payable. Taxable profit is arrived at by adjusting accounting profit for exempt income, non-deductible expenses, unutilised tax losses and capital allowances.<\/span><\/p>\n

Exempt Income – <\/span><\/em>These are incomes excluded in determining taxable profit in a particular tax year. Exemption of income from tax is necessitated by the government’s desire to promote certain activities within the economy. Examples of income streams exempted from tax include; dividend received, profits of ecclesiastical, charitable or educational institutions etc.<\/p>\n

Allowable and Disallowable Expenses – <\/span><\/em>CITA has specific provisions on what expenses are allowable and those which are disallowable for tax purposes. However, the general principle on deductibility is that only expenses which are wholly, reasonably, exclusively and necessarily incurred by companies in making the taxable profit are treated as allowable deductions for tax purpose. Where an expense does not meet this criteria, it will be treated as non-deductible for tax purposes.<\/span>1<\/span><\/p>\n

Reliefs – <\/span><\/em>CITA also makes provisions for reliefs which are deductible in arriving at the taxable profit. A typical example of such relief is capital allowance which is granted to tax payers for incurring cost on qualifying capital expenditure.<\/span>2<\/span><\/p>\n

i. Normal Tax<\/span><\/em><\/strong><\/p>\n

CIT is calculated at 30% of taxable profits.<\/span><\/p>\n

Taxable profits = Accounting profit – exempt income + disallowable expenses – reliefs<\/span><\/p>\n

A reduced tax rate of 20% applies to MSMEs with less than N1 million turnover engaged in agricultural, manufacturing, wholly-exported trade and within the first five (5) years of operations.<\/span><\/p>\n

<\/p>\n

ii. Commencement Rule<\/span><\/em><\/strong><\/p>\n

CITA sets out the provisions guiding the taxation of a company during commencement of business. Please see below details of the commencement rule;<\/span><\/p>\n

a. First year of assessment – The assessable profit<\/span>3 <\/span>of the first year of assessment is the profit earned from the day of commencement of business to 31 December of that year.<\/span><\/p>\n

b. Second year of assessment – The assessable profit of the second year of assessment is the profit for the first twelve (12) months of operations.<\/span><\/p>\n

c. Third year of assessment – The assessable profit for the third year of assessment is based on preceding year basis (see paragraph 2 above). It is noteworthy that the profits (of some periods) during the first three (3) years of commencement of business may be subjected to double tax.<\/span><\/p>\n

iii. Minimum T<\/span><\/em><\/strong>ax<\/span><\/strong><\/p>\n

Minimum tax will be applicable where a company has zero taxable profits or where taxable profits is lower than minimum tax. It is calculated as follows:<\/span><\/p>\n

a. The higher of:<\/span><\/em><\/p>\n