Company Income Tax is a tax on the profits of incorporated entities in Nigeria. It also includes the tax on profits of non-resident companies who accrue or derive profits from Nigeria or bring or receive their income in Nigeria. It is therefore commonly referred to as a corporate tax.
However, corporate tax is only applicable to companies with a turnover above N25million according to Finance Act 2019. It is one of the taxes administered and collected by the Federal Inland Revenue Service (FIRS). Company Income Tax was created by the Companies Income Tax Act (CITA).
Computation of Company Income Tax (CIT)
Computation of company income tax is done on a yearly basis, it is computed generally on a preceding year basis except in the instances of commencement of business operation, cessation of business operation, and change of accounting date, in which case, the actual year basis of computation could be employed.
However, with the Finance Act 2019, commencement and cessation of business operations are now to be on a yearly basis and preceding year basis.
The profit (Profit before Tax) in the Audited Financial Statement (AFS) is taken and adjusted for disallowable expenses like depreciation and others. In doing this, cognizance is taken of the general rule of deductibility of business expense as described in CITA.
The business expense must be wholly, reasonably, exclusively, and necessarily (WREN) incurred in earning the income of the company for the period concerned. There are also expenses that are expressly not allowable or exempted from tax in the Act.
Capital allowances are given at rates specified in the Act on each qualifying expenditure or asset used in earning the income in the year of assessment. Two types of capital allowances are claimable on any qualifying capital expenditure, they are initial and annual. It is allowed as a deduction from assessable profit to arrive at a total profit.
Capital allowances are given in exchange for depreciation for the use of business assets. Depreciation is usually added back to profit because of the different policies and rates used by companies that are capable of producing different profits. Whereas there is a uniform rate of calculation of capital allowances according to the provision of law.
There is a restriction to the amount of capital allowance claimable in any assessment year except for the companies in the manufacturing and agro-allied sectors. Other sectors are restricted to a claim of 66% or 2/3 of assessable profit in an assessment year. Unutilized capital allowance in any year of assessment can be carried forward indefinitely.
At this point, the question of what if the company makes a loss would have crossed your minds but not to worry, the Act has got you covered. Whenever a company makes a loss (normal business loss) in the year of assessment, Company Income Tax would not be computed on such loss, rather the company would be compelled to pay a minimum tax as specified in the Act. Such loss would be accepted as an allowable deduction for future years
of assessments but if not fully utilized, it could be carried forward indefinitely, save in the case of insurance companies who have a maximum four (4) years to carry such losses forward.
The minimum tax rule is not applicable to all companies in the following categories:
- Agro-allied businesses;
- Companies with at least 25% imported capital or foreign participation and
- A company in its first four years of business operations.
These categories of companies are exempted from applying the minimum tax rule.
Rate of Company Income Tax (CIT)
Company Income Tax is charged at 30% of chargeable profits, save in the case of small companies that have a reduced rate of 20%. A small company is one with an annual turnover of N1,000,000 (One Million Naira).
The Finance Act 2019 has changed the above by creating a baseline that companies with a turnover of less than N25million are not supposed to pay company income tax. While companies with turnover of less than N100million are to pay company income tax at the rate of 20%. And companies with turnover of above N100m to pay company income tax at the rate of 30%.
The fact that companies with a turnover of less than N25million are not to pay tax does not mean they should not file company income tax returns.
Due Date to File Company Income Tax Returns
Company Income Tax returns for a new company should be filed with the FIRS, within eighteen (18) months after incorporation or six (6) months after the accounting year-end whichever is earlier.
Companies that have been in business beyond 18 months are required to file Company Income Tax returns 6 months after their year-end.
A company that files returns within six months after the accounting year-end can apply to the FIRS in writing to pay its income tax in installments.
Penalty for Failing to File Company Income Tax
Failure to file Company Income Tax returns attracts a penalty of N25,000 for the first month and N5,000 for each subsequent month of default. Late payment of Company Income Tax attracts a 10% penalty and interest at the commercial rate.
The whole point of this blog was to make you know what is involved in filing your company income tax return and the implication of failure to file it at the appropriate time.
I hope by now that you’ve come to realize filing company income tax return is a technical issue, that you as a businessman might not be able to dabble into.
In filing your company income tax return, you will need a licensed practicing accountant who is an auditor to examine your books and produce Audited Financial Statement which is a primary and key documents in filing the company income tax return.
Secondly, you need a tax practitioner, to do the tax computation and other documents and file the company income tax return.
These two services can be done by one firm and also by two separate firms. However, the two services are not the same, they are two separate services.
Rather, it would be helpful you sign up for our service below. Go ahead and sign up!