Understanding Companies Income Tax – Part 2
Basis for Computing CIT
CIT computation is done for each year of assessment separately. It is done generally on preceding year basis except in commencement of business operation and cessation and change in accounting date. The profit in the audited account is taken and adjusted for non-tax items. In doing this, cognisance is taken of the general rule for deductibility of business expense. This expenditure must be Wholly, Reasonably, Exclusively and Necessarily (WREN) incurred in earning the income of the company for the underlying period. There are also expenses that are expressly not allowable or exempted from tax in the Act.
Capital allowances at specified rates are given to the taxpayers on qualifying assets used in earning the income in the year of assessment. The capital allowances are given in place of depreciation for the use of business assets. Depreciation is usually added back to profit because of the different polices and rates used by companies which are capable of producing different profits. The capital allowances are given at rates specified in the Act on each qualifying asset and allowed as a deduction from the assessable profit to arrive at the total profit. There is restriction as to the amount of capital allowances that can be claimed in any year of assessment except in manufacturing and agro-allied sectors. Other sectors are restricted to a claim of 662/3% of the assessable profit in an assessment year. Any capital allowances not utilised in a year is carried forward indefinitely.
Assessable profit is the profits from all sources in the year immediately preceding the year of assessment. If there is no tax adjustment to the financial statement, the net profit of a taxpayer is the same as the assessable profit. However, if there are adjustments such as addback of depreciation, disallowable expenses, etc. the re-adjusted profit is the assessable profit.Total profit is simply the assessable profit less the capital allowances claimable in the assessment year.
CIT Based on Dividend Payment
CIT ordinarily is based on total profits. Where a Company is not liable to tax because it has no taxable profits, but goes ahead to pay dividend, CIT will become payable by that Company on the dividend so paid, at the rate of 30%. This treatment is also applied where there is total profit for a particular year but dividend paid from that year’s profit is higher than the total profits in the year. If the tax payable is less than the minimum tax computed ordinarily for the Company, the minimum tax will supersede.
Where in any year of assessment, the total assessable profits of a company from all sources result in a loss, or where the total profits result in no tax payable or tax payable which is less than the minimum tax, minimum tax shall be levied as follows:
a. If the turnover of the company is N500,000 or below and the company has been in business for at least four calendar years, the minimum tax payable shall be
i. 0.5% of Gross Profit; or
ii. 0.5% of net assets; or
iii. 0.25% of paid up capital; or
iv. 0.25% of turnover of the company
for the year, whichever is higher; or
b. If the turnover is higher than N500,000, then whatever is payable in (a) plus additional tax on the amount by which the turnover is in excess of N500,000 at a rate of 0.125%.
The following are exempted from payment of minimum tax:
i. Companies in agricultural trade
ii. Companies with at least 25%
imported equity capital
iii . Companies with less than four
calendar years of business.
Self- Assessment and Filing of CIT Returns
Filling of CIT returns is done through self-assessment. This means that the taxpayer prepares its CIT computations by self (or by its appointed tax consultants / advisers), pays the resulting CIT liability and file its tax returns by self rather than waiting for the tax authority to issue assessment on him.
Every company, whether its profits are exempt from CIT (including those exempted from incorporation by the Companies and Allied Matters Act) is expected to register and file returns at least once in a year in the prescribed format.
For new businesses, the returns must be filed within 18 months of commencement of business or 6 months after the financial year end, whichever is earlier;
For existing businesses, the returns must be filed within 6 months after the financial/accounting year end of the taxpayer.
Application may be made to the Service for extension of time to file the returns. However, cogent reason must be provided which is subject to the approval of the Service. Penalties exist for late or non-filing of CIT returns within the statutory time period.
Provisional Tax Payment
Companies not filing on self-assessment basis are required to pay provisional CIT (which is usually an amount not lower than the tax paid in the previous year) on or before the end of March of every year. This is not necessary where the company files self-assessment and is sure to file its returns on or before the due date for filing.
CIT Payment at the Time of Paying Interim Dividend
For companies paying interim dividends, the CITA requires that CIT be computed and paid based on the profits of the company at the particular period within the financial year before the interim dividend is paid. Such CIT will represent a deposit against the total CIT payable at the end of the year. Where provisional tax has been paid by such company paying interim dividends, the provisional tax paid shall be taken into account in arriving at the CIT due.
Instalmental Payment of CIT liability
A company filing self-assessment can be allowed, on application to the tax authority, to pay its CIT liability in not more than six monthly instalments commencing from the due date of filing of returns. Such instalment payments should also not exceed 30 November of that particular year of assessment. The first instalment payment should accompany the request being made by a taxpayer to the tax authority for payment of CIT liability in instalments.
This provision of the law on instalment payments prevails over the provisions of the Tax Administration (Self-Assessment) Regulations of 2011 on the subject.
Penalties for Default in Payment and Filing of CIT Returns
CIT payments not made on or before the due date attracts a penalty of 10% of the tax due but not paid plus interest at the CBN Monetary Policy Rate (MPR- 14% currently) plus spread to be determined by the finance minister. CIT returns not submitted by the due date attract late returns penalty of N25,000 for the first month of default and N5,000 for each month the default continues.
Federal Inland Revenue Service (FIRS) recently subscribed to three Electronic Tax Payment platforms (NIBSS Ebills Payment, Remita Payment and Interswitch), with the intention to make it possible and very easy for all taxpayers to remit taxes. It is the belief of the Service that with better understanding of the principles of taxation, simplified tax rules and ease of payment, taxpayers would voluntarily fulfil their CIT obligations to the Government. This is now most expedient as Government needs adequate revenue to finance crucial public projects necessary for national development in the face of dwindling oil revenues.
The Tax Discourse series is an initiative of FIRS, which is intended to serve as a tax technical platform for building tax knowledge and enhancing awareness of basic tax issues amongst taxpayers. It is also intended to serve as an interactive space, enabling a two-way communication between the FIRS and its single most important group of stakeholders-the taxpayers. In the era of diversification of the source of Government revenue away from oil and more towards taxation, FIRS realizes the need for adequate inclusion of taxpayers through clarification of technical and administrative taxation issues via this platform and a plethora of other programs/initiatives.
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