Nigeria’s fiscal operations adhere to the Federal System of Government. The government’s fiscal authority is based on a three-tiered tax structure divided between the Federal, State and Local Governments, with the Federal Assembly and the State Houses of Legislature exercising their legislative (exclusive, concurrent and residual) powers to administer the relevant taxes falling under their jurisdictions
The Taxes and Levies (Approved List for Collection) Act, CAP T-2, Laws of the Federation of Nigeria (“LFN”), 2004 provides a list of the taxes that each tier of government can charge in Nigeria.
COMPANIES INCOME TAX. This is the annual tax on the profits of registered companies, which profits must accrue in, be derived from, brought into, or received in Nigeria. The annual tax rate on company profits in Nigeria is thirty per cent (30%).
There is however a twenty per cent (20%) tax concession for certain companies, for the first five years of their operation, i.e. those engaged in agricultural production, or mining of solid minerals with a minimum annual turnover of N500,000, and those engaged in manufacturing or in the export promotion business with an annual turnover not exceeding N1,000,000.
EDUCATION TAX. All incorporated companies in Nigeria are required to pay two per cent (2%) of their assessable profit into an Education Tax Fund. By Section 3 of the Education Tax Act, CAP E-4, LFN, 2004, the collected Education Tax is disbursed through a Education Trust Fund for the rehabilitation, restoration and consolidation of educational institutions in Nigeria, i.e. the improvement of the standard of educational facilities at all institutions of learning throughout the country.
PERSONAL INCOME TAX. Personal Income Tax is the tax on the aggregate amount of an individual’s income for an assessable year, from all sources inside and outside Nigeria, except for income specifically exempted under the Personal Income Tax Act (“PITA”), as amended in 2011. Personal Income Tax (PAYE) is based on an employee’s earnings, and on the direct income or profits of individuals using the self assessment tax system.
The Personal Income Tax rate is applied on a graduated scale on the taxable annual income, as set out below:-
a. First N300,000 – 7%
b. Next N300,000 – 11%
c. Next N500,000 – 15%
d. Next N500,000 – 19%
e. Next N1,600,000 – 21%
f. Next N3,200,000 – 24%
PETROLEUM PROFITS TAX. Currently in Nigeria, in place of the Companies Income Tax, the Petroleum Profits Tax is levied on the income, for each accounting period, of companies engaged in upstream petroleum activities.
The Petroleum Profits Tax rates vary, depending on the fiscal arrangement entered into the Federal Government and the oil and gas companies. For profits from petroleum operations carried out under a Joint Venture (“JV”) arrangement with the Nigerian National Petroleum Corporation (“NNPC”), or any Non-Production Sharing Contract that is over 5 years in tenure, the annual tax rate is 85%. For profits from non-PSC operations in the first 5 years during which the company has not fully amortised all pre-production capitalised expenditure, the tax rate is 65.75%.
For profits from petroleum operations under Profit Sharing Contracts Structure with the NNPC, the tax rate is 50%. Royalties are also payable to the Federal Government of Nigeria by the holder of an Oil Prospecting Licence (“OPL”) or an Oil Mining Lease (“OML”) as soon as oil production begins. This is usually in the form of monthly cash payments at the prescribed rate or by way of royalty oil.
The Nigerian Oil and Gas Industry Content Development Act, which is more commonly described as the Local Content Act, imposes a levy of 1% on every contract awarded to operators and entities in the upstream oil and gas industry; with contributions of this levy invested in a Development Fund managed by Nigerian Content Development and Monitoring Board, to encourage indigenous participation in the oil and gas industry, and build local capacities and competencies.
A new tax regime in the Petroleum sector of the Nigerian economy is expected to take effect once the proposed Petroleum Industry Bill is passed into law by the Nigerian Federal Assembly.
CAPITAL GAINS TAX.
Capital Gains Tax (“CGT”) is the tax on the capital gains accruing to any legal person (company or individual) when a disposal of chargeable asset occurs.
By Section 2 (1) of the CGT Act, CAP C-1, LFN, 2004, the rate of CGT is ten per cent (10%) of the gain derived when the asset was sold – gain is the difference between the cost of acquiring the asset and the sale price with approved maintenance expenses excluded when computing this tax.
The CGT in respect of companies are collected by the Federal Tax Authority; while the CGT in respect of individuals are collected by the State Tax Authority where the individual reside.
Withholding tax is an advance tax deduction from any income paid in Nigeria. This advance tax must