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DOING BUSINESS IN NIGERIA
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Presented By:
SOLA OYETAYO
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Contents Page(s)
Introduction 3-4
Forms of Business Organisation 5
Business Administration 6
Taxation 7-46
Investment Initiatives 47-48
Important Commercial / Legal Aspects 49-54
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Introduction
Nigeria is located in West Africa.
It shares land borders with Niger in the North, Republic of Benin in the West, Chad and Cameroon in the East. Its coast in the South lies on the Gulf of Guinea on the Atlantic Coast.
The Administrative Capital is Abuja, which is located in the North Central while the Commercial Capital is Lagos, located in the South West.
The official language is English and operates Federal Presidential Republic in governance.
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Introduction (Cont’d)
The total Area is 923,768 Sq km2 (356,667 Sq metres).
Nigeria is the most populous country in Africa; its population is about 160million. It’s often said, ‘for every 4 Africans is 1 Nigerian’.
It is the most populous country in the world in which the majority of the population is black?
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Forms of business organization in Nigeria include limited liability companies,joint ventures and partnerships. With some exceptions, foreign companies are not allowed to do business in Nigeria unless they are incorporated there. Limited liability companies may be public or private.
A private limited liability company is one that restricts the right to transfer its shares, limits the number of shareholders to fifty, and does not allow the public to subscribe for its shares. Any other company is a public limited liability company. Public limited liability companies must have at least seven shareholders. Joint ventures and partnerships are not taxed in the same way as incorporated entities; each partner’s share of profits is taxed on an individual basis.
Forms of Business Organisation
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Accounting Requirements
All entities are expected to prepare their financial statements. Such statements are filed with Corporate Affairs Commission within 42 days after the annual general meeting for the year.
Nigeria has adopted International Financial Reporting Standards (IFRS). All listed companies are to report in IFRS with effect from January 1, 2012. Other PIEs reporting date is January 1, 2013 and SMEs reporting date is January 1, 2014. In effect, as from January 1, 2014, all companies operating in Nigeria are to report in IFRS format.
Auditing RequirementsAll companies are required to audit their financial statements every year.
Business Administration
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A resident company pays tax on its worldwide income. A resident company is one that is incorporated or registered in Nigeria. The tax is administered by the Federal Board of Inland Revenue.
Corporate Income Tax Rates - The corporate income tax rate is currently 30%. Petroleum companies are taxable under a special regime. (See “Petroleum Profit Tax”).
Taxation of Resident Entities
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A minimum tax is levied to ensure that, unless exempt, every company pays a certain amount of corporate income tax. The minimum tax is payable by a company where in any year of assessment the total assessable profits from all sources of a company results in a loss or no tax being payable or tax payable that is less than the minimum tax. Where turnover is N500,000 or less, the minimum tax is the highest of 0.5% of gross profits or 0.5% of net assets, or 0.25% of paid-up capital or 0.25% of the turnover. Where turnover is higher that N500,000, an additional tax calculated at the rate of 0.125% of turnover over N500,000 is payable.
Taxation of Resident Entities (Cont’d)
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Agricultural or agro allied companies, companies with at least 25% foreign equity, and any company in the first four years of commencement of business are not required to pay the minimum tax.
A company is liable for tax at the corporate income tax rate on dividends declared if total profits are less than dividends declared. In addition to corporate income tax, education tax is payable at 2% of adjusted net profits before the deduction of capital allowances (See “Education Tax”). The effective rate of tax will be reduced if a company is eligible for the tax bonus described below.
Taxation of Resident Entities (Cont’d)
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Taxable IncomeTaxable income is a company’s income, less allowable deductions and losses. Income of a capital nature is not included in taxable income.
Investment IncomeDividends, interest, royalties and other types of investment income are subject to withholding taxes. Most Nigerian withholding taxes on investment income are final. However, in some cases, the income must also be included in taxable income for corporate income tax purposes.
Taxation of Resident Entities (Cont’d)
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Foreign Source IncomeNigeria has signed several treaties that provide relief from the double taxation of income (see Table 3). Unilateral credit relief is not available to corporate taxpayers. However income tax paid in non-treaty countries is deductible if Nigeria also taxes the income.
Capital GainsCapital gains are not subject to corporate income tax. Instead a separate tax on capital gains applies. The rate is currently 10%.
Taxation of Resident Entities (Cont’d)
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Exchange Gains and LossesExchange fluctuations are considered for tax
purposes if they are realised and are considered revenue in nature.
DeductionsAll expenses wholly, exclusively, necessarily and
reasonably incurred in earning the profits of a company are deductible for tax purposes.
Taxation of Resident Entities (Cont’d)
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DepreciationNo deduction is allowed for depreciation charged by a
company in its financial statements. Instead, capital allowances at various rates are granted for qualifying capital expenditure. Capital allowances are restricted to two thirds of assessable profit, except in the case of agro allied industries and manufacturing trade or business. The allowances are granted (after allowing for residue costs) on a straight-line basis at the rates shown in Table 2.
InterestPayments of interest are normally deductible for tax
purposes.
Taxation of Resident Entities (Cont’d)
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Management FeesManagement contracts must be approved by the
Federal Board of Inland Revenue. The deduction of management fees may be limited based on approval.
TaxesCorporate income tax is not deductible. Income
taxes levied by foreign countries may be deductible (See “Foreign-source Income” and “Local Taxes”).
Taxation of Resident Entities (Cont’d)
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Other ExpensesBad and doubtful debts that are specific in nature are deductible. Provisions for future expenses are generally not deductible. No deduction is allowed for formation and start-up costs charged by a company in its financial statements. Limited deductions are available for contributions made to approved pension funds and for donations to specified charitable, educational and scientific institutions.
Tax Treatment of LossesLosses may be deducted from taxable income in the first four years following that in which they were incurred. The carry forward period is not limited in the case of agro-allied enterprises. Losses may not be carried back.
Taxation of Resident Entities (Cont’d)
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Capital Allowance Rates
Refer to Table 2 for the Capital Allowance Rates.
Taxation of Resident Entities (Cont’d)
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A non-resident entity such as a company or corporation is any entity that is not registered or incorporated in Nigeria. Non-resident entities are liable for tax on income derived from Nigeria at the same rates as resident entities. Dividend, interest and royalty income derived by non-resident entities are subject to a final withholding tax. Tax credits can be claimed by entities resident in countries that have signed double tax treaties with Nigeria.
The determination of whether income was derived from Nigeria is based on whether a fixed base exists in Nigeria, whether a business is operated through a dependent agent, whether a turnkey project has been executed and whether activities that are not at arm’s length have been conducted with a Nigerian subsidiary.
Taxation of Non-Resident Entities
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A fixed base exists when permanent facilities have been built. Business operations giving rise to a fixed base include construction, installation or assembly activities and the performance of services connected with those activities. A fixed base does not include facilities that only display or store goods or collect information. Assessment for taxes is based on a fair and reasonable percentage of the turnover attributable to the fixed base, usually 20%.
A dependent agent is one whose activities are devoted wholly or nearly wholly to an entity. Assessments for tax are based on the profits attributable to the trade or business carried on by the dependent agent. The dependent agent must withhold tax on all amounts due to the company. The commissions of any agent are subject to Nigerian Tax.
Taxation of Non-Resident Entities (Cont’d)
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A turnkey project is a simple operation involving surveys, construction, installation and deliveries and includes offshore profits. Assessment for tax is based on a fair and reasonable percentage of the turnover of the contract.
Activities with Nigerian subsidiaries that are not at arm‟s length are assessed for taxes on a fair and reasonable percentage of the turnover as may be determined by the federal tax authorities. Payments in terms of a subcontract to a Nigerian company by a non-resident company are allowed as an expense, limited to the cost of the main contract.
Taxation of Non-Resident Entities (Cont’d)
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Nigerian law does not allow groups of companies to combine their results for tax purposes. The transfer of assets between companies is taxable where a gain is made. Inter-company dividends are franked investment income. Each company in a group is treated as a separate entity for tax purposes.
Tax Treatment of Groups of Companies
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Non-resident companies are not normally allowed to conduct business in Nigeria without first incorporating a resident entity. However, exceptions do exist, especially when the Nigerian branch is to be engaged in an export activity or other approved or promoted activity.
The rates of tax applying to branches are the same as those applying to resident subsidiaries. However, the tax base differs. While a resident subsidiary is taxable on its worldwide income, only income that is derived from Nigeria is taxable in the case of a branch. This taxable income may be computed using various methods, depending on the nature of the non-resident company’s establishment in Nigeria.
Tax Treatment of Branches and Subsidiaries Compared
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The tax year in Nigeria is the calendar year ending 31 December. A corporate taxpayer must file an annual return, based on its income for the accounting year. The return is due within six months after the end of the accounting year. The taxpayer’s audited financial statements should accompany the return.
Self assessment is encouraged. A tax bonus of 1% is granted to entities that file self- assessed returns and pay their tax promptly. The tax can be paid in full or, if the tax authorities so approve, in instalments over a period of not more than six months. Default in payment attracts interest and penalties. Provisional tax equal to the tax liability of the preceding year is payable between January and March by entities that do not file self- assessed returns.
Corporate Assessments and Payments
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A taxpayer that fails to file a return would be assessed by the tax authorities to the best of their judgement. However, these assessments tend to be arbitrary and an objection to such an assessment is valid only if made within thirty days of the date of service and is accompanied by a tax computation and financial statements. Additional assessments can be raised after the tax authorities examine the taxpayer‟s financial statements. Assessments are also raised on a capital gains liability with respect to the disposal of capital assets. Assessment notices are usually delivered by registered post to the registered office of known address of the corporate taxpayer.
Corporate Assessments and Payments (Cont’d)
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Personal Income tax is generally levied by the state in which an individual resides. The federal government levies tax on non-resident individuals, members of the Nigerian Armed Forces and officers of the Nigerian Foreign Service, and certain other individuals. Rates and reliefs are uniform in all states in Nigeria.
Residents are, in principle, taxable on their worldwide income, however, some types of foreign income are exempt, as described below under “Foreign Source Income”. Individuals who stay in Nigeria 183 days within a twelve month period are liable for Nigerian tax as residents.
Non-residents are subject to tax on their Nigerian-source income. The tax is usually paid by way of withholding at source.
Tax Treatment of Individuals
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Treatment of FamiliesSpouses are treated as separate taxpayers in Nigeria.
Personal Income Tax RatesPersonal income tax rates are shown in Table 1. Employees earning no more than N30,000 are subject to a minimum of tax of 5%. Taxable income excludes compensation for the loss of an office and gratuities.
Tax Treatment of Individuals (Cont’d)
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Employment IncomeIncome from employment includes salaries, wages,
benefits, whether in cash or in kind. Receipts that constitute a reimbursement of expenses by an employer are not taxable. Benefits in kind are generally valued at a percentage of their cost to the employer.
Business Income – Taxable business income for individuals is calculated in a manner similar to that described at “Taxation of Resident Entities” for companies. Some differences exist. For example individuals are not permitted to set-off losses incurred from any business against income from other sources.
Tax Treatment of Individuals (Cont’d)
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Dividend IncomeDividend income is subject to a final 10% withholding tax.
Individual shareholders in a resident company that is controlled by five or fewer persons may be required to include the undistributed profits of the company in their taxable income if these profits could be distributed as dividends without jeopardizing the company‟s business.
Foreign-source incomeForeign-source income of Residents are taxable if it is remitted to
Nigeria. Foreign-source income in convertible currency arising from salaries, dividends, interest, rents, royalties, fees or commissions is exempt if brought into Nigeria through approved channels. Income brought into Nigeria through domiciliary accounts by athletes, playwrights, authors, musicians, artists and temporary guests who are professionals is also exempt.
Tax Treatment of Individuals (Cont’d)
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Deductions and ReliefsAllowances granted to resident individuals are shown in Table 1. Such allowances are deductible from the individual‟s taxable income.
Tax Treatment of Individuals (Cont’d)
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The tax year coincides with the calendar year – An individual in full-time employment is taxed under the pay-as-you earn (PAYE) system. The employer withholds personal income tax from the employee‟s salary or wages and pays it over to the tax authorities within a period of fourteen days after deduction. An individual whose only source of income is employment income received from a single employer needs to file a tax return unless his or her employment income does not exceed N30,000 per year.
Personal Assessments and Payments
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Other individuals pay tax by self-assessment or direct assessment. Filing a self-assessment return is encouraged by granting a 1 % bonus to persons filing such returns on time. Financial statements and schedules, when applicable must accompany the self-assessment return. Payments may be made in full or, upon application, in instalments. Withholding tax suffered at source can be used to offset income tax due. Objections and appeals are permitted, penalties and interest are levied for late payments or failure to file returns.
Personal Assessments and Payments (Cont’d)
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DividendsResident companies must deduct withholding tax at 10% from all payments for dividends. The rate is reduced to 7.5% in the case of dividends paid to recipients resident in treaty partner countries (See Table 3). This tax is final for both resident and non-resident recipients. Furthermore, the resident company can offset the withholding tax on the dividends it receives against the tax payable with declared dividends from its own profit..
Interest A withholding tax of 10% applies to payments of interest to both residents and non-residents unless the interest is exempt. Exempt interest includes interest on savings accounts, provided that the amount deposited is under N50,000.
Withholding Taxes
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Certain types of loan interest are exempt or partially exempt, depending on the term of the loan, including interest on foreign currency loans in excess of N5million or on loans used for manufacturing exported goods.
The recipient of interest can claim exemption BUT the payer is still obliged to withhold.
Withholding Taxes (Cont’d)
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Royalties and Other PaymentsTax should also be withheld from royalties at the rate of
10% in respect of royalty payments to both companies and individuals. Payments such as management consulting fees and fees for technical services and commission are subject to withholding tax at rates of 10% for corporate recipients and 5% for individuals. Also a 10% withholding tax applies to all rental payments and director‟s fees. These withholding taxes are final for non-residents recipients, however, they may not be final for residents.
Rates Under Double Tax Treaties – Nigeria has treaties in force with several countries. (See Table 3.)
Withholding Taxes (Cont’d)
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Various other taxes, such as capital gains tax, petroleum profit tax, and education tax are imposed in Nigeria. Some are levied by the federal government and some by state and local governments.
Capital Gains TaxCapital gains tax is levied at the rate of 10% on gains from disposals of fixed assets that are not personal chattels. The taxable gain is the difference between the proceeds of the sale and the cost of an asset. Stocks, shares, motor vehicles not normally used for commercial purposes are exempt. There is no relief for capital losses.
Other Taxes
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Petroleum Profit TaxThe Income of a petroleum company is subject to
petroleum profit tax rather than corporate income tax. Income for the purposes of petroleum profit tax, refers to the value of the oil and related substances extracted, except gas, plus any other income of the company. Various deductions are allowed. The tax rate is normally 85%. The penalty for gas flaring is N1 0 per 1,000 cubic feet.
Other Taxes (Cont’d)
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Education TaxEducation tax at the rate of 2% is payable by all resident companies. The tax base is the company’s adjusted/assessable profits for corporate income tax or petroleum profit tax purposes before the deduction of capital allowances. The tax is payable by self- assessment or by assessment notices issued by the federal tax authorities. The tax is an allowable expenditure for petroleum profit tax purposes.
Other Taxes (Cont’d)
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Value Added Tax (VAT)Value Added Tax (VAT) is payable at a flat rate of 5% on taxable supplies of goods and services, including imports. Exempt goods and services include basic foodstuffs; medicines; medical devices; and medical services; and exported goods and services.
Most businesses are obliged to register for VAT purposes. An exemption applies to individuals and small-scale traders, who may nevertheless register voluntarily so that they can recover VAT that they pay on business related purchases. Exempt businesses should not charge VAT on their goods and services.
Other Taxes (Cont’d)
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Value Added Tax (Cont’d)
VAT returns are filed on a monthly basis, along with any payments due. The returns cover the VAT paid (Input VAT) and VAT received (Output VAT) in the previous month. If the Input VAT paid by the taxpayer exceeds the Output VAT charged to the taxpayer‟s customers, the taxpayer may apply for a refund. Input VAT does not include VAT paid on revenue expenses which are otherwise charged to the Profit and Loss Account. Various penalties and interests are charged on violations of the VAT law.
Other Taxes (Cont’d)
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Social Security ContributionsEmployers and employees must contribute to a fund that
provides old age, sickness, disability and survivors benefits. Rates of 6.5% for the employer and 3.5% for the employee, apply to the employee‟s basic annual salary. The maximum contribution levels are N2,860 per month for the employer and N1 ,540 per month for the employee.
However with effect from January 1, 2005 NSITF contribution has been suspended and a Pension Reform Act No 2 of 2004' which was passed into law on June 1, 2004 has replaced it. Other than the military, the employee is to contribute a minimum of 7.5% of his/her emolument and the employer to contribute a minimum of 7.5%.
Other Taxes (Cont’d)
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Employers with twenty-five or more employees must also contribute to an industrial training fund. The rate is 1% of gross payroll. Approved training costs are reimbursed by the fund.
Pre-operational LevyA new company that has not commenced business operations within six months after incorporation must pay a pre-operational levy of N500 for the first year and N400 in each subsequent year until it can be assessed on normal business operations.
Other Taxes (Cont’d)
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Local taxesLocal taxes in the form of township and tenements
rates are imposed by city and local governments. Some state governments levy road taxes and property tax on owners. Various other state taxes are also levied. Local taxes are normally deductible expenses.
Stamp Duties Stamp duties are charged by both federal and state
governments on various commercial and legal documents, such as transfers of deeds, insurance policies and bills of exchange.
Other Taxes (Cont’d)
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Customs and Excise Duties
Imported goods are subject to customs duties. Excise duties are levied on a number of products considered hazardous to health. Exports are exempt.
Other Taxes (Cont’d)
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Tables
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Personal Income Tax Rates
Band of Taxable Income (N) Rate of Tax on Band (%)
0 - 30,000 5
30,001 - 60,000 10
60,001 - 110,000 15
110,001 - 160,000 20
Over 160,000 25
TABLE 1: PERSONAL INCOME TAX
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Tables (Cont’d)
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TABLE 1: PERSONAL INCOME TAX (Cont’d)
Personal Allowances for Residents
Type of Allowance Amount
Personal N5,000 plus 20% of earned income
Child (under 16 yrs or receiving full time education) N2,500 per child (max of four)
Dependent relative N2,000 per relative (max of two)
Life Issuance or Deferred Annuity premiums Actual premium for self or spouse
Employed taxpayer with disabilities Greater of 20% of earned income
or N3,000
Leave grant 10% of annual basic salary
Rent N150,000
Transport N20,000
Meal N5,000
Utility N10,000
Entertainment N6,000
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Tables (Cont’d)
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TABLE 2: CAPITAL ALLOWANCE RATES
Type of Asset or Expenditure Initial Rate (%)
(%)
Annual Rate
Buildings (industrial and non-industrial) 15 10
Plant & Machinery:
Plant and machinery purchased to replace old plant & machinery (a) 95 0Agriculture production plant (b) 95 0Other plant 50 25Plantation equipment (b) 95 0Other ranching and plantation 30 50Mining expenditure 95 0Research and Development Equipment 95 0Housing Estate Expenditure 50 25Furniture & Fittings 25 20
Public Transportation Motor Vehicles 95 0Other Motor Vehicles 50 25
Notes(a) An investment tax credit of 15% is granted on expenditure for the
replacement of old plant and machinery.
(b) An additional 10% investment allowance is granted to companies on cost in the year in which new plant and machinery acquired. The limit on capital allowances is 95% of cost.
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Tables (Cont’d)
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TABLE 3: WITHHOLDING TAX RATES
Country of Recipient DividendsInterest (a)
(%)
10 7.5 7.5 7.5 7.5
7.5 7.5 7.5 7.5
7.5 7.5
Royalties
Rent(%)
10 7.5 7.5 7.5
7.5 7.5 7.5 7.5
7.5 7.5 7.5
Non Treaty Countries (c):
Treaty Countries:
Belgium Canada Czech
Republic (b)
France Netherlands
Pakistan Philippines
Poland
Romania
United Kingdom
(%)
10
7.5 7.5 7.5 7.5
7.5 7.5
7.5
7.5
7.5
7.5
(%)
10
7.5 7.5 7.5 7.5 7.5
7.5
7.5
7.5
7.5
7.5
Notes•Some tax treaties exempt certain types of interest, including interest paid to the government, an agency of the government, or a local authority. Specific treaties should be consulted.•The rates shown are those given in the treaty signed with Czechoslovakia. Since the dissolution of Czechoslovakia, the treaty is believed to continue to apply to both the Czech Republic and Slovakia.•Negotiations have been concluded with China, Bulgaria and Mauritius.•The Treaty with South Africa has been signed.
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Various investment incentives are available to foreign investors. They include import concessions, tax exemptions for exported products, tax reductions for qualifying companies, and tax deductions for research and development expenses.
Additional investment allowances are granted on the basis of the cost of qualified capital expenditure to investors that establish operations in rural areas where facilities such as electricity, paved roads, telephones and piped water are not available. These allowances also apply to factories in bonded export free zones.
Investment Initiatives
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Special incentives are given to gas development projects such as exemption from Value Added Tax and customs duties on imported machinery and equipment, a five year tax free period, a five year exemption from taxation of dividends, and a 15% investment capital allowance. Gas projects separate from oil and gas operations are assessed under the Companies Income Tax Act at a lower rate than which applies under the Petroleum Profit Tax Act.
Investment Initiatives (Cont’d)
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The monetary unit is the Nigerian Naira (NGN). The remittance of dividends is permitted, provided that the share equity was imported. Equity share capital must be brought into Nigeria through authorized dealers (banks).
A certificate of capital importation will be issued by the authorized dealer. There are no restrictions on the percentage of profits that can be distributed as dividends. The remittance of interest, royalties and technical fees is also permitted, provided that the contracts for royalties and technical fees were approved by the National Office for Technology, Acquisition and Promotion (NOTAP).
Important Commercial/Legal Aspects
Exchange Controls
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Foreign investors are encouraged to invest in any type of business in Nigeria.
The monopolistic restrictions on some essential services are being lifted to facilitate investment and participation by organized private sector and similar strategic investors. There are no local participation or management requirements, however the employment of qualified indigenous staff and their participation in management is encouraged.
Local Participation of Management Requirements
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EconomyEconomy
Nigeria economy can be regarded as a mixed economy emerging market with oil playing a dominant role. It is the 12th largest producer of petroleum in the world and 8th largest producer. 90% of the country’s earnings is from oil.
Nigeria has a well developed Stock Exchange – Nigerian Stock Exchange, which is the second largest in Africa (market capitalization of
Nigeria has one of the fastest growing telecommunication market in the world and most of these operators have Nigeria as their most profitable centres.
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Economy (Cont’d)Economy (Cont’d)
Nigeria has a highly developed financial services sector, Banks, Asset Management Companies, Discount houses, Stock/Insurance brokage houses, Insurance Companies, private equity and Investment banks.
Nigeria is the United States largest trading partner in sub-Saharan Africa and supplies a fifth of its oil imports.
Nigeria’s GDP is about $430.455 billion and the inflation rate is 12.8%.
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Economy (Cont’d)Economy (Cont’d)
The mainstay of Nigeria’s economy used to be Agriculture. At one time Nigeria was the world’s largest exporter of groundnuts, palm oil, cocoa and significant producers of coconuts, citrus fruits, maize, millet, cassava, yam and sugar cane. Nigeria still has potential to develop its underutilized arable land.
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Nigeria is No. 1 destination for Investment in Africa.
Nigeria recorded US $8.9billion in 2011 as Foreign Direct Investment, out of a total of $42.7billion that Africa recorded as Foreign Direct Investment inflow in the year.
Economy (Cont’d)
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