An Overview of Companies Income Tax (CIT) in Nigeria

What is Companies Income Tax?

Companies Income Tax (CIT), also known as Corporate Tax, is the
tax on the profits of registered companies in Nigeria. It also
includes the tax on the profits of foreign companies operating
their business in Nigeria. This tax is seen as one of the different
types of taxes that are usually levied by the government. CIT is
paid by both the public limited liability companies and the limited
liability companies.

The Companies Income Tax Act

The Companies Income Tax Act (CITA) is the principal law set in
place to regulate the tax regime of companies operating in Nigeria.
The Nigeria tax law is designed in a way that it makes provisions
for different categories of taxes. These tax regime in Nigeria is a
multi-level system which means that the three tiers of government
administer taxes. The taxes are all administered to the various
levels of administrations through the Federal Inland Revenue Service
(FIRS)^[1] and Internal Revenue Service (IRS)^[2] in all Nigerian
states.

History of the Companies Income Tax in Nigeria

The CIT was formed by the Companies Income Tax Act (CITA)
enacted in 1979. Nigeria Companies Income Tax Laws witnessed a
number of amendments in recent years, and it has its origin from
the Income Tax Management Act of 1961. In recent years, CIT has
been of immense importance and has contributed greatly to the
overall revenue accrued by the FIRS as shown by the 2018 report. In
the first quarter of the year 2018, Nigeria has generated ₦202.16
billion from CIT, which is 30% higher than what FIRS generated in
the first quarter of 2017 (₦155.57 billion).

How to Calculate Company Income Tax (CIT)

As stated in section 9 of the Companies Income Tax Act as
amended by the Company Tax Act of 2007, states that:

“Subject to the provisions of this Act, the tax shall,
for each year of assessment, be payable at the rate specified in
subsection (1) of section 40 of this Act upon the profits of any
company accruing in, derived from, brought into, or received in,
Nigeria in respect of…”

And Section 40 of the Act further states that:

“There shall be levied and paid for each year of
assessment in respect of the total profits of every company, tax at
the rate of 30 Kobo for every Naira.”

Based From the above, the companies income tax rate in Nigeria
is 30% of all companies’ taxable profit at any given fiscal year
(tax is charged on profits for the accounting year ending in the
year preceding assessment). In calculating the taxable profits of
any company, the FIRS or State Board of Internal Revenue makes use
of only the company audited account for that year.

Allowable Deductions under the Company Income Tax Act

Under section 24 of CITA, certain deductions are allowable in
determining the taxable profits of these companies. The Section 24
provides that “save where the provisions of subsection (2) or (3)
of section 14 or 16 of this Act apply, to ascertain the profits or
loss of any company of any period from any source chargeable with
tax under this Act, there shall be deduction all expenses for that
period by that company wholly, exclusive, necessarily and
reasonably incurred in the production of those profits.”

Section 24 further includes the following categories of
deductions:

1. The total rent for that fiscal year and the premiums that the
   liability incurred for the period in relation to any building or
   land occupied by the company for the sole purpose of acquiring
   accommodation for the employees of the company.
2. Any sum that is payable by way of interest on any fund that was
   borrowed and used as a source of capital for profits.
3. All expenses that are attributed to the maintenance of the
   director’s remuneration, property that does not exceed ₦10,000 per
   annum in respect to each director in the case of a property holding
   company, and the number of directors that will be remunerated shall
   not exceed three.
4. All expenses that are incurred for the repair of premises,
   machineries, and plants or fixtures that were employed in acquiring
   the profit
5. All the contributions to approved pension fund, provident or
   any other retirement benefits fund, scheme or society that are
   approved by the Joint Tax Board.
6. Salaries and wages or other remunerations that were paid to the
   senior executives or staff that shall not exceed the amount
   prescribed by the collective agreement between the employees and
   the company
7. Bad debts that were incurred in the course of carrying out the
   business or trade for which profit is ascertained.
8. Other deduction as may also be described by the minister by any
   rule

Section 25 and 25A of the Company Income Tax Act also allows for
the deductions of any donation made to fund any institutions or
body in Nigeria. Section 26 of the Act permits a deduction in
respect to research and development, as long as the deduction does
not exceed 10% of the profits ascertained before any
deductions.

Disallowable Expenses

Under section 27 of the Act, the following deductions are not
allowed in ascertaining a company’s profits. Expenses not allowed
for tax purposes are added back to accounting profit even when
these expenses have been charged in the profit and loss account to
reach the taxable profit.Deduction not allowed includes:

1. Depreciation of assets
2. Capital repaid or withdrawn or any other expenditure of a
   capital nature
3. Other payments to unapproved pension scheme such as savings,
   orphans and widows, pension, provident or any other retirement
   benefits fund, scheme or society except as legally permitted by
   paragraph (g) of section 24 of this Act
4. All appropriation of profits which includes share issue
   expenses, dividends, formation expenses etc.
5. Any other expenditures which were not incurred in earning the
   taxable profit