TAXATION AND OTHER FISCAL ISSUES Nigerian taxation has become quite sophisticated in recent times. Several new measures have been put in place to encourage investments generally while certain undesirable or outdated provisions have been eliminated. Following the report of the Study Group on the Nigerian Tax System and Administration in 1992, the evolution of Nigeria taxation has gone on unabated with the introduction of various amendments to the substantive tax laws and an overall improvement in the machinery of tax administration in the country. 1.1 LIST OF APPROVED TAXES AND LEVIES FOR THE THREE TIERS OF GOVERNMENT A list of taxes and levies for collection by the three tiers of government has been approved by government and published by the Joint Tax Board (J.T.B). The approved taxes and levies are: (A) Taxes Collectible by the Federal Government (1) Companies Income Tax; (2) Withholding Tax on Companies; (3) Petroleum Profit Tax; (4) Value Added Tax; (5) Education Tax; (6) Capital Gains Tax - Abuja residents and corporate bodies; (7) Stamp Duties involving a corporate entity; (8) Personal Income Tax in respect of: (i) Armed forces personnel; (ii) Police personnel; (iii) Residents of Abuja FCT; (iv) External Affairs officers; and (v) Non-residents. (B) taxes/Levies Collectible by State Governments (1) Personal Income Tax; (i) Pay-As-You-Earn (PAYE) (ii) Direct (Self and government) Assessment; (iii) Withholding Tax (Individuals only); (2) Capital Gains Tax; (3) Stamp Duties (Instruments executed by Individuals) (4) Pools betting, Lotteries, Gaming, and Casino Taxes (5) Road Taxes; (6) Business premises registration and renewal levy; (i) Urban areas (as defined by each state): maximum of N-10,000 for registration and - N5,000 for the renewal per annum (ii) Rural areas - Registration -N-2,000 per annum - Renewal-NI ,000 per annum (7) Development Levy (individuals only)not more than N1 00 per annum on all taxable individuals; (8) Naming of Street Registration Fee in State Capitals; (9) Right of Occupancy Fees in State Capitals; (10) Rates in markets where State Finances are involved. (C) Taxes/Levies Collectible by Local governments (1) Shops and Kiosks rates; (2) Tenement rates; (3) On and Off liquor licence; (4) Slaughter slab fees; (5) Marriage, Birth and death Registration fees; (6) Naming of Street registration fee (excluding state capitals); (7) Right of Occupancy fees (excluding State Capitals); (8) Market/Motor park fees (excluding markets where State finances are involved); (9) Domestic Animal licence; (10) Bicycle, Trucks, Canoe, Wheelbarrow and Cart fees; (11) Cattle tax; (12) Merriment and road closure fees; (13) Radio/Television (other than radio/TV transmitter) licences and vehicle radio licence (to be imposed by the Local Government of the State in which the car is registered); (14) Wrong parking charges; (15) Public Convenience, Sewage and Refuse disposal fees; (16) Customary, burial ground and religious places permits; and (17) Signboard/Advertisement permit. 1.2 TRANSACTION TAXES 1.2.1 Withholding Tax Rates and Items Chargeable For both the individual and company, there is a system of withholding tax in lieu of the taxpayers making the final tax returns. The system is to help the taxpayers to fulfill their tax obligation in a gradual process. It also helps to build information bank by the tax office to combat tax evasion. The widening of the tax base has been the harvest of the system since it was introduced in Nigeria. The prevailing rates of withholding tax for individuals and companies are specified below: Applicable rates Types of payment Individual Companies * Dividend, Interest & Rent 10% 10% * Royalties 15% 15% * Commission, Consultancy Technical & management fees 5% 15% * Construction 5% 5% * Contract of Supplies 5% 5% * Director's Fees 10% 10% 1.22.2 Capital Gains Tax As from 1996, gains accruing to a taxpayer on the disposal of a "charge-able asset" are subject to a capital gains tax at 10 per cent. Chargeable assets are defined to include all forms of property whether situated in Nigeria or not, including; (1) Options, debts and incorporeal property generally; (2) Any currency other than Nigerian currency; (3) Any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired; and [* Shares and stocks of every description were exempted as chargeable assets with effect from January 1998]. 1.2.3 Value Added Tax Government has approved the introduction with effect from January 1994 of a value-added tax to replace the existing sales tax. It is a tax of 5 per cent for specified categories of taxable goods and services. 1.2.4 Education Tax Since 1995, an education tax of 2 per cent of assessable profits is imposed on all companies incorporated in Nigeria. The tax is a social obligation by all companies to improve the standard of education facilities in the country. 1.2.5 Stamp Duties The administration of stamp duties is jointly carried out by the State and federal authorities, depending on the type and nature of document. Stamp duties are regarded as transaction taxes, and the rates chargeable would depend on the classification of the document. Some documents attract stamp duties on flat rate basis while others are assessed ad valorem. 1.3 PERSONAL INCOME TAX 1.3.1 Basis of Liability to Persona! Income Tax A tax payer is liable to tax in Nigeria on the aggregate amount of his incomes from sources inside or outside Nigeria; that is, on his global income. Under the present law, income earned overseas by a Nigerian or foreigner resident in Nigeria would appear to be liable to local taxation whether or not such income is remitted into Nigeria if for example, the income can be related to an employment exercise in Nigeria. 1.3.2 Residency Test From 1990, the 183 day test utilized to establish the taxability of employment income is to be calculated on a twelve month period commencing in a calendar year and ending either within the same calendar year or the following calendar year. 1.3.3 Income from Employment As regards the taxation of income from employment, the law is concerned with the totality of the remuneration, earnings or benefits in cash or kind obtained by an employee. The particular nomenclature or description of what an employee gets is irrelevant. What is crucial is whether or not such earnings or benefits become due to an employee as a result of his employment. Consequently, any salary, wages, fees, allowances or other gains or profits from an employment, including gratuities, compensation, bonuses, premiums, benefits or other perquisites allowed, given or granted by an employer to an employee are taxable. However, to this general rule, are a number of exceptions. In computing the income or loss of an individual, certain outgoings and expenses are specifically allowed. 1.3.4 Tax Clearance Certificates The possession of a Tax Clearance Certificate (TCC) for three years immediately preceding the current year of assessment by individuals and companies is now a legal rquirement for most transactions with any Ministry, department or agency of Government. 1.4.1 Basis of Liability to Companies Income Tax In Nigeria, tax is payable for each year of assessment on the profits of any company accruing in, derived from, brought into or received in Nigeria in respect of all kinds of income; that is, income derived from a trade, business or investments. Thus, the tax holiday of companies in Nigeria is primarily on species of income having their source or deemed sourced within the country as well as on remittances. From 1996, the rate of Companies Income Tax in Nigeria is 30 per cent. 1.4.2 Dividends and Other Company Distribution In Nigeria, a company paying dividends to its shareholders is first of all obliged to pay tax on its profits at the companies tax rate before paying dividends to its shareholders. As a general rule, any dividend or other company distribution whether or not of a capital nature made by a Nigerian Company is liable to withhioding tax at source of 10 per cent. However, any dividend paid by a Nigerian company in the form of bonus/scrip share issue is not taxable in the hands of individual shareholders and is excluded from the profits of any other company that is a shareholder in such company. 1.5 DOUBLE TAXATION AGREEMENTS In the last few years, double taxation agreements have been entered into by Nigeria with a number of countries. These agreements are entered into with a view to affording relief from double taxation in relation to taxes imposed on profit taxable in Nigeria and any taxes of similar character imposed by the laws of the country concerned. The method of relief from double taxation under Nigeria's tax treaties is by way of a "tax credit". The mechanism of the tax credit is such that the tax payable in Nigeria on profits of a Nigerian company being remitted into the country is reduced by the amount of "foreign tax" paid abroad. The converse position is equally true where an overseas company receives profits from Nigeria that have already been taxed in Nigeria.