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A Brief Overview of the Current Nigerian Tax Regime

by
Prof. Olu Ojedokun and Noah Sulaimon

Introduction

In accordance with the provisions of Section 8 of the Companies Income Tax Act (CITA), the relevant piece of tax legislation in Nigeria, the imposition of tax on company profits is a fundamental aspect of the country's fiscal policy. Taxation serves as a vital source of revenue for the Nigerian government, supporting the nation's socio-economic development and infrastructure initiatives.

The CITA, in its pursuit of the goal of equitable taxation, lays out a comprehensive framework for taxing the profits of companies operating within Nigeria. In this discussion, we will delve into six distinct categories of profits subject to taxation under Section 8 CITA. Each category represents a crucial element in the Nigerian tax landscape, encompassing various aspects of business and financial operations. By exploring these profits extensively, this article aim to provide a comprehensive understanding of the tax obligations imposed on companies in Nigeria and underscore the importance of adherence to these regulations for sustainable economic growth and development.

We proceed to discuss six types of profits that may be subject to taxation under Section 8 of the Companies Income Tax Act (CITA) in Nigeria in greater detail:


  • Trading Profits:
  • Trading profits are generated from a company's regular business activities, such as the sale of goods or services. Trading profit is equivalent to earnings from operations1, oftentimes these profits come from the buying and selling of goods and services. These profits are critical because they form the core income of most companies and are taxed to generate revenue for the government. Accurate accounting and reporting of trading profits are essential to ensure fair taxation.



  • Investment Income:
  • • Investment income includes dividends, interest, and rental income derived from investments made by the company.
    • Taxing investment income is important for several reasons: it prevents tax avoidance through investment channels, encourages transparency in financial reporting, and provides a source of revenue for the government



  • Capital Gains:
  • • Capital gains are realized when a company sells capital assets like real estate, stocks, or bonds at a profit.
    • Taxation of capital gains ensures that companies pay their fair share on the increase in the value of assets. The rate and timing of capital gains taxation can influence investment decisions and overall economic activity.



  • Royalties:
  • • Royalties are payments received for the use of intellectual property, such as patents, copyrights, or trademarks.
    • Taxing royalties is crucial to ensure that companies properly account for the income they generate from their intellectual property. This also encourages innovation and the protection of intellectual assets.



  • Foreign-sourced Income:
  • • This category encompasses profits earned by a Nigerian company from its foreign operations.
    • Taxing foreign-sourced income helps prevent profit shifting and tax evasion by multinational corporations. It ensures that Nigerian-based companies pay taxes on their global income, promoting fiscal fairness.



  • Other Income:
  • • Other income includes miscellaneous sources of profit like consultancy fees, management fees, or any income not falling into the above categories. • Proper taxation of other income is essential to prevent businesses from exploiting loopholes in the tax code and ensures that all sources of income are captured for taxation purposes.



    Extensive and accurate reporting and taxation of these profit types are vital for the Nigerian government to fund public services, infrastructure development, and other essential functions. Furthermore, clear tax regulations and compliance mechanisms are necessary to create a fair and transparent business environment in Nigeria, encouraging economic growth and investment. Companies should engage tax professionals to ensure they meet their tax obligations while optimizing their tax positions within the legal framework.

    In comparative terms we consider in brief terms another jurisdiction (United Kingdom)

    In accordance with UK tax laws, tax is imposed on the profits of any company that accrue, are derived from, bought into, or received in the UK. Here are six types of profits subject to taxation in the UK, along with detailed discussions of each:

  • Trading Profits:
  • • Trading profits are the core profits gener5675ated from a company's regular business activities, such as selling goods or providing services.
    • In the UK, trading profits are subject to corporation tax. The rate may vary depending on the size of the company and government policies. Accurate accounting and reporting are crucial for determining the taxable amount.



  • Investment Income:
  • • Investment income includes dividends, interest, and rental income derived from investments made by the company.
    • In the UK, dividends received by companies are generally exempt from corporation tax due to the dividend exemption regime. However, interest and rental income are typically subject to corporation tax, and specific rules apply.



  • Capital Gains:
  • • Capital gains result from the sale of capital assets like real estate, shares, or other investments.
    • Capital gains are subject to capital gains tax (CGT) in the UK. Different tax rates apply to individuals and companies. Some assets, like qualifying business assets, may be eligible for CGT reliefs or exemptions.



  • Royalties:
  • • Royalties represent payments received for the use of intellectual property, such as patents, copyrights, or trademarks.
    • Royalties are generally subject to corporation tax in the UK. Companies must account for and report royalty income accurately to determine their tax liability.



  • Foreign-sourced Income:
  • • Profits earned by a UK company from its foreign operations fall under this category.
    • The UK has rules to tax foreign-sourced income, mainly through the controlled foreign company (CFC) regime. This is designed to prevent profit shifting and tax avoidance.



  • Other Income:
  • • Other income covers various sources of profit, including consultancy fees, management fees, or income not fitting into the above categories. • These incomes are subject to corporation tax, and specific rules apply to each type of income to determine the appropriate tax treatment.


    Authors

    Prof. Olu Ojedokun is an Associate Professor at Lead City University, Ibadan and is an alumnus of Obafemi Awolowo University, Ile-Ife and Nottingham Trent University. He is a Barrister and Solicitor of the Supreme Court of Nigeria with almost four decades of experience in Nigeria and the United Kingdom. He is a former Head of two Departments and Dean of the Faculty of Law, Lead City University, Ibadan, Nigeria and a prolific writer and public affairs analyst.

    Noah Okikiayo Sulaimon is currently a Graduate Assistant and Researcher at the Lead City University, Ibadan, Nigeria and is a graduate of Law with the distinction of achieving a first-class and is a Sahara Energy Scholarship A wardee
    https://www.accountingtools.com/articles/trading-profit#:~:text=Trading%20profit%20is%20equivalent%20to,business%20to%20generate%20a%20profit assessed 20th September 2023

    Prof. Olu Ojedokun

    Noah Okikiayo Sulaimon

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