With amendments made to the rule of minimum tax in recent years, many Nigerians are eager to know what has changed, including how to calculate companies’ minimum tax in Nigeria. In this article, we’ll be explaining what minimum tax in Nigeria entails, and provide details on what has changed, including how companies in Nigeria calculate minimum tax.
Read on.
How to calculate companies’ minimum tax in Nigeria would be discussed below:
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What is the Minimum Tax in Nigeria?
In Nigeria, the rule of minimum tax applies to a taxable person, be it an individual or a company, who has no tax payable, or an accessible loss, or the tax calculated is lower than the minimum tax. Therefore, minimum tax can be viewed as the guaranteed sum a taxable person pays to the Federal Inland Revenue Service (FIRS) in a year.
For individuals, Section 37 of the Personal Income Tax Amendment Act 2011, as amended, is the principal legislation guiding minimum tax in Nigeria, while for companies, Section 33 of the Companies
The Income Tax Act 2004 as amended (CITA) is the applicable legislation. But for this article, we’d be focusing on companies’ minimum tax in Nigeria.
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What is the Rate of Companies’ Minimum
The general rule of companies’ minimum tax is that it is computed at 0.5% of a company’s annual gross turnover less franked investment income. More so, companies in Nigeria can enjoy a reduced minimum tax rate of 0.25%, for any tax returns filed for any 2 consecutive accounting periods between 1 January 2019 to 31 December 2021 as may be chosen by the taxpayer. However, this only applies when relevant returns are filed before the filing due dates.
N/B:
- “Gross turnover” means the gross inflow of economic benefits during the period arising in the course of the operating activities of an entity. This also includes sales of goods, supply of services, receipt of interest, rent, royalties, or dividends.
Insurance companies in Nigeria will pay minimum tax when the Company has tax payable which is less than the minimum tax computed at:
- 0.5% of gross premium and other income for non-life insurance business
- 0.5% of gross income for life insurance business
N/B:
- “Gross Premium” means the total premiums written, received, and receivable, excluding unearned and returned premiums.
- “Gross Income” means the total income earned by a life insurance business including investment income, fees commission, and other incomes, and excluding franked investment income, premiums received, and claims paid by re-insurers.
The companies minimum tax rule in Nigeria also applies to non-resident shipping and airline companies that carry out international shipping and airline operations in Nigeria. This minimum tax is computed at 2% of revenue from outbound freight activities and is usually paid in the form of withholding tax before repatriating the income in foreign currency
- What Companies are Exempted from Paying Minimum Tax in Nigeria?
As with several taxes, there are provisions for exemptions. In the case of minimum tax, the companies exempt according to the provisions of Section 14(b) of the Finance Act 2019 are as follows:
- a company within its first four calendar years of business
- a company that has an annual gross turnover of less than N25 million in the relevant year of assessment
- a company that carries on primary agricultural trade or business.
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What Amendments Were Made to Companies’ Income Tax in Nigeria?
As stated in the introductory paragraph of this piece, there have been amendments to the rule of the companies’ minimum tax in recent years.
Before 13 January 2020, the rate was;
- (a) For turnover of NGN500,000 or below and the company has been operating for four calendar years or more, the minimum tax amount is the higher of:
- 0.5% of gross profit; or
- 0.5% of net assets; or
- 0.25% of paid-up capital; or
- 0.25% of the turnover of the company
- (b) For turnover above NGN500,000, the amount payable in (a) plus an additional tax of 0.125% on the revenue less NGN500,000.
In addition, agricultural businesses, companies with at least 25% foreign equity capital, and companies within the first four calendar years of operations were exempt from MinTax in the old provision.
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How to Calculate Companies Minimum Tax in Nigeria
Having mentioned the applicable minimum tax rate of different types of corporations in Nigeria, let’s illustrate how companies’ minimum tax in Nigeria can be calculated.
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Illustration 1 on the calculation of companies’ minimum income tax:
Assuming Imo Holdings, a business in Nigeria with 25% foreign equity, had no tax payable for the assessment year of 2022 but had a total turnover of NGN30 million. What is the minimum tax payable to the FIRS by Imo Holdings if the franked investment income for 2022 was NGN 2.5 million?
Solution
The first thing to do is to less the franked investment income from the total turnover to get the taxable turnover. That would be
= 30,000,000 – 2,500,000
= 27,500,000
Having gotten the figure to be N27,500,000, let’s calculate the minimum tax for Imo Holdings below:
Remember minimum tax = 0.5% × (Total turnover – franked investment income)
= 0.5% × 27,500,000
= 0.00 × 27,500,000
= 137,500
N137,500 is the minimum tax Imo Holdings will pay for 2022.
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Illustration 2 on the calculation of companies’ minimum tax:
What is the minimum tax CUO Insurance Limited, a non-life insurance company, is expected to pay for the 2022 year of assessment if it had no taxable income but recorded NGN23 million in gross premium and other income?
Solution
The minimum tax formula for a non-life insurance company is:
= 0.5% × gross premium and other income
From the example above, N26 million was the gross premium and other income of CUO Insurance Limited for 2022.
Therefore, the minimum tax is
= 0.5% × 26,000,000
= 0.005 × 26,000,000
= 130,000
CUO Insurance Limited is required to pay a minimum tax of NGN130,000 for 2022.
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Illustration 3 on the calculation of companies’ minimum tax:
If the computed Company Income Tax of DAW Insurance Company exceeded the minimum tax for the 2021 year of assessment. What would the company pay to the FIRS if the gross income for 2021 was N400 million?
Solution
Using the formula of 0.5% of gross income for the life insurance business, below is the computation for the minimum tax of DAW Insurance Company for 2021:
= 0.5% × 400,000,000
= 2,000,000
According to the calculation above, DAW Insurance Company will have to pay the sum of NGN2,000,0000 to the FIRS as minimum tax.