Taxes are statutory obligations of every citizen and businesses in a country. It is thus a major factor in determining how much income you keep to yourself either as a business or as an individual.
For example, a man who pays tax of N1000 on a profit of N1,500 fares worse than a man who pays tax of N500 on the same profit of N1,500. How then is this possible you may ask?
The Nigerian tax law provides several means by which one can avoid paying tax or at least reduce paying excessively. This is not to be confused with tax evasion, which is considered illegal in Nigeria. Tax Evasion refers to a deliberate act on the part of a tax payer not to pay tax.
However, tax avoidance is a legitimate way of avoiding tax by exploiting loopholes and provisions in the tax code that allow you to reduce the amount of tax that you pay on your income.
Without much ado, let us look at various forms of loopholes and provisions one can use to avoid tax.
Donate Money to Organizations listed in schedule 5 of CITA
It is quite often that companies donate money to certain organizations and NGO’s. This is considered a good cause and a sign of corporate responsibility. However, ONLY donations to certain organizations are allowed to be excluded from taxable profits. Some of them are The Boys Brigade, Boys Scout, Christian Council of Nigeria, Girls Guide, Any Educational Institution recognized by the law, Islamic Education trust, ICAN, Nigerian Red cross etc.There are about 41 of them as such it is important that you know them. Donations to political parties do not qualify.
When you sell an asset, reinvest it into the same class of asset
If your business owns assets such as equipments that it uses for its daily operations, it is possible that you may wish to sell them once the assets are no longer useful to the business.
In the Capital Gains Tax Act, any profit on disposal of an asset attracts a charge of 10%. However, if the proceeds of the asset sale are utilized to acquire another asset within the same class of asset, the tax payable can be deferred for as long as the new asset is in used. So, assuming you buy a Generator for N2m and decide to sell it a 2 years later for N1m. And it cost you another N200k as selling expenses for the generator, you will be liable to a 10% capital gains tax on N800k which comes to N80k.
With this law, you do not need to pay this N80k immediately provided you spent the N1m or part of it on acquiring a new generator. However, the generator must be acquired 12 months before you made the sale or not more than 12 months after. Please not that if you use the money to buy a car (even if it is for your business) it will not apply.
Deduct Vat that you pay on your purchases from vat that you receive on your supplies
Value Added Tax is paid on certain goods and services as mandated by law. However, for companies who are into selling goods and services, you are allowed to deduct the vat that people charge you for your purchases. For example, if you are into supplies of furniture and it cost you N10m to acquire materials that you need to produce the furniture it is likely that you will be charged an extra 5% of the N10m (N500k) as Vat.
Consequently, if you sell the furniture for N15m you will charge your supplier N750 vat. When you are remitting to the government you should deduct N500k that you paid from the N750k that you collected giving you a net remittance of N250k only. Most people end up paying the N750k denying themselves the opportunity of retrieving their cost. Your business surely does not need this generosity.
Register an NGO (Non-Governmental Organisation) or a Trust
Companies Registered as Limited by Guarantee are exempted from paying tax in Nigeria. Churches, Mosques etc fall under this category. In addition, organisations that are into charitable causes also fall under this category. Whilst they do not pay taxes, they are not expected to pay dividends to their owners. Also note that transactions made by them that results in a profit can equally be taxed. For example, if they invest in shares and get dividends, they will be taxed 10% withholding tax.
If you want to run an organisation that pays no tax, then consider setting up first as an NGO.
Apply for Capital Allowance Certificate
Companies periodically buy assets which they employ to use in the ordinary course of business. The Assets go through wear and tear and needs to be replaced over time. The wear and tear are a cost the company must bear and as such is written off (expensed) just as you write off other cost such as transport, electricity, water bills etc.
However, how this cost is calculated differ from one business to another and for that reason the tax man does not deduct this cost from your profits before taxing. In its place, is capital allowance which is the tax authority’s way of writing off the cost of wear and tear. To therefore ensure that you enjoy capital allowance, which helps reduce income tax liability, you must obtain a certificate from the Ministry of Industry.
A capital allowance can only be issued to you if you have a Certificate of Acceptance, which is obtained through the Ministry of Trade. There are consultants who can help you obtain this.
Culled from Nairametric