HILLCRESTPRO
Thursday, 13 September 2018 16:36
WHAT YOU NEED TO KNOW ABOUT WITHHOLDING TAX ADMINISTRATION IN NIGERIA
Withholding Tax (WHT) is an advance payment of income tax. In principle, it is a payment for the ultimate income tax liability of the taxpayer or company. It is not a separate tax and does not confer an exemption from the filing of yearly tax returns by the company which suffered WHT. The tax is deducted at source when a payment is to be made to the beneficiary.
Applicable Tax Law
Withholding Tax (WHT) is not a distinct tax type and therefore has no legislation of its own. It is only a mechanism for the collection of other taxes. Consequently, its application is provided for in the enabling law of other tax types i.e. Section 81 of Company Income Tax Act, Section 54 of Petroleum Profit Tax Act, Section 73 of Personal Income Tax Act and Section 13 of Value Added Tax (VAT) Act.
Tax coverage and income subject to WHT
It seeks to collect taxes that may have been lost through evasion and/or avoidance. It is to ensure that taxpayers are correctly taxed but it must be understood that transactions that are ordinarily not liable to tax in Nigeria are also not liable to WHT; thus, contracts and supplies of goods and services performed entirely outside Nigeria by non-resident taxpayers will not be liable to WHT. The residence of the taxpayer is not relevant for determining liability to tax or the application of WHT, but it is important to consider whether the provider/supplier of the goods or services is liable to tax.
The rate of tax applicable to the various goods and services is provided in later parts of this paper. The introduction of the WHT regime came about to address the problem of tax evasion although, there is the overriding objective of full disclosure, transparency, predictability and fairness. In the light of these objectives and bearing in mind that the tax is intended as an advance payment of tax, its operation should always be optimized to ensure that taxpayers are not overtaxed and Government does not lose revenue.
Rents: This includes rental income on both real and personal property. As a general rule, income on a property (rent, hire or lease payments or rights (royalties) situated in Nigeria is liable to tax in Nigeria, the place of payment notwithstanding. Where a person rents or hires property/services from another, WHT at the rate of 10 per cent will apply. But where a person provides services to another for e.g. air/land transport service, using its own equipment/facilities, the transaction becomes a contract of services rather than rental or hire.
Interest: This is income from investments of every kind. WHT is applicable to income from government securities and income from bonds or Treasury bills. Interest on loans paid by a Nigerian company is often not subject to WHT.
Dividends: Refer to income from shares. The income is subject to tax whether it is received by a Nigeria company or a non-resident company. The tax imposed is regarded as final tax, but corporate bodies are allowed to recoup WHT deduction where the dividend is to be redistributed as Franked Investment Income (FII). The Petroleum Profit Tax Act (PPTA) however exempts dividends payable by oil producing companies on petroleum operations from WHT imposition.
Royalty: Refers to unearned income which accrues to the owner from past endeavors. Permission must be obtained before it can be used. It is payment of any kind as a consideration for the use of or the right to use any patent, trade mark or right/
Consultancy/professional/management/technical services: These are specialized services rendered by persons with the required knowledge and skills. The mere fact that services are provided by a company which has consultancy as part of its name does not by itself render such service as consultancy. The real content of the services being provided must be examined and if it amounts to a consultancy service, then the appropriate rate would apply; the same treatment applies to professional/management services. For instance, if an engineering company is carrying out a construction activity, the proper classification for the services would be ‘‘construction’’ as opposed to professional/technical services; similarly, the use of industrial machinery/equipment to provide a service does not render it to be ‘technical’’ because the industry position requires that only arrangements that involve a transfer of technology should be classified as technical.
All types of contracts and arrangements, other than sale and purchase of goods and property: This classification is wide enough to capture every transaction, other than outright purchase/sale of goods and property. The revenue holds the view that majority of the activities carried on in the oil industry are done by way of contractions, and should properly fall under this category. The issue of contracts and transactions, not being conducted in the ordinary course of business has over the years been subjected to series of reviews and amendments, aimed at improving the WHT system to achieve efficiency as well as minimize the cost of doing business.
The aim of WHT is not to compound the problems of producers, manufacturers and those engaged in any activity, other than services. The definition of manufacturing activate as contained in the FIRS information circular No. 2002 appears to have further generated more controversy than expected. The following classification will assist in the understanding of circumstances where WHT will apply in relation to any production activity.
Where there is a dual relationship between parties in a
business transaction
An example of this contract is where a manufacturer/producer require raw materials from a supplier for its production. This is dual relationship between both parties and the transaction will not be liable to WHT. E.g., a farmer supplies groundnut to a manufacturer of groundnut oil; a manufacturer of glass supplies bottles to a bottling company or soft drink manufacturer or an oil marking company supplies diesel direct to a user.
Where there is a tripartite relationship between parties in a transaction
In a tripartite contract relationship involving a manufacturer, supplier and agent, there could be either two options, depending on the level of financial arrangement. For example, where manufacturer A, engages agent C to procure or source for raw materials from supplier, B, for his production line, there is a tripartite arrangement here. There is nothing preventing manufacturer, A from dealing directly with supplier B to achieve a dual contract relationship.
(a) If agent C is mobilized by manufacturer B with fund to source for materials for its operation, there will be need to segregate the service cost from the entire contraction, and only the service component will be liable to WHT.
(b) If the agent, C, finances the sourcing of the raw materials for Manufacturer A, the entire contract value will be liable to WHT at the time of payment.
Where a manufacturer delivers its normal products to its
distributors and dealers for sale
In this situation, the income accruing to the manufacturer will not be liable to WHT as it is regarded as transaction in the ordinary course of business, but the commission earned by the distributors/dealers will be subjected to WHT.
Agency transactions and arrangements
Agency arrangement implies a contract between a principal and agent. The reward for services by the agent is commission, which is subject to WHT of 10 per cent.
However, if the principal is a non-resident, any sales proceeds from the arrangement will attract fie per cent WHT, where any of the conditions in Section 26(1) (b) of CITA holds.
The organizations making the payments are required to withhold tax from such payments and pay over the withheld amounts to their respective relevant tax authorities within 30 days of receipt of payment or credit by the person or entity suffering the tax.
The relevant tax authorities to receive the WHT tax transactions made by companies is FIRS and for individuals and unincorporated bodies subject to rules of residence is SIRS or FIRS.
Person liable to deduct WHT
The payer of WHT for any activity under this tax shall include company (corporate or non-corporate), government Ministries and Department, Parastatals, statutory bodies, institutions and other established organization approved for the operations of Pay As you Earn System (PAYE).
Who is taxable?
• All persons, companies etc. who’s incomes are liable to income tax, are subject to Withholding Tax.
• However, exempt entities, such as educational institutions, Government Ministries, Parastatals and other Agencies of government, are agents for the collection of WHT. They are required to deduct WHT on any payment made to a taxable body and remit same to the relevant tax authority.
WHT implication on foreign transactions
Non-resident companies/enterprises
The revenue practice is that non-resident companies are not empowered to deduct any type of WHT. These categories of enterprises are practically outside the regulatory monitoring and control of the FIRS. It will be impracticable for revenue office to inspect the accounting books of these companies to confirm due deduction and remittance of WHT.
Double Taxation Agreement (DTA)
Transactions that are ordinarily not liable to tax in Nigeria are not liable to WHT in Nigeria. Thus contracts and supplies of goods and services performed entirely outside Nigeria by non-resident individuals are not liable to WHT. Nigeria has treaty agreements with about eight countries and these countries are granted a reduced rate of WHT deduction, usually at 75 per cent of the generally applicable WHT rate. 7.5 per cent. These countries include UK, Northern Ireland, Canada, France, Belgium, the Netherlands, Pakistan and Romania.
Permanent Establishment (PE) principle under Nigeria’s taxation
The rules construe a PE where:
• The company has a ‘fixed base’ in Nigeria.
• The company operates in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf,
• The company is executing a turnkey project in Nigeria, or
• The operation between the company and its Nigeria affiliate does not appear to be at arm’s length.
• ‘Fixed base’ implies some degree of permanence and will include:
• Facilities, such as a factory, office, branch, mine, oil or gas well
• Activities, such as building, construction, assembly or installation
• Provision of services in connection with the activities listed above.
Principles of PE
• The rules construe a Permanent Establishment where:
• The company has a ‘fixed base’ in Nigeria.
• The company operate in Nigeria through a dependent agent authorized to conclude contracts or deliver goods on its behalf,
• The company is executing a turnkey project in Nigeria, or
• The operation between the company and its Nigeria affiliate does not appear to be at arm’s length.
‘Fixed base’ implies some degree of permanence and will include: Facilities, such as a factory, office, branch, mine, oil or gas well Activities, such as building, construction, assembly or installation, provision of services based on the above-listed activities.
Other types of income not liable to WHT
• Companies operating within the Free Trade Zones/Export Processing Zones.
• Insurance premium.
• Turnover/income from dealership or distributive trade
• Telephone bills are not subject to WHT.
Application of WHT
Sections of CITA and PITA that provide for the deduction of withholding tax at the applicable rates below:
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Types of payment
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Applicable rates
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Companies
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Individual
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Dividends, Interest, Rent
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10%
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10%
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Directors Fees
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10%
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10%
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Royalties
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15%
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15%
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Commission, Consultation,
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10%
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5%
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Technical, Service Fees
Management fees
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10%
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5%
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Construction/Building Contracts
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5%
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5%
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Contracts, other than outright sales and purchase of goods in the ordinary course of business
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5%
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5%
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Returns & Remittance
Tax Returns are filed monthly with evidence of remittance and a detailed schedule of taxable transactions.
Submitted schedule should show the following details:
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Name of supplier
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Address
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Nature of Service
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Invoice
Date
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payment
Date
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Amount
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Rate @ Y%
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Tax
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• Returns for corporate suppliers should be filed within 21 days from end of month of transactions.
• Returns for non –corporate suppliers should be filed within 30 days from end of month of transaction.
• In practice, tax returns are filed in the same month they occur.
• Tax deducted should be remitted to the revenue in exchange for a receipt of payment.
• Tax is payable in the currency of the qualifying transaction.
Following payment and filing of returns, the revenue processes credit notes for the suppliers on whose income tax was deducted.
• Credit notes can be used in applying for tax credit against current and future tax liabilities (i.e. where it is not final tax)
• Remittances are due to either federal or state tax authorities.
Remittances due to Federal Inland Revenue Service (FIRS):
• Corporate entities,
• Nonresident individuals,
• Members of the armed forces and police,
• Resident of Abuja,
• Foreign officers.
Remittances due to state internal revenue service (SIRS):
• All other individuals / partnerships resident in the state.
Payment of currency
Section 64B of CITA empowers the tax authority that withheld tax must be remitted to the tax authority in the currency in which the deduction was made. This means that transactions made in foreign currency are to be remitted in the same currency and that the tax so withheld is to be remitted in the same currency. Simultaneously penalty for default would also be calculated in the same currency.
How to claim WHT credit (Credit notes)
A taxpayer from whom tax has been withheld is expected to gain withholding tax credit notes from the relevant tax authority via the deducting organization. All withheld taxes are forwarded to the tax authority, which in turn records the credit against the tax payer’s account, with a schedule containing details of the contract or service, on which basis the tax authority issues a credit note. Assessed tax and related charges are usually entered as debits in the taxpayer’s tax account, while he is expected to pay only the difference between his assessed tax and withholding tax credit at the time of filing their own returns.
• It is this credit note that a taxpayer uses as a set off against tax assessed within that year or if unutilized within that year can be applied based on the taxpayer request to transfer the credit balance in that year to offset or reduce debit balance of another year.
• In cases where there is an excess charge of WHT on a taxpayer, the 2007 amendments to CITA (Section 63 (7)) have even further empowered FIRS to refund proven excess withholding tax to any taxpayer within 90 days of filing a claim.
Offences and penalties
Offences
• Failure to withhold tax or
• Failure to remit or late remittance of the tax withheld
• Non remittance of the tax withheld within the time limit stipulated by the Revenue.
Penalties
a. For companies
A fine of 200 per cent of the tax not withheld or withheld but not remitted, plus interest at the prevailing commercial rate.
b. For Individuals & other organizations
A fine of the higher of N5,000 or 10 per cent of the amount of tax due, plus the amount of tax deductible, or withheld but not remitted, plus interest at the prevailing commercial rate.
Interest on savings account of less than N50, 000 paid by a Bank, is not subject to WHT.
The WHT system has come to stay since it is a veritable source of revenue to government. It enhances the collection efforts of tax authorities and it ensures that revenue is generated in advance. It is therefore imperative that the system should continue to be improved upon in the light of modern tax administration procedure. Usually, an advance payment of tax provides information that an income source has been identified through a third party. Such information being provided by the payer should be readily available for use in accessing a potential taxpayer. Field officers should always be ready to follow up on such information.
Thursday, 13 September 2018 16:29
TAXATION OF PARTNERS AND PARTNERSHIPS IN NIGERIA
Taxation of Partners and Partnerships in Nigeria
Partnerships are not taxed in Nigeria, partners are. Nonetheless, partnership arrangements affect the computation of tax liability of the partners. Taxation of Partners is governed by the Personal Income Tax Act (PITA)[1]. Under the Act, partners are taxed as individuals with chargeable incomes derived from the partnership and other sources. To determine partners’ tax liabilities, the partnership income is first computed and then distributed to the partners in whose hands the income is subjected to tax.
Understanding the meaning and nature of partnerships as well as the financial relationship between partners will prepare the ground for understanding how partners are taxed in Nigeria.
What is a Partnership?
A Partnership is a business arrangement where 2 or more individuals or entities pool resources to run a business and agree to share the profits and losses of the business. By the Partnership Act 1890, a partnership is “the relation which subsists between persons carrying on a business in common with a view of profit.”[2]
The nature of Partnerships in Nigeria
Partnership is governed by the Partnership Act 1890–a statute of general application; the Partnership Law of Former Western Region 1958 (now Lagos, Osun, Ogun, Ondo, Oyo, Edo, and Delta); and Partnership Law of Lagos State 2009.[3] The Partnership Law of Former Western Region 1958 “is virtually a reproduction of the English Statute” but for the provisions on limited partnership in the 1958 Law.[4] Lagos State in its Partnership Law 2009 went a step further than the 1958 law by including provisions on Limited Liability Partnerships.
From these laws, three expressions of partnerships are recognized; general partnerships, limited partnerships, and limited liability partnerships. These arrangements are identified by the extent of liability undertaken by partners in the partnership.
1. General Partnerships
General partnerships impute unlimited liability on all the partners. All partners are liable for the debt and obligations of the firm during the partnership, and even after death, a partner’s estate will be liable for any unsatisfied debts.[5] In absence of contrary evidence, all partnerships are deemed to be general partnerships.
2. Limited Partnerships
Limited partnerships allow some partners in a partnership to limit their liabilities to their contribution or agreed contribution to the firm. Under this arrangement, at least one partner must be a general partner with unlimited liability towards the partnership.[6] If a limited partnership doing business in Lagos is not registered it is deemed to be a general partnership.[7] Registered limited partnerships insert “LP” behind their name.
3. Limited Liability Partnerships
Under limited liability Partnerships, the liabilities of partners are limited to the contributions they make or agree to make to the partnership as capital. Limited liability partnerships confer a separate identity different from the partners, so the firm can sue and be sued in its own name.[8] Limited liability partnership is the only partnership arrangement that confers a separate legal identity on the firm. General partnerships and limited partnerships do not have identities separate from the partners.
The nature of a partnership arrangement is recognized from the terms in the Partnership Agreement. In the absence of a Partnership Agreement, the partnership is deemed to be a general partnership.
The Partnership Agreement usually covers: names and addresses of the firm and the partners; business nature; duration of the partnership; capital contribution of each partner; interest rate on capital contributions; sharing ratio of profit and losses; rate of interest on partner’s drawings; salary or commission of partners; interest on loans to partners; mode of admission and retirement of partners; method of calculating goodwill of partners; method of treating premiums on partners’ life insurance; how proceeds are shared among the Partners; arbitration clause; method of dissolution; and so on.[9]
A certified copy of the partnership deed is required to be registered with the tax authority within 30 days of execution.[10]
How do Partners relate financially?
A partnership like any other business arrangement is profit oriented. Necessarily, all partners are concerned with the management of the business, in terms of the income and expenses, as well as profits and losses.
The financial statements for the accounting year are prepared like that of a sole trader with the addition of an Appropriation Account, a Capital Account, and a Current Account. The Statement of profit or loss and other comprehensive income and Statement of Financial Position are the statements prepared for a sole trader. The Appropriation Account shows how profits or losses are shared between the partners, that is, what share each partner is entitled to receive from the partnership in that accounting year. The Capital and Current Accounts on the other hand are used to determine the stake of each partner in the partnership; the balances in these accounts are used in preparing the Statement of Financial position.[11]
1. Statement of Profit or Loss and other Comprehensive Income
The statement of Profit and loss is used to determine the net profit or loss to be shared between the partners.
Format for Statement of Profit and Loss
Sales Revenue x
Less: Cost of Sales (x)
Gross profit X
Other incomes x
x
Less: Administrative expenses (x)
Distribution costs (x)
Finance Costs (x)
Net profit X
2. The Appropriation Account
The Appropriation Account shows how the net profit or loss is shared between the partners.[12] It shows the share of profit or loss each partner is entitled to receive from the Partnership that accounting year.
Format for Appropriation Account[13]
Net profit x
Add Interest on drawings: Partner A x
Partner B x
x
x
Less Salary: Partner A x
Partner B x
(x)
x
Less Interest on capital: Partner A x
Partner B x
(x)
Divisible profits X
Share of Profits: Partner A x
Partner B x
X
3. Capital and Current Accounts
The Capital and Current Accounts are used to determine the stake of each partner in the partnership. The Capital Account contains the capital introduced or withdrawn permanently by the partners. The Current Account contains transactions relating to drawings, interest on capital or drawings, salary or commission to the partners, and share of profit or loss.[14]
Format for Capital Account of the Partners[15]
Particulars A B Particulars A B
Drawings from Capital x x Balance b/d x x
Balance c/d x x Additional capital x x
x x x x
Balance b/d x x
Format for Current Account of the Partners[16]
Particulars A B Particulars A B
Drawings x x Balance b/d x x
Interests on Drawings x x Salary x x
Balance c/d x x Interest on Capital x x
Interest on Loans x x
Share of Profits x x
x x x x
Balance b/d x x
4. Statement of Financial Position
“Statement of Financial Position is prepared to ascertain the financial position of the business entity at the end of the reporting period.”[17]
Format for Statement of Financial Position
Assets Cost Depreciation Net Book Value
Non-current assets x (x) x
Long term investments x
Current Assets x
x
Total Assets X
Equity and Liabilities
Capital account Partner A x
Partner B x
x
Current account Partner A x
Partner B x
x
Non-current liabilities x
Current Liabilities x
X
How are partners taxed?
A Partner is liable to pay tax in the State the partner was resident during the assessment year.[18] Partners are taxed on a preceding year basis; a partner’s is to file tax returns within 90 days of the end of the fiscal year, that is, by 31 March.[19]
Under tax laws, Partnerships are viewed as a combination of two or more sole traders, and partnership income to be distributed between the partners is determined using principles applicable to sole traders.[20] “The Partners are assessed in their individual names, based on the share of partnership profits allocated to them.”[21]
Because partnerships are based on profit and loss sharing, all income received by a partner are viewed as the partners share of the partnership profit or loss. A partner’s income from the partnership is calculated as the sum of any remuneration; interest on capital; cost of leave or recreation passages to or from Nigeria charged to the Partnership account in respect of that partner; and share of the income left after deducting the 3 items above from the partnership income.[22] In other words, the income of a partner derived from the partnership is calculated by summing up;
1. Salary or commission paid to the partner;
2. Interest on capital invested in the partnership by the partner;
3. Leave or recreational passages enjoyed by the partner and charged to the partnership account; and
4. Share of profit or losses of the partner.[23]
To determine share of profits accruable to a partner, the net profit or loss of the partnership must be adjusted. An Adjustment is made by adding back to the net profit or loss all disallowable expenses and unreported taxable income under PITA while deducting from the net profit or loss all reported non-taxable incomes and allowable expenses under PITA. The adjusted profit or loss of the partnership is then split between the partners according to the agreed ratio.
All expenses disallowed under PITA from being deducted when calculating the net profit are disallowable expenses. They are; domestic or private expenses; capital withdrawn; loss recoverable under insurance; rent or cost of repair of premises not used in producing income; taxes on income or profits levied in Nigeria or elsewhere(with exception); payment to pension, provident, savings, widows, or orphan’s fund not approved by the Joint Tax Board (JTB); depreciation; sum reserved out of profits (except bad and doubtful debts that have become due and payable; expenses incurred to earn management fee without Minister’s approval of the agreement; and expenses incurred as management fee without the Minister’s approval of the agreement.[24]
All incomes chargeable to tax under PITA are taxable incomes, some of which may not have been reported in calculating the net profit. They are; gain or profits from the business; gain, profit or premium arising from business property; interest, dividend, or discount; charge or annuity; any other profit, gain, or payment to the business.[25]
Non-taxable incomes of the Partnership may have been reported in calculating the Partnership Income. They include; profit on disposal of a fixed asset; profit on disposal of an investment; and income received to cover a disallowed expense.[26]
Allowable expenses are expenses that should be deducted before arriving at the net profit of the partnership. They include; interest on loan used for business; interest on loan used to develop residential house for a partner; rent and premiums on land or building used for business; expenses for repair, renewal, or alteration of premises, plant, machinery, or fixtures used for business; bad debts due and payable during the assessment year; contribution, abatement, or pension of a public officer under an approved scheme; pension, provident, or retirement benefit, fund or society approved by the JTB; expenses incurred wholly and exclusively for the business; expenses proved to be incurred for research including levy paid under the National Agency for Science and Engineering Infrastructure Act.[27]
By adding back all disallowable expenses and unreported taxable income and deducting all reported non-taxable incomes and allowable expenses from the net profit determined in the Statement of Profit or Loss and other comprehensive income, the adjusted profit or loss of the partnership is determined.
The adjusted profit is split between the partners, first by distributing all incomes received from the partnership to partners (salaries or commissions, interests on capital, leave allowance, and other expenses charged by the partners to the partnership account) and second, by distributing the remainder of the adjusted profit or loss according to the agreed sharing ratio. Each partner’s total income is then treated for losses and capital allowances to arrive at the assessable partnership income for each partner.
Treatment of losses and capital allowances
“If the Partnership makes a loss, and consequently any of the partners make a loss, the loss can be relieved against the next year.”[28] The loss is carried forward and relieved from the partner’s total partnership income in the next year. “But if the partnership makes a profit and a partner makes a loss, the loss cannot be relieved against the next year.”[29]
Capital allowances are calculated under the PITA. Where a partnership has capital allowance to be claimed, it is usually shared in the profit ratio and relieve against each partners income.
Determining a partner’s tax liability
The partner’s incomes from the partnership is added to the partner’s income from other sources to arrive at the partner’s total income. The partner’s total income is then treated with the reliefs and deductions available under PITA. They are:
1. Consolidated relief allowance: This is the addition of the higher of N200,000 or 1% of partner’s gross income plus 20% of gross income.
2. National Housing Fund contribution
3. National Health Insurance Scheme
4. Life Assurance Premium
5. National Pension Scheme
6. Gratuities
7. Child allowance: This is “N2, 500 for each child up to a maximum of four children, provided that none is above 16 years or married. However, a relief can be granted for a child over 16 years if the child is in a recognised school, under artisanship or learning a trade.”[30]
8. Dependent Relative allowance: This is “N2,000 for each dependent relative up to a maximum of two relatives who are widowed or infirm”[31]
After deducting all applicable reliefs and allowances, the income left is the chargeable income of the partner. The chargeable income is taxed using the tax rates in the 6th schedule of PITA, thus:
1st N300,000 at 7%
Next N300,000 at 11%
Next N500,000 at 15%
Next N500,000 at 19%
Next N1,600,000 at 21%
Above N3,200,000 at 24%
Once the tax rates are applied, a partner’s tax liability for the year is determined.
Steps for computing a partner’s tax liability.
1. Identify net profit or loss of partnership.
2. Add all non-allowable expenses and unreported taxable income.
3. Deduct non-taxable income and allowable expenses not deducted.
4. Step 1-3 would give the adjusted profit or loss.
5. Deduct all private expenses and money given to each partner from the partnership profit and distribute to each partners account as income received from partnership.
6. Share the remaining adjusted profit between the partners in the profit and loss sharing formula.
7. Deduct loss carried over by each partner from the result of steps 5 and 6.
8. Deduct each partner’s share of the capital allowance for the partnership.
9. Result of steps 5 to 8 is the earned income from partnership.
10. Add income from other sources received by each partner.
11. Deduct consolidated relief allowance and other allowable deductions for individuals.
12. The result is the chargeable income per partner
13. Apply the tax rate to this income.
Format for computing partner’s tax liability[32]
Net profit or Loss x
Add:
Non-allowable expenses xx
Unreported taxable income xx
x
Deduct:
Non-taxable income xx
Allowable expenses not deducted xx
(x)
Adjusted profit X
Total A B C
Adjusted profit xx
Share of profits: (xx) xx xx xx
(Salaries, Interest on capital
Leave allowance, sharing ratio)
Losses b/f xx
Losses relieved (xx) (x) (x) (x)
Losses c/f xx
Capital Allowance xx
Capital Allowance relieved (xx) (x) (x) (x)
Income from partnership X X X
Other earned income x x x
Total Earned Income x x x
Unearned Income x x x
Statutory total income X X X
Deduct allowances and reliefs (x) (x) (x)
(Consolidated relief Allowance, NHF, Pension etc)
Chargeable Income X X X
Apply tax rate to Chargeable Income.
Conclusion
Although partners and not partnerships are taxed in Nigeria, taxing partners cannot be achieved without identifying the income the partnership brings to the table. Understanding the nature and terms of the partnership is key to determining the tax liability of partners. Once the partnership income is recognized and shared properly, partners are treated similarly with other individuals under PITA.
By Ololade Tinuola Olukowi
By Ololade Tinuola Olukowi
Thursday, 13 September 2018 16:23
NIGERIA AUGUST 2017 UNEMPLOYMENT FIGURES
Published in
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Thursday, 13 September 2018 16:17
Taxation of Interest Benefit on Employee Loans
Introduction
On 14 September 2017, Lagos Inland Revenue Service (LIRS) released a public notice on the treatment of interest benefits on employee loans. In the notice, LIRS defined employee loans are loans given by “an employer to an employee for specific reasons with the expectation that such loan will be repaid in full to the employer through pre-agreed deduction from the employee’s net salary, with or without any interest”[1]. Interest benefit is the difference between the open-market interest rate (Monetary Policy Rate “MPR”) and the lower interest rate charged by employers on loans given to employees. This benefit is enjoyed because employees pay zero or lower-than-market interest rates on loans collected.
LIRS relying on section 3 of the Personal Income Tax Act now seeks to tax interest benefits.
Tax Treatment on Interest Benefit to Employees
Before this public notice was issued interest benefits on loans granted to employees were largely unrecognized and the tax treatment was unclear.
LIRS will now treat all employee loans using an adjusted MPR of 3% less than the standard MPR as the minimum interest rate allowable on employee loans. When the adjusted MPR is higher than the interest rate given on the employee loan, the difference will be recognized as an additional benefit (income) to the employee and will be taxed. But if the interest rate is higher than the adjusted MPR it means that no benefit has accrued to the employee.
Since the MPR is currently 14% and LIRS will allow a 3% adjustment, this means that 11% will be the minimum interest rate recognized by LIRS on loans to employees. For any loan given to an employee at less than 11% interest rate, the difference in the rate will be treated as a benefit to the employee and will be taxed.
This interest benefit remains taxable as long as the loan subsists even when the employment relationship has ended.
Persons Affected by this Notice
Employees: Employees will now be expected to pay tax on benefit enjoyed on loans given by employers for loans with lower-than-11% interest rates.
Directors and Significant shareholders: Though captioned “Taxation of Employee Loan”, this tax treatment also applies to loans given to directors and significant shareholders.
Employers: Employers have the burden of deducting tax on the interest benefit given to the employee and remitting to the LIRS either monthly or yearly depending on the repayment terms agreed between the parties. The annual returns file by employers in January must now include a schedule of employee loans and repayment terms.
Possible Effects of this Treatment of Employee Loans
LIRS’s treatment of employee loans may result in any of these outcomes:
1. Some employers may no longer give loans to their staff.
2. Some employers may increase their interest rates to 11%. This way, no benefit will accrue to the employee and companies get the additional income to run their businesses. This interest will eventually be taxed as companies’ income tax.
3. Some employers may retain low interest rates while deducting tax on the interest benefits to their employees.
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Blog
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Monday, 03 September 2018 07:30
On-the-job training and internal/external training.
Our training events are carried out using on-the-job training and internal/external training. The external training could be national i.e. at venues and cities that are conducive to learning with easy accessibility or In-plant (in-house) as the client requires.
External training programmes are held in foreign countries with competent facilitators and specialized facilities. In some cases we combine both national and external training events to the delight of clients.
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HUMAN RESOURCES DEVELOPMENT/TRAINING
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Friday, 20 January 2017 02:15
Silicon Valley's Invasion of Banking Just Got Key U.S. Go-Ahead The U.S. is opening a new path for Silicon Valley upstarts to push into banking -- if they can stomach the regulation.
(Bloomberg) -- The U.S. is opening a new path for Silicon Valley upstarts to push into banking -- if they can stomach the regulation.
The Office of the Comptroller of the Currency invited fintech companies on Tuesday to apply for special national charters, hours after the Treasury Department released a report advocating that step and others to spur innovation. The OCC’s move -- potentially letting online lenders, payments firms and certain cryptocurrency ventures operate without relying on a bank -- has long been opposed by the financial industry and state regulators.
“It’s a game changer,” said Mike Whalen, co-head of law firm Goodwin Procter’s fintech practice. Tech companies lacking national charters contend with a “50-state hodgepodge” of watchdogs, while ceding ultimate control of marketing and underwriting guidelines to banking partners, he said in an interview.
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Tuesday, 17 January 2017 04:27
Professional Accounting at an affordable cost.
Our accounting service provides small and medium sized businesses with professional Accounting services at very affordable cost. We help you set your Accounting system, develop an Accounting policy and procedure manual and create a Chart of Accounts, and generate monthly management report and periodic reports on the performance of your business. We also prepare annual financial statement for your business.
Each month or quarter we’ll do the following...
- Reconcile your bank account
- Generate an income statement
- Generate a balance sheet
- Generate performance report
- Provide Excellent Financial analysis for business decision making
- Provide advise Risk management and internal controls
- Provide Sound Budgeting and financial forecasting
- Deliver Business strategy and leadership
- Identify sources of finance
- Advise on Good corporate governance
These tasks form the solid foundation of any value-adding accounting system.
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ACCOUNTING SERVICES
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Tuesday, 17 January 2017 04:27
Opportunities to reduce your tax burden
As regulations at the local, state, federal, and international levels change, our tax planning consultants are continually developing new tax strategies and amending existing tax strategies so that our clients can take full advantage of opportunities to reduce their tax burden. We continually monitor legislative, regulatory, and precedent-setting developments in tax.
When the strategy calls for it, we also can draw on a multi-disciplinary team of specialists. For instance, we have lawyers, engineers, architects, and energy experts who can help us document your tax positions when it comes to tax credits and incentives such as:
- Pioneer status application
- Investment allowance
- Unlimited loss relief
- Transfer pricing documentation
- Letter of acceptance for fixed assets
We have prepared tax returns for all types of businesses and organizations, including trusts, tax-exempt entities, and individuals. For them, we prepare:
- Tax computation
- Annual return filings
- VAT management
- WHT & CGT Management
- Payroll tax returns
In additional to our tax compliance services, we also provide tax planning and consulting services because our clients realize whether they decide to work with global suppliers or need to develop a succession plan, it is important that they consider the impact of their decisions on their taxes. Our clients benefit from our vigilance because there are tax implications to almost every financial decision. It is part of our firm philosophy to provide you with the very best advice. It’s our way of putting clients first. You can count on us to take a proactive approach to your tax planning and compliance needs.
Our tax advisors routinely combine their collective industry knowledge and experience so we can offer you exceptional thinking and problem solving. While we always build on our experience from one engagement to the next, we also realize that not every client is the same. Therefore our tax advisors and specialists will invest the time to understand your unique situation. They will become your strategic partner.
Our dedicated tax advisors will guide you through the complicated tax environment. They will help you develop a comprehensive tax plan that will reduce your tax burden and maximize your cash flow.
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TAX CONSULTANCY
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Tuesday, 17 January 2017 04:27
Our Risk Management Services include:
- Carrying out a Risk Analysis of your business to identify and quantify all possible risk facing your business.
- Develop a Risk Management Strategy to manage identified risk and all potential risks and hazards.
- Develop a Risk Policy to encapsulate the essence of the Risk Management strategy.
- Develop an Insurance approach to manage all transferable risks.
- Handle insurance claims for speedy processing.
- Provide advice on Loss prevention, Employee Compensation, Property insurance
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RISK MANAGEMENT
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