In financial accounting, net profit arises when revenue is greater than the cost otherwise it is a loss. The equation is different when it comes to assessable profit. Assessable profit is the profits from all sources in the year immediately before the year of assessment except in abnormal cases. Abnormal cases are when the basis period is greater than or less than 12 months. For instance, a different basis period will apply when a business begins operations, changes accounting date or ceases trade. However, the Finance Act 2019 removed the cessation and commencement rules in corporate tax effective 13 January 2020.
The tax impact is that a company will calculate the assessable profit on a normal basis except for where a business changes its accounting year-end. Overall, the only abnormal basis period in Nigerian taxation is when a company changes its financial year-end to a new date.
What is assessable profit and total profit?
First, assessable profit is the profit adjusted for income tax purposes using the information in the financial statements. Tax adjustments include expenses, income and any other transaction with tax impact on the income statement. Expenses must be Wholly, Reasonably, Exclusively and Necessarily (WREN) incurred in generating the income of the business for a tax year. Examples of income exempt from income tax are export profits, as long as proceeds is brought into Nigeria through government-approved channels and invested in raw materials, spare parts, and plant and machinery. If there is no tax adjustment to the financial statements, then the assessable profit is equal to the net profit. Nevertheless, expenses such as penalty, fine, depreciation are not allowed in the calculation of income tax. In essence, disallowable expenses are added back to the accounting profit which will increase the assessable profit.
Second, total profit is the assessable profit minus the capital allowances relief in the year of assessment. Capital allowances are granted to taxpayers on qualifying capital expenditure. Companies in the manufacturing and agro-allied sectors can claim the entire capital allowance in a tax year. In other words, manufacturing and agro-allied businesses have no restriction for capital allowance. However, other sectors can claim a maximum rate of 66 2/3 percent of the assessable profit in an assessment year. A taxpayer can carry forward any unused balance in capital allowances for an indefinite period. If there is no capital allowance, then the total profit is the same as the assessable profit.
Finally, a taxpayer may have no taxable profits even after making these adjustments. Zero taxable profits may trigger minimum tax or excess dividend tax.
What happens if a company has no assessable profit or taxable profit?
A company can have an assessable loss or taxable loss in a year of assessment. As income tax is calculated on profits, a loss position may appear as a NIL tax payable. However, the provisions of the Companies Income Tax Act 2004 as amended (CITA) and Finance Act 2019 have alternative ways of determining the corporate tax payable. The two rules are the minimum tax and excess dividend tax.
First Rule: Minimum tax
- assessable profits of a company from all sources result in a loss, or
- profits result in no tax payable or tax payable which is less than the minimum tax in a year of assessment
Companies exempt from minimum tax
Some companies are exempt from minimum tax. They are;
i. Agricultural businesses
ii. Small companies with an annual turnover of below NGN25 million.
iii. Companies within the first four calendar years of operation.
Second Rule: Excess dividend tax
Section 19 of CITA as amended states that where a business pays dividends out as profit on which no tax is payable due to –
(a) no total (taxable) profits or
(b) total profits are lower than the amount of dividend paid,
then the company paying the dividend will pay income tax at the applicable rate. The dividend paid replaces the taxable profits for the particular year of assessment in which the company declared dividends. For large companies with an annual turnover of NGN100 million and above, the corporate tax rate is 30%. Medium-sized companies with a turnover above NGN25 million but less than NGN100 million will use a rate of 20%. Small companies have a zero rate of income tax.
However, excess dividend tax rarely affects small and medium-sized companies for two reasons. First, a business must register as a public limited liability company to pay dividends. Second, a business requires an annual turnover above NGN100 million for listing on the Nigerian Stock Exchange.
Dividends exempt from excess dividend tax
Not all dividends paid by a company are subject to excess dividend tax. Some payments are exempt such as;
- Dividends paid from retained earnings of a company provided the amounts paid have been taxed under CITA, Capital Gains Tax Act (CGTA) or Petroleum Profit Tax Act (PPTA);
- Dividends paid out of profits which are exempt from income tax, PPTA or any other legislation;
- Franked investment income of a company; and
- Distributions made by a real estate investment company to its shareholders from rental income and dividend income,
Updated: 12 May 2020
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