New companies in Nigeria are expected to file their first set of tax returns in line with the commencement rule. However, the Finance Act (2019) has changed the tax narrative. New companies, with effect from 13 January 2020, can now file their corporate tax returns on a preceding year basis. At this point, you must have learned;
Illustration
Company ABC commenced business in Nigeria on 1 September 2015 and has an accounting year-end of 31 December. Its accounting profits (in Naira) were as follows:
Four months ended 31/12/15 100,000
Year ended 31/12/16 450,000
Year ended 31/12/17 1,200,000
Additional information
Fines and penalty – 2016 (NGN 40,000), 2017 (NGN55,000)
General provision for bad debts – 2016 (NGN 50,000), 2017 (NGN65,000)
No depreciation
Compute the assessable profits for all relevant years of assessment.
Solution
The accounting profit would be adjusted for tax purposes as follows
2015 – NGN100,000 + 0 + 0 = NGN100,000
2016 – NGN 450,000 + 40,000 + 50,000 = NGN540,000
2017 – NGN 1,200,000 + 55,000 + 65,000 = NGN1,320,000
Since no depreciation or capital allowance or loss for the period, the assessable profit is;
2015 – NGN 100,000
2016 – NGN540,000
2017 – NGN1,320,000
Step 2: Determine the basis period - Preceding year basis
Under the preceding year basis, the basis period will be
2015: First year of assessment – 1 September 2015 to 31 December 2015
2016: Second year of assessment – 1 September 2015 to 31 August 2016. The company does not have a separate account from 2015 to August 2016. Hence, the profit for 2016 is pro-rated to 8 months. That is, September to December 2015 (4 months) and January to August 2016 (8 months).
2017: Third year of assessment – 1 January 2016 to 31 December 2016
Step 3: Calculate the assessable profit - Preceding year basis
Using the basis period in step 2, the assessable profit is
2015: NGN100,000
2016: NGN(100,000 + (8/12 * 540,000 = 360,000)) = NGN 460,000
2017: NGN540,000
Total profits in the first three years = NGN (100,000 + 460,000 + 540,000) = NGN1,100,000
Step 4: Determine the basis period and assessable profit - Actual year basis
Under the actual year basis (AYB), the basis period and assessable profit of a new company will be
2015: First year of assessment – 1 September 2015 to 31 December 2015 – NGN100,000
2016: Second year of assessment – 1 January 2016 to 31 December 2016 – NGN540,000
2017: Third year of assessment – 1 January 2017 to 31 December 2017 – NGN1,320,000
Total profits on AYB = NGN (100,000 + 540,000 + 1,320,000) = NGN1,960,000
Comments
Company ABC is a rational taxpayer that wants to minimize its tax liability. The Company will choose to be assessed to taxes under the preceding year basis since it shows a lower assessable profit of NGN1,100,000. Effective 13 January 2020, the commencement rule was removed in Finance Act 2019. In essence, the illustration above does not apply to a company that starts operations after January 2020. New companies are therefore required to file returns on a preceding year basis. The full article on the changes to the taxation of new companies in Nigeria is here.
We hope this tutorial helped you learn how to calculate the basis period and assessable profit of a new business. If you have questions or comments, feel free to contact us.
You can also follow us on LinkedIn, Facebook and Twitter.