Income tax is payable on taxable income or profits. However, a person with no taxable income may have a tax liability. In such a situation, the estimated charge is a minimum tax. As minimum tax affects individuals and corporations, this article will address six frequently asked questions (FAQs) on minimum tax for companies in Nigeria.
1. What is minimum tax?
Minimum tax (MinTax) occurs when a company has no tax payable or an assessable loss or the tax calculated is lower than the MinTax in a year. It represents the guaranteed sum that a taxable person pays to the revenue authority in a year. A taxable person can be an individual or a company.
2. What is(are) the principal legislation(s)?
There are two principal acts for individuals and companies. First, the enabling law for individuals is Section 37 of the Personal Income Tax Amendment Act 2011 as amended. Second, Section 33 of the Companies Income Tax Act 2004 as amended (CITA) applies to corporations.
3. What is the minimum tax rate for companies?
Minimum tax is calculated at 0.5% of the total turnover less franked investment income. Insurance companies also use the same rate but with another tax base. MinTax for non-life insurance businesses is 0.5% of the gross premium, while life assurance companies use 0.5% of gross income. Reference: Section 6(d) and 14(a) of Finance Act 2019.
The Finance Act 2020 allows a lower rate of 0.25% to tax returns that have been filed (or will be due) for two years of assessment (YOA). That is, from 1 January 2020 to 31 December 2021.
4. Any exemption?
Yes. Companies exempt are;
- small companies with an annual turnover of below NGN25 million (twenty five million naira),
- agricultural trade or businesses, and
- companies in its first four calendar years of operations. Section 14(b)
5. The rule looks different. Was it amended?
Yes. 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 MinTax 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. However, agricultural businesses, companies with at least 25% foreign equity capital, and businesses within its first 4 years of operation were exempt from MinTax in the old provision.
6. When will the new provision take effect?
The Act came into force on 13 January 2020. Therefore, the tax authority will assess non-exempt companies to the new MinTax for returns that are due after 13 January 2020. However, the Finance Act 2021 grants a lower rate of 0.25% for any two years of assessment from 1 January 2019 to 31 December 2021.
Illustration: Company with foreign equity
FAQ International Limited is a company in Nigeria with 35% foreign equity. Based on the Finance Act 2019, is FAQ International Limited exempt from minimum tax (companies’ income tax)?
No. Companies with at least 25% of foreign equity in Nigeria are no longer exempt.
Other points to note...
- Foreign equity is no more a basis for exemption.
- Businesses with at least 25% foreign equity and indigenous companies have the same exposure to MinTax.
- Though MinTax is a flat charge of 0.5% on total turnover less franked investment income, there is a lower rate of 0.25% for any two YOA. The lower the turnover, the lesser the amount payable. At a rate of 0.5%, a company with an annual turnover of NGN100 million will pay NGN500,000. In contrast, an annual revenue of NGN500 million will attract a charge of NGN2.5million.