Introduction
There are several misconceptions regarding the statutory tax obligations of business owners and employees in Nigeria. Many business owners mistakenly believe that complying with tax laws at the corporate level absolves them of personal tax obligations. Similarly, some people erroneously think that Personal Income Tax (PIT) rates in Nigeria range from 40% to 50%, leading them to avoid discussions about taxes. Many others do not understand the difference between PIT and corporate taxes and which one applies to them. This article clarifies the fundamentals of the Nigerian tax system as it relates to PIT and underscores the importance of compliance.
Personal Income Tax – What You Need to Know
Income derived from various sources such as employment, business, assets, and investments is subject to tax under the PIT Act 2011 (as amended) in Nigeria. The applicable income tax rate depends on the income level and the corresponding tax bracket. Historically, PIT rates in Nigeria were significantly higher. For example, between 1977 and 1986, the PIT rate was 70% on annual incomes of ₦30,000 and above, and between 1986 and 1997, it was 55% on annual incomes of ₦40,000 and above. However, recent reforms have significantly reduced these rates.
When considering reliefs and allowances, such as consolidated relief allowance, pension contributions, interest on mortgages for owner-occupied houses, and life assurance premiums, the average effective PIT rate is around 18%.
Understanding the Difference Between Personal and Corporate Income Tax
It is crucial to understand the difference between personal income and company income and the applicable tax authority. If an individual owns a company, the company’s profits are subject to tax under the Companies Income Tax (CIT) Act. However, the income the individual receives from the company is taxable under the PIT Act. The payment of CIT by the company does not exempt the individual owner from paying PIT on the income derived from the company, except where such income is specifically exempt from PIT.
Consequences of Non-Compliance
The average Nigerian may be reluctant to pay taxes due to the perceived lack of direct benefits from such payments. Common questions include, “What has the government done with past tax payments?” While this concern is ethically valid, the PIT system, like other tax systems, is not based on moral suasion.
Every taxable person, whether a business owner or an employee, has a duty to comply with the PIT Act concerning monthly tax payments and the filing of annual tax returns, regardless of perceived benefits. Failure to comply with statutory tax requirements can result in penalties and interest payments in addition to the principal amount owed. In some cases, defaulters may face criminal prosecution and potential jail terms.
Non-compliance can also negatively impact business operations. The inability to obtain a Tax Clearance Certificate, now a major requirement for conducting business locally and internationally, can be detrimental. The reputational damage and other negative effects of being on the wrong side of tax laws far outweigh the benefits of unremitted taxes.
Increasing Government Efforts to Boost Tax Compliance
The Nigerian government is making significant efforts to increase tax revenue and improve the tax-to-Gross Domestic Product (GDP) ratio to a more globally comparable level. Initiatives like the automatic exchange of information and common reporting standards allow the government to obtain information about Nigerians’ offshore transactions. Domestically, the government gathers information on taxpayers through various means, including bank verification numbers, land ownership records, foreign exchange allocation, and records of private jet and yacht ownership.
Getting Involved
Some individuals are curious about why they should get involved and question the seriousness of the government’s plans to prosecute tax offenders. Ownership of an asset does not automatically make an individual liable for tax. However, authorities may investigate if declared income does not match the value of acquired assets, based on information obtained through various data mining processes. This discrepancy does not necessarily indicate under-declared income, as assets could be acquired through loans, inheritance, or other means. Tax liability arises only when a mismatch cannot be sufficiently explained.
Not all income types are taxable in Nigeria. Certain incomes, when brought into the country through government-approved channels, are exempt from PIT. Taxpayers should conduct a tax health check on their assets and income streams to ensure compliance and avoid issues with tax authorities.
Conclusion
It all comes down to a cost-benefit analysis. Individuals need to weigh the costs and benefits of complying with tax laws against the potential additional tax exposures that may eventually arise from non-compliance. A review of one’s tax position through tax health checks and subsequent regularization with relevant tax authorities may be the best way to avoid being caught on the wrong side of the law. Seeking professional help to ensure proper tax compliance can provide peace of mind and prevent future surprises when the taxman comes calling.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
