How to Calculate Companies Minimum Tax in Nigeria

How to Calculate Companies Minimum Tax in Nigeria

The company minimum tax is a mandatory tax requirement applicable to companies that have either no taxable profits for the year or whose tax on profits falls below a certain threshold. This minimum tax enables these companies to contribute to the tax revenue. This process is also possible even if they haven’t generated taxable profits or if their tax liability is lower than the stipulated minimum.

In most cases, resident companies must pay corporate income tax (CIT) on their worldwide income, while non-residents can also pay for CIT on income sourced from Nigeria. Hence, large companies, with a gross turnover bigger than NGN 100 million, face a CIT rate of 30%, which can be calculated based on the preceding year’s profits. Nigerian resident companies paying investment income to non-residents are subject to withholding tax (WHT) at source, which acts as the final tax.

Also, non-resident companies without tax residency in a treaty country but operating with a fixed base or permanent establishment (PE) in Nigeria are taxed on profits linked to that base. Similarly, non-resident digital companies without tax residency in a treaty country but having a significant economic presence (SEP) in Nigeria are also subject to Nigerian income tax on profits attributable to their presence in Nigeria.

Foreign entities engaging in digital transactions may be deemed to have an SEP in Nigeria and thus be subject to taxation if they meet certain criteria, such as earning NGN 25 million from Nigeria in a year, using a Nigerian domain name, or customizing their digital platform for Nigerian users. Revenue from activities like streaming digital content, data transmission, provision of goods or services, and intermediation services are included in the income derived from Nigeria.

Companies operating under multilateral agreements involving Nigeria are governed by the terms of those agreements. Non-resident companies providing professional, consultancy, management, and technical (PCMT) services to Nigerian residents are also subject to a final tax rate of 10% if they have an SEP in Nigeria.

This is to say that different tax rates apply to small, medium, and real estate investment companies. Real estate investment companies approved by the Securities Exchange Commission are exempt from income tax on rental and dividend income under certain conditions.

Petroleum profit tax (PPT) applies to companies involved in upstream petroleum operations instead of CIT, with varying rates based on the nature of operations and the duration of activity. The Petroleum Industry Act 2021 introduces Hydrocarbon Tax (HCT) alongside CIT for certain petroleum activities.

Tertiary education tax, minimum tax, alternative tax on distribution, alternative tax on deemed profit, and local income taxes are also part of the tax framework, each with specific provisions and rates.

To calculate the minimum tax payable by a company in Nigeria, you’ll need to follow these steps:

  • Determine the company’s gross turnover:
  • Identify any franked investment income
  • Subtract franked investment income from gross turnover
  • Calculate the minimum tax payable
  • The formula for calculating minimum tax can be summarised as follows:

Minimum Tax = 0.5% of (Gross Turnover – Franked Investment Income)

CONCLUSION:

In summary, when calculating,¬† it’s important to note that certain exemptions apply to the minimum tax, including exemptions for companies in their first four calendar years of operation, and for those engaged in primary agriculture business, and small companies.

Non-life insurance companies calculate minimum tax based on gross premium, while life insurance companies base it on gross income.

Leave a Comment