EJIRO AWHANA examines some of the tax reliefs entrepreneurs in Nigeria can avail themselves of in order to cushion the effects of the many challenges their businesses face
Having knowledge of the tax reliefs or incentives available in the country is one thing, applying them when filing tax returns is another.
Some tax incentives will only be applicable under certain circumstances, and knowing those circumstances will help you in making certain decisions when starting up or running your business.
Here is a list of the some of the tax incentives applicable to businesses in Nigeria:
Small business rate: A company with a turnover of N1m or lower will be charged 20 per cent as taxes. This rate will only be applicable to companies engaged in manufacturing, agricultural production, mining of solid minerals and fully export-based trade.
Pioneer companies: Tax holiday is granted to companies with pioneer status. Importance is placed upon the newness and relevance of the products by the company. The tax holiday period is subject to a maximum duration of five years. In this case, there is a total exemption from taxes of the company’s profit during this period.
Solid minerals mining: A company going into the mining of solid minerals will be exempted from taxes for the first three years of its operation.
Spare parts fabrication: Companies that engage wholly in the fabrication of spare parts, tools and equipment for local consumption or export will be allowed a 25 per cent investment tax credit on its qualifying capital expenditure. This means that for such companies, 25 percent of its capital expenditure will be deducted from whatever tax they are to pay.
Locally manufactured plant: Companies that purchase locally produced plant, machinery or equipment for use in their businesses will be allowed a 15 per cent tax credit on such fixed assets. This implies that there will be a 15 per cent deduction on its taxes.
Export free zone exempt profit: Companies that are 100 per cent export-oriented will be exempted from taxes for the first three years. This will apply to companies in or outside an export free trade zone.
Hotels income exempt tax: 25 per cent of foreign exchange derived from tourists by a hotel will be exempted from tax. This exemption will only apply if such derived income is put in a reserved fund and will be utilised within five years for the building or expansion of new hotels, conference centre and new facilities for the purpose of tourism development.
Investment tax relief: Companies that are located in areas devoid of essential infrastructure like electricity, water, tarred roads and telephone that incur expenditure on the provision of these facilities shall be allowed an investment tax relief on the amount of the expenditure. These allowances are broken down as follows:
Lack of telephone – five per cent
Lack of motorable or tarred road -15 per cent
Lack of water – 30 per cent
Lack of electricity – 50 per cent
No facilities at all – 100 per cent
It should be noted that for these tax relief to be applicable, the company must be located at least 20 kilometres away from any infrastructural facility. The relief is claimable for only three years.
Investment allowance: 10 per cent of funds spent in acquiring plants and machinery used for agricultural production and manufacturing by agricultural and manufacturing companies. The investment allowance tax will be applicable only in the first year of purchase.
Replacement of obsolete plant: When a company incurs expenditure for the replacement of an old or obsolete plant and machinery, there will be a 15 per cent investment tax credit for that company. In this case, whatever funds spent in acquiring the plant or machinery, there will be a general 15 per cent tax deduction for that company.
Deductible capital allowance: Full capital allowance is granted to agricultural and manufacturing companies. This is in respect of assets used in agricultural and manufacturing production. For other companies, capital allowance is restricted to two-third of its assessable profits.
Research and development: Any fund spent on research and development, including that paid to the National Science and Technology Fund, is an allowed deduction in arriving at a company’s taxes. In addition, any reserve made out of the profits for research and development is also an allowable deduction of up to 10 per cent of the total deductable profits of a company. There is also a 20 per cent investment tax credit on qualifying expenditure for companies engaged in research and development for commercialisation.
Entrepreneurs should not leave the job of filing their companies’ taxes in the hands of certified accountants alone. There is a need for entrepreneurs to understand the basics of filing taxes. This knowledge will help the entrepreneur make better and informed decisions in the daily running of their businesses.
For instance, the knowledge of the investment tax relief will help a business owner to determine where to locate a company. For example, if you are to buy a property for your business in a town that lacks basic infrastructural amenities, it will be advisable to acquire a property at least 20 kilometers away from ‘civilisation’. Since the business owner will still be providing these amenities, it is advisable to situate the business in a location where he or she will be able to enjoy the tax relief.
Another instance is the hotels income exempt from tax. As an hotelier that enjoys the patronage of tourists, understanding this tax exemption will help in creating strategies that will boost the volume of foreign currencies used in the hotel. Knowing full well that a good percentage of that money is tax free if utilised in a certain way, the hotelier will make informed decisions in running and expanding the business.
Since the primary goal of every business is to make profit, understanding and taking advantage of these tax incentives will help businesses a great deal.