The American expression about the certainty of death and taxes is increasingly becoming a reality in most countries and economies of the world today. Businesses as the engine of economic growth are expected to fuel this growth through their payment of taxes amongst others.
With dwindling revenues accruing to Government, a lot of focus is now placed on increasing tax compliance and by extension, growing tax revenue especially the revenue from the business community, to which you belong.
To achieve this business owners are required to provide evidence of compliance with tax rules as a pre-requisite for handling certain transactions or being able to participate in productive activities. Here are a few elements of tax compliance that you may find useful as you navigate the murky waters of taxation:
#1: Tax Registration: Every tax-paying citizen including your business and the individual employees that work for you are required to register with the relevant tax authorities. In Nigeria for example, businesses are required to register for taxes in the various states where they are headquartered while employees register in the states where they work.
For businesses in Nigeria’s federal capital, Abuja, businesses and individuals register with the Federal Inland Revenue Service. At the point of registration, the business and the individual employees will be assigned Tax Identification Numbers (TINs) that will be used to track all tax payments made on your behalf. Usually, to open a bank account in these days, you will be required to provide evidence of registration with the tax authorities – you will be required to have your TIN. The TIN allows the tax authority to track all those who are paying taxes, and those who are not.
As tax compliance increases and the authorities seek to widen the tax base of the country, the TINs will serve as a veritable tool for enforcement.
#2: Pay-As-You-Earn (PAYE):PAYE is the acronym that describes the personal income tax that you and your employees pay to the Government. The tax laws stipulate the basis for calculating PAYE and the mode and timing of remittance of PAYE to the tax authorities.
For PAYE, employees would have been registered and issued TINs. The calculation of PAYE is relatively easy and simplified. It is a progressive tax that charges higher amounts to higher income earners. Your business as an employer is responsible for deducting PAYE at source before payment of salaries and remitting same to the tax authorities.
The tax authorities usually carry out PAYE audits every three years or so, and will hold the business (employer) liable for any under-payments or shortfalls. One big issue about PAYE that you should be mindful of as a business owner is that all income paid to your employees and yourself (salaries, bonuses, etc.) are taxable and should be subjected to tax.
You should work closely with your accountant to understand the PAYE rules and how it affects your business and your employees
#3: Value Added Tax (VAT):VAT is a consumption tax charged on goods and services purchased at each point along the supply chain of any particular product or service. It is paid to the tax authorities and constitutes a major source of revenue to the Government. Some goods and services are VAT exempt – books and educational resources.
As a registered tax citizen, your business is required to add VAT at the applicable rate to its final goods and services (that are ‘VATable’) and collect this VAT from your customers and subsequently remit same to the tax authorities. Your invoices should therefore carry your VAT Number and state the VAT amount so that your customers can clearly identify the VAT component.
The tax rules stipulate the goods and services that are VATable, those exempted from VAT, the mode of collection, and timing of remittance to the tax authorities. The tax authorities also carry out periodic audits of VAT collection and remittance, as it constitutes a major source of tax revenue.
#4: Withholding Tax (WHT):This is a retention tax collected by businesses when they pay for services from other businesses or individual contractors and service providers. The idea is that by retaining this tax on behalf of the Government, you are helping the Government to collect taxes.
The amounts that have been retained for a particular service provider can be re-claimed by the service provider and off-set against the service provider’s final company income tax liability. Let’s illustrate by looking at it from two perspectives: you as the vendor and then you as a buyer of a third party service.
Let’s say for example that you are a law firm, providing professional services to corporate clients. Each time you invoice your corporate clients, the tax authorities expect that your clients will withhold tax at a specified percentage (5% or 10%) and remit this amount to the tax authorities. The amount withheld will be remitted alongside your Tax ID and you will receive a Withholding Tax Credit to your Tax ID/Account with the tax authorities.
At the end of your financial year when your accountants are calculating your corporate income tax, the withholding tax standing to your credit will be netted-off before arriving at your actual tax liability.
In a similar way, if you engage the services of a vendor – say a consultant for your law firm, you will also be required to withhold tax on their professional fees and remit to the tax authorities. This way, the government ensures that it earns its corporate tax revenue “up-front” and limits the possibility that companies/individuals proving services to registered businesses will try to evade taxes.
During tax audits, the tax authorities will be concerned and check that you have not only withheld taxes on all services provided to your company, but that you have also remitted accordingly.
#5: Company Income Tax (CIT):This is the tax paid by corporate bodies on their assesssable business profit based on the guidelines provided by the tax authorities. At the end of each financial year, your business is required to prepare audited financial statements, and pay CIT based on the profits made by the Company.
The tax authorities have rules for calculating the assessable profits and the actual CIT amount and they also stipulate the mode and timing of payment of CIT by businesses. As mentioned under WHT, any WHT amount deducted at source on your behalf will be deducted from your CIT amount, and you will only be required to pay the difference. In some cases you may find that the WHT deducted on your behalf may out-strip your CIT based on your assessable profits.
#6: Tertiary Education Tax:This is a special tax levied on all companies in Nigeria at the rate of 2% of assessable profit to provide a special intervention fund to support tertiary educational institutions in the country. The tax is collected by the tax authorities at the end of each financial year, based on the assessable profits.
#7: Tax Clearance Certificate (TCC):The tax system operable in Nigeria is based on self-assessment. Companies like yours are required to calculate the tax liabilities for both PIT and CIT, remit to the relevant tax authorities and receive a TCC for the tax-paying employees and also for the Company.
TCCs are often required to bid for tenders from Government Ministries, Departments and Agencies and for other services or schemes run by the Government. Some large corporates also insist on transacting business with companies who can show evidence of compliance with tax laws with a TCC.
It therefore serves the long-term interest of your business to pay attention to tax matters, pay the appropriate taxes and get the TCCs required.
There is so much that business owners should know about taxes, especially with the increasing attention being paid by the Federal as well as State Governments on revenue generation via tax. You can learn more about tax compliance and the expectations of your business by seeking professional guidance from your accountant.
Finally, it is also noteworthy to mention that the taxes discussed above are not exhaustive, as States and Local Governments have the right to collect other rates and levies that may affect your business, depending on the specific industry, location or activities of your business.