Tax Obligations of Sole Proprietorships, Partnerships and Incorporated Companies

*Reviewed on 25/9/2017

It is no longer news that the Nigerian government has become increasingly keen on enforcing compliance with tax laws. Therefore, it is important for business owners to have basic knowledge of Nigerian tax system. To start with, the first step in your tax obligation is to have tax identification number, it is therefore important that you view my colleague's article Things you Must Know About Tax Identification Number (TIN) in Nigeria  for succinct explanations. 

Different levels of government make laws and regulations related to taxation of businesses and individuals, respectively. Hence,  a first step will be to understand the various taxes and levies  administered by Federal, State and Local Governments in Nigeria. 

A reference point would be the Taxes and Levies (Approved List for Collection) Act CAP T2 LFN 2004. Some interesting highlights include making it unlawful for Tax Collectors to mount roadblocks for the purpose of collecting taxes. In addition, there are limits to the use of Police to enforce tax collection.

For business owners seeking to know their tax obligations under the law, provided below is a succinct guide:

 

1. Sole Proprietorships and Partnerships

Taxation of  sole proprietorships and partnerships are somewhat similar as both are subject to the Personal Income Tax Act (PITA), which makes provision for the direct assessment of the tax liabilities of the business on the sole proprietor or partners.

“Partnership” and “Sole Proprietorship” as business entities do not pay income tax. Rather, the tax (that is, the Personal Income Tax) is levied on the owner’s  share of profit after the distribution of the profit or loss made by the business. 

For a full understanding of your tax  obligations, you can consult the Personal Income Tax Act. 
  In summary:

• Your partnership or sole proprietorship is not ‘itself’ chargeable to tax
  
• What is chargeable to tax is the share of profit from the partnership or sole proprietorship.

2. Incorporated Companies

 

An incorporated  company, for tax purposes, is treated as a separate legal entity from the owners and therefore pays taxes accordingly. Based on the Company's Income Tax Act, the income of a company on which tax is payable are  the profits of a company from whatever source and irrespective of whether such profits are distributed as dividends or not.
 
Hence, your company should do the following as far as the tax law is concerned:

• Find out if the income accruing to your company and its line of business is chargeable under the Companies Income Tax Act. You can share your line of business with me so as to enable me give a proper advice in this regard.
  
  
• 
  Pay 2% of your assessable profit as annual Tertiary Education Tax. This tax represents your company’s social responsibility to the Nigerian education sector.
  
  
• If your company does any of the lines of business stated below, and have an annual turnover of NGN100M (one hundred million naira) and above, your company will be mandated by law to pay 1% of its profit before tax or the net profit figure as disclosed in your company’s account as the National Information Technology Development (NITD) Levy. The businesses affected are:

1. Banking and Non-Bank Financial Institutions (NBFIs) such as capital market operators, mortgage institutions and microfinance banks
   
   
2. 
   Insurance Services and Brokerage
   
   
3. Cyber and Internet Services
   
   
4. Pension Fund Administration, Pension Management and allied activities, and 
   
   
5. GSM Services and Telecommunication.

3. General Tax Duties Affecting Sole Proprietorships, Partnerships and Incorporated Companies

• Value Added Tax (VAT):

VAT is an indirect tax imposed on the supply of services and goods in Nigeria, except for items that are exempted by the VAT Act (please consult the Value Added Tax Act for more information). VAT is calculated at 5% flat rate. 
 
Every business owner in Nigeria (whether an incorporated company, sole proprietorship or partnership) is required to be an agent of the Federal Government to collect and remit VAT (Value Added Tax). Your duty is to include 5% of the total goods and services supplied as VAT on your invoice when sending to your clients/customers. When you receive payment, the VAT should be remitted to the Federal Inland Revenue Service (FIRS) on or before the 21st day  of the month following the month the goods or services were sold. For example, VAT collected in January should be remitted on or before 21st February.

• Capital Gains Tax:

When your company (whether incorporated company, sole proprietorship or partnership) sells an asset, it must pay 10% of the chargeable gains accruing from the sales. For purposes of computation, you must be guided by the provisions of the Capital Gains Tax Act.

• Withholding Tax (WHT):

WHT is an advance payment of tax and is deducted at source. By implication, your company (whether an incorporated company, sole proprietorship or partnership) merely acts as collection agent for onward transmission to the appropriate tax authority. Your company should deduct at source the WHT from gross payments made to individuals, partnership, community trustees, executors, family and body of individuals in respect of the following income sources:

• All aspects of building, construction, civil work and related activities;
  
  
• All types of contract activities or agency arrangements other than outright sales and purchase of goods and property in the ordinary course of business;
  
  
• Professional services;
  
  
• Technical services; and
  
  
• Commissions

The current rates for withholding tax are as follows:

S/N	Types of Payments	Rates (Companies)	Rates (Individuals/ Partnerships)
1.	Interest, Rents & Dividend	10	10
2.	Royalties	10	5
3.	Building and Construction	5	5
4.	All types of contracts and agency arrangement, other than sales in the ordinary course of business.	5	5
5.	Consultancy and Professional Services	10	5
6.	Management Services	10	5
7.	Technical Services	10	5
8.	Commission	10	5
9.	Directors Fees	10	10

A good understanding of how tax system operates in Nigeria is necessary to the long term success of your business. It is therefore imperative that you embrace the knowledge shared in this article and use it to structure your business for purposes of effective compliance with government tax regulations.

Please note that the thoughts expressed in this article are the author’s opinion. This should not be used in making business or investment decisions and is not intended to serve as a tax advise.