In this article, we’ll delve into the taxation of special companies in Nigeria.
Businesses have to pay tax, but there are some that are subjected to taxation at the lower of 20%. These are businesses that are classified as small.
A small business was originally defined as one whose turnover is not more than N500,000, but sooner, it became different.
The 1995 amendment now requires that a small business in the Agricultural, manufacturing and mining sector shall be ones whose turnover does not exceed N1000,000.
This is applicable for the first three years of commencement of business but may be extended to five years.
It is not applicable to companies formed to acquire the whole or part of an existing business.
Special Companies/Businesses In Nigeria
There are basically 3 types of specialized businesses provided for under the Nigeria tax laws.
- Shipping and air transport companies
- Insurance companies
Now, let’s take it one at a time.
1. Shipping & Air Transport Companies
For Nigerian companies the income chargeable to tax is the global income irrespective of whether or not there are branches outside Nigeria.
This means that for a Nigerian shipping or air transport business, the global income is charged to tax after giving effect to the global expense.
For company other than a Nigerian company which carries on the business of transport by air or sea, the amount of profit chargeable to tax in Nigeria should be based on the profit derived from the carriage of passengers, mail livestock or goods shipped or loaded on to an Aircraft in Nigeria.
The significance is that no cognizance is given to profit derived operations outside Nigeria or where Nigeria is merely a transit in the course of its operation.
2. Insurance Companies
There are two types of insurance companies in Nigeria, namely Life insurance companies and Non-life insurance companies.
It is also known that in practice, some insurance companies have both life and non-life insurance departments.
Where this arises, adequate care must be taken to give the fact that there are basic differences in the manner of computing the adjusted or assessable profit of the two businesses.
The adjusted or assessable profit for the two departments must be separately determined.
Life Insurance Business
The adjusted profit of a life insurance business is determined by deducting management expenses and commission from investment.
Income management expenses here is made up of all the normal administrative establishment and financial expenses.
It is therefore required that the details of those be thoroughly reviewed to separate the inadmissible portion.
Investment income ha been defined to include any premiums or surpluses on actuarial valuation of any unexplored risks.
It will appear, however, than practice the premium are never considered for computing the tax liability of a life business.
Similarly, surplus on actuarial valuation is only subjected to taxation where it has been distributed to the shareholder as dividend.
The confusion inherent in this practice is the basis of determining whether or not the dividend distributed to the shareholder of a life insurance company arose from the surplus actuarial valuation, or from some other sources.
Non-Life Insurance Business
In the determination of the Assessable profit of a non-life insurance business, payment on re-insurance and return made to the insured are deducted from the Gross Premium received to obtain the Net Premium Income.
The following income are added;
- Investment income
- Commission received
- Provision for unexposed risks at the beginning of the year and any other sundry income.
From the sum total above are deducted the;
- Provision unexplored risks at the year end
- Administrative expenses
- Commission and,
- Agency fees.
- A reasonable proportion of head office expense and other allowable expenses.
When an insurance company carries out life insurance business in conjunction with insurance business of other class, the life insurance business shall be treated as a separate business from any other class of insurance business carried on by the company.
The implication in loss relief schemes is that the loss from a life insurance business may not be utilized to reduce profit from a non-life insurance business or vice versa.
3. Taxation of Banks
Prior to 1991 year of assessment, banks were subjected to tax on excess profit. See the list of all Nigerian banks here.
Excess profit here refers to the difference between the total profits (i.e profit assessible to tax) and Normal profit.
Normal profit is the sum obtained by applying the percentages specified below to the amount of capital employed as at the end of the relevant accounting year of the company.
There you have it, the taxation of special companies in Nigeria.