Company Income Tax in Nigeria and How It Effects Investment Decisions

Company Income Tax in Nigeria and How It Effects Investment Decisions

Nature of Taxation

Company Income Tax in Nigeria – Tax was described and not defined in the statues, but according to Cambridge International Dictionary of English, tax is defined as an amount of money paid to the government usually a percentage of personal income or company profit. Okezie (2003) defined taxation as a way of making persons, individuals, companies contribute money through legalized levies according to their level of income or some order criteria, to a common fund of government for the purpose of running the affairs of the state. It is a compulsory exaction of money by public authorities for public purpose.

To Aguolu (2009) taxation is the compulsory levy by government through the various agencies on the income, capital or consumption of its subjects. Taxation a system of raising money for the purpose or government by means of contributes from individual person or corporate body.

According to Ola (1987) taxation is defined as compulsory payment of money by the citizens of the country. Four facts are obvious from the above definition: they include not punitive, not negotiable, compulsorily impose and flow of resource from household or firm sector to government section.

The not punitive characteristic of taxation means that not withstanding that payment of tax embodies an element of compulsion. It is not aimed at punishing taxpayer.

Apparently the taxpayer dose not negotiates the tax to be paid with the tax authority. Government through the tax laws simply fixes the income of the respective tax authorities to apply the rate to the income of the respective tax payers.

Nigimgale (1997) described tax as a compulsory contributed imposed by the government and he concluded that even through tax payers may receive nothing identifiable in return for their contributed, they nevertheless have the benefit of living in a relatively educated, healthy and safe society.

It must be completed that the payment of taxes is not voluntary like in the case of free will offering. It is obligations impose by a contribution recipient authority on all taxable bodies such as companies (Ekwerike, 2002).

Aguolu (2009) noted as followed, taxation being the most reliable source of revenue to the government, two main reasons are often advanced as to why government impose corporate taxes.

A means to provide collective wants

A tool for government economic policies

Company Income Tax in Nigeria – Historical Background of Nigeria Tax System

Economic history of Nigeria has that people in Nigeria paid taxes before that advent of the British colonial rule, especially in the Northern part of Nigeria. The Nigeria history also has shown that Nigerians has had to pay tax to a constituted authority, either in cash or in kind. Payment of taxes in Nigerian has developed over a number of years. Before the British came into Nigeria, there was a tax system in the Northern Nigeria under the rule of the Fulani conquerors. West Africa sub-region was inhabited by hunting and farming people from stone Age times. People with knowledge of the cultivation of agricultural crops came to live in Northern Nigeria probably before 2000 BC.

In 1400 AD. A new Empire was established in the Northeast and its capital was Bornu. In 1600 A.D, Bornu began to expand under the rulership of Mai Idris Alooma. It was also developed as a centre for Islamic teaching and culture which introduced various forms of taxes such as Zakat, Kurdin Kasa, Shukka-Shukka, Jangalia, Kharant taxes etc.

The people of the Northern Nigeria paid Zakata tax prescribed by the Holy Koran and levied on Moslems for religious, educational and charitable purpose. This types of tax was paid Kurdin-Kasa tax levied on agriculture crops.

In the southern Nigeria, a religious, political and economic administration institution was entirely different. Through the concept of taxation has been in existence for so long in the world. Yet the Southern Nigeria has no organized system of taxation. The Southern Nigeria practiced ceremonial or festivity tax system as the Obas and Eze (King) relied on tribute, arbitrary llevies for revenues annual levies, special contributes at special festivals, fee, presents, all collected through the head of families was the system of taxation commonly practiced in the Southern Nigeria.

Company Income Tax in Nigeria – The Colonial Period

Before the British to Nigeria, Kings, Emirs, Obas and Eze were imposing and collecting taxes through the family heads. When British established their government, they did not introduced any taxation in North, rather they made use of tax system existing in the Northern Nigeria in their administration. In 1904, Sir, Fredrick Lugard introduces the first native revenue proclamation to study the entire tax system existing in the north. It may be important to mention that before 1904, there was no legal backing for these taxes collected by Emirs, Obas and Ezes, as there were no tax laws during that period (Okezie 2003). After the amalgamation of both the North and South in 1914, the direct tax system was extended to the South by the enactment of the native revenue ordinance of both the North and South in 1914, the direct tax system was extended to the South by the enactment of the native revenue ordinance of 1917. This repealed the native revenue proclamation of 1906. By 1918, it was felt that the whole south was ready for the introduction of direct taxation. However, in 1927 a native revenue (amendment) ordinance was enacted to apply in the whole country including eastern Nigeria, Warri and Asaba areas with effects from 1st April, 1928. The introduction of this tax amendments ordinance sparked off disturbances in Warri and Kwara area and eastern province of which the Aba woman riot of 1929 is best known. It should noted that these tax laws underwent series of amendment due to the discriminating nature of the tax system and the unscientific manner of its administration, which led to the evolution of federal system of government taxation in 9150s. In 1958 the Raisman fiscal commission recommended the introduction of uniform basic principles for taxing incomes of persons other than limited liability companies throughout the country. The recommendation which was embodied in the Nigeria (constitution) order in council 1960 formed the basis of the income tax act of 1979 and the personal income tax (Lagos) act 1961 as amended. These legislations were later repeated and reenacted as the personal in income tax act 1993 and the companies income tax act cap LFN, 1990, respectively. As a result of the work of the law review commission, these laws have been reviewed and updated and are included in laws of federal republic of Nigeria 2004.

Company Income Tax in Nigeria – Structures and Categories Of Nigeria Tax System

According to Aguolu (2009) taxes may be classified into two broad categories: direct and indirect taxes.

Direct Tax

Tax is direct if the person who pays the tax, i.e. the person assessed, is also the person who bears the burden of the tax. It is a tax levied directly on the person who is expected to pay the tax, the tax payer on not only advised by notification but he is duly receipted (Lekan 2006) the purpose of these formalities is to bring to taxpayer notice to the incidence of such tax.

Direct tax is a peculiar feature of profit or income tax, the burden of which is borne by the person who pays the tax, Examples of direct taxes are income tax, profit tax capital gain tax.

Indirect Tax

According to Lekan (2006) indirect tax is borne by a other than one from whom the tax is collected.

It is levied on the manufacturer but paid by the consumer. The ability to shift the burden of tax will depends on the elasticity or otherwise of the demand for the goods or services, the object of the tax. If the demand is elastic, then the burden of the tax be shifted, but if the demand is completely inelastic, then the burden can be 100%.

The taxpayer is never notified nor have knowledge of such levy examples of indirect taxes are valued added tax, custom Duties, Excise Duties pool Betting tax, Entertainment tax e.t.c.

Structures of Taxation

The concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits and an orderly society with reliable records.

Tax rates according to Okezie (2003) may be progressive, regressive or proportional.

Propotional Tax

Proportional Tax is payable by taxpayer at the same proportion or percentage on their income. This simply implies that the rich pay a greater sum as tax than the poor. The emphasis of proportional tax is on percentage and not the amount of tax

Progressive Tax

Regressive tax applied progressively higher tax rates as earnings reach higher levels. Progressively tax according to Okezie (2003) is adjusted to fall most heavily on the rich. It is a system which not only enables the rich to pay more tax than the poor but also handover a greater percentage of the income as tax.

 Regressive Tax

Regressive tax compels the poor to pay grater proportion of their income as tax than the rich. This system discourages laziness and rewards hard work. It encourages or increase productivity and investment.

Company Income Tax in Nigeria – Objective of Taxation

According to Uchenna (2009) taxation has two main objectives. The primary purpose of taxation is to raise revenue for government expenditure and also to influence economic activities in country. Objectives of taxation could be achieved through tax policies which provide mechanism for influencing consumer demand and for providing incentives for production, investments and savings. Okezie (2003) outlines the objectives of taxation as followings;

  1. Taxation makes it possible for government to provide public goods and all essentials services such as law and order, waste supply, defense, electricity, etc to the citizen.
  2. Taxation is an instrument for the protection of home or infant industries. This tool is effectively used to encourage industrialization (Wilson. 2009).
  3. To Okezie (2003) taxation is used to encourage investments. The total wealth of nation depends on the volume and value of investments in that economy. Investment yield income and income is re-invested for more income. Also companies are encouraged to invest in other companies and real estate through some tax incentive package (Adebisi 2008).

Principles of Good Taxation

Importance of tax system the modern day governance cannot be over-emphasized. Tax revenue provides one of the easiest and most convenient means of meeting ever increasing public expenditure. It is therefore imperative that every government no matter its nature and type put in place an efficient, effective and equitable tax system. However, it is important to x-ray the principles underlying the administration of taxes in general.

According to Okezie (2003), in 1776, Adams smith laid down what came to be known as cannons of taxation in which any good tax system is based. Aguolu (2009) outline the principle as follows:

Universality: the liability for tax should be all embracing. In line with the principle of universality therefore. It is important to note that the tax laws do not make any exemptions are as to individuals, rather than exemptions are as to certain classes of income which are exempted from tax.

Certainty: The amount of the tax liability of individual or company must be determined with certainty as well as the time of payment. If there is nay ambiguity in the amount of tax the individual shall pay, there must be well defined options. Otherwise the tax system is inequitable.

Convenience: the time and manner of payment must be convenient of tax payer. If the procedure for the payment must be convenient of the tax payer. If the procedure for the payment of tax is complicated or not the tax payer required to pay at a time when he is least in the position to do so, then such a tax system lacks the essential principle of convenience and hence it is inequitable.

Economy: The system of collection must be economical. Tax revenue must be judiciously applied to the benefits of the taxpayer.

Company Income Tax in Nigeria –  Overview of Company Income Tax Law and Practice In Nigeria

The taxation of the profit of the companies is under the company income tax 1990. The term company for the purpose of CITA 1990 is defined under S.84 to mean any company or corporation (other than corporation sole or partnership* established by or other under any law in force in Nigeria or else where.

The history of company income tax in Nigeria dates back to the colonial era. It is worthwhile to note that prior to colonialism in Nigeria, English companies operated Nigeria. Interestingly such a companies like the royal Niger Company were not registered in Nigeria. Moreso, there were no legal nets to trap outside companies doing business in Nigeria. However, in 1912, by the companies ordinance, provision were made for the incorporation of such companies ordinance, provision were made for the 1912, by the companies in Nigeria based on the companies consolidation act of 1908, which was meant to cloak the illegality of the foreign companies as it ws through that registration in England was not enough (Uchenna 2009).

It was during the era lord lugard that some laws on taxes such as native revenue proclamation 1906, native revenue or dinance of 1917 were passed. This was in operation in Northern and Western Nigeria. Subsequently upon these, both the native direct taxation and non-natives income tax ordinance were passed in 1937 and theses ordinances initiate discrimination in direct taxation of non-Africans and companies. This ordinance is the foundation of modern company income tax in Nigeria (Uchenna 2009).

Subsequently, amendments on these tax laws have considerably changed the powers, functions and duties of the various administrative machineries of these tax laws. Currently the companies income tax act (CITA) as amended by the finance (miscellaneous provision) decree 1993 regulates companies’ income tax and other amendments contained in the annual budget to date.

Company Income Tax in Nigeria – Administration of Companies Income Tax In Nigeria

Company income tax is a significant source of revenue the government of Nigeria. It is a direct tax levied on the profits of companies in Nigeria. Government had always use company taxation not only to raise money to run the affairs of government but also is important tool for economic development. There is therefore, need to have in place a strong and a vibrant tax administration not only at the federal level but also at state level so as to ensure that the objectives of tax system are achieved.

According to James (2008) tax administration is the process of assessing and collecting taxes from individuals and companies by relevant tax authorizes, in such a way that current amount assessed is collected efficiently and effectively with minimum tax avoidance or tax evasion.

The administration of the taxation of the profit of incorporated companies is vested on the federal board of Inland Revenue service (FIRS) (section 1 (1) CITA). The board companies the following:

  1. The Executive chairman
  2. Directors and Heads of departments.
  3. Director or Ag. Directors in charge of planning, Research and statistics in the federal ministry of finance.
  4. Member of the board of the national revenue mobilization allocation and fiscal commission.
  5. An officer from the NNPC not below the rank of an executive director.
  6. A Director from the National planning commission.
  7. A Director from the nation customs services.
  8. Registrar general of the corporate affairs commissions.

The legal adviser to the federal Inland Revenue Service.

The function of federal board of Inland Revenue among others include:

  1. Administration of the companies’ income tax Act and other tax acts as may be vested in FBIR.
  2. Assessment and collection of companies tax.
  3. issuing direction or guidelines on the interpretation of the provisions of the company’s income tax act and other tax laws.

However, the board can make use of its best of judgment to asses a company if the company did not provide the necessary returns within the stipulated period. The federal Board of Inland revenue is the sole authority for the administration of companies tax.

Company Income Tax in Nigeria – Basis Of Liability To Companies Income Tax

                Tax is payable for each year of assessment on the profit of nay company accruing in, derived from, brought into received in Nigeria in respect of all kinds of income: that is income derived from a trade, business or investments. Thus, the tax holiday of companies in Nigeria is primarily on species income having their source or deemed sourced within the country as well as on remittance. From 1996 the rate companies income tax in Nigeria has been 30%.

The process of ascertaining the profit of a company for a given period begins with the preparation of financial statement or accounts in accordance with generally acceptable accounting principles and provisions of companies and Allied matter act 1990. The company income tax act section 19 and 20 provides that certain expenses and income shall not be includes in the profit computation. Taxable profit of companies is arrived at after the treatment of the following.

  1.  Loss relief
  2. Capital allowance and balancing allowance.
  3. Balancing charges.

Company Income Tax in Nigeria – Filling Returns and Companies Income Tax


The law required every company to, at least once in every year without notice or demand make and deliver to the board a reture in the forms of:

  1. The audited accounts, tax and capital allowances computation and a true and correct statement in writing containing the amount of its profits from each and every source.
  2.   a declaration which shall be signed by director or sectary of the company that returns contain a true correct statement of the amount of its profit computed in respect of all sources and that the particular in such returns are true and complete.

Investment Decision

Investments according to Longman dictionary of contemporary English is defined as money that people or organization put into a company, business or bank in order to get a profit or make a business activity successful.

Pandey (2010) defines investment decision as a firm’s decision to invest its current funds most efficiently in the long term assets in anticipation of an expected flow of benefits over a series of years. However, it is interesting to note that investment decision involves foregoing presents consumption for greater future consumption (Imaga 2005). The continuous existence of any company is not predicted on its investments on short term basis but rather on the long term investment strategies (Akinsulire 2010). According to Osuala (2009) investment is the current commitment of money or other resource in the expectation of reaping future benefits. Capital investment decisions aims includes, allotting the capital investment funds of the  firm in the most effective manner to make sure that the returns are the best possible returns.

Assessing projects as well as the allocation of the capital depends on the project requirements are some of the most crucial capital investment decision aspects. The power to study as well take capital investments decision permits an individual as the manger or owner of a particular business to make sure that their resources which are limited are apportioned to the project (s) which would best accomplish their strategically goals. These kinds of decisions could be associated to capital investments decisions like constructing a new factory.

The aim of a business while making capital investment decisions is maximizing the wealth of the shareholder by acquiring assets that yields cash flow which is positive. Capital investment decisions mostly are regulation by the procedure of rating and identifying the organization’s capital investments. The company ought to decide as to which of the capital investments that are given, would ensure the maximum value to their business and thus they can make their investment decision.

Making strategic capital investment decisions which are consistent could also be in form of financial assets and real assets (Osuala 2009). Financial assets are essentially claims on income generated by real asset. However real assets investment involves the communities of fund in producing tangible assets over which an investor exercise direct control lumby (2005). However, it is interesting to note that investment   decision involves forging present consumption for greater future consumption and involves the following processes.

  1. identification of a project
  2. Definition of a project and screening
  3. Analyzed and accepting
  4. implementation
  5. Monitoring and post audit.

Company Income Tax in Nigeria – Classes Of Capital Investment Decision

 Investment in real or tangible assets can take various forms such as purchase of new equipment, opening a new branch of the same firm elsewhere, vertically integrating in the production process, perhaps to exercise control over its raw materials etc. generally, capital investment decisions are classified in two ways (Osuala 2009). One way is to classify them on the basic of decision situation

On the basis of firm’s existence. The capital budgeting by existing are taken but the both newly incorporated forms as well as by existing firm. The new firms may be required to take decisions in respect of selection of a plant to be installed. The existing firm may be required to take decisions to meet the requirement of new environment or to face the challenges of competition. These decisions may be classified into:

  1. Replacement and modernization decisions: The replacement and moderation decisions aims at to improve operating efficiency and to reduce cost. Generally all types of plants and machinery require replacement either because of the economic life of the plant or machinery is over or because it has become technologically outdated.
  2. Expansion Decision: Existing successful firms may experience growth in demand of their product line. If such firms experience shortage or delay the delivery of their products due to inadequate production facilities, they may consider proposal to add capacity to existing product line.
  3.  Diversification decision: These decision require evaluation of proposals to diversify into new product line, new market etc. for reducing the risk of failure by dealing in different product or by operating in several markets.

Company Income Tax in Nigeria – Character of Capital Investment

                According to Osuala (2009) long term investment have the following features.

  1. They typically involve a large amount of initial casg outlay which tend to have a long impact on the firm’s future profitability. Therefore, this initial cash outlay needs to be justified on a coat benefit basis.
  2. There are expected recurring cash inflows over the life of the investment project. This frequency requires considering the time value of money. Depreciation expense is a is a consideration only to the extent that it affects the cash flows for taxes.
  3. Income taxes  could make a different in the accept or reject decision. Therefore income tax factors must be taken into account in every capital budgeting decision.

Company Income Tax in Nigeria – Importance of Capital Investment Decision

 Capital investment decision is one of the most critical and crucial decision of any investor or organization. It is an integral part of the corporate plan of an organization and thus, it reflects the basic objectives of an organization.

  1. Growth: The effect of investment decision extend into the future and have to be endure for a longer period than the consequences of the current operating expenditure. A firm’s decision to invest in long term asset has a decisive influence on the rate and direction of the growth. A wrong decision can prove disastrous for the continued survival of the firm.
  2. Risk: A long term commitment of fund may also change the risk complexity of the firm. If the adoption of an investment increase average gain but causes frequent fluctuations in its earning, the firm will become more risky. Thus, investment decision shapes the basic character of a firm.
  3. Irreversible: Most investment decisions are irreversible. It is difficult to find a market for such capital items once they have been acquired. The firm will incur heavy losses if such assets are scrapped.
  4. Funding: Investment decision generally involve large amount of funds, which make it imperative for the firm, to plan its investment programmes very carefully and make advance arrangement for procuring finances internally and externally.
  5. Complexity: Investment decisions are among the firm’s most difficult decision. They are an assessment of future events, which are difficult to predict. Economic, political, social and technology forces causes the uncertainty in cash flow estimation.

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2013 copyright Company Income Tax in Nigeria and How It Effects Investment Decisions

11 Comments on “Company Income Tax in Nigeria and How It Effects Investment Decisions”

  1. idegbe beauty says:

    i just wanna tell u thankx for making my project easy.

  2. Adeyemi Dolapow says:

    This is great,good work done

  3. Please, i would like to know if government agencies are mandated to pay with-holding tax?

  4. pls i need some references on dis article

  5. adejoh bd says:

    greate job.thanks.pls give summary, conclusion, recommendation and references.

  6. adejoh bd says:

    Great job. Thanks. Pls give summary, conclusion, recommendation and references.


    need to have a copy please

  8. yusuf haruna says:

    Need materials on effect of any tax incentives on sme in nigeria

  9. what a wonderful write up…it has helped me in the course of my research tremendously….however i just want to know your take on the effect of tax havens on developing countries…if its a way forward or a bane to economic prosperity…Thank you

  10. OBASI CANICE says:

    what are the allowable expenses for corporate bodies.

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