The Intricacies of Tax Management
For the Royal Family, the joy of the arrival of Prince Harry and Meghan Markle’s baby brings with it the more serious world of personal finance. From a tax perspective the Royal establishment will need to ask: “Is the baby a UK or US resident?’ The answer to this question will be ‘both’ – which sets the stage for managing consequences, which include double taxation.
Such are the complexities of taxation.
As tax reforms headline the news in Nigeria, organisations and individuals are grappling with legitimate planning strategies intended to minimise tax liability through the best use of all available allowances, deductions, exclusions, and exemptions. This article takes a cursory look at all the elements that should make your next tax season the most effective yet.
With the plethora of tax legislation, and the pressure faced by businesses to grow their turnover and hence maintain reasonable profitability, the following avenues help taxpayers minimise potential tax liabilities, whilst operating within the ambit of all relevant laws:
Pioneer Status Incentive (PSI): Pioneer companies may be granted an income tax holiday for three years initially, which may be extended for another two years. Examples of activities that qualify include the mining of solid minerals, glass and glassware manufacturing, production of fertilisers, and steel manufacturing. Dividends paid out of pioneer profits are also tax exempt when distributed to the company’s shareholders.
Tax Loss Harvesting: Losses posted by Business A can be used to offset the tax liabilities of Business B, as long as both organisations belong to the same group of companies.
Capital Gains Tax exemptions: The Capital Gains Tax applies to all gains accruing to a taxpayer (individual or corporate) from the sale, lease or other transfer of proprietary rights in chargeable assets, which are subject to a tax of 10%. However, Section 26 of the Capital Gains Tax Act exempts some gains from taxation:
- Gains of ecclesiastical, charitable or educational institutions, statutory and diplomatic bodies;
- Where trustees or nominees transfer assets to beneficiaries;
- Gains made from the disposal of business assets where the proceeds are used to procure new and similar business assets;
- Gains made upon the disposal of the rights under any policy of assurance, or contract for deferred annuity on the life of any person;
- Sums obtained as compensation or damages for any wrong or injury suffered by an individual.
- Gains arising from acquisitions, mergers, or takeovers provided that no cash payment is made in respect of the shares acquired;
- Gains from the main or only private residence of an individual, provided that the area does not exceed one acre.
- Gains on stock, shares, and other government securities such as treasury bonds, premium bonds and savings certificates.
Tax relief on pension contributions: Taxpayers who contribute more to their pensions enjoy a reduction in taxable income. Employers may also be able to add to the taxpayer’s contributions, increasing the total amount available at retirement.
- The ‘Tax Relief on Interest Income’ scheme grants tax exemption on interest accruing to banks for loans extended to export activities;
- A company that is engaged in an approved manufacturing activity in an Export Processing Zone (EPZ) and incurs expenditures in its qualifying building and plant equipment is entitled to 100% capital allowance in that assessment year;
- A company that is 100% export oriented, but located outside an EPZ will enjoy a three-year tax holiday, provided the company is not formed by splitting up or reconstruction of an already existing business and the export proceeds from at least 75% of its turnover;
- Profits of companies whose supplies are exclusively inputs to the manufacture of products for export are exempt from tax. Such companies are expected to obtain a certificate of purchase of the input from the exporter in order to claim tax exemption;
- Where plant and machinery are transferred to a new company, the tax written down value of the asset transferred must not exceed 25% of the total value of plant and machinery in the new company. The company should also repatriate at least 75% of the export earnings to Nigeria and place it in a Nigerian domiciliary account in order to qualify for a tax holiday;
- Profits of any Nigerian company in respect of goods exported from Nigeria are exempt from tax, provided that the proceeds from such exports are repatriated to Nigeria and are used exclusively for the purchase of raw materials, plant, equipment, and spare parts.
Allowable Donations under Schedule 5 to the Companies Income Tax Act (CITA): In addition to the existing bodies eligible for tax deductible donations – the Nigerian Red Cross, Boys Brigade, Boys Scout, Girls Guide, Educational Institutions recognised by the law, the Institute of Chartered Accountants of Nigeria – ICAN, the Christian Council of Nigeria, the Islamic Education Trust etc. – donations made to institutions, bodies or funds engaged in the following broad categories of activities (provided that they are not-for-profits) are tax deductible:
- Youth empowerment and development; Museum development and promotion of sports, arts and culture; Promotion and the defence of human rights; Women empowerment and development; Awareness creation for transparency in governance and electoral processes; Re-orientation, rehabilitation, welfare support service for orphans, widows, physically challenged, refugees and all categories of persons that may require social or economic rehabilitation and transformation.
Tourism income: Section 28E of the Company Income Tax Act provides for 25% of the income derived from tourism by hotels in convertible currencies being exempt from tax, if such income is put in a reserve fund to be utilised within five years for expansion or construction of new hotels and other facilities for tourism development.
Capital Allowance Claim: Certain tax codes allow taxpayers to claim certain benefits in relation to their business investments in Nigeria as well as reduce the certain tax burdens which they would have borne, were such provisions not available. One of such provisions is the right of the taxpayer to claim capital allowance on qualifying capital expenditures and on assets in use for the purpose of the business at the end of the relevant basis period – as provided in the Companies Income Tax Act (CITA), Personal Income Tax Act (PITA) and Petroleum Profits Tax Act. An investment allowance of 10% on the cost of qualifying expenditures in respect of plant and machinery is available as a deduction from assessable profits in the year of purchase. There is no restriction to the full claim of capital allowance in any year of assessment for companies in the mining, manufacturing, and agricultural sectors.
The crisis of dwindling crude oil income has diverted the focus of the Nigerian government on generating maximum revenue from non-oil sources, the most substantial source being taxes levied on organisations and individuals. Yet, given the natural penchant of these groups for wealth preservation, it is astonishing how few of them are taking pro-active positions on tax-reduction opportunities, some of which have been presented above (and are by no means exhaustive).
*Disclosures: This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. ARM Investments (ARMI) advises investors to independently evaluate particular investments and strategies, and seek the advice of a financial advisor or wealth manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.