Thursday, May 26, 2011

Nigeria Recent Developments in Company Income Taxation in Nigeria

Abiola Sanni, LLM, BL, FCTI [*]
Issue: Bulletin for International Taxation, 2011 (Volume 65), No. 1
Published online: 22 November 2010

  • This article outlines the major changes introduced in Nigeria by the Companies Income Tax Act, 2007

under the following broad policy headings: (1) streamlining company taxation; (2) ensuring fairness in tax
administration; (3) reviewing penalties; (4) countering tax avoidance; and (5) reviewing allowances and


 Since 1939, when the Companies Income Tax Ordinance [1] was enacted, the federal government of Nigeria has maintained exclusive jurisdiction over the taxation of companies. [2] In 1940, the Income Tax Ordinance [3] was enacted regarding the taxation of both companies and individuals. A joint statutory framework for taxation of individuals and companies continued until 1961, when the Companies Income Tax Act (CITA) [4] was enacted. The CITA was re-enacted in 1979 [5] and again in 1990 [6] during the Law Revision Exercise of that year. [7] In 2002, the Minister of Finance established a Study Group, headed by Prof. Dotun Phillips, an economist, to review the Nigerian tax system. The Study Group submitted its report in 2003, which contained far-reaching recommendations, some of which the government may have considered to be too radical or impracticable or for which it simply lacked the political will to implement. Subsequently, a Working Group, headed by Seyi Bickersteth, [8] was established to revise the recommendations of the Study Group. The recommendations of the Working Group largely formed the basis of the present ongoing tax reform. [9] [10] One of the by-products of the tax reform exercise is the recent amendment of the Companies Income Tax Act, the Laws of the Federation of Nigeria (LFN), [11] as amended (“the Principal Act”) by the Companies Income Tax (Amendment) Act [12] (“the Amending Act”). The objective of this article is to review the provisions of the Amending Act against the background of the recommendations of the Study Group and Working Group. The article is divided into four parts. Section 1. introduces the subject, whilst section 2. provides the background to the recommendations of the Study Group and Working Group that served as the basis for the current tax reform of the federal government, which includes the enactment of the Amending Act. Section 3. is an overview of the major changes introduced by the Amending Act and the effects on the Principal Act. Section 4. concludes the article and contains recommendations for further amendments, but expresses regrets that some of the major recommendations of the Study Group and the Working Group were not implemented, particularly with regard to the eduction in the company income tax rate from 30% to 20%. Following the precedent established a decade earlier, [13] a Study Group on the review of the Nigerian tax system was set up in 2002. The terms of reference of the Study Group included, inter alia: (1) reviewing all aspects of the tax system and recommending improvements; (2) reviewing all tax legislation in Nigeria and recommending amendments where necessary; (3) considering international developments and recommending suitable adaptations to Nigerian circumstances; and (4) evaluating and confirming the desirability or otherwise of the retention of the portfolio of fiscal incentives in the tax laws. [14] A Working Group was subsequently established to review the recommendations of the Study Group. [15] This section is devoted to the contents of the recommendations of the Study Group (see 2.2.) and the Working Group (see 2.3.). The Study Group viewed the Nigerian tax system as “unduly complex, skewed, low revenue-yielding, poorly administered, anti-federalism, largely-inequitable, and loaded with unduly large number of overlapping taxes which have more nuisance value than revenue value”. [16] The Study Group also noted that Nigeria’s corporate income tax rate of 30% is one of the highest in the world and diverges from the growing international trend of harmonizing

1. Introduction
2. Reports of the Study Group and Working Group
2.1. Introductory remarks
2.2. The Study Group

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the rates of personal and corporate taxes. [17] In addition, the Study Group considered it to be grossly inequitable
and destructive to business enterprise to tax a company realizing losses. [18] Consequently, the Study Group
recommended the adoption of a simple tax system with a low tax burden comprising a few broad-based taxes. [19] According to the Study Group “in the not-too-distant future, Nigeria should fully replace the whole of her existing
tax system with only two taxes: income tax and expenditure tax”. [20] Other recommendations included the
The Working Group was convened in 2004 by the former Minister of Finance, Dr Ngozi Okonjo-Iweala, to “critically
evaluate the recommendations of the Study Group and propose prioritised set of strategies whose
implementations would give effect to the reform of the Nigerian Tax System”. [24] Whilst the Working Group agreed
with the Study Group that the Nigerian tax system had to be redesigned and managed to encourage economic
growth on a sustainable basis, [25] it disagreed with the recommendation of the Study Group on the replacement of
the existing tax system with a broad-based income tax and expenditure taxes. The Working Group also disagreed
with the recommendation that small companies should pay their income tax to the states on the grounds that: [26]
The Working Group also recommended that:
The Amending Act consists of 25 sections. A general appraisal of the amendments reveals the following key policy
objectives: (1) streamlining the provisions of the CITA by the establishment of the FIRS under an independent
statute (the Federal Inland Revenue Service (Establishment) Act, 2007 [31] – FIRSEA); (2) ensuring fairness in tax
administration; (3) reviewing penalties; (4) countering tax avoidance; and (5) reviewing allowances and reliefs.
The division of the various reforms for consideration in 3.2. to 3.6. has been adopted only for the purpose of
convenience. Whilst each of the amendments may fit into one or more of the objectives noted previously, there is
the possibility that some may overlap. It should be noted that the various amendments are not of the same
significance. In this regard, the changes introduced by the Amending Act are discussed in no particular order of
– a reduction in the companies income tax rate from 30% to 20% to improve Nigeria’s global competitiveness; [21]
– a company realizing a loss in the year of assessment should not be liable to pay tax in that year and, therefore,
Sec. 28A of the CITA should be repealed;
– companies whose turnover is less than NGN 50 million in a year of assessment should pay tax on their profits
to the state either at a rate of 2% of turnover or 20% of the total, i.e. chargeable profit, whichever is lower;
– Sec. 17 of the CITA, which empowers the tax authorities to treat the undistributed profits of a Nigerian company
controlled by not more than five persons as distributed and taxable, should be repealed on the basis that it is
impractical for the tax authorities to compel such companies to declare dividends against their wishes;
– taxes should no longer be withheld at source from the dividend, interest, rent or royalties income of companies
that are exempt from company income tax; [22] and
– the investment tax credit of 15% on expenditure incurred by companies to replace plant or machinery should be
amended to become a 15% investment tax allowance to safeguard state revenue. [23]
2.3. The Working Group
– the current constitutional provisions do not permit the delegation to the states of the power to collect tax on the
profit of companies;
– the high probability of ineffective tax administration due to fluctuations in the turnover of companies on the
borderline of the proposed tax threshold and the consequent lack of vigilance and coordination between the
Federal Inland Revenue Service (FIRS) and States’ Inland Revenue Services; and
– the current unhelpful approach of the states to revenue collection would be likely to discourage small
companies, especially small and medium-sized enterprises (SMEs), which require support in their initial years.
– the rate of company income tax should be reduced to 20%; [27]
– the assessment rules on the commencement and cessation of business should be abolished; [28] and
– the preceding-year basis of taxation should be changed to a current-year basis of taxation [29] (the Working
Group thought that such a reform would realize a significant increase in revenue on a current-year basis,
although further study of the implications of the change would be required, particularly with regard to the
application of the withholding tax regime). [30]
3. Synopsis of the Provisions of the Amending Act
3.1. Introductory remarks
3.2. Streamlining the CITA and the FIRSEA
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The campaign to restructure and grant administrative and financial autonomy to the FIRS has been a long one. The
end came with the promulgation of the FIRSEA. [32] Previously, the Federal Board of Inland Revenue (FBIR) and
the Body of Appeal Commissioners (BAC) had been established under the CITA. With the far-reaching
restructuring of the FBIR, [33] a separate statute was dedicated to the establishment of the (new) FIRS, under which
a Tax Appeal Tribunal (TAT) was set up. [34]
Secs. 1 to 7 of the CITA (which formed Part 1 on the establishment, composition and powers of the FBIR) were
abolished by the Amending Act to avoid overlapping provisions, some of which could have been conflicting.
Specifically, Sec. 2(2) of the Amending Act provides that the “Federal Board of Inland Revenue established under
the Principal Act is dissolved”. The establishment of the FIRS under a separate statute of its own makes for easy
reference by administrators, practitioners and researchers. The FIRSEA granted a number of powers and a
measure of autonomy to the FIRS to enable it to discharge its statutory roles. For instance, the FIRS may now
recruit, discipline and determine the terms and other conditions of service of its staff outside the civil service
structure. With the institution of the new structure, the FIRS has been reinvented in terms of dynamism and
professionalism. [35]
In view of the establishment, under the FIRSEA, of the TAT with jurisdiction to settle disputes arising from the
operation of all of the federal taxing statutes listed in the First Schedule to that Act, Secs. 53-57 of Part X of the
Principal Act dealing with Appeals to the Body of Appeal Commissioners were abolished [36] and substituted with
the provision that “Appeals shall be as provided in the Federal Inland Revenue Service Act”. [37] Accordingly,
appeals from the decisions of the FIRS in respect of the companies income tax, personal income tax, capital gains
tax, petroleum profits tax, education tax, technology tax and VAT now lie with the TAT. [38]
A strong and efficient administrative framework is a sine qua non for a good tax system. Whilst the far-reaching
restructuring of the FIRS under the FIRSEA is intended to strengthen the FIRS, there is also a commitment to
review provisions that were considered to be unfair to taxpayers.
The operation of the withholding tax system has been a cause of serious concern in Nigeria. Withholding tax
applies not only to investment income, such as dividends, interest, directors’ fees and rents, but also to payments
made under a contract, except for purchases on the open market. If a refund is due to companies, the FIRS has
always been reluctant to make such refunds, even in appropriate cases. In a move that was apparently to
safeguard the interests of the tax authorities, what is popularly known as the “matching concept” was enacted in
Sec. 63(5) of the Principal Act. This provides that:
Income tax recovered under the provisions of this section by deduction from payments made to a
company shall be set-off for the purpose of collection against tax charged on such company by an
assessment, but only to the extent that the total of such deductions does not exceed the amount of the
assessment and provided the assessment is for the period to which such payments relate... (emphasis
The effect of this provision, especially the italicized text, is to allow taxpayers to use credit notes of a particular year
of assessment only for the purpose of offsetting the tax liability of that year of assessment, whilst any excess
withholding tax credit in a particular period is generally not allowed as a set-off against future tax liabilities.
In response to criticism of this practice, Sec. 63(5) of the Principal Act has been amended by deleting the italicized
words, thereby removing the provision that a withholding tax deduction set-off against the tax liabilities of a
company cannot exceed the amount of the assessment for the year. [39] Sec. 19 of the Amending Act also provides
that excess payments are to be refunded by the FIRS within 90 days of the assessment if duly filed, with an option
for set-off against future taxes. [40]
3.2.1. Initial comments
3.2.2. Repeal of Part 1 of the CITA
3.2.3. Appeal process – abolition of the BAC
3.3. Ensuring fairness in tax administration
3.3.1. Initial comments
3.3.2. Abolition of the matching concept for withholding tax
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It is, however, remarkable that, despite this new legal basis for refunds, the attitude of the FIRS to refunds has
remained unchanged on the basis that the government has yet to establish a dedicated account from which
refunds are to be made. In practice, despite the fact that Sec. 19 of the Amending Act states that refunds are to be
granted within 90 days of approval, the approval process is tedious and bureaucratic, involving inter-ministerial
approvals that, in some cases, may take around two years. [41] Accordingly, laudable as the abolition of the
matching concept may be, the existing bureaucratic procedures in making refunds have made this reform only a
partial success by allowing taxpayers to carry forward any unutilized credit notes. The current situation still leaves
unresolved the concerns of taxpayers who may genuinely have large credit notes that cannot be relieved in a
reasonable time.
One of the features of a tax is that it is a compulsory payment for which no direct benefit is received in return. Few
persons, if any, willingly pay to the state on a continuous basis, hence the cliché that no one pays tax with a smile!
Yet, anyone who fails to pay tax risks severe penalties. It is remarkable that the various penalties in the Principal
Act and other tax laws could unwittingly serve as incentives for non-compliance, as they are sometimes
ridiculously low. In a few instances where stringent penalties were imposed, [42] they are not really enforced,
thereby reflecting corruption in the tax administration. The Amending Act, therefore, altered some of the penalties
under CITA to reflect current realities and or make them more administrable.
Sec. 13(3) of the Amending Act [43] increased the penalty for failure by companies to file annual returns as and
when due from NGN 500 to NGN 25,000 for the first month of default and from NGN 400 to NGN 5,000 for every
subsequent month. A higher sanction of NGN 100,000 or two years’ imprisonment on conviction is provided for in
respect of any director, manager, secretary or other similar agent of an errant company who has connived at, or
consented or attributed to the default of a company. [44] The penalty for sundry offences has also been increased
from NGN 200 to NGN 20,000 on conviction and from NGN 40 to NGN 2,000 for each day the failure continues.
A pre-operational levy of NGN 500 for the first year and NGN 400 for every subsequent year is payable by
companies that are yet to commence business six months after incorporation. [46] The pre-operation levy has been
increased to NGN 20,000 for the first year and NGN 25,000 for every subsequent year. [47] Apart from having a
role in revenue generation for the FIRS, the basis of the pre-operational levy appears to be questionable, as
company income tax is generally payable on profits. It may be sufficient to require such companies to at best file a
nil return rather than subjecting them to taxation under any form before the commencement of business.
The penalty for failure to deduct or remit withholding tax as and when due has been reduced from 200% on
conviction to 10% a year of the tax not withheld or remitted, as the case may be. [48] The removal of the
requirement of a criminal conviction has turned the penalty from a judicial one into an administrative one. The
question is whether or not the new penalty, which is less than the commercial lending rate, [49] could encourage
Generally, the main thrust of most tax amendments is to address issues relating to evasion and avoidance by
closing unintended opportunities that become apparent following previous amendments. The Amending Act has
attempted to address this issue in a number of ways.
Under new Sec. 41(4) of the Principal Act, [50] an income tax assessment must be made in the currency in which
the transaction took place. The failure to expressly provide for this in respect of the petroleum profits tax partly was
the contentious issue in Shell v. FBIR, [51] which lasted for almost 20 years before the final determination of the
case by the Nigerian Supreme Court. The statutory period of filing a withholding tax return is also reduced from 30
days to 21 days by Sec. 20 of the Amending Act. [52]
3.4. Review of penalties
3.4.1. Initial comments
3.4.2. Increase in late-filing penalty
3.4.3. Increase in pre-operational levy
3.4.4. Failure to deduct or remit withholding tax
3.5. Countering tax avoidance
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The Amending Act provides a new basis for assessing the profits of insurance companies. Out of almost 100
sections in the Principal Act, there was only one direct provision dealing with insurance companies, i.e. Sec. 14.
The legal framework proved inadequate to address some issues relating to assessing the profits of insurance
companies. Sec. 4 of the Amending Act [53] has amended the applicable tax regime in respect of insurance
companies in Nigeria as follows:
These are laudable anti-avoidance measures, especially following the recent consolidation of the insurance sector.
[64] The elaborate provisions for the insurance sector may be an indication that, in the future, the legislature may
wish to make similar interventions in other sectors, such as shipping, aviation and even banking.
Tax incentives are often used to compensate for perceived deficiencies in the investment environment.
Internationally, tax incentives are used to give a country a competitive edge over other countries in an increasingly
competitive global economy. However, studies have raised serious doubts as to the efficacy of tax incentives in
Nigeria and their role in business decisions. [65] It should be noted that tax incentives by their very nature represent
a revenue cost for the government and may become an unacceptable cost if not well focused and administered.
The recent disclosure by the Controller General of Customs that Nigeria is losing very large sums as a result of
exemptions is instructive. [66] Tax incentives, if well coordinated and implemented, can stimulate economic growth
in certain areas. However, if tax incentives are not well coordinated and implemented, they could waste resources
that could have been put to better use.
According to the Study Group, the most important tax incentive for corporate investors is a low income tax rate.
Consequently, the Study Group recommended that the company income tax and education tax should be
combined into a single tax at the lower rate of 20%. [67] The Working Group, for its part, was also of the view that
tax incentives should rarely be used as a tax policy instrument and that the best tax incentive is a low-tax regime.
[68] Whilst the Working Group shared the view that the best incentive for investors was a low tax rate, [69] it posited
that tax incentives alone are not sufficient to promote investment, but that good governance, political and
economic stability, the necessary infrastructure and social services would.
The Amending Act expands the scope of tax exemptions in respect of the interest payable on bank loans
“providing working capital for any cottage industry established by the company”. [70] The requirement under Sec. 9
(7)(b) of the Principal Act that the cottage industry must have been established under the Family Economic
– Life insurance business and non-life insurance business are distinguished through the keeping of separate
books of accounts and the filing of separate returns for each class of insurance. [54]
– If there are several types of insurance within a class, these form one type of insurance. Losses from one type of
business cannot be set off against the income of another type of insurance. However, losses can be carried
forward and set off against the profits from the same class of insurance, but limited to a four-year period. [55]
– The profits of non-life insurance business (whether Nigerian or non-Nigerian) are determined for tax purposes
by adding together gross premiums, interest and other income receivable in Nigeria, less reinsurance and a
deduction from the balance of a reserve for unexpired risks. [56]
– The allowable deduction for non-life insurance business with regard to unexpired risks is 45% of total
premiums; for marine cargo insurance it is 25% of total premiums. [57]
– The profits of a life insurance business (non-Nigerian companies) that are to be assessed for tax purposes are
investment income less management expenses, including commission. [58]
– If part of the profits accrue outside Nigeria, investment income is determined by the sum of the premiums less
agency and head office expenses. [59] Total allowable expenses and outgoings are restricted to 15% of the total
profits of the company.
– The profits of a life insurance business (Nigerian companies) are determined for tax purposes as the
investment income less the management expenses, including commissions. [60] Total allowable expenses are
restricted to 15% of the total profits.
– Life insurance business is granted the following allowable deductions: (1) 1% of its gross premium or 10% of
profits, whichever is greater, in respect of a special reserve fund; [61] (2) all normal allowable business
outgoings; and (3) an amount to make a general reserve fund equal to the net liabilities on policies. [62]
– An insurance company that engages an insurance agent, loss adjustor and insurance broker must include in its
annual tax returns a schedule of the names and addresses of service providers, the date of their employment
and the payments made. [63]
3.6. Review of allowances and reliefs
3.6.1. Initial comments
3.6.2. Interest on loans to cottage industries
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Advancement Programme to be entitled to the exemption has been removed. “Cottage industry” is defined as “an
industry where the creation of products and service is home-based, rather than factory-based”. [71] The two
conditions to be entitled to the relief now are that: (1) the tax moratorium must not be less than 18 months long;
and (2) the rate of interest on the loan must not be more than the base lending rate at the time the loan was
granted. [72]
The attempt to encourage banks to lend money to cottage industries is commendable. However, it is doubtful if
these provisions alone are sufficient to encourage banks and other financial institutions, in general, to lend to
cottage industries because of the high-risk nature of such lending. [73] It could also have been expected the
incentives would have been extended to small-scale industries generally, considering their critical roles in
economic development. [74] For this laudable objective to be achieved, this policy must be vigorously pursued in a
larger policy and legal framework aimed at encouraging the growth and development of small-scale industries.
Under the Principal Act, the period for the carry-forward of losses is limited to four years. [75] Both the Study Group
and Working Group considered this to be unfair and recommended that companies should be able to set off all
past losses against future profits without time limitation. [76] The reasoning behind this is that it is poor tax policy to
levy tax on the capital (the tree) instead of the profits (the fruits). Effect was, therefore, given to this
recommendation by Sec. 8 of the Amending Act, which removed the four-year limitation and brought the treatment
of losses under CITA into line with that on Petroleum Profits Tax Act. [77] However, vigilance is required on the part
of the FIRS to prevent abuse of this provision by carrying out random audits of companies that may be declaring
losses repeatedly as a tax planning device.
By way of a new Sec. 21A of the CITA, donations to universities and other tertiary or research institutions in
respect of research or any developmental purpose are now tax deductible, subject to a maximum of 15% of total
profits or 25% of the tax payable, whichever is greater. [78] The upper limits may be varied by an Order of the
Minister, subject to the approval of the Federal Executive Council and published in the Federal Gazette. Hitherto,
for a donation to be deductible it had to meet the following conditions: [79]
The Amending Act removed condition (3), whilst increasing the percentage of the total profits of a company in
condition (4) that can be used for donations to universities and other tertiary or research institutions. [80] This has
provided a new basis for corporate social responsibility. In this regard, it should be noted that, for donations to
qualify under the new provisions, they must be made to “universities” or “institutions”. Accordingly, if a donation is
intended for a college, faculty or department of a university or institution, it is advisable that such donations be
routed through the university or institution. In any case, it is to be hoped that the FIRS interprets the provisions
liberally to encourage a positive response from corporate bodies.
Sec. 14 of the Amending Act [81] abolished the provision that companies that filed returns benefited from a 1%
discount (bonus) of the tax payable for early filing, as provided for by the Principal Act. The implication is that the
self-assessment system, which was previously deemed to be optional in respect of corporate tax, is now a
statutory duty for corporate taxpayers.
Sec. 5 of the Amending Act [82] provides for the inclusion of the profits of the companies established in free-trade
or export processing zones to be tax exempt. This section reinforces similar provisions made in the Export
Processing Zone Act. [83] However, the provisions in the Amending Act are subject to the condition that 100% of
the production of the company is to be wholly for export if it is to benefit from the tax exemption. Accordingly, the
profits realized by companies established in an export processing zone or free trade zone from goods sold in
3.6.3. Loss relief carry-forward period
3.6.4. Deductible donations for educational purposes
(1) it had to be made to a public fund, or a statutory body or institution, or an ecclesiastical, charitable,
benevolent, educational or scientific institution established in Nigeria, as specified in the Fifth Schedule to the
(2) it had to be made out of the profits of the company and not its capital;
(3) it could not be an expenditure of a capital nature; and
(4) it could not exceed 10% of the company’s total profits for the year of assessment (any donation in excess of
such an amount was not allowed).
3.6.5. Repeal of 1% discount (bonus) for self-assessment filers
3.6.6. Taxation of profits of companies in free-trade zones
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Nigeria are taxable.
Sec. 9 of the Amending Act [84] abolished the 5% rural investment allowance (granted in addition to initial
allowances) previously enjoyed by companies in respect of capital expenditure incurred in the provision of
telephones in areas at least 20 kilometres from where such a facility is provided by the government.
Sec. 10 of the Amending Act [85] abolished the 25% investment tax credit for companies engaged wholly in the
fabrication of spare parts, tools and equipment in respect of qualifying capital expenditure. The 15% investment tax
credit allowed to companies that had incurred expenditure on the replacement of obsolete plant and machinery
was also abolished by Sec. 12 of the Amending Act. [86] In addition, the 15% investment tax credit previously
available to a company that purchased locally manufactured plant, machinery or equipment for use in its business
was abolished. Furthermore, Sec. 12 of the Amending Act abolished Sec. 30(41) of the Principal Act in respect of
the relief relating to the replacement of obsolete plant and machinery. Previously, if a company had incurred
expenditure in respect of the replacement of obsolete plant and machinery, the 15% investment tax credit was
granted to the company.
In computing the deductions to be allowed for the purposes of determining the profits or losses of a company, the
Amending Act repealed the provisions in Sec. 20(24) of the CITA that allowed as a deduction to a property-holding
company the expenses attributable to the maintenance of the property and directors’ remuneration. By this
amendment, a property-holding company now cannot deduct such expenses attributable to the maintenance of a
property. [87]
The power previously vested in the Minister to alter the rate of tax or allowances by regulation under the Principal
Act [88] was abolished by Sec. 23 of the Amending Act, which now states that:
The National Assembly may on the proposal by the President by a resolution of each of the Houses of
National Assembly impose, increase, reduce, withdraw, or cancel any rate of tax, duty or fee chargeable
specified in section 29 and Second Schedule to the Act and in accordance with section 59(2) of the
Constitution of the Federal Republic of Nigeria, 1999.
This provision is a welcome attempt to curb the prevalent practice of amending the tax law via the budget speech
or circulars. This tendency began to manifest itself in the 1999 Constitution and had to be ended at an early stage
in its development. For example, there was an attempt by the administration of General Olusegun Obasanjo to
introduce fuel tax via the budget speech. [89] The Minister of Finance of the same administration also purportedly
increased the VAT rate from 5% to 10% by way of the publication of an article in a newspaper after the proposal
had been rejected by the National Assembly. [90] In this regard, it should be noted that a resolution of the National
Assembly is insufficient to impose, increase, reduce, withdraw or cancel any rate of tax. Statutory enactment in
accordance with Sec. 59 of the 1999 Constitution is still required for such an imposition, reduction, withdrawal or
cancellation to be valid. [91]
This article has attempted to highlight the major changes introduced by the Amending Act in respect of the taxation
of company income or profits in Nigeria. Background information has been provided to cast light on the policy
reasons for some of the changes. Except perhaps for the insurance sector, the provisions of the Amending Act
are, in the author’s opinion, mere tokenism compared to the far-reaching recommendations of the Study Group
and the Working Group. If the recommendations of both the Study Group and the Working Group that the income
tax rate should be reduced to 20% had been adopted, this would have provided an incentive for both local and
foreign investment in Nigeria, where cost of doing business continues to increase due to a combination of political
instability, a declining infrastructure, bribery and corruption and complex bureaucratic processes. The need for a
reduction in the company income tax rate has become more compelling so as to attenuate the effect of the global
economic crisis on businesses. The recommendation of the Study Group that Nigeria should adopt two broadbased
taxes as soon as possible is also worth considering in greater detail, in view of the large number of taxes
3.6.7. Abolition of rural investment allowance
3.6.8. Abolition of certain investment tax credits
3.6.9. Abolition of maintenance allowance for property-holding companies
3.6.10. Power to alter rates
4. Conclusions
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that exist in Nigeria, most of which may not be generating sufficient revenue to make economic sense. [92]
Finally, although such a policy shift would have significant implications for fiscal federalism, it is suggested that the
recommendation requires further in-depth study, rather than being discarded. For example, further study could
recommend some more taxes, in addition to the two proposed by the Study Group, as this would still significantly
reduce the number of existing taxes and help in improve taxation in Nigeria. Accordingly, if tax policymakers
should propose more significant changes in the overall development of Nigeria’s tax system, it may be a good idea
to borrow from the recommendations of the Study Group, which could be adapted, reworked or updated, as
Senior Lecturer, Department of Commercial and Industrial Law, University of Lagos, Fulbright
Fellow, legal adviser and fellow of the Chartered Institute of Taxation of Nigeria. The author is
grateful for the comments of Prof. M.T. Abdulrazaq in writing this article. He can be contacted at
No. 14 of 1939. Companies income tax was introduced for the first time in Nigeria in 1939.
Nigeria is a federation of 36 states and a Federal Capital Territory. The federal government is vested with
legislative powers in respect of the “taxation of incomes, profits and capital gains”. See Sec. 4, item 59 of
the Exclusive Legislative List, Second Schedule of the 1999 Constitution.
No. 3 of 1940. The Income Tax Ordinance of 1940 was comprehensive legislation that provided for the
taxation of individuals and companies for the first time.
Cap 22 of 1960.
No. 28 of 1979.
Cap 60 of 1990.
There have been Law Revisions in Nigeria in 1948, 1958, 1990 and 2004. LFN 2004 did not become
effective until May 2007, following the enactment of the Companies Income Amendment Act No. 11, 2007.
Accordingly, the Amending Act were based on the provisions of the Companies Income Tax Act as
contained in the LFN 1990, as amended, which was the then extant law.
Bickersteth was the Managing Partner of Arthur Anderson at the time of his headship of the Working
Group and is currently the Managing Partner of KPMG Consulting.
The federal government had initiated the following nine executive tax bills in the National Assembly in one
go in 2005 to establish a legal framework for its tax reform: A Bill for an Act to establish the Federal Inland
Revenue Service; A Bill for an Act to amend the Companies Income Tax Act; A Bill for an Act to amend the
Personal Income Tax Act; A Bill for an Act to amend the Value Added Tax Act; A Bill for an Act to amend
the Petroleum Profits Tax Act; A Bill for an Act to amend the Education Tax Act; A Bill for an Act to amend
the National Sugar Development Council Act; A Bill for an Act to amend the National Automotive Council
Act; and A Bill for an Act to amend the Customs, Excise Tariffs etc. (Consolidation) Act.
The recommendations are discussed in 2.2. and 2.3., respectively.
Cap 60 of 1990.
No. 11 of 2007.
Prof. Edozien led the Study Group on the Review of the Nigerian Tax System. See Federal Government of
Nigeria, “Report of the Study Group on the Nigerian Tax System and Administration” (Lagos: Government
Press, 1992).
“Nigerian Tax Reform in 2003 and Beyond”, Main Report of the Nigerian Tax System (July 2003) (“Study
Group Report”), pp. 1-2.
“Nigerian Tax Reform 2003 and Beyond. Report of the Working Group on the Review of the Report of the
Study Group on the Review of the Nigerian Tax Reform” (March 2004) (“Working Group Report”).
Study Group Report, supra note 14, p. 18.
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Id., p. 206.
Sec. 19(1)(n) CITA.
Sec. 12 of the Amending Act abolished Sec. 30 of the Principal Act.
Working Group Report, Introduction, supra note 15, p. 5.
Id., Para. 2.1.1, p. 7.
Id., Para. 4.2.2, p. 15.
Id., Para. 4.2.1, p. 15.
Id., Para. 4.2.3, p. 15.
Id., Para. 4.2.4, p. 15.
No. 13 of 2007.
J.A. Arogundade, Nigerian Income Tax and Its International Dimensions (2nd ed.) (Ibadan: Spectrum
Books Ltd, 2010), p. 1.
Id., pp. 4 and 13. Whilst under the Principal Act the FBIR was a legal person, whilst the FIRS was the
operational arm of the FBIR, the Amending Act removed the oversight function of the FBIR with regard to
the activities of the FIRS. A major implication of the new structure is that the decision-making process on
tax administration now lies with the FIRS, with a legal personality and power to sue and be sued. The
membership of the board has increased from 14 to 15. The six Departments Heads and the office of the
Legal Adviser ceased being members. The offices of the Minister of Justice and Attorney General of the
Federation and the Governor of the Central bank of Nigeria are now represented on the Board. Whilst the
FIBR was charged primarily with the administration of the tax laws under the Principal Act, the FIRS has
very significant powers as prescribed by Sec. 7 of the FIRSEA.
The TAT was established by Sec. 59 and the Second Schedule of the FIRSEA.
The public perception of the FIRS has been mixed. From a notoriously corrupt, inefficient and ineffective
bureaucracy, the agency has recently received recognition as one of the few public institutions that is
doing relatively well. In this regard, This Day newspaper awarded the FIRS the Government Agency of the
Year 2008 Award for initiating “a revolutionary tax collection system that has helped increasing the
revenue profile of the Federal Government”. See C. Ukeje and K. Olayode, “The Federal Inland Revenue
Service as a Pocket of Effectiveness: Evidence and Contradictions of Tax Administration in
Nigeria” (unpublished), p. 5.
Para. 18 Amending Act.
Sec. 18(2) CITA.
The establishment of the TAT is one of the landmark features of the ongoing tax reform of the federal
government. The TAT is an attempt to provide a single appeal tribunal for the adjudication of disputes
arising from the administration of all the federal taxes administered by the FIRS, instead of the prior
arrangement whereby the VAT Tribunal was responsible for determination of appeals on VAT and the
Body of Appeal Commissioners was responsible for appeals arising from the administration of other
federal taxes. The TAT was inaugurated on 4 February 2010.
Sec. 19 Amending Act. This was one of the recommendations of the Study Group that was implemented.
See Study Group Report, supra note 14, p. 225.
The recommendation of the Study Group was that the tax authorities should pay refunds within 30 days.
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See Study Group Report, supra note 14, p. 225.
The process requires the approval of the Office of the Accountant General to authorize that a payment
should be made by the Treasury.
For example, the penalty of 200% for failure to remit tax withheld at source.
Amending Sec. 41 of the Principal Act. This was one of the recommendations of the Study Group that was
implemented. See Study Group Report, supra note 14, pp. 215-218.
Sec. 13(5) Amending Act.
Sec. 21 of the Amending Act amending Sec. 71(1) of the Principal Act. This was one of the
recommendations of the Study Group. See Study Group Report, supra note 14, p. 226.
Sec. 29(4) Principal Act.
Sec. 11 of the Amending Act amending Sec. 29(4) of the Principal Act. The Study Group had
recommended that Sec. 29(4) be deleted completely. See Study Group Report, supra note 14, p. 214.
Sec. 20 of the Amending Act amending Sec. 64 of the Principal Act.
At the time of the writing of this article, between 21% and 25%.
Inserted by Sec. 13 of the Amending Act.
[1996] 8 NWLR (Pt.466) 256.
Amending Sec. 64 of the Principal Act.
Amending Sec. 14 of the Principal Act.
Sec. 14(6) of the Principal Act, as amended.
Sec. 14(7) of the Principal Act, as amended.
Sec. 14(1) of the Principal Act. as amended.
Sec. 14(8)(a) of the Principal Act, as amended.
Sec. 14(2)(a) of the Principal Act, as amended.
Sec. 14(2)(b) of the Principal Act, as amended.
Sec. 14(5)(b) of the Principal Act, as amended.
Sec. 14(9)(a) of the Principal Act, as amended.
Sec. 14(9)(b) of the Principal Act, as amended.
Sec. 14(11) of the Principal Act, as amended.
“Consolidation: Insurance industry two years after”, Punch (9 November 2009), available at
Study Group Report, supra note 14, p. 40.
“FG Loses N200bn to Tax Waivers”, This Day (3 June 2009), available at
Working Group Report, supra note 15, p. 2.
Id., Para. 2.4, p. 10.
Sec. 3 Amending Act.
Sec. 3(c) CITA.
Sec. 3 Amending Act.
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O.G. Amokaye, “Financing Micro, Small and Medium Enterprises (MSMs) in Nigeria: Security Options”,
Current Law Series (2006), pp. 1-2. Institutional lenders often perceive SMEs generally as high risk, as
entrepreneurs lack a sufficient capital base and adequate collateral to guarantee loans. Lenders are also
of the view that SMEs have no performance record on which to evaluate their credit worthiness and regard
most SMEs as unstable, as such enterprises often enter and exit the market and often lack incentives to
remain for a tangible period, and are as such risky borrowers.
Id., p. 2. One of the current key socio-economic issues confronting Nigerian policymakers and institution
lenders alike is how to stimulate sustained investment in micro, small and medium enterprises (MSMEs).
The reason for this increased focus and emphasis can be understood, given the global recognition of
MSMEs as important engines of industrialization, economic growth, employment generation, poverty
eradication, wealth creation, increased productivity and competitiveness in the global market.
Sec. 27(2)(a)(iii) Principal Act.
Amokaye, supra note 73, pp. 62-63. This recommendation was enacted into law by Sec. 8 of the
Amending Act.
Sec. 16 Petroleum Profits Tax Act, Cap P13, LFN 2004.
Sec. 7 Amending Act.
Sec. 21 CITA.
Sec. 7 Amending Act.
Deleting Sec. 41A of the Principal Act.
Amending Sec. 19 of the Principal Act.
No. 63 of 1992 Cap N107 Laws of Federation, 2004.
Deleting Sec. 28B of the Principal Act.
Deleting Sec. 28F of the Principal Act.
Deleting Sec. 30 of the Principal Act.
Sec. 6 Amending Act.
Sec. 79 Principal Act.
Fuel tax was initially introduced in 2003 as a “price modulator” by the government of former President
Olusegun Obasanjo to keep the prices within a certain range through the upward and downward
adjustments of the tax in response to the prices of crude oil in the international market. Following a public
outcry, however, the former President resorted to an outright price increase without implementing it as a
tax. See the 2003 Budget Speech, available at
The increase in VAT to 10% was announced by the federal government on 24 May 2007 and was to have
had retroactive effect from 23 May 2007. The Minister of Finance, Mrs Nenadi E. Usman, justified the
increase on the ground that Nigeria has the lowest rate in the West African subregion. The tax was
resisted by the Nigerian Labour Congress, the Organised Private Sector (consisting of the Members of the
Manufacturers Association of Nigeria, the Nigerian Employers Consultative Association, and the Nigerian
Association of Chambers of Commerce, Industries, Mines and Agriculture) and civil society organizations
across Nigeria. See “Nigeria: FG increases VAT to 10 Percent”, all (25 May 2007), available at
It is a well-settled principle that taxation is statutory. See Cape Brandy Syndicate v. IRC ([1921] K.B. 64);
S.A v. Regional Tax Board (1970) 1 ALR Comm. 68; and Aderawos Timbers Trading Company Ltd. v.
FBIR. (1969) 1 All NLR 247.
Although there are 38 taxes and levies listed in the Taxes and Levies (Approved List for Collection) Act No.
2, Cap T2, LFN 2004, more than 95% of tax revenue is generated by the petroleum profits tax, personal
income tax, companies income tax and VAT.

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