A,B,C Guides to Taxation

WHAT IS TAX?

Taxes can be defined as compulsory payments imposed by the government on individuals, families, corporations, and other entities. They are typically levied to generate revenue for the government and fund public expenditures, such as infrastructure development, healthcare, education, and defense. Taxes are a vital part of the functioning of a country, allowing the government to provide essential services and maintain public order.

TAX AS DISTINCT FROM OTHER CHARGESS OR FEES

The key elements that differentiate taxes from other fees or charges are:

1. Compulsory: Taxes are mandatory payments that citizens and entities are legally obligated to pay. Failure to pay taxes can result in penalties or legal consequences.

2. Imposed by the government: Taxes are levied by the government, which has the authority to collect them. Other institutions or organizations do not have the power to impose taxes.

3. Public purpose: Taxes are collected to serve the public interest and fund government programs and services that benefit society. Unlike fees or charges, taxes do not necessarily provide direct benefits to the individual taxpayer.

LEGAL FRAMEWORK

In Nigeria, the legal framework for taxes is established by the Constitution of the Federal Republic of Nigeria (CFRN), 1999 as amended. The constitution mandates citizens to declare their income honestly and pay taxes promptly. Additionally, various statutes, such as the Personal Income Tax Act (PITA), Company Income Tax Act (CITA), Petroleum Profit Tax Act (PPTA), and others, provide the legal basis for specific types of taxes.

FORMS OF TAXES

There are two main categories of taxes: direct and indirect taxes.

1. Direct taxes: These taxes are borne directly by the taxpayer and are levied on wealth, income, or profits. Examples of direct taxes in Nigeria include:

– Personal Income Tax (PIT): Paid by individuals, families, trustees, and business names.

– Company Income Tax (CIT): Paid by corporations.

– Petroleum Profit Tax (PPT): Paid by companies engaged in petroleum operations.

– Capital Gains Tax (CGT): Paid for the disposal of assets.

– Education Tax: Imposed on companies registered in Nigeria.

– Technology Tax, etc.

2. Indirect taxes: These taxes are borne by the final consumers and are imposed on goods and services before reaching the consumer. The burden of these taxes can be shared between buyers and sellers. Examples of indirect taxes in Nigeria include:

– Value Added Tax (VAT): A tax on the value added to goods and services at each stage of production and distribution.

– Stamp Duties: Levied on certain documents and transactions.

– Excise Duties: Imposed on locally manufactured goods.

– Customs Duties: Levied on imports and exports.

SOURCES OF NIGERIAN TAX LAW

The sources of Nigerian tax law include the Constitution, statutes, case laws, budget speeches, international law, and delegated or subsidiary legislation.

WHO PAYS WHAT TAX?

The payment of taxes varies depending on the type of tax:

– Pay As You Earn (PAYE): Paid by individuals’ resident in a particular state on their employment income.

– Company Income Tax: Paid by all registered companies operating for profit in Nigeria.

– Petroleum Profit Tax: Paid by companies engaged in petroleum operations.

– Capital Gains Tax: Paid on the disposal of assets by individuals or companies.

– Stamp Duty: Paid by individuals or companies on specified documents.

RELEVANT TAX AUTHORITY

The relevant tax authority (RTA) to which taxes are paid differs based on the type of tax:

– Personal Income Tax: The State Internal Revenue Service (SIRS) of the state in which the individual is a resident.

– Company Income Tax, Petroleum Profit Tax, Education Tax, Technology Tax: Federal Inland Revenue Service (FIRS).

– Capital Gains Tax and Stamp Duties: Either FIRS or SIRS, depending on the circumstances.

CANONS/ESSENTIALS OF A GOOD TAX SYSTEM

A good tax system should adhere to several essential principles:

1. Equity/Equality: Taxes should be based on the taxpayer’s ability to pay.

• Certainty: The income, commodity, property, or object to be taxed, the rate, the amount and the manner of arriving at the tax payable must be transparent and clearly spelt out to qualify as a good tax.
• Convenience: A taxpayer must be able to pay his or her taxes at a time and manner that is most conducive and easiest to pay. An example of this is the Pay As you Earn (PAYE) system.

• Economy: Cost of collection must be so minimal compared to the amount generated and made available to the government for use.

Tax Avoidance and Evasion

Tax Avoidance is simply taking advantage of the loopholes in the law to the taxpayer’s advantage. It is the use of legal or lawful methods to reduce the incidence of tax liability paid to the government. Instances include investments in tax advantaged accounts, contribution to approved Pension Scheme, donations to approved entities recognized by law etc.

Tax evasion on the other hand is an illegal or fraudulent method of concealing information by taxpayers or their consultants to obtain a reduced tax liability. Instances include Under-reporting, falsification of information, non-disclosure of income from every other source amongst others.

Tax Planning:

Tax Planning is the legitimate way of reducing your tax liability in any given year and probably re-investing in a manner that contributes to the growth of the Nation’s economy. It can be defined as the analysis of financial situation from tax efficiency to paying the lowest amount of taxes.

Types of Tax Planning:

Short term Tax Planning: This is an immediate and yearly tax planning method undertaken to reduce the incidence of tax.

Long Term Tax Planning: This type of tax planning may not yield immediate result, but it is aimed at reducing the incidence of tax of the taxpayer in the long run.

Permissive Tax Planning: This is a type of tax planning that is allowed under the extant tax laws in the Country.

Purposive Tax Planning: This is a type of tax planning aimed at attaining a specific objective.

Advantages of Tax Planning:

Tax planning is a major part of your overall financial planning. A reduced tax liability means fewer burdens on you, which will lead you to plan your financial goal as per your dreams and needs. Here are a few objectives of tax planning:

1. Reduced Tax Liability
2. Productive Investment
3. Growth of Economy
4. Litigation Minimization
5. Economic Stability

Tax planning is strategic and must be executed by experts timeously considering so many factors. For more guide and advice on preparation of your payroll and how to reduce your incidence of tax drastically and efficiently within the ambits of the law, kindly reach out to us at the address below:

Simmonscooper Partners

27/29 Adeyemo Alakija Street,

Victoria Island, Lagos

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