Minimum tax is another tax levied by the Nigerian government. It is computed at a fixed rate of 0.5% of gross turnover of a business. When calculating the minimum tax, gross turnover does not include franked investment income. You need not be confused about the finance jargon. This article will address frequently asked questions (FAQs) about minimum tax for companies in Nigeria.
What is Franked investment income?
Franked investment income (as it pertains to minimum tax) is first deducted from the gross turnover. This is in a case where franked investment income had first been included in gross turnover. The amount derived is then multiplied by 0.5%. Franked investment income is defined as dividend received by one company from another after the Withholding Tax (WHT) has been deducted.
Minimum tax is to be paid by companies that do not have taxable profits for the year. Any dividend that has not suffered Withholding Tax is not a franked investment income and is not to be deducted from gross turnover when calculating minimum tax. There must be evidence that a dividend income has suffered Withholding tax before it can be treated as Franked Investment Income.
When it pertains to Minimum Tax in Nigeria, the franked investment income is only deductible where it has been included in the gross turnover.
What is “Gross Turnover?”
Gross Turnover refers to the total inflow of economic benefits (such as cash, revenues, receivables, other assets, etc.) that come from the operations and activities of a company. These include sales of goods and services, lending of money, leasing of assets, granting of rights, investment activities, etc. When calculating minimum tax, gross turnover includes all operating incomes or revenues anywhere.
However, the following companies are exempt from Minimum tax:
Companies in the first four calendar years of operation
Companies engaged in the agriculture business
How Minimum tax is calculated generally
Minimum tax is calculated as 0.5% of gross turnover minus franked investment income.
Minimum Tax for non-life insurance companies
Minimum tax for non-life insurance companies is calculated as 0.5% of gross premium
Minimum Tax for life insurance companies
Minimum tax for life insurance companies is calculated as 0.5% of gross income
What is income tax?
Income tax is that which is paid on taxable income or profits. Nonetheless, a person with no taxable income may have a tax liability, that is, may still have taxes to be paid. In this case, the estimated charge is a minimum tax. Minimum tax is not limited to companies or corporations only but could also affect individuals.
What is minimum tax?
Minimum tax (MinTax) usually occurs when a company has no tax payable or has recorded a loss. It also occurs when the tax calculated is lower than the minimum tax for companies in a year. Generally, minimum tax represents the guaranteed sum that a taxable person must pay to the relevant authority in a year. Note: the term ‘taxable person’ refers to an individual or a company.
What is the minimum tax rate for companies?
The minimum tax is calculated at 0.5% of the total or gross turnover excluding franked investment income. Insurance companies also use the same rate but is calculated with another tax base. Minimum Tax per year for non-life insurance companies is 0.5% of the gross premium. Minimum tax for Life assurance companies is 0.5% of gross income.
Exemptions from Minimum tax
Companies that are exempted from paying Minimum tax are
- small companies with an annual gross income less than NGN25 million (twenty-five million naira),
- Companies involved in agricultural trade or businesses
- Companies in their first four calendar years of operations.
Before Minimum Tax amendment
The Minimum tax was amended and put to operation on 13 January 2020, before then, the rate was;
The minimum tax for companies with total turnover of NGN500,000 or below and who have been operating for four calendar years or more:
- 5% of gross profit; or
- 5% of net assets; or
- 25% of paid-up capital; or
- 25% of the turnover of the company
Minimum tax for companies with a total turnover above NGN500,000 is same as the amount paid above plus an additional tax of 0.125% on revenue less NGN500,000.
However, companies involved in agricultural businesses with at least 25% foreign equity capital, and who are within its first 4 years of operation were exempted from Minimum Tax before the recent amendment.
Minimum tax Amendment
- Foreign equity is no more a basis for exemption
- Businesses with at least 25% foreign equity and other indigenous companies are charged at the same rate
- Minimum Tax rate is a flat charge of 0.5% on turnover only. This means that the lower the turnover, the lesser the amount to be paid.
For example, a company with an annual turnover of NGN100 million will have a Minimum tax of NGN500,000. A company with NGN500 million income per annum will have a minimum tax of NGN2.5 million. Minimum tax for life assurance companies is calculated at 0.5% of gross income
The new provision for the Finance Act came into force on 13 January 2020. This means that the tax authority will assess non-exempt companies for returns that are due after 13 January 2020.
An illustration on the new Finance Act 2019
Example: A company with foreign equity
If a company called ABC International Limited is based in Nigeria but has 35% foreign equity. If the company’s financial year-end (FY) is 30th November and it wants to file returns for 2019 FY in June 2020 (after 6 months in addition to a 1-month extension)
Based on the new provisions (Finance Act 2019), is ABC International Limited exempted from paying minimum tax?
The Answer is No.
Under the new provision, companies with at least 25% of foreign equity in Nigeria are no longer exempted from minimum tax. So the minimum tax for ABC International Limited is 0.5%, which is (Gross turnover – franked investment income). Since the Finance Act 2019 took effect from 13 January 2020, it applies to the returns in 2020.