Company Income Tax, Withholding Tax and VAT Compliance for a Nigerian Manufacturer
Adewale Foods Ltd is a Nigerian manufacturer with turnover of ₦480m for the year ended 31 December 2024. Its profit before tax was ₦96m. The accounts include: depreciation ₦18m; a donation of ₦3m to a political party; a ₦1.5m penalty for late VAT remittance; and ₦6m of interest on a loan from a shareholder. Capital allowances for the year are ₦24m. The company paid ₦40m to a foreign consultant for technical services and did not deduct withholding tax. It also collected ₦12m of VAT on local sales but remitted only ₦7m. The finance manager believes no tax is due because the company is a ‘small company’ and because the foreign consultant is not Nigerian. The company has no unrelieved capital allowances from prior years.
1. Compute the company’s company income tax and education tax for 2024, showing all adjustments, and explain why the small company claim fails.
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Turnover is ₦480m, which is above the ₦100m threshold for a large company, so the small company claim fails. The company is taxable at 30% company income tax and 2.5% education tax. Start with profit before tax of ₦96m. Add back depreciation of ₦18m because depreciation is not deductible; capital allowances replace it. Add back the political donation of ₦3m because it is not incurred wholly and exclusively for the business and is not deductible. Add back the ₦1.5m penalty because fines and penalties are not deductible. The shareholder loan interest of ₦6m is left in the computation because no evidence shows it is excessive or not at arm’s length. Adjusted profit is ₦96m + ₦18m + ₦3m + ₦1.5m = ₦118.5m. Deduct capital allowances of ₦24m to arrive at assessable profit of ₦94.5m. Company income tax is 30% × ₦94.5m = ₦28.35m. Education tax is 2.5% × ₦94.5m = ₦2.3625m. Total tax is ₦30.7125m. The unrelieved capital allowance position is nil, so no restriction arises.
2. Explain the withholding tax implications of the ₦40m payment to the foreign consultant and the consequences of not deducting the tax.
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The payment for technical services to a non-resident is subject to withholding tax in Nigeria. The company is required to deduct tax at the applicable rate, generally 10% for technical services, and remit it to the tax authority within the prescribed time. On ₦40m, the withholding tax would be ₦4m. The fact that the consultant is not Nigerian does not remove the obligation; if anything, the withholding tax is the mechanism for taxing the non-resident’s Nigerian-source income. Failure to deduct and remit creates a liability on the company, together with penalties and interest. The company should also consider whether the payment is at arm’s length under transfer pricing rules, because the consultant may be a related party or the amount may be excessive. From a deduction perspective, the gross technical service fee may be deductible if it is wholly, exclusively and reasonably incurred, but the failure to withhold can expose the company to disallowance risk in addition to the withholding tax liability. The company should regularise the position voluntarily before an audit.
3. Explain the VAT position and the consequences of the ₦5m shortfall.
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VAT is charged at 7.5% on taxable supplies of goods and services in Nigeria. The company collected ₦12m of output VAT from local sales, so it holds that amount as agent for the tax authority. It remitted only ₦7m, leaving a shortfall of ₦5m. The shortfall is not a business expense or additional profit; it is an unpaid tax liability. The company must remit the ₦5m balance and will also be exposed to penalties and interest for late remittance. The finance manager should reconcile the VAT returns to the general ledger, identify why only ₦7m was remitted, and correct the position. If input VAT was incurred on eligible purchases, it should be claimed only with valid tax invoices and within the rules; the scenario gives no input VAT, so the entire ₦12m output VAT is the starting liability. The company should also ensure that the ₦1.5m penalty already charged for late remittance is not treated as deductible for company income tax, as explained in the tax computation.