Understanding Taxes in Nigeria: What You Need to Know 2024

 Understanding Taxes in Nigeria: What You Need to Know 2025

In Nigeria, the tax system is structured around three levels of government: Federal, State, and Local. Each level manages and collects taxes independently within its area. The money from these taxes is vital for government spending and national development.

The Nigerian government collects taxes from individuals and businesses to fund public services. This way, everyone contributes to the country’s growth according to income and other government-set criteria. For example, in Lagos, tax money guides economic choices and promotes or discourages certain activities.

The Federal Inland Revenue Service (FIRS) oversees tax administration in Nigeria. They define tax compliance as willingly following tax laws. This means registering with tax authorities, keeping accurate records, filing tax returns, and paying taxes on time.

Regular tax payments from people and businesses are crucial for steady national development, helping the government meet the needs of society.

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List of Taxes

Federal level

  • Companies Income Tax
  • Education Tax
  • Stamp Duties
  • Custom Duties
  • Excise Duties
  • Withholding Tax 
  • Value Added Tax 

State Level

  • Personal Income Tax 
  • Withholding Tax

Local Govt Level

  • Administer levies

Various Types of Taxes

Value Added Tax (VAT):

Value Added Tax (VAT)
Value Added Tax (VAT)

Value Added Tax (VAT) is applied to goods and services whenever value is added during production and at the final sale. This tax is ordinary and paid by everyone who purchases goods or uses services.

Personal Income Tax (PIT):

Personal Income Tax (PIT)
Personal Income Tax (PIT)

Personal Income Tax (PIT) is charged on the income of individuals within the government’s jurisdiction. By law, individuals must file an annual income tax return to determine if they owe taxes or qualify for a refund. The amount of PIT varies based on gross income and tax reliefs under the Personal Income Tax Act (PITA). Each state has its tax authority, while the Federal Inland Revenue Service (FIRS) handles PIT in the Federal Capital Territory.

Withholding Tax (WHT):

Withholding Tax (WHT)
Withholding Tax (WHT)

Withholding Tax (WHT) is a method of collecting income tax in advance. It is not a separate tax but a way to prevent tax evasion.

Education Tax (EDT):

Education Tax (EDT)
Education Tax (EDT)

Education Tax (EDT) is a 2% tax on the assessable profits of all companies incorporated in Nigeria. This tax helps fund the development of the education sector.

Petroleum Profits Tax (PPT):

Petroleum Profits Tax (PPT)
Petroleum Profits Tax (PPT)

Petroleum Profits Tax (PPT) is levied on the profits of companies involved in upstream petroleum operations, such as exploration, mining, and drilling. The tax rate is 50% for deep offshore and inland basin operations and 85% for onshore and shallow waters operations.

Companies Income Tax (CIT):

Companies Income Tax (CIT)
Companies Income Tax (CIT)

Companies Income Tax (CIT) is charged on the profits of resident and non-resident companies in Nigeria. The tax rate is 30% on earnings derived from or brought into Nigeria. Companies must conduct a self-assessment and submit annual tax returns as per FIRS guidelines. Foreign companies earning income from Nigeria must remit their tax payments accordingly.

Capital Gains Tax (CGT):

Capital Gains Tax (CGT)
Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a 10% tax on profits from the sale, lease, or transfer of property rights. It applies to gains from the disposal or exchange of certain assets.

Given the strict enforcement and penalties for non-compliance, it is crucial for businesses, especially SMEs, to manage their taxes properly. Staying updated with tax regulations and ensuring timely payments can help avoid severe consequences.

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Incomes Subject To Withholding Tax 

Withholding tax (WHT) became part of Nigeria’s tax system in 1977, starting with rent, dividends, and directors’ fees. Since then, it has broadened to cover various income sources:

Rent (including hire of equipment)

Rent covers income from both real estate and personal property. Regardless of where the payment is made, income from Nigerian property is taxable at a rate of 10%.

Dividends

Dividends, income from shares, are taxed whether received by Nigerian or non-resident companies. The tax imposed on dividends is considered final.

Director Fees

Compensation paid to directors for their services, excluding expense reimbursements, is subject to WHT.

Royalty

Royalty refers to income earned from past efforts, like payments for using patents or trademarks.

Interest

Income from various investments, such as government securities, bonds, and loans, is subject to WHT.

Commission

The commission is the reward for services provided under agency arrangements. Both agent commissions and distributor commissions are subject to a 10% W.H.T.

Consultancy/Professional/Management/Technical Services

Specialized services provided by individuals or companies with expertise are subject to WHT. The classification of services determines the applicable rates.

Building Construction and Related Activities

This includes all construction contracts, maintenance activities, and service charges, including drilling and related work.

Contract of Supplier

Except for outright sale and purchase of goods, all contract activities are subject to WHT. For example, if a manufacturer funds an agent to source materials, only the service cost is subject to WHT. However, if the agent covers the entire sourcing, the contract as the whole value is taxed at payment.

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Withholding Tax Rates in Nigeria

In Nigeria, withholding tax (WHT) rates apply to transactions involving individuals and companies as well as residents and non-resident entities. Here are the applicable rates:

WHT Rates for Resident Companies and Individuals

Type of PaymentsCompany Rate ResidentNon-ResidentIndividual (FIRS) RateNon-ResidentIndividual (SIRS) Rate
Royalty10%10%5%5%
Rents (including equipment)10%10%10%10%10%
Dividends10%10%10%10%10%
Interest10%10%10%10%10%
Commission5%10%5%10%5%
Consultancy & Professional Services5%10%5%10%5%
Technical Services5%10%5%10%5%
Management Services5%10%5%10%5%
Directors Fees15%20%10%
Construction2%5%2%5%2%
Contract of Suppliers2%5%2%5%5%

Double Taxation Agreement (DTA) on WHT

Nigeria has double taxation treaty agreements with several countries, resulting in different rates for dividends, interest, royalties, and management/technical fees. Here are some applicable rates:

CountriesDividend (%)Interest (%)Royalties (%)Management/Technical fees (%)
Belgium7.57.57.510
Canada7.57.57.510
China7.57.57.510
Czech Republic7.57.57.510
France7.57.57.510
Netherlands7.57.57.510
Pakistan7.57.57.510
Philippines7.57.57.510
Romania7.57.57.510
Slovakia7.57.57.510
South Africa7.57.57.510
Spain7.57.57.510
United Kingdom7.57.57.510

These rates vary depending on the country and the type of income involved.

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Frequently Asked Questions

What are the principles of taxation in Nigeria?

In Nigeria, everyone must pay taxes. This applies to all individuals, whether they live in Nigeria or not, whether they are employed or run a business, and whether they earn income in Nigeria. It also includes all companies operating in Nigeria.

How does Nigeria’s tax system work?

Nigeria has a decentralized tax system, meaning that different levels of government are responsible for the taxes in their respective areas. The country also uses a progressive tax system, where higher-income individuals pay higher taxes.

Which income is not taxable in Nigeria?

Dividends, interest, rent, or royalties earned abroad and brought into Nigeria in convertible currency through government-approved channels and deposited into a local account in an approved bank are exempt from Nigerian tax.

How to calculate WHT in Nigeria?

For a contract payment of NGN 1,000,000, the withholding tax (WHT) would be NGN 100,000, which is 10% of the contract amount. Similarly, for rent income of NGN 500,000 received by a corporate body, the WHT would be NGN 50,000, which is also 10% of the rent amount.

What is the difference between VAT and WHT?

Withholding tax is applied to non-residents who earn income in a country. It also applies to domestic income types, like dividends, interest, and royalties. In contrast, value-added tax (VAT) is charged when goods and services are sold within the country.

How do you calculate value-added tax (VAT) in Nigeria?

To calculate VAT on a customer’s order, follow these steps:

  • Sum the Total Order: Add the total cost of all goods and services your customer ordered.
  • Calculate VAT: Multiply the total by 7.5% (which is the VAT rate). This can be done by multiplying the total by 7.5 and then dividing by 100.
  • Add VAT to the Total: Add the VAT amount to the original total to get the final amount your customer needs to pay.

What is the penalty for late VAT payment?

If your VAT payment is 16-30 days late, you will incur a penalty of 2% of the VAT owed, but you won’t face a second late payment penalty. If your VAT payment is more than 31 days late, you will be charged 2% of the outstanding amount as of day 15 and 2% of the amount still outstanding on day 30.

How to remove VAT from the price?

To calculate the original amount before Value Added Tax (VAT) was added or to do a reverse VAT calculation, you can use this simple formula: Divide the total amount by 100 plus the VAT percentage, then multiply the result by 100.

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Conclusion

Understanding taxes in Nigeria is crucial for individuals and businesses. With a decentralized tax system operating at federal, state, and local government levels, everyone is responsible for contributing to the country’s development. Taxes, such as Personal Income Tax (PIT), Value Added Tax (VAT), and various others, play a vital role in funding public services and promoting economic growth.

The Federal Inland Revenue Service (FIRS) oversees tax administration, ensuring compliance and fair implementation of tax laws. Strict enforcement measures are in place to penalize non-compliance and safeguard the integrity of the tax system.

Withholding Tax (WHT) is an essential aspect of Nigeria’s tax regime, facilitating the collection of income tax in advance and preventing tax evasion. It applies to various transactions, including rent, dividends, interest, and royalties.

Businesses, particularly Small and Medium Enterprises (SMEs), must manage their taxes diligently to avoid penalties and contribute effectively to national development. Staying informed about tax regulations and fulfilling tax obligations promptly is essential for sustainable economic progress.

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