TAX POLICY AND LEGISLATION DEPARTMENT
Clarification on the Taxability of Investment Incomes Earned by Government Institutions and Corporate Entities Exempted by Law
from Taxation
1. The Federal Inland Revenue Service (FIRS) has in recent time been inundated with inquiries from Banks, Companies under Pioneer Status, Ministries, Departments and Agencies of Governments to make clarification on their tax status in relation to incomes earned from investment sources. The thinking by officials of those organisations which are exempted from income tax or companies whose profits are being exempted from income tax is that such profit/income exemption status granted to them should also qualify them for exemption from all forms of corporate or personal taxes, including consumption taxes, particularly the Value Added Tax (VAT). This view is erroneous and completely at variance with the intention of the law.
2. The provisions of Section 23(1)(n) of the Companies Income Tax Act, CAP C21, LFN,2004 clearly provides that “nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under Sections 78,79 or 80 of this Act …shall apply to a dividend, interest, rent or royalty, which is a part of the profits or income referred to in subsection (1)(a) to (f) and (h) to (i) of this Section”. The reference to ‘company’ in the law means any company or corporation, established by or under any law in force in Nigeria or elsewhere and it is on a “company” that the duty to deduct withholding tax is placed, since it is the company that is making payments to various beneficiaries. The 10% WHT charged on such investment incomes shall become the final tax in the hand of the beneficiary.
3. For the purpose of clarity, FIRS wishes to inform the public and all our stakeholders, Banks, Ministries, Departments and Agencies of Government, including Corporations and Regulatory Agencies that all investment incomes in the nature of interests/royalties, rent and dividends are subject to Withholding taxes (WHT) at the prescribed tax rate of 10% in line with Sections 78, 79, 80 of Companies Income Act. No organisation or company is exempted from the payment of Withholding Tax on any investment incomes, even though these organisations may be under a tax exemption regime or pioneer exemption status. It should be understood that such tax exemption status relates only to profit/income from businesses but does not include passive or unearned incomes.
4. The general public is hereby requested to note the contents of this public notice for compliance and guidance. FIRS will henceforth no longer issue individual letters on inquiries relating to this subject from stakeholders, taxpayers/tax agents, Banks and Government Institutions for clarification on taxability or otherwise of investment incomes accruable to any investors, including government agencies which have placed funds with financial institutions or deriving dividends from companies where they have some shareholdings.
FIRS Tax Payment Guidelines:
- Taxpayers must be registered with relevant Tax Office nearest to them and obtain a Taxpayer Identification Number (TIN).
- Taxpayers should render appropriate tax returns.
- Taxpayers should obtain Assessment and Demand Notices where applicable.
- Taxpayers should remit all taxes to the approved collecting Banks in the various forms so designed for such purposes and obtain an Electronic Ticket (e-ticket).
- Taxpayers should present the e-ticket for the issuance of FIRS official receipts.
- Taxpayers can now process their Tax Clearance Certificate accordingly.
Read: How to process Tax Clearance Certificate
Taxpayers are in two categories- Individuals and Corporations.
- Individual taxpayers: this category of taxpayer is further sub-categorised for ease of administration into-
- Resident individuals- taxpayers who reside in Nigeria for a period or periods amounting to 183 days or more in any 12 month period commencing in a calendar year and ending either within that same year or the following year.
- Non-resident individuals- this category include immigrants and any individual who is in Nigeria for some temporary purpose only and not with intent to establish residence.
- Individuals include a corporation sole and a body of indiduals but does not include a company, partnership, community, family, trustee or executor, or any body trustees of executors.
- Corporations: any company incorporated under the Companies and Allied Matters Act.
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Benefits of Tax Payment in Nigeria
Nigeria as a country and indeed all socially responsible and law abiding individuals, groups, organizations and corporate citizens will derive valuable benefits from imbibing a culture of tax compliance. The benefits derivable include but are not limited to:
- Providing sustainable finance and funding for governance, public and social services and economic development.
- Promoting civic responsibility, patriotism by citizens and social responsibility by corporate citizens.
- Stimulating priority social and economic activities and sectors while discouraging less preferred ones.
- Bringing about the redistribution of wealth and bridging sharp disparities in living standards.
- Giving taxpayers the moral and legal right to demand for (thereby engendering) a culture of accountability.
- Serving as a gauge for measuring the level, growth and health of economic units and economic activities.
- Individuals and corporate organizations are conferred with definite benefits, rights and privileges in the system based on their tax compliance status.
Tax compliance enables law abiding citizens to avoid the consequences, penalties and sanctions of non-compliance.
Any inquiry in connection with this publication should be referred to the Office of the Executive Chairman/ FIRS, Headquarters, Revenue House, Wuse Zone 5, Abuja or visit our website: www.firs.gov.ng; email: enquiries@firs.gov.ng