FACULTY OF LAW

300 LEVEL

LAW OF TAXATION

Topic: RULES ON RWSIDENCE AND TAXATION

Group 2

1. Olayenikan Oluwafunto Praise- Law/2020/1069

2. Adeniyi Mariam Ajoke - Law/2020/1013

3. ⁠ Abolusoro Rosemary oluwayinka - Law/2020/1001

4. Ajibade Covenant Adenike - Law/2020/1026

5. Ajisafe Feyisetan Modupeoluwa

Law/2020/1027

6. Adejumo Tomiwa Aduragbemi LAW/2020/1008

7. Adebayo Praise Oluwatomiwa Law/2020/1003

8. Okesanya Taiwo Israel Law/2020/1060

9. Olorunfemi Faithful Okikiola. Law/2020/1071

10. ⁠Arokodare Precious Ifeoluwa. LAW/2020/1034.

11. ⁠Olanrewaju Mercy Moyinoluwa. Law/2020/1067

12. Okesanya Taiwo Israel. Law/2020/1060

Outline

• What is taxation?
• What is residence?
• Types and rules of taxation
• Tax exemptions
• Compliance and non compliance with tax rules
• Relevant laws that state the rules on taxation

WHAT IS TAXATION
 Taxation refers to the process by which a government collects financial
contributions from individuals, businesses, and other entities to fund public
expenditures and services. In Nigeria, taxation is governed by various laws,
including the Companies Income Tax Act and the Personal Income Tax Act, among
others.

According to the *Companies Income Tax Act*, taxation is defined as the levy or
charge imposed on the income or profits of companies and other entities. The Act
provides the framework for assessing and collecting corporate taxes, including the
rates applicable and the obligations of taxpayers.

Furthermore, the *Personal Income Tax Act* defines taxation concerning individuals
and outlines the processes for assessing and collecting personal income tax.

In essence, taxation serves as a critical mechanism for governments to generate

revenue, which is necessary for the provision of public goods and services such as
infrastructure, education, healthcare, and security.

WHAT IS RESIDENCE

Criteria for Individuals to be considered a tax resident

An individual is tax-resident in Nigeria throughout an assessment year if that
individual:
(i) is domiciled in Nigeria;
(ii) (ii) sojourns in Nigeria for a period or periods, in all, amounting to an aggregate of
183
days or more in a 12-month period (inclusive of annual leave or temporary period of
absence);
(iii) (iii) has a permanent place available for his domestic use in any part of Nigeria;
(iv) or (iv) serves as a diplomat or diplomatic agent of Nigeria in another country.

– Criteria for Entities to be considered a tax resident

A company is considered resident in Nigeria if such a company is registered or
incorporated under
the Companies and Allied Matters Act.
Resident Company and Liability to Tax: According to Section 13(1) of the Companies
Income
Tax Act (CITA) CAP. C21, LFN 2004 (as amended), the profits of a Nigerian company
are liable
to tax in Nigeria irrespective of where the profits have arisen and whether or not they
have been
brought into or received in Nigeria. As such, the failure of a Nigerian company to
repatriate profits
made from abroad does not prevent such profits from being taxed in Nigeria.
Tax Liability of Non-Resident Companies in Nigeria: Every company, resident or non-
resident, is
liable to companies income tax (CIT) in Nigeria where the profits accrue in or are
derived from,
brought into or received in Nigeria. Note: exemption from incorporation does not
confer tax
exemption on any company.
In accordance with the provisions of section 13(2) of CITA, a non-resident company
is taxable in
Nigeria if any of the following conditions is met:
i) the non-resident company has a fixed base (i.e. a place of business) in Nigeria to
the extent
that the profit is attributable to the fixed base;
ii) ii) the non-resident company habitually operates a trade or business through a
person in
Nigeria or maintains a stock of goods or merchandise in Nigeria from which
deliveries are
regularly made by a person on behalf of the company;
iii) iii) the non-resident company does not have physical presence in Nigeria but
derives
income from Nigeria through digital activities to the extent that it has a “significant
economic presence” in Nigeria;
iv) iv) the trade or business or activities of the non-resident involves a single contract
for
surveys, deliveries, installations or construction; v) the trade or business of the non-
resident involves the remote provision of technical, management, consultancy or
professional services to a Nigerian resident;
v) vi) the trade or business or activities is between the company and a related party,
which is
considered not to be at arm’s length.

TYPES AND RULES OF TAXATION

1. Companies Income Tax – This tax is paid by all companies incorporated in Nigeria.
All companies are subject to this tax, except those involved in petroleum activities
(upstream sector), which are covered by the Petroleum Profit Tax Act.
A company’s income is profit accrued from all sources after required deductions,
and the tax is imposed upon such profits.
Currently, companies with an annual turnover lesser than 25 million are exempted
from paying taxes. Companies with an annual turnover between 25 to 100 Hundred
million Naira are liable to pay taxes of 20%, while companies with turnovers of over
100 million Naira are to pay 30%. of their profits.
The Federal Inland Revenue Service (FIRS) is the government agency in charge of the
collection and administration of company income tax in Nigeria.
2. Personal Income Tax – Personal Income Tax is the tax the individuals are liable to
pay to the various states they reside. It is imposed on the income/profits of
individuals, a group of people (families, communities, etc) among others. Personal
Income tax is administered by a relevant State Government through their various
Internal Revenue Agency. For instance, the Lagos State Internal Revenue Service
(LIRS) is the government agency in charge of collection and administration of
personal income tax in Lagos State.
Personal Income Tax is regulated by the Personal Income Tax Act.

3. Value Added Tax- Value Added Tax (VAT) is also known as the consumption tax, as
it covers specified goods and services that are often used by final consumers, on
whom the tax is charged. The Value Added Tax rate is 7.5%. The VAT is regulated by
virtue of the Valued Added Tax Act.

[Link] Tax: This is a tax chargeable at the rate of 2% is imposed on assessable

profits of all companies to fund the Tertiary Education Trust Fund. The amount
generated from education tax contributes to the funding of universities,
polytechnics, and colleges of education in Nigeria.

[Link] Gains Tax: This tax is imposed upon the disposition of chargeable assets,
whether by sale or exchange at a rate of 10%.
6. Petroleum Profits Tax: At a rate of between 50% to 85%, this tax is imposed upon
the chargeable profit of the companies operating in the upstream petroleum sector
in Nigeria. Companies charged under this tax are exempted from the Companies
Income Tax. The tax is regulated by virtue of the Petroleum Tax Act.
7. Stamp Duties: Stamp duty is the tax or duty payable on any agreement executed
in Nigeria, especially in respect of any property situated in any state in Nigeria. It is
also imposed at the rate of 0.75% on the authorized share capital at the
incorporation of a company or increase of share capital. Stamp duty is chargeable
either at a fixed rate or ad valorem. In line with the recent amendment of the Stamp
Duty Act, all financial institution in Nigeria are required to charge stamp duties of
N50 on every eligible transaction above N10,000. It is governed by virtue of the
Stamp Duty Act
8. . Stamp Duties: Stamp duty is the tax or duty payable on any agreement executed
in Nigeria, especially in respect of any property situated in any state in Nigeria. It is
also imposed at the rate of 0.75% on the authorized share capital at the
incorporation of a company or increase of share capital. Stamp duty is chargeable
either at a fixed rate or ad valorem. In line with the recent amendment of the Stamp
Duty Act, all financial institution in Nigeria are required to charge stamp duties of
N50 on every eligible transaction above N10,000. It is governed by virtue of the
Stamp Duty Act

Apart from all other above, there are other taxes and levies imposed on companies
operating in Nigeria. Some of these levies include Industrial Training Fund levy,
which represents 1% of the payroll in companies having more than 5 employees or
more than N50 Million turnover; and National Social Insurance Trust Fund levy,
which also is 1% of the payroll in all companies operating in Nigeria.

- Withholding Tax: Withholding tax in Nigeria is the advance payment of income tax.
It is applicable to company income and personal income tax. It is imposed at the
rates ranging from 2.5% to 10% for companies and 5% to 10% for individuals
depending on the specific transaction. It is governed by both the Companies
Income Tax Act and Personal Income Tax Act.

TAX EXEMPTIONS
Tax exemption is the reduction or removal of a liability to make a compulsory
payment that would otherwise be imposed by a ruling power upon persons,
property, income, or transactions. Tax-exempt status may provide complete relief
from taxes, reduced rates, or tax on only a portion of items. Examples include
exemption of charitable organizations from property taxes and income taxes,
veterans, and certain cross-border or multi-jurisdictional scenarios.

Tax exemption generally refers to a statutory exception to a general rule rather than
the mere absence of taxation in particular circumstances, otherwise known as an
exclusion. Tax exemption also refers to removal from taxation of a particular item
rather than a deduction.
You can broadly classify tax exemptions into two categories: statutory exemptions
and discretionary exemptions. Statutory exemptions are those provided for by law.
Discretionary exemptions are those that are up to the discretion of the authorities to
grant.

Some of the common types of statutory exemptions include income tax, property
tax, sales tax, and customs duty. Discretionary exemptions can include things like
import duty and excise duty.

1. Income tax exemption is the most common type of exemption. This is where you
are not required to pay taxes on a certain amount of your income. The amount that
you’re exempt from paying taxes on depends on your country’s tax laws.

2. Property tax exemption applies to you if you’re a property owner. This is where you
don’t have to pay taxes on the value of your property. It’s up to your country’s tax
laws to dictate your exemption. You must be a property owner to get an exemption
for property established.

3. Sales tax exemption is where you aren’t required to pay taxes on the sale of
certain items. Again, your local laws set your exemption level.

4. Customs duty exemption is where you don’t have to pay taxes on goods that you
import into your country.

5. Discretionary exemptions can include things like import duty and excise duty.
Import duty is a tax that you have to pay on goods that you import into your country.
Excise duty is a tax that you have to pay on certain products that you manufacture in
your country.
You can claim an exemption from paying taxes on income, property, sales, or
customs duty. The amount that you’re exempt from paying taxes on depends on your
country’s tax laws.

To claim an exemption, you need to fill out a form and submit it to the authorities.
The form will ask for information about your income, property, sales, or customs
duty.

Reference: [Link]

COMPLIANCE AND NON COMPLIANCE WITH TAX RULES

Non Compliance with Tax rules.

What is tax non-compliance? Simply put, tax non-compliance is the failure to obey
tax laws.
It is a pressing issue affecting both individuals and businesses, leading to
significant revenue loss for governments. It encompasses a variety of actions (or
inactions), including misreporting income, hiding sources of income, or simply
failing to file tax returns. The underground economy and issues like identity theft
further complicate the landscape, creating loopholes that affect the overall
financial system.
As government regulations increase, the complexity of maintaining compliance
grows, especially for large-scale operations like private equity firms and
multinational corporations. Even minor errors can lead to major financial
repercussions, from penalties and interest charges to severe legal consequences.

There are two primary forms of tax non-compliance: tax avoidance and tax evasion.

• Tax Avoidance: This involves legally using the tax system to reduce tax
liabilities. For instance, using deductions and credits to lower taxable income.
Although it is legal, some forms of tax avoidance can be "tax aggressive" and may
violate the spirit of the tax code. Laws like the General Anti-Avoidance Rule (GAAR)
aim to curb these practices.

• Tax Evasion: Unlike avoidance, tax evasion is illegal. It involves

deliberate actions to underpay or not pay taxes owed. Common methods include
underreporting income, claiming false deductions, or hiding assets.
Tax Evasion
Tax evasion is a serious crime. The IRS defines it as the intentional nonpayment or
underpayment of taxes. To prosecute tax evasion, the IRS must prove that the
taxpayer's actions were willful. Examples of tax evasion include:

• Underreporting income
• Claiming false credits or deductions
• Concealing assets
• Using false Social Security Numbers

Penalties for tax evasion can include fines up to $250,000 for individuals, $500,000
for corporations, and up to five years in prison.

Tax Avoidance
On the other hand, tax avoidance is the use of legal methods to reduce tax liability.
Common strategies include:

• Investing in retirement accounts

• Making charitable donations
• Claiming eligible tax credits
While tax avoidance is legal, it must comply with the intent of the tax laws. The IRS
and courts, through doctrines like "economic substance" and "business purpose,"
scrutinize aggressive tax avoidance schemes to ensure they align with the law's
intent.

Causes of Tax Non-Compliance

Tax non-compliance can arise from various actions and behaviors. Here, we'll break
down the main causes: misreporting, underreporting, concealment, and identity
theft.

Misreporting
Misreporting happens when taxpayers provide incorrect information on their tax
returns. This can be due to honest mistakes or intentional deceit. For example,
claiming credits or deductions that one is not legally entitled to can fall under
misreporting. According to Investopedia, this is a common way individuals and
businesses evade taxes.
Underreporting
Underreporting is when taxpayers declare less income than they actually earned.
This is a significant contributor to the tax gap. For instance, a business might report
lower sales figures or an individual could fail to declare all sources of income. The
IRS's Criminal Investigation Division often detects such discrepancies through
various investigative techniques, including reviewing bank records and interviewing
third-party witnesses.

Concealment
Concealment involves hiding financial or personal assets to avoid taxation. This can
include using offshore accounts, maintaining a double set of books, or extensive
use of cash to avoid leaving a paper trail. The IRS employs sophisticated methods to
uncover concealed assets, such as conducting surveillance and executing search
warrants.

Identity Theft
Identity theft is a growing concern in tax non-compliance. Fraudsters use stolen
personal information to file false tax returns and claim refunds. The IRS has
implemented several measures to combat refund fraud related to identity theft, but
it remains a challenging issue. According to the GAO, long-term strategies are
needed to effectively prevent this type of fraud.

Effects of Tax Non-Compliance

Revenue Loss
Tax non-compliance significantly impacts government revenue. When individuals or
businesses evade taxes, the government collects less money. This "tax gap" can be
enormous. For instance, Edgar L. Feige estimates that the tax gap in the U.S. is
around $500 billion annually. This shortfall affects public services and infrastructure
projects that rely on tax funding.

Legal Repercussions
Failing to comply with tax laws has serious legal consequences. Tax evasion is
illegal and can lead to severe penalties. On the other hand, tax avoidance—though
legal—can still lead to civil penalties if it's deemed "tax aggressive."

Business Impact
Non-compliance can also hurt businesses. Penalties can start at 25% of unpaid tax
liabilities, and there is no statute of limitations for unfiled returns. This means
businesses can be audited indefinitely, leading to unexpected financial burdens.
Unresolved tax issues can also complicate mergers, acquisitions, and obtaining
funding. Many business owners have faced unexpected tax deficiencies during due
diligence, affecting their operations and financial stability.

Non-compliant taxpayers are more likely to face audits. The IRS is stepping up its
efforts to ensure compliance, especially with the additional funds from the Inflation
Reduction Act. High-income individuals and large businesses are under greater
scrutiny. An audit can be a lengthy and stressful process, often resulting in
additional tax liabilities, penalties, and interest.

Penalty for non-compliance

Failure to file CIT(Corporate Income Tax) returns, according to the Companies
Income Tax Act incurs a penalty of NGN 25,000 for the first month and NGN 5,000
for each subsequent month of default. Late payment of CIT attracts a 10% penalty
and interest at the commercial rate.
Late submission of PPT returns also attracts a penalty.

Solutions to Combat Tax Non-Compliance

Enhanced Reporting
One of the most effective ways to combat tax non-compliance is through enhanced
reporting. By improving the accuracy and transparency of tax reporting, businesses
can reduce errors and avoid penalties. For example, the IRS has strict guidelines for
reporting income, deductions, and credits. Following these guidelines can help
businesses stay compliant. This reduces the risk of non-compliance and helps
businesses stay on top of their tax obligations.

Quality Services
Access to quality tax services can make a significant difference in compliance.
Professional tax advisors provide valuable insights and guidance on navigating
complex tax laws. They can help identify potential issues before they become
problems, ensuring that businesses remain compliant.

RELEVANT LAWS ON TAXATION IN NIGERIA

*Primary Sources*
The Companies Income Tax Act (CITA), Cap C21, LFN 2004

The Stamp Duties Act LFN 2004

Value added Tax Cap V1 LFN 2004

Stamp Duties Act Cap. 441 LFN 1990

personal income tax act Cap p8 LFN 2004

*Secondary Taxation Laws:*

1. *Federal Inland Revenue Service (FIRS) Establishment Act, 2007*: Establishes the
FIRS as the primary tax authority.
2. *Tax Administration (Self-Assessment) Regulations, 2011*: Guides self-
assessment and tax filing.
3. *Tax Appeal Tribunal Act, 2009*: Establishes tribunals for tax disputes.
4. *National Tax Policy, 2017*: Outlines Nigeria's tax policy framework.

References:
ICAN research.
Olisa Agbakoba legal research.
Notice Ninja.