Tax exemptions under the Nigerian Tax Laws

Tax laws frequently provide specific exemptions for persons, items or transactions which would otherwise be taxed. Exemption is an amount allowed by law as reduction of income or profit that would otherwise be taxed.  The Black’s Law Dictionary has defined the term to mean ‘Immunity from the obligation of paying taxes in whole or in part’

A Biblical account and perhaps the first account of exemption from taxes is recorded in the Holy Bible in First Samuel 17 (25) with respect to the promise of King Saul that whoever was capable of killing Goliath the terrorist of Israel would not only be given the king’s daughter to marry but his family would also be exempted from taxes. It was recorded as follows:

‘‘………The king will give him one of his daughters for a wife, and his whole family will be exempted from paying taxes.

A non- biblical account provides that since 1894, the U.S. Congress has passed income tax laws that provided exemptions for certain institutions. These exemptions were provided for a variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers,  charities,  trade associations, social clubs, and political organizations.

In modern times, an individual, a corporate body or tax-exempt organization which falls within a protected class of some kind that government wishes to promote economically are being granted tax exemptions. Generally, incomes and profits can be exempted from tax. Allowances, gains, goods and services and transactions can similarly be exempted.

What is Tax exemption?

Tax exemption has been variously defined as follows:

• An amount allowed by law as reduction of income or profit that would otherwise be taxed;

•An amount of taxpayer’s income that is not subject to tax; and

•          Immunity from the obligation of paying taxes in whole or in part.

Legislation

Apart from the Companies Income Tax Act (CITA) Cap. C  21 LFN 2004 as amended which contains generous exemptions from companies’ profits, other Acts or Agreements can also confer tax exemptions on profits, incomes, gains, transactions, goods and services. The statutory bases for granting the tax exemptions are specified under  the following relevant Nigerian tax laws.

The legislation include:

•Nigeria Export Processing Zones Authority Act;

•Personal Income Tax Act Cap. P8 LFN 2004 (as amended).

•Capital Gains Tax Act Cap. C1 LFN 2004.

•  Stamp Duties Act Cap. S8 LFN 2004

•Tertiary Education Trust Fund (Establishment, etc.) Act 2011

•Petroleum Profits Tax Act Cap. P13 LFN 2004

•Value Added Tax Act Cap. VI LFN 2004 as amended.

•Oil  and Gas Export Free Zone Decree No. 8  1996, now CAP. O5 L.F.N. 2004

• Industrial Development (Income Tax Relief) Act Cap. 17LFN 2004

•The Mining and Minerals Act Cap. M 12 LFN 2004.

Others are-

•Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act 1990

•Double Taxation Agreements; and

•Acts setting up some Government Organisations or companies, e.g. Nigerian Liquefied Natural Gas Limited;

•Profits exempted as per the Companies Income Tax Act (CITA)

All profits are taxable under the relevant provisions of the Companies Income Tax Act (CITA) Cap. C21 LFN 2004 (as amended) except those  exempted under  Section 23 of the Act  or other Act which may give specific exemption to some types of incomes or profits.  The exempt profits are hereby classified into two as follows:

•Exempted Profits from Companies Income Tax Provided the Profits are Not Derived from a Trade or Business Carried on by suchCompanies

The five classes of the profits are:

•the profits of any company being a statutory or registered friendly society,

•the profits of any company being a co-operative society registered under any enactment or law relating to co-operative societies;

•the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character;

• the profits of any company being a trade union registered under the Trade Unions Act; and

•the profits of any company or any corporation established by the law of a State for the purpose of fostering the economic development of that State.

Where any of the profits listed in (a) to (e) is derived from a trade or business, the exemption will be forfeited and such profits will be taxed.      

•Exempted Profits from Companies Income Tax Even Though they May Be  Derived From a Trade or Business Carried on by SuchCompanies

The types of profits are as follows:   

Company in sporting activities

• the profits of any company formed for the purpose of promoting sporting activities where such profits are wholly expendable for such purpose;

Unit Trust

•dividend distributed by Unit Trust;

Company established

To be continued

Teju Somorin