Richard Ojo, CEO of Taxmingo in this interview with BusinessDay’s Frank Eleanya, speaks on why tech startups should comply with tax obligations from the government. He also explains what startups should do to avoid falling behind on their taxes and what Taxmingo is doing to reduce the cost of compliance.
Why should tech startups worry about taxes considering that many of them are bootstrapping? And should they think about it from Day 1?
As I always tell most of the startups that I have the opportunity to engage, while they are worrying about growing their business, growing the revenue, and looking for investors, taxes should also be one of their concerns. The reason is that paying taxes is law. It is not optional.
It is not what you do when you feel like it or you don’t feel like it. You have to pay taxes for as long as you are doing business and earning income in Nigeria. Also, if you are in Nigeria and earning income from another country, you must pay your tax as a business. It is law and when you bridge it, it becomes illegality. There are penalties for not paying. So they should also worry about taxes, the same way they worry about every other thing to do with their businesses.
Aside from being law, it is also their civic responsibility which they must perform from the inception of their business. Failure to comply with taxes can expose them to future liabilities and penalties. This could be imprisonment.
The recent tax reforms of the administration, mean they are taking it more seriously. This is because oil revenue is dwindling and cannot service the country’s expenditure. The only sustainable source of revenue the government is looking into is taxes. Soon, there won’t be a hiding place for any business in Nigeria that evades tax.
What is your view of the new finance tax and the role of startups in it?
The Finance Act of 2019 which former President Muhammadu Buhari signed into law in 2021, has several amendments that are favourable to startups. For example, before its enactment every company in Nigeria irrespective of their size paid 30 percent of their annual income as tax.
However, the Finance Act brings an amendment that is favourable to small businesses. It now makes provision for businesses that do turn over of N25 million or less annually to pay zero percent income tax. Medium-income businesses or companies are required to pay 20 percent of their annual profit as tax.
These businesses that their turnovers are above N25 million but less than N100 million. Large businesses that do turnover of N100 million are to pay 30 percent of their profit as tax. This is encouraging unlike before when the size of the company was not in consideration.
The Finance Act also makes provision for bonus tax which applies to medium companies for as long as their turnover is less than N100 million. When they pay their taxes early, they will be given a bonus of 20 percent of the tax due. In 2022, former President Muhammadu Buhari also signed into law the Startup Act, a provision to support startups in Nigeria.
As long as you meet the conditions of what is referred to as startup, you will be exempted from income tax for the first five years of your existence. Part of the condition to meet what is referred to as a startup is that you must be registered as a limited liability company in Nigeria, not enterprise. You must build within the first ten years of your registration and also obtain startup certification with the relevant government agency.
What is your view about tax evasion and how the government is addressing it?
Tax evasion is not particular to Nigeria as a country. It is all over the world. But it is rampant here in Nigeria for many reasons. We all know the level of corruption in Nigeria and that has a significant impact on the revenue generated by the government from taxes in Nigeria.
There are so many leakages from the government and their agencies. The collection process also is tedious and aids tax evasion in the country. But the new government is trying to address these issues. They need to work on the process to shorten it.
What percentage of startups comply with their tax obligations?
There was a report around 2021 and 2022 by the National Bureau of Statistics which stated that about 80 percent of small businesses are not paying taxes. This sector accounts for about 96 percent of the businesses in Nigeria and about 84 percent of employment opportunities in Nigeria. This simply means that only about 20 percent of small businesses and startups comply with taxes in Nigeria.
How do we improve the number of companies paying taxes and what percentage of startups are not complying?
The same report also stated that startups in Nigeria or small businesses in Nigeria that are registered in Nigeria are about 42 million businesses. If they have about 42 million registered and only 20 percent of that are complying with taxes in Nigeria, that is very poor.
What the government can do to improve this number is to build the trust of the citizens in terms of what they are doing with the revenue they generate from taxes. Most Nigerians believe that the taxes collected are not well spent and this has created distrust between the citizens and the government.
The government need to do a lot of public awareness for startups and small business. They should have periodic public education on tax. This is because most of them do not understand the type of taxes they are to pay and how to pay them. The mentality is that there are so many taxes to pay.
This is why Taxmingo tries to educate them. Some are aware of personal income tax which is pay-as-you-earn, there are also assessments, company income tax, withholding tax, and value-added tax and the companies will ask if they are paying all of these, what will be left as profit.
We keep telling them that the only tax that they pay from their profit is the company income tax. They do not pay Withholding as tax nor do they pay pas-as-you-earn as tax, the same with value-added tax. They are just agents of collection for the government. They only assist the government in collecting and remit to the government. This is why there is a need for education. For the startup to help them understand what they are paying as tax.
The government should also work on the process of collection. The process is complex although there is work ongoing to ease the process. But more can be done. For example, you do not need to go to the tax authorities to register as a taxpayer.
They can ease the process to enable people to pay from the comfort of their homes or offices so they can register with the relevant tax authorities. Addressing this can improve the number of businesses that pay taxes. The government should also work on the ambiguity of the tax law.
What are the areas startups struggle the most in terms of tax compliance?
They struggle most with the ambiguity of the tax law. Many of them do not understand it. From experience, we have also discovered that most of them want to comply with taxes but they are having challenges with the cost of compliance.
Since they do not understand the tax laws and process, you do not ask them to go and study tax at the university, hence the need to engage professionals or consultants to help them. However, the cost of engaging these consultants is a major setback. For example, if a startup is expected to pay a cumulative of about N100,000 or less and engages a consultant that is asking for retainership of between N500,000 and N1 million, where will they get the money from?
As a startup doing business in Nigeria, complying with taxes begins with registration with the relevant tax authority. You have to register your business with them. These include the Federal Inland Revenue Service (FIRS) and the tax authority in the state where your business resides.
If your business is located in Lagos for instance, you have to register with the Lagos State Internal Revenue Service (LIRS) and FIRS. If it is in Ogun State, you have to register with the Ogun State Internal Revenue Service and FIRS. So the journey begins with registration with these authorities. Why should you do this?
If you have employees there is an obligation on you when you are making payment of their salary to deduct Pay-As-You-Earn (PAYE) and remit it to the tax authorities. Of where your staff reside. Other taxes like VAT and Withhold Tax that you deducted from other limited liability companies that do business with you must be remitted to the FIRS. it doesn’t stop there, you must also ensure that you keep adequate records of your transactions. This will enable you to know the actual taxes that are due. Also, track your periodic returns.
Read also: New FIRS Chairman targets 18% tax-to-GDP in 3 years
What is Taxmingo doing to help startups address these issues?
We launched Taxmingo in 2021 mainly for small businesses and startups in Nigeria. The idea before Taxmingo was because we observed that most of the startups and small businesses in Nigeria do not know where to start because of the issues I highlighted earlier.
Engaging professionals has not helped so much because this ends up increasing their cost of complaince. We thought about creating a solution that helps startups comply with their taxes efficiently, conveniently and in a very affordable manner. Our solution cuts off all the administrative aspects of a professional assisting them in handling their taxes by combining professionalism with technology.
Taxmingo is the first online consulting firm in Nigeria. With Taxmingo, they have access to professionals handling their businesses. We have various plans for different sizes of businesses, from solo to medium, to enterprise and basic businesses. With just N6000 monthly you can get your taxes handled monthly by professionals with chartered certifications.
