Types of assessment
Assessments based on taxpayers’ returns
These are assessments based on the information contained in the taxpayer’s returns. The tax computations together with the capital allowances computations are enclosed along with the audited accounts and such assessments could either be self-assessment or government assessment.
Minimum tax
Minimum tax is payable by every company in Nigeria when the total profits of the company from all sources have produced on tax, or tax payable which is less than the minimum tax specified by the law. However, the followings are exempted from the payment of minimum tax:
• Companies engaged in agricultural trade or business.
• Companies with at least 25 percent imported equity capital.
• Any company for the first four years of its commencement of business.
The rates applicable to companies which are liable to minimum tax are the highest of any of the following:
• 0.5% of gross profit
• 0.5% of net assets
• 0.25% of paid-up share capital
• 0.25% of turnover of up to N500,000.
If, however, the turnover is higher than N500,000, the minimum tax payable will be the highest of the above plus 0.125 percent of the excess of the turnover above N500,000.
Treatment of capital allowances when minimum tax is applicable
It is important to note that in any year of assessment when minimum tax is chargeable, the capital allowance due in that tax year must be adjusted against the profit of that year along with the unabsorbed balances brought forward. This treatment is adopted to ensure that the charging of minimum tax does not preclude the deduction from assessable profit and the utilisation of capital allowances for that year. The position of the law is that capital allowances should be deducted as far as possible, from the assessable profit of that year and the unabsorbed portion, if any, shall be carried forward.
Minimum tax on dormant cases
Minimum tax is justified on the theoretical premise that every asset should generate an income and it is applied as an anti-tax avoidance measure. This tax is sometimes referred to as asset tax. Already, it is being applied in that manner during periods of dormancy in the sense that minimum tax is computed and charged on net asset or share capital, whichever is the higher of the two. The aim of this clarification is to ensure uniformity in the application of the law on minimum tax with respect to dormant cases. Minimum tax should be computed although the assessment may be raised when the business eventually recommences.
Best of judgement assessment
This is raised where audited accounts and other relevant returns are not submitted within the stipulated time in line with the tax law. It is usually based on “fair and reasonable’’ estimate of income/profit of the preceding year’s results reported by the company.
Related Article: Assessment procedure (1)
