What is double taxation?
Double taxation occurs when a company or individual is taxed twice on the same income or profit by the same or different tax authorities.
Well, I quite understand that there are issues of double taxation in Nigeria but the most painful ones are those that are self-inflicted. From my experience, I realized that some businesses are ignorantly paying double taxes on their transactions.
In Nigeria, small and medium-sized enterprises (SMEs) can avoid double taxation by following the following steps:
I will only discuss two steps in this article.
Keep Accurate Financial Records: Keeping accurate financial records is essential for SMEs in Nigeria to avoid double taxation. You may ask, what has this got to do with taxation? It matters a lot. For instance, if you are filing VAT returns, there is a section for VAT input and VAT output. It is expected that you deduct VAT input from your VAT output, while you pay the net to the Federal Inland Revenue Services. However, the company needs to keep adequate records of the transactions on which it has paid VAT (to be claimed as VAT input). Without the records backed with evidence of such transactions such as invoice/receipt, such VAT input will be disallowed, thereby making the company pay another VAT on the same transactions.
Also, there are different ways VAT can be recorded in the books of accounts, depending on the nature of the transactions. For instance, the way you record the VAT on overheads will be different from the way you record it when it comes to direct costs. This is where professionalism comes in. Accounting is not just about bookkeeping. It is more than that. That will be a subject for another day.
Claim your Tax Credits. I believe you are all familiar with withholding tax. I like you to understand that withholding tax is not a separate tax on its own. I know this can be confusing as I will still be making reference to it as a tax.
So, what is withholding tax? Withholding tax is a type of tax that is deducted from the source of income. It is a tax that is withheld or deducted by the person or entity paying income to the recipient. The withheld amount is then paid to the government on behalf of the recipient of the income.
Withholding tax is often used by governments as a way to ensure that tax revenue is collected in a timely manner, and to make sure that taxpayers do not underestimate or forget to pay their taxes. It is typically a percentage of the total income paid to the recipient.
In order to avoid double taxation, it is your responsibility to follow up with your customer who has deducted withholding tax to ensure that the amount withheld has been remitted to the relevant tax authority. In the case of FIRS, your company can then use the amount withheld to offset part or the entire income tax liability at the end of the year. This is the reason why I mentioned earlier that withholding tax is not a separate tax on its own. This may sound technical to some people. You don’t need to stress yourself too much, this is where your tax consultant comes in.