Ugodre Talks Figures: How to efficiently use taxation to boost profits

by Ugodre Obi-Chukwu

They both used equity to finance their business and no debts yet his brother made more money than he did.

Two brothers were given an equal share of their father’s wealth as he approached his death. They both followed the footsteps of their father and decided to engage in buying and selling. They soon became successful in their individual endeavours, doubling their investments within two years. However, as time went by, one made more profit than the other despite trading in similar environments.

The younger one who hasn’t faired so well recently decided to make an inquiry. He realised, he made pretty much the same turnover as his brother and spent just as much on operating expenses. They both used equity to finance their business and no debts yet his brother made more money than he did. What he soon realised was that he had not put in so much emphasis in the past on how his taxes should be well managed.

Tax, which he always looked at as one for the accountants to deal with, was difference between maximising his earnings. For example, a man who pays tax of N100, 000 on a profit of N150, 000 fairs worse than a man who pays tax of N50, 000 on the same profit of N150, 000. The Nigerian tax law provides several means by which one can efficiently manage tax.

When you sell an asset, reinvest it in the same class of asset

If your business own assets such as equipment, which it uses for its daily operations, it is possible that you may wish to sell them once they are no longer useful to you. In the Capital Gains Tax Act, any profit on disposal of an asset attracts a charge of 10 per cent. However, if the proceeds of the asset sale are used to acquire another asset within the same class then tax payable can be deferred as long as the new asset is in use for the business.

Deduct VAT that you pay on your purchases from the one you receive on your sales

Value Added Tax is paid on certain goods and services as mandated by law. However, for companies which are into selling goods and services, you are allowed to deduct the VAT that people charge you for your purchases from those you receive from your invoices. For example, if you it cost you N10m to acquire materials that you need to produce furniture, it is likely that you will be charged an extra five per cent of the N10m (N500,000) as VAT. Consequently, if you sell the furniture for N15m you will charge your supplier N750,000 VAT. When you are remitting to the government you should deduct N500,000 that you paid from the N750,000 that you collected giving you a net remittance of N250,000 only. Most people end up paying the N750,000 denying themselves the opportunity of retrieving their cost.

Make sure you collect your withholding tax receipts

Withholding Tax is paid on contract for supplies, services, director fees, dividends, interest, etc. Whilst withholding tax on director fees and dividends is a final tax, it is an advance payment of tax for contracts on supplies and services as such should be deducted from your income tax. For example, during the year, your clients have deducted a total of N1m from your invoices as withholding tax. In that same year, your tax liabilities have been calculated to be N5m. Before you pay the tax liability of N5m you should deduct the N1m that had been deducted from your invoices during the year. This is because the N1m is seen as an advance payment of your tax and is kept as a credit for you. But to enjoy this credit you must obtain a WHT credit note from your client. Your client having deducted the money from your invoice must provide you with that credit note (after remitting the deduction on your behalf to the FIRS) before you can deduct the N1m.

Invest in industries that the government wishes to promote

The Nigerian government, as a matter of policy, usually have certain sectors of the economy which it wants people to invest in. To get people to invest in these sectors government usually gives certain incentives. One of such incentive is a pioneer status. If a company is given pioneer status then it is exempted from paying income tax for a minimum period of three years and a maximum of five years. So, such company enjoys free tax status. So, you may have to invest in pioneer industries. Dividends paid out of profits during the pioneer period are also exempted from taxes.

Other tax efficient means of boosting profits are investing in businesses that are wholly export oriented. Donation Money to Organisations listed in schedule 5 of the Company Income Tax Act. Applying for Capital Allowance Certificate to enable you claim capital allowances on the cost of your assets. Ensure you obtain a certificate of capital importation whenever you borrow money from foreign banks or obtain foreign equity investments. Whilst not tax related, it ensures that you purchase dollars at CBN rates should you decide to repatriate.

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Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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