The 5 Most Common Taxes Entertainment Businesses Will Encounter
The increasing successes and growth of the Nigerian entertainment industry both at home and abroad have been copiously documented and thus…
The increasing successes and growth of the Nigerian entertainment industry both at home and abroad have been copiously documented and thus require no repetition here.
However, with the increasing value being generated by the industry - coupled with a national policy focused on increasing public revenues through taxes - both federal and state tax authorities alike are beginning to take more of an interest in this sector.
As a result it is important for entertainment sector entrepreneurs and business owners to understand where their tax liability exposures lie and how they can navigate what is potentially a complicated landscape that can have significant financial implications. This will enable them and their businesses to avoid huge potential losses - in the form of fines, penalties, and excess taxes - and possibly even bankruptcy.
This article therefore sets out the five most common taxes entertainment business owners will certainly have to contend with and thus plan for. The penalties for non fulfilment of the requirements in relation to each tax are also provided in order to give an idea of the potential costs of noncompliance.
Value Added Tax:
This is an indirect tax that is charged on the supply of all goods and services @ 5% of the value of the goods/services supplied — and which must be remitted by the 21st day of the month following the date on which the transaction occured.
When entertainment businesses provide their services or license their IP assets, all such transactions are generally subject to VAT.
Entertainment busineses must therefore all ensure they are registered for VAT purposes immediately upon incorporation, and failing that as soon as possible thereafter - in addition to fulfilling monthly invoicing, collection, remittance and filing requirements - in order to avoid unnecessary penalties.
Penalties -
Non-registration for VAT - N10k first month, N5k each month thereafter (and subsequently sealed premises)
Non-issuance of VAT invoice - 50% of invoice amount
Non-collection of VAT - 150% of uncollected amount plus interest
Non-remittance of VAT - 5% of unremitted amount plus interest
Non-filing of VAT returns - N5k each month
Withholding Tax:
This is an advance payment of income tax that is deducted and remitted by a company paying fees/commissions/royalties/dividends to individuals and companies at a rate of 5% and 10% respectively in relation to each transaction between the parties; which must be remitted by the 21st day of the month following the month in which the duty to deduct/remit arose.
Thus, when paying management commissions, recording/publishing royalties and consultancy fees, entertainment businesses must ensure that WHT is deducted and remitted where necessary in order to avoid penalties.
Penalties -
10% pa plus interest - at 15% or current bank lending rate
Personal Income Tax:
All individuals, enterprises and other unincorporated entities are liable to tax on their income om a graduated basis with a top line marginal tax rate of 18.96% on all income above N3.2m, and a minimum tax rate of 1% of all gross income.
Tax is payable on all worldwide gains/profits/income including employment income and benefits in kind (BIK). The only income that is exempted from tax is pension income, interest on certain types of loans, and coupon payments on corporate bonds and Federal/State Government bonds.
Tax is assessed either on a self-assessment basis (for self-employed individuals, enterprises and unincorporated entities) or a pay-as-you-earn (PAYE) basis (for employees).
Tax is calculated based on taxable profit less consolidated allowance of 21% of gross income, allowable deductions, and balancing adjustments.
Entertainment businesses (which are generally unincorporated/informal business enterprises) are like all other businesses liable to tax on their worldwide income payable to the State internal revenue service (SIRS) where they are resident - residence defined by where the business operates from.
Business owners must thus ensure they register with their relevant state tax authority for income tax purposes and must do same within the first twelve months from the date of commencement of business. Additionally, returns must also be filed by the 31st Jan following the end of the relevant financial year.
For business owners with employees, there are further obligations of registering with the SIRS of the state(s) in which they operate for PAYE purposes and deduct, remit and file returns in respect of employee deductions. Failure to fulfill these requirements results in avoidable penalties.
Penalties -
10% pa on tax owed plus interest
Company Income Tax:
Nigerian companies are liable to tax on all profits/income derived from, accruing in, brought into, or received in Nigeria at a rate of 30%
Tax is levied on all worldwide income (excluding gains on disposal of assets - which are charged to CGT).
Minimum tax -
Minimum tax is payable by companies having no taxable profits for the year or where the tax on profits is below the minimum tax. However, companies in the first four calendar years of business, companies engaged or companies that have foreign equity capital of at least 25% are exempt from minimum tax.
Minimum tax payable is calculated as follows:
Where the turnover of the company is NGN 500,000 or below, minimum tax is the highest of:
0.5% of gross profits
0.5% of net assets
0.25% of paid-up capital, or
0.25% of turnover of the company for the year.
Where the turnover is higher than NGN 500,000, minimum tax is the highest of the calculations listed above plus 0.125% of turnover in excess of NGN 500,000.
Penalties -
10% pa on tax owed plus interest
Tertiary Education Tax:
The Tertiary Education (Establishment Fund) Act provides for a tax of 2% to be levied on the taxable profit/income (before deduction of any capital allowances) of all Nigerian companies.
Penalties -
5% of amount due (and after 2 months of non-payment) N10k and/or 3yrs imprisonment - first time offenders; or N20k and/or 5yrs imprisonment - subsequent offenders.
The foregoing are but the tip of a proverbial iceberg of potential tax liabilities that entertainment businesses will encounter, especially as such businesses continue to grow in success. It is therefore of critical importance that business owners in today’s Nigeria seek professional advice on their tax obligations and how they can plan their affairs to minimise their tax exposure and liabilities.
Regardless of the fact that entertainment sector businesses still operate and conduct transactions on an informal basis, tax authorities increasingly have the intent and the means to identify taxable transactions, incomes, and assets; and will punish offending businesses for negligent non-compliance and/or outright willful tax evasion.
So long as you use a bank account conduct your transactions, with the continuous improvements being made to the Biometric Verification Number (BVN) system implemented by the financial sector, ignoring one’s tax obligations is becoming an increasingly risky and potentially detrimental business decision.
Olumide Mustapha, Esq. ACTI ACIArb BL(Hons) QSEW BA
T: +2348104215500
E: lumimustapha@gmail.com
About the author:
Olumide is a media/entertainment attorney and chartered tax practitioner who provides entertainment businesses with specialist advisory services in relation to their legal, business, and tax related issues and concerns.