Who Bears the Burden of Corporate Tax

Who bears the actual economic burden of the corporate income tax is an open question. One thing is certain: it cannot be the corporations. A corporation is a legal fiction and legal fictions do not pay taxes people to pay taxes. 

The corporate tax could be borne by corporate shareholders in the form of lower returns, owners of all capital (again in the form of lower returns): corporate customers in the form of higher prices, or employees (in the form of lower wages). It is almost certainly some combination of these above.

The economics profession has changed its thinking this issue several times over the past four decades but the latest consensus is that workers probably bear more than half of the burden of the corporate income tax because capital is highly mobile. 

Labours share of the corporate tax burden is potentially as high as three quarters. Nevertheless, government estimators continue to assume that the primary incidence of a corporate tax is on those that of the capital.

The Economic Impact of Corporate Tax 

Others studies find that like US or countries corporate tax rate like the US or changing the corporate tax altogether would have a pronounced positive economic impact. This is because lower corporate tax rates will lead to higher investment higher productivity, higher real wages and both foreign and domestic business choosing to locate headquarters and production facilities in the country such as Nigeria, US, etc.

The corporate income tax is perhaps the most economically destructive tax that the federal government impose in Nigeria and beyond. Some American enterprises institute scholars Alex Brill and Kevin Hassett find that a corporate tax rate higher than 26 percent (including state or provincial corporate tax rates) result in a loss of tax revenue. 

In other words, they find that the corporate tax results in so much reduced economic output or in U.S and foreign corporations moving so much economic activity out of the U.S that imposing a tax higher 26 percent reduces rather than increases federal revenue. Because Nigeria, as well as U.S corporate taxes on average, are about of percent, tens would imply that reducing the federal corporate tax rate to 22percent would actually increase revenue.

Administration of Corporate Taxation 

The organ of government that administers corporate taxation in Nigeria is the federal board of inland revenue (FBIR) which its operational arm is known as federal Inland Revenue Services (FIRS) established under S.1 CITA  at the federal level. 

Then at the state level, the   State Internal Revenue and the local government level authorities at the grassroots level.   

The board is saddled with the statutory function of assessment and collection of the tax and shall account for all monies so collected in a manner to be prescribed by the Minster.  

For the ends of corporate taxation which is in focus in this research a Nigerian company which is chargeable to tax is one the management and control of which is exercised in Nigeria. Consequently, if the management control is exercised outside Nigeria the company becomes a non-Nigeria company. 

A company is controlled in the country where the members of the Board of Directors hold their meetings.  

Theoretically, therefore, if for examples the Board of Directors of Nigeria management directives from Ghana giving branches, the profits from the Ghana branch where it has to be liable to Nigerian tax, mainly because the profit will not be deemed as derived in Nigeria.

Strictly, under the Law regulating taxation of companies, taxes could be levied only on profits that accrue in derived from, brought into or received in the tertiary of the FRN. 

For such taxable profits to be derived from Nigeria, a measure of activities must be performed in the country. Indicative of the activities are the possession or ownership of a place of business in Nigeria or of staffers of the company residing in Nigeria and receiving remuneration therein.

Corporate Taxation and Practice in Nigeria

The major statute governing corporate taxation is the Tax Act (CITA)  Companies Income.

There are four types of taxes which a company registered in Nigeria may be liable to pay. There are income tax, capital gains tax, petroleum profits tax, and educational tax. While the first and the fourth are payable generally by all companies, the third is payable only by companies carrying on petroleum operations. 

Companies Profit Chargeable Tax 

The CITA provides the deduction of tax based on deduction of tax from interest on rent, dividends, and other sources.

By the virtue of S.9 C1) of CITA, the tax is payable at the specified rate upon the profit of any company accruing in, derived from, brought into or received in Nigeria in respect of certain transactions.

The profits of a Nigeria company are deemed to accrue in Nigeria whatever the source and whether or not all or any part of the profit have been remitted to or received in Nigeria.

In TOUFIC KARUN V COMMISSIONER OF INCOME TAX WACCA 25 MAY, 1948, Hooper J, in majority judgments said the words “accruing in” and “received in” appear to me to import a clear territorial limitation to Nigeria, while the words “ derived from” appear to me to be designed to meet  among other things cases where profit arise from transaction  carried out in Nigeria by non-resident taxpayer. 

The words “brought into” apply to bring into tax, net profit from transaction carried on outside Nigeria by a Nigeria company but the tax is restricted by the profits actually imported into Nigeria.