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Taxation for Tech Startups

Taxation for Tech Startups

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taxation for tech startups - the spark youth empowerment platform in nigeria

Ruth Owojaiye is a tax and regulatory expert. In this article, she shares with us her journey into becoming an expert on taxation as well as insight into taxation for technology start-ups.

 

– By Ruth Owojaiye

I have a first and a masters’ degree in Law.  I began my professional career with a brief stint working as a Lawyer and thereafter moved on to work in the tax, regulatory and people division of KPMG Nigeria for 6 years. While working with KPMG, I provided tax advisory and compliance tailored services to companies in different industries including manufacturing, telecommunications, oil & gas and retails (multinationals and local companies).

I thereafter moved on to work as the Tax Manager of a multinational manufacturing company in Lagos in last 6 years.

 

Building a Career in Taxation Law

While taxation has a largely compliance-driven element, the basis for the charge and collection of tax is the Law. Taxation law is an area that has not been fully ploughed and I felt I could make an impact in this space. I also liked the fact that the Law was and still is the bedrock of any form of tax collection which ultimately drives the imposition and collection of taxes. This always gave room for open discussions with the tax authorities and in areas of ambiguity, there were and still are opportunities to seek interpretation in the law courts or lobby for changes to the law with the National Assembly through the right channels.

 

Tax-Related Problems That Need Redress

Taxation is an area where (until the recent drive by government to raise alternative sources of revenue due to the fall in oil prices) simply put, there is an under-collection of tax as there is still a high number of companies and individuals who are not yet in the tax net. A few companies (mostly multinationals) are fully and in some instances over-taxed while the others are either under-taxed or not taxed at all. There is therefore inequality of taxation for which government suffers loss of revenue and the companies who make the efforts to comply are overburdened with incidents of over/multiple taxation.

The problems noted therefore are three-faced:

  • There needs to be a situation where every company and individual pay the ‘right amount of tax’ for the benefit of the economy. Few companies and individuals should not bear the full tax burden of the state/nation.
  • The tax authorities also need to make the process of tax collection and compliance less cumbersome for the tax payers.
  • All incidents of multiple taxation at the federal, state and local government levels need to be eliminated.

While good progress has been made in these areas by the Government and the tax authorities, there is still a wide gap to fill in ensuring that the tax net is widened to bring in all companies and individuals who earn income from or in Nigeria. 

 

Taxation for Tech Businesses

The concept of taxation is the same for all companies in Nigeria. Tax for tech companies like other companies is based on the income/profits made by the companies (direct taxation). Tech companies are also expected to act as agents of collection for some taxes as applicable (indirect taxation).

 

Before Staring Out

Potential start-ups should bear in mind that while it aims to make great sales from technological innovation, all the monies from sales / profits made are not strictly for the start-up companies and its shareholders. Some of it belongs to government. There are other statutory / legal obligations which their companies are expected to comply with. One of such key obligations is taxation.

 

Basic Tax Laws for Tech Companies

The major tax laws applicable to tech companies include:

  • Companies’ income tax @ 30% of profits
  • Tertiary Education tax @ 2% of assessable profits
  • Value Added Tax @ 5% of sales (less purchases input VAT)
  • National Information Technology Development Agency Levy @ 1% of Profit Before Tax for applicable companies
  • PAYE tax – income tax on salaries of its employees
  • Withholding Tax deduction from fees paid to its suppliers and service providers.

 

Mistakes Tech Start-ups Make With Tax

Mistakes I see tech entrepreneurs and start-ups make is to focus mainly on making sales and relegating taxes to the background of their businesses. Tax should be an integral part of their business models. The tax laws are clear on the tax compliance requirement for companies. Taxation therefore should not be left until the tax authorities come knocking for tax audits / reviews.  Companies should be good corporate citizens and should ensure that their accounting and tax records are up to date and proper taxes are remitted to government.

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Influence of Technology on the Tax Profession

Yes technology has influenced the tax profession. Tax is closely linked to accounting records. These accounting records are used by government agencies to check the correctness and accuracy of taxes paid. Various accounting software packages have been developed and improved on over time to keep records which has made tax reviews easy. Examples of these packages are SAP, Navision, Peachtree, Sage, QuickBooks etc.

The Federal Inland Revenue Service (FIRS) have also used technology to aid tax compliance. For instance, tax payers can now sit from the comfort of their offices to file their monthly tax returns which previously had to be completed manually and submitted at the tax office.

 

Challenges and Prospects

Challenges include the need to sensitize all companies, including start-ups, on the need to pay their tax. The FIRS, Lagos and Ogun states have ongoing sensitization programs to encourage compliance.  Other state governments are encouraged to emulate this trend.

There needs to be an open communication and partnership between government and tax payers.  Tax payers most likely will willingly comply where they trust that the monies paid to government will be put to good use. Government must in turn ensure the use of resources to provide and maintain infrastructure and basic amenities which will impact businesses directly and indirectly.

Also, government must make the economy conducive for businesses to thrive and encourage local and foreign investments. Some actions to improve the business environment is continuous changes made to archaic laws, grant of incentives and tax waivers where necessary and elimination of multiple taxation.

 

Final Advice for Tech Start-Ups

I do not expect tech start-ups to have a full grasp of what the tax compliance needs of their companies are as their areas of strength is their core tech business. I advise that they hire tax experts and advisers to support them on all tax and regulatory compliance until they become big enough to hire in-house personnel.

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