Why the FIRS might owe your company NGN1.78

Let's have some tax fun. Can lawyers, accountants and tax experts disprove the statement below?

"If the FIRS has applied the tax rates of 20% or 30% to the total profit of a company in the last six years, and the kobo equivalent of such total profit cannot be expressed as a multiple of 100, the FIRS owes such a company a refund which cannot be more than NGN1.78 kobo."

Allow me to prove it first.

We all agree that the companies income tax (CIT) rates under the Nigerian Companies Income Tax Act (CITA) are the zero tax rate, 20%, 30% or the minimum tax rate. But let us focus on the 20% and 30% rates.

§ 40(b) and (c) of CITA provides:

(b) Medium-sized company, tax at the rate of 20 kobo for every Naira;

(c) Large company, tax at the rate of 30 kobo for every Naira.

You will notice percentages are not used, and the expression used is "...for every Naira". Because CITA does not define "Naira", we resort to § 15 of the Central Bank of Nigeria Act which states that a Naira "...shall be divided into one hundred kobo".

Since 20 kobo and 30 kobo are respectively 20% and 30% of 100 kobo, we just assume the tax rates are such percentages. But we are negligibly wrong!

The percentages will only work if your total profit is a number whose kobo equivalent is a (positive) multiple of 100. If the kobo equivalent of your total profit is not a multiple of 100, you will overpay your taxes because you will have paid 20% of what is less than a Naira.

Put simply, if your total profit has some extra kobos not up to a hundred, you will overpay your taxes using those percentages. You still do not agree?

Let us say our medium-sized XYZ Limited's total profit for the years 2022 and 2023 are, respectively, NGN200 and NGN200.75 kobo (hey, these are not gross turnovers!).

Applying the 20% rule

• We get NGN40 for 2022 because the kobo equivalent of NGN200 is a multiple of 100 i.e. 20,000 kobos.
• We get NGN40.15 kobo for 2023 because the kobo equivalent of NGN200.75 is not a multiple of 100 i.e. 20,075 kobo.
• So, the extra 15 kobo for 2023 is 20% of the 75 kobo.

Applying the "20 kobo for every Naira [i.e. every 100 kobo]" rule

• We still get NGN40 for 2022 because because the kobo equivalent of NGN200 is a multiple of 100 i.e. 20,000 kobos.
• But we get NGN40 for the year 2023, too, because the kobo equivalent of NGN200.75 is not a multiple of 100 i.e. 20,075 kobo, and we have to stop the taxing at 20,000 kobo. Why?
• The extra 75 kobo in NGN200.75 (20,075 kobo) is not up to a Naira (i.e. 100 kobo) and therefore cannot be subject to the "20 kobo for every 100 kobo" rule.

So, if your total profits for the last six years have kobos after them and have been subjected to the percentages, then the FIRS might owe you at most NGN1.78 using the 30% rate. How?

The maximum kobo before the money becomes a Naira is 99; 30% of 99 kobo is 29.7 kobo which when multiplied by the refund limitation period of six years equals 178 kobo or NGN1.78 kobo. See § 90 CITA.

But we can still express the rates as percentages if we say "20% or 30% of the total profits expressed in kobo, up to the last multiple of 100 thereof". However, if the FIRS had been ignoring the decimal in the application of the percentages to your total profits, then they do not owe you.

Now, NGN1.78 kobo is negligible. But if your company's dividend policy is to declare and pay dividends when your distributable profit reaches a certain threshold, and your distributable profit is now N1.78 short of that threshold because the FIRS applied the percentage rule, then NGN1.78 makes all the difference, no?

You may have a derivative (shareholder) action on your hand as directors, no? I cannot think of some other legal ramifications of this at the moment. If you know one, do share.

This is not professional advice! Just having fun here.

So, what did I miss in the law or the math?