Nonprofit payroll: what you need to know about Nigeria's tax laws for NGOs
When you think of Non-Governmental Organisations (NGOs) in Africa, the terms “Nonprofit Payroll” and “Tax compliance” are not likely to come to mind. Instead, like most NGOs, you may think of efforts to secure funding, to reach out to locals, and to overcome cultural differences in the pursuit of a single goal… And yet, payroll and tax compliance are equally important to an NGO’s success in an African country. After all, good management of finances is key to public trust in charitable institutions and this very much includes payroll and compliance.
In Nigeria, the law has various conditions set for NGOs regarding payroll and tax compliance, not all of which are straightforward or easily implemented.
Read on to find out more about the many intricacies of payroll and tax compliance for NGOs in Nigeria.
Income Tax for NGOs in Nigeria
It is commonly – and incorrectly – thought that NGOs do not pay taxes in Nigeria. This misunderstanding likely stems from laws stating that NGOs and Nonprofit Organisations (NPOs) are not required to pay income taxes if and when their income is obtained from their registered primary activities. These primary activities include donations, membership fees, subscriptions as well as local and international grants.
The operative term here is “Primary activities”. If a local NGO derives income from activities other than their primary ones, they are liable to pay income tax for these earnings according to Nigerian law.
Additionally, local NGOs are required to pay income tax on the following:
- Investment income; this includes stocks, investment funds, bonds and other such securities
- Capital gains; this occurs when NGOs & NPOs sell their assets and make a profit from the transaction
- Passive income; this includes income derived from rent, interest, dividends and royalties, among others
Foreign NGOs do not pay income tax in Nigeria
Foreign NGOs are, however, not required to pay income tax in Nigeria thanks to double-taxation treaties. International Organisations may also benefit from other exemptions through these agreements. But foreign NGOs should not rejoice too quickly, as Nigeria has Double Tax agreements with no more than 15 countries , in a list which does not include the United States and other global superpowers. In comparison, Malaysia has such agreements with over 60 countries.
Concretely, what this means is that a number of NGOs will have to pay income taxes when they expand to Nigeria.
Value Added Tax
NGOs, whether local or foreign, are required to pay other taxes, besides those on income. While local and international NGOs both do not pay Value Added Tax (VAT) on items and services directly related to their primary humanitarian activities, they are liable to pay VAT at the standard rate on items and services not directly related to their primary activities. For example, this could include the purchase of office supplies.
Other taxes
When making payments to a company, person, or unincorporated entity, NGOs need to ensure that the correct taxes are withheld from these payments. This includes payments for: rent, royalties, service charges, consulting services fees, technical processing fees, administration costs, supplies, contracts and more. These taxes then need to be submitted to the relevant tax authorities.
Tax Returns for NGOs
Every year, local and foreign NGOs in Nigeria are required to submit tax returns, which must include audited financial statements, tax and capital allowance computations, and a written statement listing the total surplus from all sources for the applicable tax years.
The 2020 Finance Act Update
Prior to 2020, the law about taxation and NGOs was a rather unclear one, where basic terms such as “public character” and “activities of a public character” did not have a proper definition, leading to a number of gray areas for NGOs. Compliance with the law is often a complex task, rife with uncertainties. Besides, it also requires keeping up to date with the law, a task which is as crucial as it is time-consuming.
Why NGOs should outsource their payroll and compliance obligations?
1. More time to focus on their core mission
The bottom line is that all NGOs operating in Nigeria will have to pay some form of tax at some point. While the task may sound simple, it really is much more complex. Firstly, there is a real difficulty in knowing which taxes to pay and at what time. Afterwards, it is a matter of actually withholding and paying tax to the relevant local authorities in time, for fear of legal sanctions and blows to their reputation. All in all, it is risky for NGOs to take on the responsibilities of paying taxes and compliance all by themselves. Besides, it also takes away from time that could be spent working towards the Organisation’s main mission.
2. Maintaining the Organisation’s reputation
For NGOs and NPOs that normally rely on external funding, keeping taxation issues at bay is crucial. If any issues with tax and compliance crop up, this could betray a lack of proper management, and even more crucially, of goodwill – the very foundation upon which most NGOs and NPOs are built, the very value that motivates people and companies to make donations to the cause championed by the charitable Organisation.
How Africa HR Solutions can help NGOs like yours
With over 12 years serving NGOs in Nigeria and across 45 other African countries, Africa HR Solutions is an Organisation that your NGO or NPO can trust. We work with knowledgeable local partners in Nigeria to lift the stress of payroll and compliance from your shoulders through our payroll and Professional Employer Organisation (PEO) solutions.
Get in touch with our team now to find out how we can help your NGO thrive in Nigeria.