By Roland Akindele Esq.
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Taxes are an ever-present consideration in the world of investments. Investors must consider the various regulatory frameworks that govern tax policies, tax authorities, and the complexities of the 5Ws+1H: why they must pay taxes, whom they must pay, where they must pay, what they must pay, when they must pay, and how they must pay.
However, in addition to these primary considerations, it is critical to investigate the benefits of tax reliefs such as tax holidays, tax credits, and tax incentives. This article examines the critical role of tax consciousness in investment decisions and how investors can use tax breaks to reduce their tax liability while increasing their returns.
Tax consciousness is an essential aspect of investment decisions, as it directly impacts the potential returns of any investment. Every investment has tax implications that must be considered before making a decision. A tax can be a significant expense for investors, and thus, it is crucial to understand how taxes work and how to minimise their impact on investment returns. Tax consciousness involves a deep understanding of tax laws and regulations and the various tax benefits available to investors.
Understanding the regulatory framework on taxes is the first step towards tax consciousness. This framework encompasses various tax laws and regulations, such as income tax, capital gains tax, and value-added tax (VAT). Tax laws and regulations vary from country to country, and investors must be familiar with the laws and regulations in the jurisdiction(s) where they operate. Additionally, investors must be aware of the tax authorities responsible for collecting taxes, such as the Internal Revenue Service (IRS) in the United States, the Federal and State Inland Revenue Services (FIRS and SIRS) in Nigeria and HM Revenue & Customs (HMRC) in the United Kingdom.
The 5Ws+1H of taxes are why you pay taxes, whom to pay, where to pay, what to pay, when to pay, and how to pay. Each of these elements is critical in understanding the taxation process. Knowing why you pay taxes involves understanding the purpose of taxes, which is to fund government activities and services. Whom to pay involves identifying the appropriate tax authority responsible for collecting taxes. Where to pay involves determining the relevant tax jurisdiction and, in a broader sense, the location where taxes must be paid, such as a tax office or an online portal. What to pay involves understanding the specific taxes that must be paid, such as income tax or capital gains tax. When to pay involves identifying the tax payment deadline, which varies depending on the tax and jurisdiction. Finally, how to pay involves determining the payment method, such as via bank transfer, credit card, or payment in kind.
In addition to understanding the regulatory framework on taxes and the 5Ws+1H of taxes, investors must also explore the various tax benefits available to them. Tax reliefs come in different forms, including tax holidays, tax credits, and tax incentives. Tax holidays are periods during which specific taxes are waived or reduced.
Notably, a ‘tax holiday’ can cover the entire gamut of the tax system, e.g. tax holiday for companies operating in an Economic Processing Zone (EPZ). However, a tax holiday can be in respect of a particular tax regime, e.g. tax holiday for companies with Pioneer Status which is usually a specific waiver of corporate income tax under Nigeria’s Companies Income Tax Act (CITA). Tax credits, on the other hand, are deductions from the total tax amount owed. Tax incentives are offered to encourage specific investments, such as tax breaks for investing in renewable energy.
In conclusion, tax consciousness is an important factor to consider when making investment decisions. Ultimately, tax consciousness is critical for any investor looking to make informed investment decisions and achieve long-term financial success.
By Roland Akindele Esq. (Legal practitioner & chartered tax practitioner), Adeleke University, Ede.
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