February 18, 2019

Court of Appeal Affirms Educational Institutions’ Companies Income Tax Obligation

The Court of Appeal (CoA), in December 2018, upheld the ruling of Federal High Court (FHC) on the liability of educational institutions to pay companies income tax (CIT). The judgement arose from an appeal by Best Children International Schools Limited (BCIS/the Appellant) against Federal Inland Revenue Service (FIRS) in respect of the FHC decision that BCIS’ profits do not qualify for exemption under Section 23(1)(c) of Companies Income Tax Act (CITA). Background In 2014, FIRS assessed BCIS to CIT and tertiary education tax (TET). BCIS challenged this by instituting an action at the FHC. The FHC decided in favour of FIRS on the premise that BCIS is a company limited by shares (CLS) and thus not an educational institution with public character. BCIS appealed the decision, urging the CoA to determine the appropriateness of FHC’s reliance on Section 26 of Companies and Allied Matters Act (CAMA) in determining its exemption status under CITA and to provide an injunction restraining FIRS from enforcement of the assessment on the Appellant. The CoA upheld the FHC decision declaring that BCIS is liable to tax as it was not registered as a company limited by guarantee (CLG). According to the CoA, a CLS is for profit making and must pay income taxes. The fact that BCIS is a school or an educational institution is not enough to exempt it from payment of taxes. Analysis and implications of the decision Section 23(1)(c) of CITA exempts “profits of any company engaged in ecclesiastical, charitable or education activities that are of public character and the profits are not derived from a trade or business carried on by such company.” In view of the above, I have examined the conditions and considerations for exemption below: Nature of activity: the activities must be educational in nature. Although not defined in CITA, educational activities are easy to determine and BCIS was able to demonstrate it carries out educational activity. Activities must be of public character: CITA does not define “public character”, thus its interpretation often generates issues. The CoA ruled that BCIS did not prove that its educational activities are of a “public character”, thus the exemption is inapplicable. Moreover, the Appellant’s proprietor introduced herself as a member of the National Association of Proprietors of Private Schools. In a similar case between American International School (AIS) and FIRS, brought before the Tax Appeal Tribunal (TAT) in 2015, FIRS sought to levy CIT on AIS on the grounds that it was not an educational institution of “public character”, even though AIS was registered as a CLG. This is because the services rendered by AIS were for a fee and could not be said to be available to every Nigerian. AIS argued that its activities are of a “public character” using an analogy of “institution of a public character” as defined in Paragraph 9 of the Requirements for Funds, Bodies or Institutions Regulations, 2011, pursuant to FIRS’ Establishment Act, which defines such body as “a body or institution whose activities are meant to benefit Nigerians in general and particularly the public and its profits are not available for distribution to its promoters”. TAT ruled in favour of AIS, on the following bases: No segment of the Nigerian public was excluded from the services rendered by AIS – FIRS did not provide any evidence of exclusion of any segment AIS’ profit/income was not distributed to AIS’ directors or guarantors AIS derives profit only from educational services. The above presupposes that an entity would be able to claim “public character” if no segment of the Nigerian public is excluded from benefiting from its educational activities. This then raises the question of the extent of exclusion that will negate “public character” – would gender, special needs, foreigners only etc., constitute exclusion of any segment of the Nigerian public from having access to educational services? Additionally, does the fee charged by the schools ensure availability to all segments of the Nigerian public, or does it ensure that only the segment of the public that pays enjoys the benefit? Non-derivation of profit from a trade or business: One of the bases of CoA’s decision was that BCIS failed to prove that its profit was not from a trade or business. Simply put, trade is a business carried on for profit purpose. Thus, applying CITA strictly, offering educational services at a fee with a view to making profit would constitute a trade/ business which negates the exemption. Notwithstanding, applying this strict interpretation would be counter-productive, as Section 23(1)(c) of CITA is an exemption provision. It envisages that educational institutions would make profits, it only exempts those profits from tax. This view was given credence in AIS v FIRS where TAT held that charging fees for educational services is not strange to the income generation activities of a school. Considering that educational entities are mere artificial persons holding interest of promoters, ability to distribute profits from the trade to ultimate beneficiaries becomes important. This, in my view, forms the basis of taking cognizance of modality of set up. Thus, CoA’s focus on the form of registration (which ultimately affects distribution to promoters) in BCIS v FIRS appears to be in order. One of the grounds of dismissing the appeal is that BCIS did not prove that it was registered as a CLG (proscribed from distributing profits to promoters). Rather, it was presented by FIRS as a CLS (permitted to share profits to shareholders). One perspective on this is consideration of what happens if a CLS does not distribute profits and has no intention of distributing profits and documents thisfact in its Memorandum and Articles of Association (MEMART). Would such educational institution then be considered to be of public character? In my view, this should not absolve such companies as the MEMART may be amended while the restriction under a CLG or incorporated trust is pursuant to a law which is not under the control of the promoters. Conclusion Educational institutions (with the ability to distribute profits to promoters

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FIRS Enforcement Move Threatens Investors Confidence

Only recently, business owners were awakened to cruel bank transaction notifications running into millions of naira undertaken without their consent. On further enquiries from their respective banks, they were shocked to learn that the Federal Inland Revenue Service (FIRS) had issued fiat to financial institutions to put lid on accounts of suspected tax defaulters. “We just woke up, saw notifications from our banks that the FIRS told them to put a lien of an outrageous amount in taxes we are owing; that was about a N100 million,” one of the affected business owners told THISDAY on conditions of anonymity. The Executive Chairman, Federal Inland Revenue Service (FIRS), Mr. Tunde Fowler, recently disclosed that the sum of N23 billion had been recovered from 45,000 tax defaulters, who had over N100 million as turnover in their respective bank accounts. He further hinted that a new batch of 40,000 millionaires would be targeted in this year. However, the latest mode of clampdown on businesses, which had failed to comply with their tax obligations have been severely criticised in some quarters, including FIRS staff and renowned tax and audit authorities. A source further told THISDAY that some staff of the revenue agency had even urged affected individuals to seek legal redress as the move by Fowler was unprecedented, with grave implications for the growth of small enterprises which are critical for economic development. Famous audit firm KPMG, had promptly questioned the FIRS move, describing it as “draconian”. It stated: “We note and salute the FIRS’ objectives to bring delinquent taxpayers into the tax net and consequently increase the federal government’s tax revenue. “However, the current practice whereby the FIRS issues fiat to freeze taxpayers’ bank accounts generally and to demand that SBs pay alleged outstanding tax liabilities from customers’ bank balances without recourse to affected persons, is draconian. “This will cast doubt on the federal government’s drive to improve the ease of doing business in Nigeria, diminish the credibility of the Nigerian tax system, and erode investors’ confidence in the Nigerian economy.” The company also called on taxpayers to “ensure that they fulfill their civic obligations by paying the right amount of taxes and filing relevant tax returns with the tax authorities, as and when due”. Apparently, under pressure from critics over its unpopular actions to compel compliance through seizure of accounts, Fowler had within the week halted the freezing of bank accounts of tax defaulters for 30 days. According to him, the directive became necessary in view of the large number of taxpayers, who had besieged its offices in their bid to regularise their tax positions, coupled with the inconveniences they encountered during the process.But in spite of the criticisms bedevilling the FIRS measures, particularly the seeming lack of due process in freezing bank accounts, the service appears unperturbed and has maintained that it possessed powers under its Establishment Act to take the steps. Justifying its actions, FIRS spokesman, Mr. Wahab Gbadamosi, responding to THISDAY enquiries maintained that “tax is anchored on law, the basis of tax is law in the first place” stressing that the FIRS Establishment Act (FIRSEA), Company Income Tax Act (CITA) among others already provided the basis for its actions. Quoting relevant sections of the Act, Gbadamosi said, “The Service may require any person to give information as to any money, fund or other assets, which may be held by him for, or of any money due from him to, any person. “Also note that Section 49 of CITA further empowers FIRS to take all the steps we have taken with respect to recovery of tax debts from billionaire and millionaire tax defaulters.” What Gbadamosi does not seem to understand is that a country tax regime is one of the factors potential investors consider in choosing where to invest their funds. Nevertheless, KPMG, in its position paper released in February, argued that the revenue collection agency had overstepped its bound in a bid to expand its tax revenue base. The firm added that contrary to FIRS’ claim, “nothing in the CITA or FIRSEA authorises the FIRS to impose a freeze order on a taxpayer’s bank account beyond the amount of tax proven to be due and payable by that taxpayer.” As the argument over the legality or otherwise of the FIRS actions persist, particular attention should be paid to the negative impact it would have on the investment atmosphere, especially at a period when the federal government is working hard to improve the ease of doing business in the country, which had been a point of concern to wooing foreign investment into the country. The freezing of companies’ bank accounts at will further calls to question the non-disclosure obligations the banks themselves owe to customers, especially as this is not yet a criminal case until proven by a court of law, and could dampen the confidence of small and medium enterprises, which are struggling to grow under an already harsh business environment. According to a source who had his accounts frozen and later released, what they (FIRS) are doing is illegal and abnormal without following the law. There was nothing like consulting the taxpayers, telling them of their discrepancy and issues in their taxes-absolutely nothing like that. “Somebody sits down, calls the bank, looks at your turnover and slams you a tax, without confirming whether you have paid or not, whether you are in compliance or not, whether you are in breach or not and without even going through your TIN because they are the custodian of who is an active tax payer or not.” The resultant development had seen those who had no issues in their tax filing suffer unnecessarily during the siege on their accounts by the FIRS, which requested affected clients to show up at its headquarters in Abuja to reconcile their tax records. Although, FIRS deserves commendation for embarking on innovations that had seen tax receipts grow in recent times, its new approach to enforcing compliance poses a grave concern, which if not addressed

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FIRS Soft Pedals, Directs Banks To Unfreeze Tax Defaulters’ Accounts

As a result of complaints by Nigerians and industry experts, the Federal Inland Revenue Service (FIRS) has written to banks, directing them to lift the lien on tax defaulters’ bank accounts for 30 days. The directive, which takes immediate effect, was contained in a letter from the Chairman, FIRS, to bank Managing Directors. FIRS, however, made the announcement in a statement posted on its official Twitter account Friday night. The agency explained that it issued the directive because of the large number of taxpayers, who have besieged its offices in their bid to regularize their tax positions and the inconveniences they are going through. It should be remembered that the FIRS recently issued Letters of Substitution, pursuant to Section 49 of the Companies Income Tax Act (CITA) 2004 and Section 31 of the Federal Inland Revenue Service Establishment Act (FIRSEA) 2007, to banks in Nigeria, appointing them as tax collecting agents for certain listed customers maintaining bank accounts with such banks. The FIRS, in the said Letters of Substitution, alleged that the affected companies have breached their tax obligations by failing to pay tax to the FIRS, as and when due, and provided the SBs with an indication of a specific amount owed by each said company. The SBs were directed to set aside the indicated sums and pay such over to the FIRS in full or partial payment of the alleged tax debt. KPMG advisory services had on Thursday stated that FIRS have gone draconian by giving fiats to banks to freeze accounts of suspected tax defaulters. “The current practice whereby the FIRS issues fiats to freeze taxpayers’ bank accounts generally and to demand that SBs pay alleged outstanding tax liabilities from customers’ bank balances without recourse to affected persons, is draconian. This will cast doubt on the Federal Government’s drive to improve the ease of doing business in Nigeria, diminish the credibility of the Nigerian tax system, and erode investors’ confidence in the Nigerian economy,” the for wrote in an explanatory note. It, however, stated that taxpayers must also ensure that they fulfil their civic obligations by paying the right amount of taxes and filing relevant tax returns with the tax authorities, as and when due.   Source: Tribune

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