Excess Dividend Tax is illegal –Expert

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The Finance Act and oversight functions of tax authorities came under heavy hammer Thursday in Lagos  as the pioneer president of Chartered Institute of Taxation  of Nigeria (CITN), Chief Ajibola Olorunleke, adjudged the Excess Dividend  Tax provision as illegal, just as Dame Gladys Simplice, the current helmsman,  urged tax regulatory activities to be centralised.

According to Olorunleke, there is nothing like excess dividend tax in the tax laws.” I don’t know who coined it to be excess dividend tax”! He queried.

The ex-CITN boss, who stated this during  2020 Business Luncheon organised by the institute, explained what is misconstrued in the tax law.

His words: “I have no doubt that many of us have been having issues with our taxes, particularly the tax laws and some interpretations of some of the provisions. Of recent, for example, I was in Abuja recently, I heard people talk about Excess Dividend Tax. And  I said there is nothing like excess dividend tax in our tax laws. I don’t know who coined it to be Excess Dividend Tax. There is no tax on excess dividend.

“The tax, actually, is for- if instead of paying taxes, you are given reliefs, capital allowances. And instead of taking the relief, that is, paying no dividend, you go ahead and pay dividend. Then the government says, ‘if you can afford to pay dividend, you can also afford to pay tax on that dividend because the government is giving you relief on capital allowances.’ And so, if you are healthy enough to now pay dividend, you should be healthy enough to also pay taxation. lt is, therefore, not Excess Dividend Tax! It is your sacrificing what the government has given you as relief and, therefore, we believe that you have the capacity to pay dividend, you should have capacity to pay government tax as well. These are some of the things that many of the people in the tax world take advantage of without regard to what you need to do to help the  government  improve its resources.”

Under the Companies Income Tax – The Finance Act amends the Third and Seventh Schedules of the Companies Income Tax Act (CITA) to –

Exempt from Excess Dividend Tax (EDT)

(a) dividends paid out of exempted profits or retained earnings previously subjected to tax,

(b) distributions made by real estate investment companies to their shareholders and dividend incomes received on behalf of those shareholders.

KPMG, in its impact analysis of the Finance Act explains that “the Excess Dividend Tax (EDT) provision contained in the CITA is intended as  an anti-tax avoidance rule that creates a minimum level of protection against corporate tax avoidance using aggressive tax planning schemes.  “According to the rule, dividends paid by a company in any year should be deemed to be that company’s taxable profit for the year, if the actual taxable profits is less than the dividend paid in the same year.

A strict interpretation of this , according to KPMG,  is that “the provision has sometimes resulted in further taxation of profits that have already suffered tax, i.e., after-taxprofits transferred to retained  earnings account. In some other instances, this provision has been applied to dividends paid out of tax-exempt profits, thereby, effectively rescinding the tax-exemption on those profits.

“The unintended consequences of a strict interpretation of the rule has caused several disputes between taxpayers and the Federal InlandRevenue Service (FIRS), some of which have been adjudicated on by the courts in favour of the FIRS.

“The Finance Act seeks to mitigate the above incidence of (double) taxation by excluding certain profits from the rule. These profits includefranked investment income, after-tax profits, tax-exempt income and distributions made by Real Estate Investment Companies etc.

“That said, companies are encouraged to properly track  the sources of the dividends they declare (and possibly disclose these sources on their financial statements) in order to enjoy the exemptions. It may also be useful for some companies to update their current dividend policy to ensure alignment between the dividend paid to shareholders and the tax payable to government, requirement to pay income tax on interim dividend distributions.”

Simplice, on her part, condemned the duplicity of the tax regulation in the country, wondering  why these  activities could not be centralised.

Her words: “Are we not having too many operators; people would come to your factory, NAFDAC, will come; NDLEA will come; NESRA will come. All sorts of people will come. Are they not too many? Cant such regulatory activities be curtailed so that companies can concentrate on their core activity. We are having too many syndications from over the tax authorities. They are doing audit,  consultants are coming g,  monitors are coming; they are monitoring Withholding Tax. they will come back to say they are monitoring VAT. Almost at the same time sending you desk audit bill. Is this not cumbersome for companies to deal with? These are the things we need to look at.”