Taxes & Tariffs | |
Taxes & Tariffs | |
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Friday, November
08, 2019 /1:35 PM / By Wole Obayomi, KPMG / Header
Image Credit: Resolution Law
The Tax Appeal Tribunal (TAT or "the Tribunal")
sitting in Lagos recently delivered judgement in the consolidated tax appeals
filed by United Capital Asset Management Limited (UCAM) and United Capital
Trustee Limited (UCT), jointly referred to as "the Appellant",
against the Federal Inland Revenue Service (FIRS or "the Respondent").
The key issues for determination were:
whether the provision of Section 19 of the
Companies Income Tax Act (CITA) was properly applied by the FIRS in assessing
the Appellant to income tax; and
whether the Appellant was entitled to relief sought
under the Executive Order No.004 of 2017 on Voluntary Assets and Income
Declaration Scheme (VAIDS).
Facts of the case
The FIRS issued notices of assessment for
additional income tax liabilities, inclusive of interest and penalty, to the
Appellant following conclusion of its desk review of the Appellant's financial
records for 2011 to 2016. The FIRS based its assessment on Section 19 of CITA
because the Appellant distributed dividend to its parent company in excess of
its total profits. Section 19 treats dividend distributed as a company's total
profits in any year of assessment where such company has no total profits or
where its total profits are less than the amount of dividend paid.
The Appellant disagreed with the additional
assessment but failed to object in writing to the assessment within the
statutory 30-day period or pay the alleged additional liability. Consequently,
the FIRS maintained that the assessment had become final and conclusive, and pasted
non-compliance stickers at the Appellants' headquarters. The Appellant
subsequently negotiated a payment plan with the FIRS and filed individual
appeals at the TAT. The TAT consolidated the appeals as they relate to
similar issues and the entities belong to the same group.
The Appellant argued that the FIRS wrongly assessed
its income derived from government and corporate bonds to tax under Section 19
when such income is specifically exempted from income tax by the Companies
Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011
("Exemption Order"). The Exemption Order was issued by the President pursuant
to his power under Section 23(2) of the CITA.
Also, the FIRS rejected the Appellant's application
to regularise its tax positions under the Voluntary Assets and Income
Declaration Scheme (VAIDS or "the Scheme") in order to enjoy certain tax
benefits under the Scheme, including exemption from payment of interest and
penalties on outstanding tax liabilities on the basis that the Appellant did
not meet specified requirements of the Scheme. The VAIDS program was introduced
by the Federal Government through the Executive Order No.004 of 2017 and lasted
from 1 July 2017 to 30 June 2018.
TAT's decision
After considering the arguments of both parties,
the TAT held that:
1. Section
19 of CITA does not concern itself with the source or origin of the dividend
paid. Rather, Section 19 is applicable once the dividend declared and paid is
higher than total profits.
2. Executive
Orders, in the nature of the Exemption Order, are inferior to CITA. Therefore,
its provisions cannot override or supersede the provisions of CITA, including
Section 19.
3. The
tax liabilities had become final and conclusive due to the Appellants' failure
to file an objection notice to the FIRS within the statutory timeline; and the
Order of the TAT extending the time for appeal cannot be construed as extending
the timeline to object to the assessment.
4. The
Appellant is eligible to seek amnesty under Paragraph 4(f) of the Executive
Order on VAIDS , which the FIRS prematurely denied the Appellant. Therefore,
the Appellant is not liable to interest and penalty on the outstanding tax
liabilities.
Related Link: Ecobank Nigeria appealing Tribunal Judgment on disputed FIRS Tax Liability
Comments
1. The TAT's judgement that
Section 19 of CITA does not concern itself with the source or origin of
dividend paid, but only with whether the dividend declared and paid is higher
than total profits, is consistent with recent judgements delivered by the
Federal High Court (FHC) and the TAT on the matter. Despite the judgements, the
matter remains contentious as the indiscriminate application of such
interpretation of Section 19 will inevitably result in double taxation, where the
dividend is paid from profits on which tax has been paid in prior years. This
will particularly be the case if a company would not have been liable to excess
dividend tax if it had distributed all the profits as dividends in the year
they were earned, rather than retain them in the business.
2. The TAT's decision that the
Exemption Order is a subsidiary legislation whose provisions are inferior to,
and cannot supersede CITA's provisions actually did not consider the legal
status of the Executive Order in the context of Section 23(2) of CITA. Section
23(2) of CITA specifically empowers the President to exempt "all or any
profits of any company or class of companies from any source", from tax
through an Order. Given that the President issued the Exemption Order in the
exercise of his power under this provision, the Order is part and parcel of
CITA and must be accorded equal legal status as other provisions of CITA.
Consequently, the Tribunal should not have declared the Exemption Order
inferior to CITA. Thus, subjecting income exempted from tax under the Order,
which is an extension of CITA, to tax under another provision of CITA is
uncalled for. Indeed, the TAT should have extended to the Exemption Order the
same treatment it rightly gave the Executive Order No. 004 of 2017 on VAIDS by
which it overruled the FIRS for denying the Appellant’s application for amnesty
under the Order and reversed its assessment of penalty and interest on their
tax liabilities under CITA. In effect, the TAT upheld the provision of the
Executive Order on VAIDS on waiver of penalty and interest on tax liabilities
notwithstanding the extant provisions of CITA on penalty and interest.
3.
Furthermore, the decision
of the Tribunal to the effect that "we hold that the dividends declared by
the Appellants were properly subjected to tax under Section 19. The Section
does not concern itself with the source or origin of any distribution. Once
either of the situations prescribed in the Section occurs, the provisions of
the Section are triggered and are applicable. For this reason, the Appellants' Counsel's invitation to distinguish the three Oando cases referenced in
Paragraphs 6.43 to 6.47 of the Appellant's Final Address is declined" is
very concerning, especially in terms of its implications for investment holding
companies (Holdcos). What it means is that a Holdco whose source of income
is exclusively dividends from its subsidiaries, which Section 80(3) exempts
from further tax, is nonetheless taxable under Section 19, because Section 19
does not distinguish the source or origin of dividends distributed in excess of
taxable profits. But the question is, can the same legislation which declares
in one vein [Section 80(3)] that the withholding tax paid on dividend income is
the final tax, subject the same dividend to tax in another vein [Section 19]?
This cannot be so in the face of the unambiguous provision of Section 80(3) of
CITA to the effect that "dividend received after deduction of tax … shall be
regarded as franked investment income... and shall not be charged to further tax
as part of the profits of the recipient company."
The foregoing is a clear pointer to the fact that
the last word has not been heard yet on Section 19 of CITA. While the TAT might
have been constrained by the precedents in the judgements of the FHC in Oando
v. Federal Inland Revenue Service (Appeal No. FHC/L/6A/2014) and Court of
Appeal in Appeal No. CA/L/409/2008, it might have gone further to distinguish
this case, which deals with statutorily tax-exempt income. As it is uncertain
when the Court of Appeal will give its judgement in the pending appeal against
the FHC's decision in the Oando case referenced above, the time has come for
legislative intervention to reverse the undesirable consequences of the
prevailing interpretation and application of Section 19 of CITA by the FIRS and
the courts.
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