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.
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.
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 Appellantâ€™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 â€¦ 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.