Taxes & Tariffs | |
Taxes & Tariffs | |
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Saturday, February 16,
2019/03:55pm/Deloitte
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:
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 (“girls-only” or
“boys-only”), 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 or shareholders) in Nigeria may no longer be
able to enjoy income tax exemption on the basis of carrying out educational
activities alone. Ability to share profits (driven by mode of registration)
appears to be a prerequisite for determining “public character” and ultimately,
tax exemption.
Furthermore, the treatment of ancillary income
from other activities (transportation and sale of books and uniforms) carried
out by schools may come under more scrutiny. The jury is still out on whether
these activities qualify as “other trade or business” or an extension of
“educational services”.
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