Taxes & Tariffs | |
Taxes & Tariffs | |
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Tuesday, July 09, 2019 / 08:41AM / By PwC
Nigeria
Background
Section 19 of the Companies Income Tax Act
(CITA) imposes tax at 30% on a company where it declares and pays dividends in
excess of its total profit. The relevant total profit is the profit of the year
from which the dividend was declared and not the profit of the year in which
the dividend was paid. The tax imposed by section 19 is generally referred to
as Excess Dividend Tax [EDT]. Previous decisions of the Tax Appeal Tribunal
[TAT], Federal High Court [FHC] and Court of Appeal [CoA] on section 19 have
all been against the taxpayers.
Facts of the appeal
The company involved in this case declared and paid dividends to its
shareholders in financial year 2014 even though it had no taxable profits for
the year. Based on the audited financial statements, the dividends paid were
from retained earnings which had suffered tax in previous accounting years.
Taxpayer’s position
The company’s arguments are:
The company also asked the Tribunal to distinguish the earlier decisions
because in this case, there was uncontroverted evidence before the TAT that the
taxpayer had not carried out any tax avoidance scheme.
FIRS’s position
The FIRS’s position was that section 19 should be interpreted literally.
It argued that in applying the section, two things should be considered:
1. the year of assessment in
which the dividend was paid;
2. the total (taxable) profit
of the company for that year.
Where the dividend exceeds the taxable profit or there is no taxable
profit, the excess should be deemed as profit and subject to tax.
The decision
The TAT, following previous decisions, applied the four-step
test established in those decisions, ruled against the taxpayer. The
TAT refused to distinguish the appeals even though there was evidence that the
taxpayer paid tax in previous years on the profits from which the dividend was
paid.
Takeaway
Even though Section 19 was introduced to curb tax avoidance, the courts
have taken the view that it should be applied even when there is no incidence
of tax avoidance. The implication is that Section 19 results in double taxation
on companies which defer distribution of profit to a later period or pure
holding companies who redistribute dividends to ultimate shareholders. For
these reasons, the National Tax Policy [NTP] has proposed that section 19 be
amended or expunged from CITA.
One of the earlier decisions is currently on appeal at the Supreme
Court. If not eventually expunged, there remains an opportunity for the courts
to resolve the problems arising from the operation of section 19.
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