These are interesting times for Nigeria’s economy with mounting pressure for “dividends of democracy” amidst dwindling revenue. Nobody is ready to listen to excuses for non-performance and government needs to become more creative. If you ask any Nigerian why he’s unable to lower his expectation knowing the economic situation, he’ll retort: don’t they know that before? Government seems to have realised this and seems to be firing on all cylinders to rake in as much revenue as it could from non-oil sources. Income generating agencies are beginning to think outside the box. Or even think like there’s no box (without the box).
I hold the view, and strongly so, that by strengthening compliance, the government could significantly increase its revenue base. In the recent past, FIRS has been combing through tax laws to see provisions that were previously not being enforced. For example, there was a recent directive asking non-resident companies to start filing returns based on actual results. By this it means, preparing financial statements for their Nigerian operations and computing tax base on actual income.
Before now, use of deemed income as basis for taxing non-resident companies was the general practice. By filing actual returns, a number of issues will come to the fore, including potential transfer pricing issues. Filing returns based on deemed income is a child of pragmatism, the law require every taxpayer to file returns based on its actual income. FIRS has only reiterated the law by demanding for actual return, without precluding itself from using deemed income where necessary.
The hottest cake in the Nigeria tax space right now is the furor generated by demand for payment of provisional income tax based on interim dividend. In a recent public notice by FIRS in major Nigerian newspapers, taxpayers were reminded of tax obligations on interim dividends. If you’ll like to read further, Deloitte Nigeria issued a tax alert on the subject. Also, Monday’s edition of #InsideTax article in Guardian Newspaper focused on matters arising from this issue. #InsideTax is a weekly publication in Guardian Newspaper by Tax professionals at Deloitte Nigeria. It’s been running every Monday for nearly 3 years!
For those interested in staying current with tax news, please endeavour to read it, either in print or online via www.deloitte.com. If you missed Monday’s #InsideTax, please read it here: http://www2.deloitte.com/ng/en/pages/tax/articles/inside-tax-articles/section-43-6-of-cita-and-interim-dividend.html#
So, what exactly did the provision of S. 43(6) of CITA says? What are the issues begging for answers? Let me reproduce the provision of Section 43(6) of CITA for ease of following. ““Notwithstanding the foregoing provisions of this section, every company paying dividend to its shareholders shall pay tax at the prescribed rate in subsection 1 of section 40 of this Act to the Board prior to the payment of the dividend. The tax so paid shall be a deposit against the tax due from the company on the profits out of which the dividend is paid”.
The heading of Section 43 of CITA itself is “Dividends and tax on interim dividends paid by Nigerian companies”. This is just to provide some context as it is a legal principle that headings may not necessarily be seen as part of the provisions of the law. Based on the section cited, it could be deduced that provisional income tax is an obligation when interim dividend is payable.
Let’s now get into the crux of the issue. To determine tax payable, you need 2 things – the tax base and the tax rate. What rate of tax is applicable? The answer is given in section 40(1) that was referenced in the provision cited. Here’s what it says: “The rate of tax levied and payable for each year of assessment in respect of the total profit of every company is thirty kobo for every Naira”. Let’s ask simply: What’s the tax rate specified? The answer is straight forward – 30 kobo tax for every Naira profit. That’s simply 30% of the total profit.
The tricky part is the tax base. When paying income tax on interim dividends, on what BASE should the 30% be applied? Should it be 30% of (a) the interim dividend (b) the accounting profit from which the dividend is paid or (c.) the taxable/total profit for the period? At best, Section 43(6) doesn’t give a complete answer. It only says tax should be paid at the RATE prescribed in Section 40(1). In section 40(1), tax is payable at 30% of TOTAL PROFIT for the assessment year. You can only imagine the complexity inherent in this simple provision.
On the other hand, the public notice issued by FIRS indicated 30% of “the profits from which the dividends are paid”. But many will argue that doesn’t seems to be what the quoted phrase is pointing at in Section 43(6). My reading is that the provisional tax is regarded as an advance payment against the tax due from the company on the profits. The inference that tax will be calculated at 30% “on the profits out of which the dividend is paid” appears to be in conflict with Section 40(1). Section 40(1) stated 30% of “total profit” for the assessment year, not “the profits from which the dividends are paid”.
Total profit is not just the accounting profit. There is a whole chapter in CITA (PART V) that deals with ascertainment of total profits. Total profit is specifically defined in Section 31 of CITA. In the definition, there’s reference to a given assessment year.
If you read the definition of total profit per section 31 of CITA, you’ll need to take it slowly and allow it sink in. For reference purposes, section 31(1) is reproduced here: “The total profits of any company for any year of assessment shall the amount of its total assessable profits from all sources for that year together with any additions thereto to be made in accordance with the provisions of the Second Schedule to this Act, less any deductions to be made or allowed in accordance with the provisions to be made or allowed in accordance with the provisions of this section, section 32 and of the said schedule”.
I won’t attempt to do any further probing into how to calculate total profits but suffice to say that total profit is not just the accounting profit. There’s also another rounds of issue for companies that have withholding tax credit notes that’s enough to cover any potential provisional tax. Since provisional tax is a payment on account of tax due at yearend, should taxpayers still cough out “advance cash” if there’s enough tax credits?
To put it mildly, there are gray issues around the determination of income tax payable based on interim dividend. It will be important for FIRS to provide necessary clarifications in form of circular to guide taxpayers and reduce the confusion. Of course, the circular would only explain how to operationalize the provisions of the law. It can’t be used to create new rules/laws. I am optimistic that FIRS will look into these issues and provide the needed clarifications as soon as possible.
If you’ll like to read more about the topic, please see Monday’s edition of #InsideTax article here: http://www2.deloitte.com/ng/en/pages/tax/articles/inside-tax-articles/section-43-6-of-cita-and-interim-dividend.html#
Note:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday, 18 November 2015. Every Wednesday at 17:00 WAT (CUT+1), I run a one-hour “tweetax” session with hashtag #TaxWiseNG where topical tax issues are discussed. The tweets are subsequently posted as an article and posted on my website www.yomiolugbenro.com, facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
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