It’s another episode of our weekly “tweetax” session – TaxWiseNG. Today, we’ll be discussing Tax Obligations of Not-For-Profit Organisations in Nigeria.
Some people call them non-profit organisations, non-business entities and other similar names. Let’s refer to them as NFPO as that fits better for twitter word count constraints. Essentially, a NFPO is a type of organisation that does not earn profits for its owners. Money earned, received by or donated to a NFPO is used in pursuing the organisation’s objectives. They are organised and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose. Its members, contributors and other resource providers do not, in such capacity, expect pecuniary return directly from the organisation.
The Companies and Allied Matters Act (CAMA) 1990 as amended, made provision for registration of NFPOs. Based on CAMA, NFPOs are registered as a “Company limited by Guarantee”. The object clause is primarily to promote the objectives of such a company. Shareholders/owners/members/promoters/ trustees/financiers are not entitled to profits in form dividend or similar return on investments. Any surplus arising from their activities are not generally distributed to owners or members but in furtherance of their goals and objectives.
It is this overriding philosophy of not being a business venture or profit generating entity that drives their tax status. Section 23 of Companies Income Tax Act (CITA) grants tax exemption on profits made by NFPOs but the exemption is not absolute. Tax exemption is only to the extent that the profit is not derived outside the core objective. It generally flow like this – the profits are exempted from tax but only to the extent that it is not derived outside the core objective.
Let’s explore some of the wordings of CITA provisions on tax exemption of NFPOs. It comes under the heading of profits exempted from tax – Section 23 of CITA:
a) The profits of any statutory or registered friendly society. But as mentioned, this is not absolute.
It says IN SO FAR AS SUCH PROFITS ARE NOT DERIVED FROM A TRADE OR BUSINESS CARRIED ON BY SUCH SOCIETY.
b) The profit of any company being a co-operative society registered under any enactment or law relating to a co-operative societies. Again, it gives a proviso: NOT BEING PROFITS FROM ANY TRADE OR BUSINESS CARRIED ON BY THAT COMPANY.
c) The profits of any company engaged in ecclesiastical, charitable or educational activities of a public character. As usual, there are limits – IN SO FAR AS SUCH PROFITS ARE NOT DERIVED FROM A TRADE OR BUSINESS CARRIED ON BY SUCH COMPANY.
d) The profits of any company formed for the purpose of promoting sporting activities. Again, it is WHERE THE PROFITS ARE WHOLLY EXPENDABLE FOR SUCH PURPOSE, SUBJECT TO SUCH CONDITIONS AS THE BOARD MAY PRESCRIBE.
e) The profits of any company being a trade union registered under any Trade Union Act. Wait for it again: IN SO FAR AS SUCH PROFITS ARE DERIVED FROM TRADE OR BUSINESS CARRIED ON BY SUCH TRADE UNION.
There are a few more entities listed in CITA that enjoys tax exemption. E.g. those established by Local, State and Fed Governments. Also the profits of any company established by the law of the State to foster economic development. Still, CITA reiterated that such exemption doesn’t extent to profits derived from other business-related activities carried on by them. It also excludes income from any share or interest possessed by that corporation in trade or business in Nigeria carried on by some other person or authority.
From the above, some facts could easily be established. One is that NFPOs enjoys tax exemption only from income relating to their core objectives. There is a deliberate emphasis in CITA on the “profit(s)” generated by NFPOs from their core objective rather than the NFPO as an entity. This means that the entity itself doesn’t enjoy tax immunity, only the profits from their core activities are exempted.
NFPOs are not exempted from filing tax returns, even where they have earned income from sources that are exempted from tax only. There is a difference between paying taxes and obligation to file annual tax returns. CITA specifically made it clear that ALL companies are to file returns irrespective of tax exemptions conferred on their income.
Section 55 of CITA requires every company to file tax returns. Even those exempted from incorporation. It also states that it doesn’t matter whether or not the company is liable to pay tax or not in a given assessment year. NFPOs, like profit-oriented companies, are expected to prepare and submit annual income tax returns to FIRS. This seems logical as tax is chargeable where a NFPO derives profits from other business-related activities.
In Nigeria, flowing from the tax penetration level, one may easily imagine the numbers of NGOs and other NFPOs that do not file tax returns. The question is not so much about whether taxes may be due, it is about the fact that the law is not being complied with. Many NFPOs that engage in taxable business activities are outside tax net because they are not tax registered let alone file tax returns.
Take the case of religious organisations. Some have established printing outfits, word/music distribution channels. Books, Audio/Video CDs, “holy water”, miracle oil and “anointed chattels” are sold to members at commercial rates. Some have become extremely “blessed and prosperous” and now own terrestrial and cable Radio/TV licenses. Often times, these commercial arrangements are offered under separately incorporated entities owned by the religious body or individuals. But the fact that they are offshoots of religious establishments make it easy to stay under the cover of exempted ecclesiastical activities.
Beyond income tax for the NFPO as an entity, there are payroll and withholding tax obligations. Those are not covered by any exemption. NFPOs employ staff who are entitled to remuneration. It is the duty of the employer to account for related PAYE taxes of their employees. The employer is required to register with the relevant tax authorities and account for employees’ personal income taxes. The amount the individuals are paid do not matter. Taxes are due no matter the level of income. The directors, managers are employees of these organisations are taxable. PAYE tax withholding and monthly remittances are required with annual returns expected from both the employer and employees.
NFPOs also engage vendors and service providers to render various services. There are withholding tax obligations from such relationships. The fact that a NFPO enjoy tax exemption for its own income does not extend to its obligations with respect to withholding taxes. Appropriate withholding taxes should be deducted from fees payable to the service providers.
NGOs, social, educational, professional, religious, health, charitable organisations all need to demonstrate responsible citizenship. Tax authorities should also wake up to their responsibilities and use their monitoring and enforcement powers to raise the bar of compliance. The FIRS Chairman was recently quoted as saying 35,650 corporate taxpayers and 22,000 individual taxpayers registered in the last one month. This is a positive development. FIRS is also making efforts to simply the process of tax registration by reducing the number of pages and fields needed to be completed. This process of simplifying the tax system would go a long way to raising compliance.
Nigeria needs everyone to pay to his/her part in Nation building. Paying taxes is a constitutionally imposed obligation. “It shall be the duty of every citizen to declare his income honestly to appropriate and lawful agencies and pay his tax promptly”.
Let the NFPOs and their employees pay their part to build a good Nation as they further their goals and objectives. Thanks for sharing your evening with me. Let’s do it again next week. Until then, remain tax wise. Yours truly signs out!
Note:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday, 25 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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