THE LEGAL STATUS OF
FREE OF TAX PAYMENTS UNDER
THE NIGERIAN PERSONAL
INCOME TAX ACT OF 2004
BY
M. T. Abdulrazaq*
I. INTRODUCTION:
The problems which arise when a
document, or an oral agreement, contains words in relation to some future money
payment, which require that payment is to be made “free of tax,” forms the
basis of this paper.1
When words such as “free of tax”
or “without any deduction” are used two
questions of construction may arise. The
first is whether the words used do refer to tax at all; clear words are
necessary to have any effect for tax purposes ; “without any deduction,” by themselves, will not usually be taken as
referring to tax.
There is no
case among all those which have been cited to me where an annuity had been
stated to be free of income tax unless there was clearly expressed on the face
of the will an intention of the testator that, when he referred to freedom from
deductions, he was including income tax. 11
General words can
only relate to tax if they are qualified in some way to show an intention that the tax is not to
be borne by the annuitant.12 This intention may be gathered from the
other parts of the relevant document13;
if the words used include “taxes” this will generally indicate that the annuity
is to be free of income tax.14 Where the words free of all deductions
whatsoever” could, in their context, only apply to income tax, they were held
to imply a sufficient intention15 but this decision is of doubtful authority.16
Where a testator directed that an annuity should be paid as in his
lifetime (when he had paid it without deduction of tax) and there were other
words indicating an intention that it should be free of tax, this construction
was adopted.17 Even if “free of tax”
is used, the question may arise whether Nigerian tax is intended if the
testator is domiciled abroad.18
II THE STATUTORY
PROVISIONS:
(b)
arising to any trustee or executor under any
settlement, trust or estate, which shall
be determined under and be subject to all the provisions of this Act.
“every individual
other than persons covered under paragraph (b) of this subsection or corporation
sole or body of individuals deemed to be resident for that year in the relevant
State under the provisions of this Act”
Furthermore, Section 3(1)
(a) and (b) of
PITA in defining the limits of income chargeable provides that:
“ Tax shall be payable for each year of
assessment on the aggregate amounts each of
which is the income of every taxable person,
for the year, from a source inside or
outside
Nigeria, including, without restricting the generality of the foregoing:
The clause “free of Tax” would be ineffective,
also, where it is not under section 19 of PITA as an income exempt as specified
in the Third Schedule to the Act.
Neither would the clause be effective if it is not within the deductions
allowed under section 20 (1) (a-d) PITA which provides that:
"a)
A sum payable by way of interest on money borrowed and employed as capital in
acquiring the income;
c)
Rent for that period, and premiums on liability for
which was incurred during that period, payable in respect of land and building
occupied for the purpose of acquiring the income; and
d)
Expenses for
repairs of premises, plant, machinery or fixtures employed in
acquiring the income, or for the renewal,
repair, or alternation of any implement,
utensil or article so employed;"
In addition, the
income must satisfy the test of “wholly, exclusively, necessarily and
reasonably incurred”. The test is as
follows:
(a) Wholly and Exclusively Incurred:
The word
“wholly” refers to the quantum of the
money expended while the word “exclusively” refers to the motive or object
accompanying it. The question where the
expenditure was incurred exclusively for business purposes is one of fact and
purpose. However, if the sole purpose is
business promotion the expenditure is not disqualified because the nature of the
activity necessarily involves some other result or the attainment or furtherance
of some other objective since the latter is necessarily inherent in the act.
(b)
Necessarily Obliged To Incur
The test of
necessity is objective19 and the fact that the trader or employer,
requires the particular expenditure is not decisive20 .
Hence, the test is not whether the trader or employer imposes the
expense but whether the business or duties do, in the sense that irrespective
of what the trader may require or what the employer may prescribe, the business
or duties cannot be performed without incurring the particular outlay.21
(c) Reasonably
Incurred
In the context of
the statutory provision in section 20 PITA 2004 the meaning of “reasonably
incurred” is unclear as its usage here tends to connote the existence of a
situation where expenses could be incurred
“wholly and exclusively”, and “necessarily” without it being “reasonably” incurred. Taken on its own this would appear to be the real
test of deductibility of expenses in
Nigeria in the sense that once it is shown that the expenses were reasonably
incurred for the purpose of ascertaining the income in the opinion
of the relevant tax authority other requirements are really subsidiary, so
that, on the other hand, where there is a claim that an expense has been
incurred in accordance with the rules of
deductibility and the tax authority is of the opinion that it was not reasonably incurred it then becomes irrelevant
that it was incurred, wholly and exclusively, and necessarily. The test of deductibility in the real sense
in Nigeria would appear to depend on the discretion of the relevant tax authority which is expected
to be exercised “reasonably”.
The clause “free
of tax” would certainly be effective if
the taxation falls within section 33 PITA as amended which makes provisions for
a consolidated relief allowance.
III AGREEMENTS
NOT TO DEDUCT TAX:
Agreements not to deduct tax is void by the provision of
section 73(1) PITA which states: “Income tax assessable on a person whether or
not an assessment has been made, shall, if the relevant tax authority so
direct, be recoverable from any payment made by any person to that person.” and
section 73(5) provides that “A person required under any provision of the Act
to make a deduction from payments made
to a person shall account to the relevant tax authority in such a manner as the
relevant tax authority may prescribe for the deduction so made”
Also Section 73(6) states that: “The Minister on the advice of the Board may,
from time to time, make regulations for carrying out the provisions of this
section." The directions of the
relevant tax authority or the advice of
the Board to the Minister must be based on reasonable grounds and in any case
the relevant tax authority must make a direction or the Joint Tax Board (
JTB) must advise the Minister charged
with responsibility for taxation if the income is specifically provided for by
the statute. The PITA 2004 has specifically provided for the deduction of
tax in the following situations:
(a) Rent
Under
Section 69 (1) "where a rent becomes due or payable to a person, the payer
of the rent shall, at the date when the rent is paid or credited whichever
first occurs shall, deduct therefrom tax at the rate prescribed in sub section
(2) of this section and shall forthwith pay over to the relevant tax authority
the amount so deducted.”
(b)
Interest or Royalty:
Section
70 (1) provides that “where a payment, such as interest or royalty, becomes due
or payable to a person, the payer at the date when the payment is made or
credited whichever first occurs, there deduct therefrom tax at the rate
prescribed in subsection (21) and shall forthwith pay over to the relevant tax
authority the amount so deducted.”
(b)
Director's Fees
Section 72 (1) states that “where any payment
of director's fees becomes due from or payable by a Nigerian company to a
person, the payer at the date when the payment is made or credited whichever
comes first occurs, deduct thereof tax at the rate prescribed under subsection
(2) of this section and shall forthwith pay over to the relevant tax authority
the amount so deducted.”
(d)
Tax Clearance Certificate
Under
section 85 whenever the relevant tax authority is of opinion that tax assessed
on the income of a person for the three
years immediately preceding the current year of assessment has been fully paid
or that no tax is due on the income or that the person is not liable to tax for
any of those three years, it shall issue
a tax clearance certificate to the
person within two weeks of demand for the certificate by that person or give
reason for the denial, so however that the
payment of current year tax shall not be made a condition for the
issuance of the certificate unless the applicant is leaving the country finally.
A
tax clearance certificate shall disclose in respect of the last three years of
assessments:
a)
Chargeable income;
b)
Tax payable
c)
Tax paid; and
d)
Tax outstanding or alternatively a statement to the
effect that no tax is due.
These
taxes must be deducted at source under sections
69,70,71,72 of PITA 2004 and Section 74 PITA 2004 provides a criminal penalty
for failure to deduct tax.
It
was held in I.R.C. v. Ferguson22
that an agreement “free of tax” meant
that the payer was bound to pay the recipient such a sum as after deduction of
income tax at the basic rate would leave the figure specified in the agreement.
Occasionally
a problem arises whether a payment arises under a document to which this
provision does apply or under one to which it does not. Thus when a dispute as to the validity of a
will was compromised by an annuitant agreeing to take smaller annuity than the
will gave him, it was held that the direction in the will not to deduct tax
remained effective so long as the agreement did not provide further security
for the annuity.23
The
final problem now has to be considered, namely, the tax consequences to the
payer and recipient of a valid “free of tax”
clause. Where the clause uses
words such as “free of tax” or a formula which depends on the tax liability of the
recipient24 then what is known as
the rule in Re Pettit is brought into
play.
THE RULE IN RE
PETTIT
Where
the clause is valid and, on its true construction, implies that the payment is
to be free of the tax which the recipient has to bear upon it25, it
is now well established that the payer is liable to pay the stipulated sum in
full and that this payment is treated for tax purposes as if it had been a
gross sum from which tax at basic rates has been deducted.26 The recipient, however, is under a duty27
to reclaim from the Revenue the tax to which he is entitled in respect
of the income in question by virtue of his personal relief or allowances28
and to account and pay the tax so recovered to the payer, under the rule
in Re Pettit29 This rule is based on the English Law of Trusts
and it is not clear how far it applies in Nigeria. When it applies, the liability to repay the
tax recovered does not reduce the total income of the recipient, nor his right
to the reliefs 30; there is no decision as to its effect on the
original payer, but the practice is to treat him as entitled to additional
income equivalent to the grossed up amount of the sum he is repaid. It has been held in Total Nigeria PLC v Akinpelu that the rule in Re Pettit would apply in
Nigeria to a provision in a contract requiring payment to be made free of tax.31
When
the clause provides for a payment free of tax up to a stated rate of tax and
the rate is higher, the recipient must account for a proportion of the tax
recovered in respect of his reliefs.32 When an estate is insufficient to meet
annuities given by will33 and an abated capital sum is payable34
the effect of the rule in Re Pettit, where it applies, is taken
into account in calculating the capital sum.35
* LLB(ABU),LLM(LSE),Ph.D(ABU),B.L, ACIArb, MCMI,
AMNIM, ACIPM, FCIB, FCTI.
FIRS Professor
of Taxation, Faculty of Law, Lagos State
University.
1 Whiteman & Wheatcroft (1976) Income
Tax (Sweet & Maxwell) pp. 160-166
2 See Harvey, B.W. (1968) The Law and Practice of Nigerian Wills, Probate and Succession (Sweet
and
Maxwell) p. 56
3 See Re Skinner (1942) 1 ch. 82
(where Morton J. explained the rules applicable to these cases);
Re
Sharp (1906) 1 ch.793
4 Re. Skinner (supra): Re Cain's
Settlement (1919) 2 ch. 364
5 Re Sharp (1906) 1ch. 793
6 Re
Loveless (1918) 2ch. 1
7 Re Saillard (1917) 2 ch. 401
8 Sadler v. Rickards (1858) 4. K
& J 302.
9 Gleadow v. Leatham (1882) 22 Ch.
D. 269. See also Well v. Wall
(1817) 15 Sim. 513 (“ clear of all
taxes and
deductions”: held subject to property tax): Lethbridge v. Thurlow (18510
15 Beav. 334
(“clear
of legacy duty and every other
deductions whatsoever”; same result); and Abadam v. Abadam
(1884) 33 Beav 475 (“ payable
without any deduction whatsoever”: held subject to income tax)
10 Re Wright (1952) 2 All E.R. 698.
11 (1910) ch. 411, at p. 413, followed in Re
Skinner (supra) where the words were “such a sum … as will
bring his
income up to £1,000 per
annum.”
12 Festing v. Taylor (1863) 32
L.J.Q.B. 41 Lovat v, Leeds(1862) 31 L.J., Ch. 503; Re Bannerman
(1882)
21 Ch.D 106; Re Williams (1936) 1 Ch.509; Re Hirst (1941) 3 All
E.R. 466.
13 Turner v. Mullineux (1861) 1
J.&H. 334; or from a will where the clause in question is in a codicil;
Re
Buckle (1894) 1 Ch.286
14 Re Shrewsbury Estate Acts (1924)
1Ch.315 where the words were “clear of all deductions
whatsoever whether for taxes or otherwise” of Wall v. Wall (supra)
see also Ferguson v. I.R.C. (1970)
A.C.442
15 Re Cowlishaw 1939) 1 Ch. 654
16 See Re Wells (1940) Ch. 411 (supra):
Re Hooper (1944) Ch.171
17 Re Balley (1951) Ch. 558
18 See Havelock v. Grant (1946) 27
T.C. 363 See also Re Bishop Bertram Lasbrey 5 WACA 142
19 Ricketts v. Colquhoun (19260,
AC 1 at 10. See Abdulrazaq, M.T.
(1989) Deductibility of Legal and
Accounting
Expenses to Contest Tax Liabilities in Nigeria, Gravitas Review of Business
& Property law
Ibi 2.No.12 p.69.
20 Roskams v. Bennett (19500 32 TC 129; Owen
v. Burden (1972) 1 All ER 655; Maclean v. Trembath
(1956) 36 TC 653 at 666
21 Brown v. Bullock (1961) 40 TC 1 at 10; Blackwell
v. Mills (1945) 2 All ER 356 at 358; Lomax v.
Newton (1953) 2 All ER 805; Ellwood v. Utitz
(1965) 42 TC 482
22 (1969) 46 T.C.1
23 Re Grettons Indenture (1923) Ch 77; see
also Hutchinson v. I.R.C. (1929) 15 T.C.89
24 Re Maclennan (1939) Ch. 750
25 Where a tax-free annuity is qualified by a
provision depending on the basic rate of tax and the
qualification comes into operations, the rule in Re Pettit does
not apply; Re Batley, (No.2)
(1952) Ch.
781.
26 I.R.C. Cook (1946) A.C. 1: 26 T.C.
480
27 Re Kingcome (1936) 1 Ch. 566. A married woman is bound to claim
separate assessment so as to
obtain the
relief herself: Re Batley (No.2)
at first instance (1952) W.N.225; in the
C.A. (supra)
the point
was not decided as it was held that the Re Pettit rule did not apply,
but, if it had, Jenkins
L.J. (at
p.790) agreed on this point.
28 For personal reliefs generally, see Section
33 PITA 2004 as amended.
29 (1922) 2 Ch. 765, Re Eves (1939) ch.
969; Re Williams (1945) Ch. 320
Cameron, Kingsley v. IRC
(1996) 42 T.C.539 that a husband receiving repayment of tax receivable by him because his wife's income is deemed to be his
does so as trustee for his wife and the “deeming” is for purposes of collection
only and extends only to the income eventually found liable to tax.
31 See Total
Nigeria PLC v.Akinpelu (1960-2010)1 NTLR 214.
32 Re Bates (1946) 1 Ch.83; Re Arno
(1947) Ch.198 See Section 30 PITA 2004.
33 See also generally Harvey B. W. (1968) op.
cit.
34 Under the rule in Re Cottrell (1910)
1 Ch. 402
35 Re Twiss (1941) ch. 141; Re
Dunsille (1946) N.I. 90 and Re Rothermere (1945) Ch. 72
No comments:
Post a Comment