NIGERIAN
BANK HOLDING COMPANIES ARE TAXABLE ON DIVIDENDS.
by
M.T. Abdulrazaq*
Nigerian Banks have been declaring huge
profits and it is expected that huge sums would be paid out as dividends. The
question that needs to bother the bank holding companies is how the dividends
received by them would be treated for tax purposes.
In an explanatory note
on the critical tax issues for the operation of bank holding company structure
in Nigeria, the Federal Inland Revenue Service under the authority of its Board
issued an information circular PC – T12. 2.3. 027 dated April 2012.
The circular addresses issues arising
in connection with the taxation of Bank Holding Companies and their
Subsidiaries pursuant to Section 61 of the Federal Inland Revenue Service
(Establishment) Act, 2007, Cap F36, Laws of the Federation of Nigeria, 2004.
The circular applies to all Bank Holding Companies and their Subsidiaries in
Nigeria.
The circular explained that the
Central Bank of Nigeria (CBN) recently
issued its Regulations on Scope of Banking Activities & Ancillary Matters,
No 3, 2010 (Regulation 3 of 2010), repealing the erstwhile Universal Banking
Licence regime and modifying the scope and framework for banking business in
Nigeria. In line with requirements of the CBN Regulations aforesaid, some
banking groups in Nigeria restructured their business operations by
incorporating one or more Holding Companies to aggregate shareholder capital
and hold ownership interest in operating companies conducting Banking and other
permitted businesses separately.
The main thrust of the
information circular is the clarification on relevant tax issues and avoidance
of double taxation on dividends paid.
The FIRS clarified that any
dividend paid by subsidiary companies within each Group to their parent Holding
Company (HoldCo) is Franked Investment Income which would not form part of the
said Holding Company’s total profits for tax purposes including consideration
of total profits chargeable to tax in the contemplation of the anti-tax
avoidance provisions in the Companies Income Tax Act (CITA), Cap C21, LFN, 2004
(as amended) particularly Section 19 thereof.
For purposes of clarity, it is
further stated that Section 19 of CITA, CAP C21, LFN, 2004 states that:
“Where
a dividend is paid out as profit on which no tax is payable due to-
(a)
no total profits; or
(b) total profits which are less than the
amount of dividend which is paid, whether or not the recipient of the dividend
is a Nigerian company, the company paying the dividend shall be charged to tax
at the rate prescribed in subsection (1) of section 40 of this Act as if the
dividend is the total profits of the company for the year of assessment to
which the accounts, out of which the dividend is declared, relates”.
The FIRS stated that Section 80
(3) of CITA, CAP C21, LFN, 2004 provides that:
“Dividend
received after deduction of tax prescribed in this section shall be regarded as
franked investment income of the company receiving the dividend and shall not
be charged to further tax as part of the profits of the recipient company...”
The FIRS then further states that
Section 80(3) regards dividend received by a company after deduction of
withholding tax as Franked Investment Income (FII), which should not be
subjected to further tax (income tax) and by extension WHT. Therefore, FII
received by a HoldCo (including Intermediate Holdco), as the case may be, from
its operating subsidiaries should not be subjected to further companies income
tax. Accordingly, in the opinion of the FIRS the provisions of Section 19 of
CITA will not apply to such FII upon redistribution of dividends to such
Holdco’s ultimate shareholders.
In the light of the above, the
FIRS states that any Holdco’s income profile which may consist of dividend
received from its subsidiaries, will not be subjected to any further tax.
It is instructive to note that
the FIRS said that the circular is made pursuant to section 61 of the Federal
Inland Revenue Service (Establishment) Act 2007, Cap F36, Law of the Federation
of Nigeria 2004.
The section 61 of the FIRS (Establishment) Act 2007
provides that “The Board may, with the
approval of the Minister, make rules and regulations as in its opinion are
necessary or expedient for giving full effect to the provisions of this Act and
for the due administration of its provisions and may in particular, make
regulations prescribing the—
(a) forms for returns and other information
required under this Act or any other enactment or law; and
(b) procedure for obtaining any information required
under this Act or any other enactment or law.”
The requirements of
section 61 are clear. It must be with the (1) approval of the Minister of
Finance it must be by way of (2) rules and regulation and it must, like
paragraph 1 (2) of the fifth Schedule of the FIRS (Establishment) Act be by (3)
Notice in the Federal Gazette.
What do we have?
We have an Information Circular issued under the authority of the Federal
Inland Revenue Service Board. It is humbly submitted that this is not what is
envisaged by section 61 of the FIRS (Establishment) Act of 2007.
An information
Circular issued under the authority of the FIRS Board does not meet the demands
of section 61 and therefore cannot be the exercise of the authority contained
therein.
If it is not an exercise
of the purported authority, it then simply means that the power has not been
exercised and therefore the dividend received by the bank holdings companies in
Nigeria remains taxable under section 19 of the Companies Income Tax Act Cap
C21, LFN, 2004.
If this is the
correct position and it is the correct position then what is the legal status
of an information circular?
The meaning and
legal status of Information Circulars was explained in the case of Halliburton v Federal Board of Inland
Revenue N.R.L.R. 2 (2013) p11 where it was stated that “Information Circulars issued by the
Respondent are neither laws nor regulations but merely for information of
general public and in particular all taxpayers’ representatives or advisers and
staff of Revenue Services. They contain what the makers consider to be their
interpretation of the various Nigerian Tax Acts and thus constitute their
opinion on a point of law with no legally binding effect”.
Two further
issues. The first issue is, assuming that the powers under section 61 of the
FIRS (Establishment) Act was properly exercised, the dividend received by the bank
holding companies would still be taxable as no rule or regulation can alter or
be in conflict with a substantive law as determined in the cases of Ewete v. Gyang (1997) 738 and Kuusu v. Udom (1990) 1 NWLR (pt 127)
421.
We can also not
run away from the provisions of section 51(1) of the FIRS (Establishment) Act which
states that “In the exercise of the
powers and duties conferred upon the Board by this Act, the Board shall be
subject to the general direction of the Minister and any written direction,
order or instruction given by him after consultation with the Executive
Chairman shall be carried out by the Board:
Provided that the Minister
shall not give any directive, order or instruction in respect of any particular
person which would have the effect of requiring the Board to increase or
decrease any assessment of tax made or to be made or any relief given or to be
given or to defer the collection of any tax or judgment debt due, or which
would have the effect of initiating, forbidding the initiation of, withdrawing
or altering the normal course of any proceeding whether civil or criminal,
relating either to the recovery of any tax or to any offence under any of the
laws listed in the First Schedule.”
This simply means
that even on a proper application, section 61 of the FIRS (Establishment) Act
would have no effect by virtue of section 51 (1) if it does as it seeks to “decrease any assessment of tax … or to
defer the collection of any tax” made under section 19 of CITA 2004.
Under sections 2,
25, 68 and the First Schedule to the FIRS (Establishment) Act 2007, Information
Circulars are not part of the legislation to be administered by the Federal Inland
Revenue Service.
To achieve the
intention of the Federal Inland Revenue Service to exempt banks holding companies
from section 19 of CITA the Tax Act would need to be amended as stated in Northern Nigeria Investments Ltd v. Federal
Board of Inland Revenue (1981) 2 P.L. & 517 at 525.
The second issue
is, what is next in the present circumstances? This would be an enforcement of
the recovery of any outstanding tax debts of bank holding companies as properly
stated by the FIRS in its Public Notice on Recovery of Tax Debts issued on 14th
August 2013.
*Professor
M. T. Abdulrazaq is a Professor of Taxation, Faculty of Law, Lagos State
University and former Registrar/Chief Executive of Chartered Institute of
Taxation of Nigeria.
