Nigeria: Federal High Court Judgement On The Nigeria Police Trust Fund: A Remedy Or Respite To The Multiple Taxation Of Companies' Profits In Nigeria?

Public safety and the security of lives and property are critical to the sustainable growth and prosperity of any country.  This fact is globally acknowledged.  In fact, it is reflected in the constitution of many countries.  Section 14(1)(b) of the Constitution of the Federal Republic of Nigeria a 1999 (as amended) ("the 1999 Constitution" or "the Constitution"), for instance, states explicitly that "the security and welfare of the people shall be the primary purpose of government."

In a bid to achieve its above primary purpose, the Federal Government of Nigeria (FGN) has allocated significant funding to the recurrent and capital expenditure of the country's Military, Police, Intelligence and Para-military agencies over the years.  Between 2016 and 2019, more than NGN5 trillion was allocated to security-related expenditure in the FGN's budgets.  Sadly, despite this expenditure, the security situation in the country still leaves much to be desired, and Nigeria's security agencies, especially the Nigeria Police Force (NPF), still lack adequate equipment, training, and personnel.

It was against the above backdrop that the Nigeria Police Trust Fund (Establishment) Act ("NPTF Act" or "the Act") was enacted in June 2019. Section 3 of the NPTF Act birthed the Nigeria Police Trust Fund (NPTF or "the Fund"), whilst Section 4 of the Act provides that the Fund would receive funds from disparate sources in order to meet the NPF's training and capacity development needs, and enable the NPF's procurement of necessary equipment and construction of police stations and living facilities.  These sources include:

• 5% of the total revenue accruing to the Federation Account.
• NPTF Levy of 0.005% of the net profit of all companies operating in Nigeria.
• Take-off grants and special intervention funds as may be provided by the Federal, State and Local Governments of the Federation.
• Aids, grants and assistance from international bilateral and multilateral agencies, non-governmental organizations and the private sector.

Since the enactment of the NPTF Act, no guidelines, or regulations regarding the payment of the NPTF Levy or administration of the NPTF have been published.  However, considering the aggregate budgetary allocation of over NGN85 billion that was made to the NPTF last year, and the amendment made to the Act by Finance Act, 2021 (which has a commencement date of 1 January 2022) regarding the designation of the Federal Inland Revenue Service as the tax authority empowered to assess, collect, account for, and enforce the payment of the NPTF levy, the expectation was that the NPTF would be well-positioned in 2022 to start achieving its statutory mandate.

The realization of this expectation is now suspect, though, as the Fund's main sources of funding have been hit by turbulent judicial headwinds.

Specifically, the Federal High Court (FHC or "the Court") recently nullified the provisions of Section 4(1)(a) and (b) of the NPTF Act on the basis that they are inconsistent with the provisions of the 1999 Constitution.  This landmark judgement was delivered by the FHC Abuja Division in a case between the Attorney General for Rivers State (AGRS or "the Plaintiff") and the Attorney General of the Federation and Others (collectively referred to as "the Defendants").

The case started in 2020, when the AGRS filed a suit¹ to stop the allocation of 0.5% of the total revenue accruing to the Federation Account and the NPTF Levy collectible from companies, to fund the NPTF.  This was done in response to the FGN's deduction and remittance of 0.5% of the total revenue accruing to the Federation Account for the month of March 2020, into the NPTF.  The Plaintiff, which was aggrieved by the FGN's action, averred that Section 4(1)(a) and (b) of the NPTF Act, which is the legal basis for the abovementioned allocation, contradicts the provisions of Section 162(1) and (3) of the 1999 Constitution, and is, therefore, unconstitutional.  The AGRS also prayed the Court to mandate the FGN to refund all sums deducted based on its implementation of the provisions of Section 4(1)(a) and (b) of the Act.

To be clear, Section 162(1) of the 1999 Constitution provides that all revenues collected by the Government of the Federation of Nigeria (with a few exceptions) shall be paid into the Federation Account.  Section 162(3) provides that any amount standing to the credit of the Federation Account shall be distributed among three categories of beneficiaries – namely, the FGN, State Governments, and Local Government Councils in each State of the Federation – on such terms and in such manner as may be prescribed by Nigeria's federal legislature.

Accordingly, the AGRS contended that it was unconstitutional for the FGN to withhold revenue due to the Federation Account, or withdraw any amount standing to the credit of the Federation Account, and directly remit or allocate such monies to (the Fund of) a Federal Government agency like the NPF, which is not specified in Section 162(3) of the 1999 Constitution, and which, in any case, should be solely funded by the FGN.

On their part, the Defendants argued that the provisions of Section 4(1)(a) and (b) of the NPTF Act were in order, as they were made pursuant to the FGN's power under the 1999 Constitution to prescribe the manner in which funds accruing to the Federation Account should be distributed.  The Defendants also asserted that funds can be allocated to the NPF by an Act of the National Assembly, given that the NPF was created to serve the entire Federation and not just the FGN.

Moreover, the Defendants contended that the "total revenue accruing to the Federation" referenced in Section 4(1)(a) of the NPTF Act, is different from the "total amount standing to the credit of the Federation Account" referred to in Section 162 of the Constitution.  The point of the analysis was that Section 162 of the Constitution contemplates that debits could be made to the Federation Account, and that the balance after such debits, qualifies as the "total amount standing to the credit of the Federation Account" that is constitutionally required to be shared amongst the FGN, State Governments, and Local Government Councils.

On 25 January 2022, the FHC ruled in favour of the AGRS and held that Section 4(1)(b) of the NPTF Act is unconstitutional and, therefore, null and void, given that it requires companies to remit NPTF Levy into the NPTF Fund rather than the Federation Account.  The Court's decision was premised on its position that the section is inconsistent with Section 162(1) of the Constitution, which clearly provides that all revenues collected by the FGN (except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the NPF, the Ministry or department of government charged with responsibility for Foreign Affairs and residents of the Federal Capital Territory, Abuja) must be paid into the Federation Account maintained by the FGN.

The Court further held that Section 162(1) and (3) of the Constitution does not empower the FGN to deduct any sums directly from the Federation Account for the purpose of training or

maintaining the NPF.  This is especially so because the 1999 Constitution puts the sole responsibility for the establishment and maintenance of the NPF on the FGN.

The FHC did not agree with the Defendants' argument on the distinction between the "total revenue accruing to the Federation" referenced in Section 4(1)(a) of the NPTF Act, and the "total amount standing to the credit of the Federation Account" referred to in Section 162 of the Constitution.  The Court was also not swayed by the Defendants' position that the use of the word "credit" in Section 162(1) of the Constitution presupposes that debits could be made from the revenue accruing to the Federation Account before the balance in the account is distributed to the FGN, State Governments, and Local Government Councils.

Consequently, the Court granted the AGRS' request for a refund of the Rivers State Government's share of the sums that had been deducted by the FGN and remitted directly to the NPTF from the Federation Account, as first-line charges.  However, the Court stopped short of making a similar order in respect of the other 35 States of the Federation who were not parties to the suit.

The judgement of the FHC comes at a time when loud and persistent calls are being made for increased fiscal federalism in Nigeria.  The Court's decision also sits perfectly well in the context of numerous existing, new, and proposed FGN levies that are (in the process of) being imposed directly or indirectly on companies' profits/incomes by various pieces of legislation, given that the laws stipulate that such levies should/would be paid directly into accounts other than the Federation Account.

For instance, companies operating in the Nigerian oil and gas industry suffer a 1% Nigerian Content Development (NCD) Levy on the total contract value of every contract awarded to them in respect of any project, operation, activity, or transaction in the upstream sector of that industry.  That NCD Levy is paid into a Nigerian Content Development Fund (NCDF), and not into the Federation Account.  Similarly, GSM service providers, telecommunications companies, cyber companies, insurance companies and financial institutions are required to contribute 1% of their profit before tax to the National Information Technology Development Fund annually.

Just last October, the Nigerian Senate passed a Tertiary Hospitals Development Tax (THDT) Fund Bill, 2021.  The Bill (which is yet to be enacted) seeks to establish a THDT Fund which will be funded by multiple sources, including 1% of petroleum companies' tax paid on total barrels of crude oil produced yearly, 1% of mobile phone service providers tax paid on airtime and data sold yearly, 1% of beverages and breweries companies' tax paid on profit yearly declared, 1% of cement companies' tax paid on profit yearly declared, 1% of paint and chemical manufacturing companies' tax paid on profit yearly declared; and 1% of tobacco companies' tax paid on profit yearly declared.

In November 2021, the House of Representatives approved a Nigerian Postal Service Bill, 2021, which also contains a taxing provision.  Specifically, Section 45 of the NIPOST Bill empowers the Nigeria Postal Commission to grant "licenses for the carrying on of postal services, cargo, E-commerce, courier express services and logistics"; while Section 68(2)(b) of the Bill requires licencees – many of which are generally known to have very low margins – to contribute 2% of their annual turnover as annual levies to a Universal Postal Service Fund!

Add to all these the fact that the Finance Act, 2021 recently introduced changes to the National Agency for Science and Engineering Infrastructure (NASENI) Act, which are expected to activate the imposition of a 0.25% NASENI Levy on the profit before tax of companies or firms operating in the banking, mobile telecommunications, information and communications technology, aviation, maritime and oil and gas sectors that earn an annual turnover of at least NGN100 million, with effect from 1 January 2022.  The NASENI Levy will be paid into a Fund to be set up by the NASENI pursuant to Section 20 of the Act – and not into the Federation Account.

Generally, companies are also subject to certain employee-related taxes, such as the Industrial Training Fund (ITF) and Employees' Compensation Fund (ECF) contributions, which are payable (into the ITF and ECF) at the rate of 1% of payroll.

What is more, even the National Youth Service Corps (NYSC) may soon have a dedicated Fund into which 1% of the net profit of all companies operating business in Nigeria will be paid, going by the current provisions of the NYSC Fund (Establishment) Bill, 2021.

Based on a strict interpretation of the FHC judgement, some analysts are of the view that all of the above levies and contributions could be adjudged to be inconsistent with Section 162 of the 1999 Constitution, if challenged at the FHC, for the simple reason that the levies are being paid (or will be paid) directly into sundry Funds, rather than into the Federation Account.  Thus, given the current macroeconomic situation in Nigeria, and the rate at which additional taxes are being imposed on the profits/incomes of companies (over and above the corporate income taxes and capital gains taxes they are constitutionally liable to), it is no surprise that the FHC judgement has been hailed by many taxpayers as a very positive development.  This is notwithstanding these taxpayers' desire to see a marked improvement in the security situation in the country.  That begs the question: Will the FHC's decision be a panacea for the multiple taxation of companies' profits, or will it merely provide companies with a breather?

That question raises many others whose answer will depend on many variables.  For example, it will depend on whether the FHC's judgement has been/will be appealed by the FGN, and if the judgement is overturned by a higher court.  In this regard, the jury is out on whether Section 80(1) and (3) of the 1999 Constitution, which provides for the establishment of public funds for specific purposes and for the funding of such funds in accordance with the provisions of relevant Acts of the National Assembly, could influence a higher court's decision on the constitutionality or otherwise of Section 4 of the NPTF Act.

Besides, could the FGN simply line up the provisions of Section 4 of the NPTF Act (and the charging sections of other pieces of legislation setting up dedicated funds) with those of the Constitution, and thus require that the affected levies be paid into the Federation Account?   How would such a change affect the revenue that would accrue to the FGN from those levies and how effectively those funds are utilised?  Could that cause the FGN to consider increasing the rate of the NPTF Levy, for instance?

Will the relevant tax and regulatory authorities continue to enforce the collection of the NPTF Levy and other similar levies despite their presumed conflict with the 1999 Constitution?  Can taxpayers claim a relief from the nullification of Section 4(1)(b) of the NPTF Act by the Court considering that they were not parties to the suit?  Will taxpayers need to challenge the constitutionality of the NPTF Levy and other similar levies in order to free themselves from the increasing burden of multiple taxation? Are many taxpayers likely to do so?

What are the main reasons for the recent proliferation of specific funds in new pieces of legislation in Nigeria?  Are the funds being created purely to mobilize revenues to enable government agencies to achieve their statutory mandates, or are there other considerations?  Have most of the specific funds created in the past (e.g., the NCDF, ITF and ECF) been judiciously utilized, or have there been cases of misappropriation?

So, will the FHC's decision be a remedy to the multiple taxation of companies' profits in Nigeria, or will it merely provide companies with a brief respite?  To us, the judgement does not seem like a remedy, as far-reaching constitutional, legislative, political and administrative reforms are required to address the nagging issue of multiple taxation in Nigeria.  But, perhaps, it is safe to answer the question by saying "only time will tell"!

Footnote

1. Suit No. FHC/ABJ/CS/511/2020.

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