The Companies Income Tax Act ("the Act") is the enabling legislation for the assessment and payment of income tax on companies in Nigeria. Sections 78 to 81 of the Act provides for the deduction of income tax payable on interest, rent, dividend and other sources of profits. Parties making qualifying payments to companies liable to tax under the Act are required to deduct tax at source thereon and remit same to the Federal Inland Revenue Service (FIRS, or "the Service") or the State Internal Revenue Services, as the case may be. This deduction is referred to as Withholding tax (WHT).
The applicable WHT deduction rates for payments relating to interest, rent and dividend are clearly spelt out in the Act. Nevertheless, the administration of deduction of tax at source from other sources of profits (other than interest, rent and dividend) is deputized to the discretion of Service. Specifically, Section 81(1) of the Act (as amended) provides that " Income tax assessable on any company, whether or not an assessment has been made, shall, if the Board so directs, be recoverable from any payments made by any person to such company". Pursuant to this Section, the Service has issued several circulars on the general objective and administration of WHT deduction and payment. The circulars reiterate the WHT deduction rates specified in the Act and also provided additional ones to cover those not mentioned in the Act.
Notwithstanding the above, Section 81(6) of the Act provides that " Every person required under any provisions of this Act to make any deduction from payments made to any company shall account to the Board in such manner as the Board may prescribe for the deduction so made". In essence, only persons required to deduct WHT under Section 81 of the Act are liable to the provisions thereunder.
In this regard, Section 23 of the Act (as amended) provides for certain profits to be exempted from income tax under the Act. Some of these profits include the profits of a company being a statutory or registered friendly society, the profits of small companies (as defined in the Act) the profits of any company engaged in ecclesiastical, charitable or educational activities, the profits of a company generated from export sales (subject to certain conditions), the profits of any company being a trade union registered under the Trade Unions Act etc. Naturally, tax-exempt companies may be given to the assumption that their tax-exempt status is all encompassing, and that they are relieved of all related tax obligations i.e. tax registration, tax fillings, WHT deduction obligations etc. To this end, the concluding paragraph of Section 23 1A of the Act provides that "Nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78, 79 or 80 of this Act, such that the provisions of sections 78, 79 and 80 of this Act shall apply to a dividend, interest, rent or royalty paid by a company exempted from tax under subsection (1) (a) to (e), (h) to (/), (o), (q), (r) and (t). This section clarifies that the tax-exempt status of a company does not exempt it from complying with the provisions on the deduction of tax at source in Section 78, 79 ad 80 of the Act. However, there is no mention of any compliance requirements with respect to Section 81 of the Act. One can imply that tax-exempt companies under Section 23 of the Act are not required to comply with Section 81 of the Act – on the deduction of WHT from payments other than interest, dividends and rent – and by extension, not required to comply with the WHT regulations or the Service's directives and information circular(s) with respect to WHT deductions from payments other than interest, dividends and rent.
Of course, there are several matters arising from this; if indeed, it is the intent of the law to relieve tax-exempt companies from WHT obligations under Section 81 of the Act, it is surprising that there is no existing FIRS information circular or directive confirming this. In addition, tax audits being carried out on these tax-exempt companies still cover WHT deduction obligations. It is also less arguable that the intent of the law is to relieve the tax-exempt companies from the administrative burden of WHT deduction and remittance (small companies, as they are currently tax exempt under the Act, are likely to be more disposed to this presumption given that they are currently exempted from VAT filing and payment), since these tax-exempt companies would still incur the related costs associated with the deduction and remittance of WHT on interest, dividend, and royalty payments.
Further, if indeed, tax exempt companies are not required to comply with Section 81 of the Act, exactly how will the WHT due on their vendors' income be accounted for? Will these vendors have to resort to the impracticable option of self-deducting WHT on their invoices and remitting same to the tax authorities?
Regardless of the above, going by the strict interpretation of the Act, tax-exempt companies may have a case for deciding not to comply with any provisions or directives under Section 81 of the Act. It is therefore important that the Service provides additional clarity on what the intent of the law is in this regard to avoid unnecessary tax disputes on the subject matter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.