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LAW OF TAXATION II

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This PDF contains succinct yet detailed Key-Points on the Nigerian Law of Taxation (Second Semester). The contents are in line with outlines of Nigerian Universities (Faculties of Law) and recommended textbooks. This PDF note is for providing a quick grasp / understanding for Students and Practitioners.

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PREVIEW LAW OF TAXATION II

 

Contents

HISTORICAL BACKGROUND OF THE CITA. 2

AMENDMENTS/IMPROVEMENTS INTRODUCED. 2

The FIRS Establishment Act 2007. 3

COMPANIES INCOME TAX (CITA). 4

Section 23: EXEMPTED PROFITS. 5

SELF ASSESSMENT. 8

EDUCATION TAX. 10

TECHNOLOGY TAX. 11

STAMP DUTIES. 12

VAT. 15

CAPITAL GAINS TAX. 19

TAXATION ON INVESTMENT INCOME. 21

PETROLEUM PROFIT TAX. 22

DIFFERENCES AND SIMILARITY BETWEEN TAXATION UNDER PPT AND TAXATION UNDER CITA. 25

 

 

 

LAW OF TAXATION PART II.

HISTORICAL BACKGROUND OF THE COMPANIES INCOME TAX.

HISTORICAL BACKGROUND OF THE CITA.

The war had far reaching effects on the number of viable companies left. Thus, the first CITA (of 1939) died prematurely.

Before the CIT 1939, companies’ income was taxed under the Personal Income tax ordinance. Then came the 1961 Companies Income Tax Act. After undergoing several amendments, the Principal act was enacted in 1979. This principal act underwent several amendments and was consolidated in the 1990 Act Cap 60 LFN 1990.

CIT (Companies Income Tax) has always been a federal matter. It is contained in Item 59 of the Exclusive Legislative list.

In 2002-3 the Dotun Philips Tax Study Group was set up to review the Nigerian tax system. It noted the following:

  • CIT should be reduced from 30 percent to 20 percent because a low tax regime is the best incentive especially when coupled with good governance and economic stability.
  • The tax system was unduly complex and poorly administered therefore constituting more nuisance than value.
  • The tax system should be simplified such that tax be levied on only income and expenditure.
  • Companies that are making losses should not be taxed… furthermore, Tax exempt companies should not be subjected to withholding tax.

To this effect, there is an Amendment Act of 2007 which does not really implement any of the recommendations. Note however that the Amendment process culminated in the Ambivalence we have today as to the applicable CIT law. The dilemma can be traced to the attempt to reform the tax law by the Dotun Philips Tax Study Group in 2003. Their bill was made based on the 2004 LFN. They were however requested to go back and make the revision based on the 1990 LFN. By the time this was done, LFN 1990 had been repealed. This notwithstanding, the CITA 2007 (which was made based on the repealed LFN 1990) was validated by the president. We now have a situation where the major players, lecturers and students are confused as to the applicable law.

 

AMENDMENTS/IMPROVEMENTS INTRODUCED.

  1. Streamlining Companies Tax:
  • The Federal Inland Revenue Service was Established under the FIRSEAct 2007 to replace the FBIR which was recognised under Section 1 of the CITA.
  • TAT Established in Section 59. This replaced the Body of Appeal Commissioners.
  • Part 1 of the CITA was removed. Similar provisions have been made in the FIRSEA.
  1. Matching Concept: has been abolished in Section 19. To this effect, redemption of tax credit is no longer limited to the year in which the credit note was received. You can now redeem your last year’s tax credit this year. Although in practice, there might be delay.
  2. Minister’s power to vary/alter rate of tax removed from Section 23 of the principal Act.
  3. Penalties have been reviewed to meet current circumstances and deter offenders. E.g. late filing has been increased from N500 to 25k, pre-operational levy (not starting the business you registered within 6 months) has been increased from N500 to N20,000. Section 40(4) of the Amendment Act.
  4. Some Allowances and deductions have also been Reviewed:
  • Under Section 8, losses can now be carried forward ad infinitum. This is in cognisance with the Tax Study Group’s recommendation.
  • Section 14 has removed the 1 percent bonus for prompt filing.
  • Donations to universities… deductible under s 21.
  • Allowance now made in respect of cottage industries.
  • 5 percent rural investment allowance removed in Section
  1. Tax Clearance Certificate introduced: this certificate may be required for certain transactions.
  2. Section 5 of the Amendment Act exempts the profits of companies in export processing zones or free trade zones where 100 percent of the company’s production is for export.
  3. Revisions: provisions on taxation of insurance companies, deduction of tax at source, amongst other were reviewed in a bid to counter evasion.
  4. A new section; call for returns, books and evidence was introduced.

Amongst others. These improvements are applauded although they appear to be cosmetic.

OUR DISCUSSION SHALL BE MADE ON SECTIONAL BASIS FOR CLARITY. PLEASE HAVE YOUR LAWS BY YOUR SIDE.

The FIRS Establishment Act 2007.

Established the FIRS to replace FBIR. Section 1(2) of the FIRSEA provides that it shall be a body corporate with perpetual succession and common seal which can sue and be sued and hold or dispose property. The FIRSEA is not a taxing statute. It just establishes an authority to administer tax.

Section 2 provides that the objects of the service shall be to control and administer tax and account for such taxes collected.

Section 3 Establishes the Federal Inland Revenue Service Board which shall supervise the FIRS the board shall be composed of:

  • An Executive chairman and six other members with requisite qualification who shall be appointed by the president.
  • A representative of the AG Fed, Governor of CBN or his representative.
  • Representative of the minister of finance.
  • MD of NNPC, Comptroller of Customs, Registrar General and so on.

Section 7 and 8 provide for the powers and function of the board and service. Some of which include:

  • Assessing, collecting, recovering and accounting for tax collected from chargeable persons, companies and enterprises.
  • Reviewing the tax regime in collaboration with relevant agencies.
  • Examination, investigation and enforcement of tax compliance, eradication of tax evasion in collaboration with relevant agencies.
  • Maintain database of taxable persons, individuals and companies.
  • Enlightenment and promoting public awareness.
  • Provide the general policy guidelines relating to the functions of the service.
  • The Tax Appeal Tribunal is established under Section 59 to settle disputes arising from operations of the Act.

 

COMPANIES INCOME TAX (CITA)

106 Sections, 14 parts and 6 schedules. Section 1-8 has been removed so we shall start our sectional discussion from:

Section 9: is the charging provision. It provides the basis of liability. On the profits of any company accruing in, brought into or received in Nigeria in respect of:

  1. Any trade or business for whatever period of time: “trade/business” was not defined in the act. What amounts to trade or business is a matter of fact based on the circumstances of each case. The 1955 Royal Commission of UK submitted certain badges of trade. Trade has an expanded meaning while business has a wider meaning. In construing such, we look at:
  • The subject matter of the transaction.
  • Length of the period of ownership.
  • Frequency of transaction: where frequent, it may amount to trade. However, in Arbico V FBIR, the court noted that the disposition of the landed property to the government by the plaintiff were taxable notwithstanding that it was a one-time thing or that the company was not in the business of buying and selling. Holding that one transaction could amount to trade or business. As Section 9(1a) states ‘for whatever period of time’
  • Adaptation: in Cape Brandy Syndicate V IRC: three taxpayers amalgamated and mixed three types of drinks and encased it in different bottles under a new name. They disagreed that they were involved in trade. This argument was rejected and the court held in favour of the authorities… i.e. that they were involved in trade.
  • The motive: in Religious Tract and Books Society case, the object of the society was distributing tracts. It then set up a book store. Court held that the society was engaged in trade.

Worthy of note is Section 9(1d) which paints a wide base… “any other income”. Thus, even if the transaction does not fall under what was listed in sub a(trade), b(rent)  and C(investment income), it may still be taxed under Section 9(1d)

From the foregoing, it is apparent that the CITA seeks to tax companies on their profits which have a connection with Nigeria notwithstanding that they are not incorporated or resident in Nigeria.

Section 11 exempts interest on loans to agricultural and like manufacturing businesses… foreign loans.

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