February 2, 2019
On 11 December 2018, the Court of Appeal (COA or the Court), in the case between Best Children International Schools Limited (BCIS Limited or the Company) vs Federal Inland Revenue Service (FIRS), held that the Company is liable to Companies Income Tax (CIT), regardless of its claim to be an educational institution. The Court reached this decision on the grounds that BCIS Limited failed to prove that it qualified as an educational institution entitled to the tax exemption granted under Section 23(1)(c) of the CIT Act.
BCIS Limited is an educational institution registered as a private company limited by shares under the Companies and Allied Matters Act (CAMA). On 1 September 2014, the FIRS issued an assessment of over N30 million to BCIS Limited consisting of CIT, Education Tax (EDT), Withholding Tax, and PAYE tax for 2008 to 2012.
BCIS Limited instituted an action at the Federal High Court (FHC) challenging the said assessments on the grounds that it is exempted from paying corporate tax under the CIT Act because it is an educational institution. However, the FHC ruled in favour of the FIRS holding that BCIS Limited, being a company limited by shares, was liable to the tax as assessed by the FIRS because only companies limited by guarantee qualify for tax exemption under Section 23(1)(c) of the CIT Act. Dissatisfied with the decision of the FHC, BCIS Limited appealed to the COA.
The crux of the issues before the COA was whether BCIS Limited qualified for corporate tax exemption under Section 23(1)(c) of the CIT Act.
The COA ruled in favour of the FIRS, affirming the decision of the FHC. Specifically, the Court held that BCIS Limited is a profit-making company limited by shares and is therefore liable to tax.
In delivering the Judgment, the Court held that BCIS Limited has to prove that it is a company engaged in ecclesiastical or charitable or educational activities of a public character to qualify for tax exemption under Section 23(1)(c) of the CIT Act. In addition, the Court held that BCIS Limited has to prove that its profits are not derived from any trade or business it carries on.
Furthermore, while the FHC had ruled that only companies limited by guarantee, which are prohibited from distributing profits by CAMA, are entitled to the tax exemption, the COA simply affirmed the decision of the FHC. According to the COA, the Company failed to adduce evidence to demonstrate that it is a company limited by guarantee and failed to prove that it is an academic institution or an institution of public character qualified for tax exemption under the CIT Act.
The Judgment in this case implies that only companies limited by guarantee can be exempted from CIT under Section 23(1)(c) of the CIT Act. Thus, educational institutions, charitable organization and ecclesiastical bodies that are registered as companies limited by shares or other forms of companies other than companies limited by guarantee may not enjoy tax exemption status under Section 23(1)(c) of the CIT Act.
This Judgment is a departure from established practice that a company solely engaged in educational activities should be exempt from CIT. In a similar case between American International School of Lagos (AIS) v FIRS, the Tax Appeal Tribunal held that AIS, being an educational institution of public character, was not liable to pay corporate tax. Although AIS is a company limited by guarantee, the crux of the issues in that case was whether AIS was an educational institution of public character and not the form in which AIS was registered under the CAMA.
While Section 26 of the CAMA provides that a company, which is to be formed for the purpose of promoting education should be registered as a company limited by guarantee where it does not intend to distribute its profits to its members, the clear words of the Section 23(1)(c) of the CIT Act makes no reference to the form of the company in granting tax exemption. Thus, one would have expected that Section 23(1)(c) should ordinarily apply to all forms of companies given that tax laws are to be construed narrowly and strictly and the ordinary meaning of words used in tax laws should be applied.
Nevertheless, this Judgment stands as a Judicial Precedent until it is overturned by the Supreme Court, even though it is open to debate from taxpayers and practitioners. It is important for affected taxpayers to engage their tax and legal advisers to review their peculiar situation and provide relevant advice to them on how to mitigate tax liabilities that may arise from the enforcement of this judgment on taxpayers with similar structures.