December 18, 2019
On 24 September 2019, the Tax Appeal Tribunal (“TAT” or “the Tribunal”), sitting in Lagos, upheld the imposition of excess dividend tax under Section 19 of the Companies Income Tax (CIT) Act on income which is exempted from tax under the Companies Income Tax (Exemption of Bonds and Short Term Government Securities) Order, 2011 (CIT Exemption Order).
The TAT also held that United Capital Assets Management Limited (UCAM) and United Capital Trustees Limited (UCT) (“the companies”) were entitled to a waiver of interest and penalty on their tax liabilities even though the Federal Inland Revenue Service (FIRS) wrongfully denied them participation in the erstwhile Voluntary Assets and Income Declaration Scheme (VAIDS or the Scheme). These decisions were reached in the case between United Capital Assets Management Limited (UCAM) v Federal Inland Revenue Service (FIRS).
UCAM and UCT are subsidiaries of the United Capital Group Plc. The companies separately invested in government securities and corporate bonds, from which they earned income which was exempt from tax, pursuant to the CIT Exemption Order.
In 2017, the FIRS conducted separate desk reviews on the affairs of UCAM and UCT for 2011 to 2016 and 2012 to 2016, respectively. At the end of the reviews, the FIRS, relying on Section 19 of the CIT Act, assessed the companies to additional CIT liability of over N3 billion and N1 billion, respectively. The basis of the additional assessments was that both companies distributed dividends to their parent company in excess of their total taxable profits declared in the said years.
The companies initially failed to object to the assessments within the 30-day timeframe specified under the CIT Act. However, they filed separate appeals before the TAT, which were consolidated as the facts and issues for consideration were similar. The companies also made applications to remediate their tax affairs under the Federal Government’s tax amnesty programme: VAIDS. VAIDS granted a waiver of interest and penalties to voluntarily self-assessed tax liabilities. The applications were, however, rejected by the FIRS.
At the TAT, the companies argued that Section 19 of the CIT Act is of general application while the CIT Exemption Order which was issued later in time is of specific application. Thus, the FIRS should have applied the provisions of the Order to exempt the said dividends from the application of Section 19 of the CIT Act as they were paid out of the exempt profit. On its part, the FIRS contended that Section 19 of the CIT Act was rightly applied to the income of both companies. In addition, the FIRS argued that the failure of the companies to object to the assessments within the time prescribed by law rendered the assessments final and conclusive.
In its decision, the Tribunal ruled in favour of the FIRS, holding that the dividends declared by the companies were properly subjected to tax under Section 19 of the CIT Act. The TAT relying on the decision of the Court of Appeal in Oando v FIRS emphasized that any dividend paid in excess of total profits would be subject to tax under Section 19 of the CIT Act and that the Section does not concern itself with the source or origin of the dividend being paid. In reaching its decision, the TAT further held that the CIT Exemption Order is a subsidiary legislation which is inferior to the CIT Act. Thus, the provisions of the Order cannot override the provisions of the CIT Act.
On the issue of whether the assessments had become final and conclusive, the TAT held that the companies’ failure to object within the statutory stipulated timeframe and manner of objection had rendered the assessments final and conclusive, notwithstanding the fact that the companies had filed an appeal at the TAT.
However, the TAT held that the FIRS was wrong to have refused the companies’ applications to participate in the VAIDS, because Paragraph 4 of the VAIDS Executive Order, made the Scheme open to all persons and entities in default of their tax liabilities. Consequently, the TAT held that the FIRS should not have charged interest and penalty on the unpaid portion of the assessments, given that the Scheme granted a waiver of interest and penalties to eligible companies.
The TAT’s decision and the recurrent position of the courts and tribunals on this issue continue to reinforce what many commentators see as a narrow interpretation of Section 19 by the tax authorities and the courts to the effect that once dividends are paid out in the manner described under the Section then they would be taxed without a consideration of any special circumstances that may have given rise to the payment of the dividend such as payment from retained earnings or, in this regard, profits exempt due to an Exemption Order, duly issued by the President. In addition, the decision of the Tribunal to uphold the argument by FIRS, that the Appellants fell under the ambit of Section 19 even though they enjoyed the exemption granted under the CIT Exemption Order, seems to nullify the benefit that the Order intended to grant to companies investing in government bonds and securities. It can therefore be argued that the Tribunal’s decision that the CIT Exemption Order is an inferior legislation whose provisions cannot override those of the CIT Act, is an attempt to take away the power of the President duly given him by the National Assembly under Section 23(2) of the CIT Act to grant such exemptions. The Tribunal might have not considered this implication, otherwise, it might have refrained from making such a general statement.
Thankfully, the Finance Bill, 2019, which was recently passed by the National Assembly, has addressed the controversies surrounding the application of Section 19 of the CIT Act, as it proposes an amendment of the Section by introducing categories of profits that will not be subjected to excess dividend tax, which includes profits that are tax exempt under the CIT Act, amongst others. Once signed into law, the Finance Bill, should address the concerns of taxpayers on the application of Section 19 and hopefully put to bed all the controversies.
Another important issue decided by the Tribunal relates to its powers to extend the time within which a taxpayer can object to an assessment. The Tribunal in this regard, clarified, that while it has the powers to extend the time within which to appeal a decision, this did not extend to the time within which a taxpayer may object to a decision. According to the Tribunal, it may, in deserving cases, expand the time within which a taxpayer may appeal to it. However, taxpayers are still obligated to ensure they object to assessments, within the time provided in the tax laws, as otherwise, the Tribunal will necessarily deem such assessment as final and conclusive except where it is found to be defective or not issued in line with the provisions of the law.
On the issue of eligibility to participate in the VAIDS, it can be implied from the Tribunal’s decision that defaulting taxpayers who had applied to participate in the Scheme but were denied such requests can still obtain a waiver of their interest and penalties which had accrued when the application was made. However, it is doubtful if this part of the Ruling will still be of benefit to any taxpayer, since the Scheme has since ended.
As always, taxpayers are advised to continuously seek for and obtain professional guidance on tax issues affecting their businesses in order not to incur liabilities that can be avoided.