September 10, 2019
The introduction of withholding tax (WHT) provisions in the Nigerian tax laws in 1977, imposed on taxpayers the obligation to deduct tax at source on payments for qualifying transactions. The tax deducted are to be remitted to the relevant tax authority within a statutory timeline, with penalty and interest charges imposed on defaulting taxpayers.
However, the drive by taxpayers to comply with their withholding tax obligations appear impaired by the existence of certain vague provisions in the Nigerian tax laws. Where tax laws are difficult to understand, conflicting interpretations are given to these vague provisions and this may have detrimental effect on a country’s tax system, through limited compliance by taxpayers and punitive interpretations by the tax authorities.
One key area of contention is the lack of clarity on the Phrase ‘sales in the ordinary course of business’, which the WHT Regulations issued pursuant to the Companies Income Tax Act and Personal Income Tax Act, have exempted from WHT. While the WHT Regulations lists certain transactions on which tax is to deducted, which include “all types of contracts and agency arrangements, other than sale in the ordinary course of business” (emphasis ours), the WHT Regulations neither defined nor provided any commentary on what constitutes a sale in the ordinary course of business.
Recognising the likely impact of this ambiguity on taxpayers’ compliance with their WHT obligations, the Federal Inland Revenue Service (FIRS) attempted to provide some clarity on the phrase via the issuance of WHT Information Circulars in 1998, 2002, 2006 and 2009. Although the aim of the Circulars were to provide clarity and correct any ambiguity and misinterpretation with the operation of WHT in Nigeria, its effort to eliminate the controversy on what constitutes “sale in the ordinary course of business” further exacerbated the ambiguity. Taking the 2006 Circular as a case in point, the FIRS modified the provisions of the Regulations to “all types of contract and agency arrangements, other than outright sale and purchase of goods and property in the ordinary course of business”.
While the introduction of these additional words by the FIRS may have sought to clarify the issue, it appeared to focus more on qualifying the word “sale”, rather than explaining the Phrase. Furthermore, the FIRS highlighted in the 2006 Circular that where a manufacturer delivers its normal products to its distributors and dealers for sale; and where a distributor earns income from their trading activities, such transactions are sales in the ordinary course of business and are not liable to WHT. In 2009, the FIRS issued another Circular and further attempted to clarify the ambiguity by subjecting “all types of contracts and agency arrangements” to WHT while deleting the ‘sale in the ordinary course of business’ exemption. While the modification in the 2009 Circular appears a quick fix, it is instructive to note that the Nigerian Courts have held that FIRS’ circulars are merely explanatory notes that do not carry the force of law and cannot modify the provisions of an enacted legislation.
The definition of, and what constitute ‘a sale in the ordinary course of business’ has not really been tested in the Nigerian Courts. However, the Black’s Law Dictionary defines the phrase “ordinary course of business” as the normal routine in managing trade or business. This definition suggests that a sale is made within the ordinary course of business, if the transaction aligns with the routine or customary practices associated with the business of the seller. Therefore, sales made as part of a predominant business practice can be construed as ‘a sale in the ordinary course of business’. This position appears consistent with the decisions reached by a United States Tax Court in the case Grober v. Commissioner, where the Court construed the sale of machinery and equipment as a sale in the ordinary course of business; after considering the aims of acquiring and disposing the assets, the continuity of the sales, frequency of sales and the overall history of the sales operations.