CHAPTER THREE: ISSUES INTHE TAXATION OF COMPANIES INCOME

3.1 INTRODUCTION

This chapter addresses certain legal issues arising from the

imposition and administration of companies income tax in Nigeria.

It starts by examining the legal basis for the taxation of

companies income in Nigeria. The relevant tax statute which

constitutes the legal basis for the taxation of companies income

is the Companies Income Tax Act (CITA). This statute today is

enmeshed in certain controversy with respect to the authentic and

valid version or edition of the law applicable to the

administration of companies income tax.

Other numerous issues in the taxation of companies income are

also closely examined in this chapter with a view to improving

the tax system. This work is interested in enthroning an

efficient tax system as such the recommendations made herein are

geared towards ensuring an efficient tax administration of the

companies income tax in Nigeria. Such other issues alluded to are

the inadvertent imposition of tax on the capital of the company

under the principle of minimum tax. Also the commencement rule,

wrought with justifiable disaffection from the point of view of

tax payers is critically examined. The provisions of the law

relating to excess dividends of a company are also objectively

analysed.

36 | P a g e

3.2 CONTROVERSIAL ISSUES IN THE TAXATION OF COMPANIES INCOME.

The taxation of companies income in Nigeria is wrought with

numerous legal issues some of which are avoidable. Starting with

the statute imposing the tax, the tax statute is short of

certainty. It is most absurd to say the least to realize that

there are different CITAs in vogue in Nigeria. The first is CITA

as compiled in the Laws of the Federation of Nigeria, 1990.1 The

second is the CITA contained in the Laws of the Federation of

Nigeria, 20042 and the last is the Companies Income Tax

(Amendment) Act.3

Furthermore, certain provisions of CITA are controversial and

their application has generated so much debate among the

stakeholders. The Tax Appeal Tribunal constituted pursuant to the

FIRS Act to adjudicate over dispute between taxpayers and the tax

authority is involved in a constitutional battle.4 The tribunal

has been a subject of constitutional uncertainty. The issue is

whether the tribunal as presently established is not inconsistent

with the provisions of Section 251(1)(a),(b) and (c) of the

Constitution of the Federal Republic of Nigeria, 1999, as

amended.5 The courts have not helped matters in resolving this

constitutional quagmire. Two conflicting decisions were handed1 See Cap.60, Laws of the Federation of Nigeria, 1990.2Supra note 6. 3 Act No 11 of 2007.4 The Tax Appeal Tribunal was inaugurated on 4th February, 2010 by the thenMinister of Finance, Dr. Mansur Muhktar.5 The provisions conferred exclusive jurisdiction on the Federal High Courtover civil causes and matters relating to the revenue of the FederalGovernment of Nigeria.

37 | P a g e

down by different divisions of the Federal High Court on the

constitutionality of the Tax Appeal Tribunal. There are very

interesting and cogent arguments on both sides of the divide. The

question however is whether this uncertainty does not project the

Nigerian tax and judicial systems in a bad light.

While the issue of the Tax Appeal Tribunal is treated in Chapter

Four, and Transfer Pricing in Chapter Five, other outstanding

issues are considered hereunder.

3.2.1 THE TAX STATUTE

There is no justification whatsoever for the circulation of

different editions of the Companies Income Tax Act (CITA) at the

same time. The version adopted by the Federal Inland Revenue

Service (FIRS) is different from the one contained in the latest

edition of the Laws of the Federation of Nigeria (LFN), 2004. We

have a situation where different sections are rightfully cited

for the same provisions and/or purports of CITA. Whatever

accounts for the present situation is not and cannot be a

justification for this anomaly at best it can only be an

explanation.

The principle is well settled in taxation that tax is statutory.

Also one of the cannons of taxation is certainty. Tax should not be

imposed arbitrarily6. The only way and perhaps the most widely

6I. A. AyuaThe Nigerian Tax Law1996 Spectrum Publishing, Ibadan. Page 7

38 | P a g e

acceptable mode of imposing a tax is through the statute wherein

contains all the provisions relating to the tax imposed.

Provisions relating to basic things such as tax rate, tax base,

tax net, time limit, offences penalties e.t.c are stipulated very

clearly in the statute.

The guiding principle for the interpretation of tax statutes is

well settled. Tax statutes are interpreted strictly. The

principle was expressed by Rowlett J. in Cape Brandy Syndicate v.

IRC other “one has to look merely at what is clearly said. There

is no room for any intendment. There is no equity about a tax.

There is no presumption as to tax. Nothing is to be read in,

nothing is to be implied. One has to look fairly at the language

used.”7

It is therefore an anathema in tax jurisprudence to have two or

more versions of a tax statute in force at the same time. The

situation is far from certain. It is confusion!8 The FIRS usually

makes reference to the oldest version of the statute which is

contained in the 1990 edition of the Laws of the Federal Republic

of Nigeria.9

7[1921] KB 64 at 71. See also Magg v. Ovam [1968] 3 All ER 1 at 5 perDanckwerts LJ.8For example the provisions relating to minimum tax is contained in Section 30of CITA while another person can rightfully cite the same provision as Section33.9 See Cap 60, LFN, 1990

39 | P a g e

The above situation came about as a result of series of events in

the area of law revision and amendment of the then existing

CITA.10 Before the year 2000, the only CITA in force was the CITA

Cap 60, LFN 1990 together with the subsequent amendments. The

government embarked on a law revision exercise to update and

collate in one collection, the laws of the Federal Republic of

Nigeria. This exercise culminated into the laws of the Federal

Republic of Nigeria (LFN), 2004 which did not receive the

requisite legislative blessing until 2007 via the passage of the

Revised Edition (Laws of the Federation of Nigeria) Act into law

by the National Assembly.

The various statutes contained in the 2004 edition of the LFN now

bears new labels in form of chapters with the first letter of the

statute forming the basis for arrangement in alphabetical order.

In the 2004 edition of the LFN, CITA is labeled as chapter C21.

All intermediate amendments of CITA before 2002 were synchronized

and included into Cap C21. This necessarily occasioned a re-

numbering of the sections just as the chapters were relabeled.

The 1990 CITA had 85 sections. There were 25 new sections that

were introduced by the various amending decrees. As such the 2004

edition now contains 106 sections. This explains why the same

provision in the 1990 edition may not retain its numbering under

10 See generally, Abiola Sanni “Problems of Determining the Applicable TaxLaws in Nigeria: Resolving the Dilemma for FIRS and Taxpayers” in Journal ofAfrican Law 2012.

40 | P a g e

the 2004 edition. When the 2004 edition of the LFN was eventually

given legal effect in 2007, the 1990 edition was in the same

breath repealed by the law makers.

Meanwhile there was a tax reform process in progress as at 2003.

With particulars reference to the taxation of companies income,

the Federal Government was looking to amend the tax law and also

to strengthen the administration of all Federal Taxes including

the companies income tax.11 The amendment bill presented to the

National Assembly was based on the 1990 edition of the LFN

because the 2004 edition of the LFN validation was not

forthcoming the lawmakers requested the FIRS to present the

amendment bill based on the 1990 edition. The amendment was

eventually passed into law in 2007. Unfortunately for the

sponsors of the bill, the 2004 edition of the Laws of the

Federation of Nigeria got its needed validation from the national

assembly only three months after the enactment of the amendment

act. Section 1 of the Revised Edition (Laws of the Federation of

Nigeria) Act provides that:

The laws of the Federation of Nigeria compiled and published in 2004 under theauthority of the Attorney General of the Federation and Minister of Justice arehereby approved by the National Assembly.

While Section 3 provides that “the Revised Edition (Laws of the

Federation of Nigeria) Act, 1990 is hereby repealed.” The repeal11Abiola Sanni “Recent Development in Company Income Taxation” in Bulletin forInternational Taxation, 2011, (Volume 65) No.1. November, 2011.

41 | P a g e

of the LFN 1990 presupposes that the whole collection of laws

contained in the 1990 LFN ceases to exist and in place of it is

the 2004 edition of the LFN.

Nothing can be used of a repealed law. According to the court in

the case of Ayorinde v. Oyo State Govt12

the immediate effect of a repealed statute is that it ceases to be an existing law”See Uwaifo v. Attorney General Bendel State &Ors [1982] 7SC 124, also cited as[1982] NSCE [Vol 13] 221 where Idigbe JSC stated as follows at pages 123 – 224:

“The rule of law relating to the effect at common law of the repeal of astatute is contained in two statements of much respected judges of thecommon law courts - Lord Tenterden CJ and Tindal CJ.

(1) It has long been established that, when an Act of Parliament isrepealed, it must be considered, except as to transactions past andclosed, as if it had never existed. (Surtees v. Ellison9 B&C, 750 per LordTenterden CJ

(2) The effect of repealing a statute is to obliterate it completely from therecords of Parliament as if it never existed except for the purpose ofthose actions which were commenced, prosecuted, and concludedwhilst it was in existence. [See Kay. v Goodwin [1830] 6 Bing 576 at582.

From the above observations of Lord Tenterden CJ and Tindal CJ, itfollows logically that the long-term effect of a repealed statute is that itceased to be an authority to ground or support any cause of actionthat arises after the statute was repealed, as in this case.

12[2007] ALL FWLR [Pt. 356] 709 at 709

42 | P a g e

Not even the saving provision contained in Section 2 of the

Revised Edition (Laws of the Federation of Nigeria) Act can

justify the continuous application of any statute in the repealed

LFN of 1990.13The Companies Income Tax (Amendment) Act of 2007

(Amendment Act) cannot by any stretch of imagination be

considered as a transaction past and closed. This is because the

Revised Edition (Laws of the Federation of Nigeria) Act was

passed into law weeks after the Amendment Act was passed into

law. Can it be argued that the Amendment Act is valid even after

the repeal of the substantive Act. It does not appear so. This is

because the Amendment Act cannot stand in vacuum. You cannot put

something on nothing and expect it to stand. The CITA contained

in the 1990 edition of the LFN no longer exists. As such the

Amendment Act which was based on the CITA 1990 cannot stand.14

The point was lucidly stated by Abiola Sanni thus:

The repeal of a law renders it legally impotent for the purpose of effecting legalrights in terms of conferring benefits or imposing obligations. When an act isrepealed it is taken as though it never existed…. Therefore, in view of the expressrepeal of LFN 1990 by the Revised Edition Act, it is submitted that any continuedreference to LFN 1990 by FIRS and consultants is questionable and not inaccordance with the law. The point being made here is that the use of LFN, 1990

13 Section 2 provides “Any inadvertent omission, alteration and amendment ofany existing statute shall not affect the validity and applicability of thestatute”.14See Macfoy v. UAC Ltd [1961] ALL ER 1169. See also the dictum of OgundareJSC in Oladoye v. Administrators Osun State [1996] 10 NWLR [Pt. 496] 38.“Where an enabling law is repealed or revoked any delegated legislation,instrument or order made pursuant thereof becomes of no legal binding effect,except for the right that has accrued prior to the repeal or revocation”.

43 | P a g e

in legal documents, judicial and legislative proceedings, legal opinion, e.t.c asreference to the extant tax law in Nigeria is most inappropriate, wrong andillegal, the law having been repealed by the Revised Edition Act and replaced withLFN 2004.15

It is therefore wrong from the legal and practical view-points

for anyone be it a tax payer, consultant or tax administrators to

continue to refer or act on the repealed statute or any amendment

based thereon. Unfortunately, there is no record of any legal

challenge against this unlawful act in any judicial proceedings

on the subject of companies income tax. The FIRS has continued to

issue its assessments and generally administer the companies

income tax in Nigeria based on the repealed CITA 1990 and the

amendment thereon. We submit that the absence of a high culture

of public interest litigation, using the judicial process to

challenge executive act has again played out here. For various

reasons, Nigerians are reluctant to challenge executive acts in

court and this has a negative impact on the system of governance

and the development of our jurisprudence generally.

The above argument is not intended to rubbish the amendment of

CITA. This is infact acknowledged as forming part of the much

needed reform of the Nigerian tax system. What is examined herein

is the circumstances that inadvertently rendered the amendment

unenforceable.

15Abiola Sanni Supra note 11 at page 10

44 | P a g e

The only existing law on companies income tax in our humble view

based on the foregoing is the CITA Cap C21 LFN, 2004. The only

way to incorporate the amendment is to re-present the amendment

bill based on the 2004 edition of the LFN to the National

Assembly for re-enactment. From the peculiar circumstances of

this suggested re-enactment, one would think that the process

would not be as rigorous and time consuming as in the case of a

regular legislative exercise since the amendment is just to be

made to conform with the sections and numbering in the 2004 CITA.

The government and FIRS have the simple task of explaining this

above scenario to the lawmakers to achieve a speedy consideration

and passage of the bill.

The current situation is unacceptable although largely untested

in a court of law. There is a very strong possibility that the

court would nullify any executive act done or carried out under

the repealed 1990 CITA in the face of a strong argument from a

deft advocate. Before it gets to this level, it is strongly

advised that the re-enactment of the amendment act be undertaken

as a matter of urgency.

3.2.2 THE COMMENCEMENT RULE

The Companies Income Tax Act (CITA) makes provision for the

taxation of newly incorporated companies during the early days of

commencement of business. Generally a company is taxed on its

45 | P a g e

profits on a preceding year basis.16 However, for a company that

has just commenced a trade or business, companies income tax is

payable in the year it commenced business. The tax for the second

year is assessable on the profits of the company for the first

twelve (12) months from the date of commencement of business.

While for the third year, the tax is assessed on the preceding

year basis. In effect a company, Bookers Nigeria Ltd which

commenced business in July 2000 for example, would have to be

assessed for tax three times for the first 12 months of

commencing business in Nigeria. The relevant provision of CITA is

reproduced below for clarity:

29(1) Save as provided in this section, the profits of any company foreach year of assessment from such source of its profits (hereinafterreferred to as “the assessable profits”) shall be the profits of theyear immediately preceding the year of assessment from each suchsource.

(3) The assessable profits of any company from any trade or business forthe year of assessment in which it commenced to carry on such tradeor business (or in the case of a company other than a Nigeriancompany for the year of assessment in which it commenced to carryon such trade or business in Nigeria) and for the two following years ofassessment (which years are in this section respectively referred to as“the first year”, “the second year”, and “the third year”) shall beascertained in accordance with the following provisions:

(a) for the first year the assessable profits shall be the profits of thatyear;

16 Section 29, CITA

46 | P a g e

(b) for the second year the assessable profits shall , unless such noticeas hereinafter mentioned is given, be the amount of the profits ofone year from the date of the commencement of the trade orbusiness as determined for the purpose of paragraph (a) of thissubsection

(c) for the third year the assessable profit shall, unless such notice ashereinafter mentioned is given, be computed in accordance withsubsection (1) of this section,

(d) A company shall be entitled, on giving notice in writing to theBoard within two years after the end of the second year, to requirethat the assessable profits both for the second year and the thirdyear (but not for one or other only of those years) shall be theprofits of the respective year of assessment;

The implication of the above rules for a company that has just

commenced trade or business in Nigeria is that it will be subject

to assessment in the first year of commencement of business. The

first year is any period on or before the 31st of December. Going

by the example above, Bookers Nigeria Ltd will be subject to

assessment on its profits between July 2010 and December, 2010

being the assessable profit for the first year.

The second year according to paragraph (b) quoted above, the

assessable profits will cover the income of the business between

July 2010 to July 2011 i.e. one full year, except if the company

elects to be assessed on the actual year basis for the second and

third year by giving the notice mentioned in paragraph (d). The

implication of this is that Brookers Nigeria Ltd which commenced

business or trade in July 2010 would have been subjected to

47 | P a g e

assessment two times within the first twelve (12) months of

commencing business in Nigeria.

For the third year, the rule reverts to the general provision of

assessment on the preceding year basis as provided in subsection

(1) of section 29. This again is subject to the company’s

election to be assessed for tax on an actual year basis. Thus the

practical implication of this is that Bookers Nigeria Ltd would

have been assessed on its profit for the first twelve (12)

calendar months of commencement of business in Nigeria three good

times. As said earlier, it is doubtful if this is the intendment

of the lawmakers. To tax a newly established company three times

within the first one year of commencing business is not what any

developing economy can afford. This has been severally criticized

as absurd,17 and nothing has been done to ameliorate the

situation.

Unfortunately, there is little or nothing anybody can do about

this going by the principle of interpretation of tax statutes.

According to Court of Appeal in Nigerian Breweries Plc v. Oyo State Board of

Internal Revenue18

17 O.K. Obayemi “Tax Litigation in Nigeria and A Review of Recent NigerianCourt Decisions on Taxation” in Research Journal of Finance and Accounting Vol.5, No.24, 201418 (2002) LPELR 8672 (CA) at P. 18.

48 | P a g e

Tax laws are strictly or narrowly interpreted from the bare words used in theenactment there is no presumption or equity about a tax – see Ahmadu & Anor v.The Governor of Kogi State &Ors (2002) 3 NWLR (Pt. 755) 502 at 522 thus:

“In a taxing legislation, one has to look at what is clearly said. There is noroom for any intendment. There is no equity about a tax. There is nopresumption about a tax. Nothing is to be read in and nothing is to beimplied, one can only look fairly at the language used. But strictness ofinterpretation may not always enure to the subject’s benefit, for “if theperson sought to be taxed comes within the letter of the law, he must betaxed, however great the hardship may appear to the judicial mind” PerLord Cairns – in Partington v. Attorney - general (1869) L.R 4 H.L. 100 at P.122.

The way out of the above absurdity is legislative intervention by

way of amendment of the relevant provisions of CITA to remove

this absurdity. Unfortunately, the Amendment Act of 2007 does not

address this point. The economic environment is harsh enough for

business to struggle to strive in Nigeria. Adding this burden on

newly established businesses is to say the least absurd. This is

tantamount to killing a baby business at infancy. There is no

assurance that a newly established company or business will

profit within the first twelve (12) calendar months of

commencement of business, let alone imposing the burden of

companies income tax on such business three times within that

period. The commencement rule should be abolished. It is fair

enough for companies income tax to be based on the preceding year

as the accounting period for tax purposes.

49 | P a g e

3.2.3 EXCESS DIVIDEND TAX

Under the relevant provisions of CITA, a company is required to

pay 30% of its taxable profit as income tax.19 In addition to

this, the company is also subject to Education Tax,20 information

technology tax [NITDA Levy],21 and Nigerian Content Development

Levy.22 All these taxes are based on the profit of the company.

One wonders what is left for the shareholders of the company as

their own return on investment by way of dividends. Furthermore

the company is obligated to deduct 10% as withholding tax before

paying dividends to its shareholders.23

The law further requires a company to pay 30% of the dividend

declared by it as tax as if the dividend is its total profit for

the year of assessment. This is applicable where the company is

not ordinarily liable to tax for that year of assessment due to

no taxable profit or less profit then the dividend. According to

section 19 of CITA;

“Where a dividend is paid out as profit on which no tax is payable due to:-(a) No total profits, or

19 Section 40(1) of CITA20 Education Tax Act as amended Cap E4, LFN 200421 National Information Technology Development Act, 200722 Nigerian Oil and Gas Industry Content development Act, 201023 Section 80, CITA

50 | P a g e

(b) Total profits which are less than the amount of dividend which is paid,whether or not the recipient of the dividend is a Nigerian Company, is paid bya Nigerian company, the company paying the dividend shall be charged totax at the rate prescribed in subsection (1) of section 40 of this Act as if thedividend is the total profits of the company for the year of assessment towhich the accounts, out of which the dividend is declared, relates.

The above provisions appears as an anti-avoidance scheme to

present a company who declares no profits from going back to

declare and pay dividends to its shareholders without paying

companies income tax. The general intendment of the provision is

understandable. How can a company who declares no taxable profits

declare and pay dividends to its shareholders. The payment of

dividends is inconsistent with the declaration of no taxable

profits or a lesser taxable profits.

However, the provision is being interpreted and applied by the

FIRS to levy tax on a company whose dividend exceeds taxable

profit regardless of whether the profits being distributed has

already been subjected to income tax or whether the profits is

exempted from tax. There are genuine situations where the

dividend may be higher than the taxable profits. The practice of

the tax administrator in this regard is discouraging investment

or re-investment of returns on portfolio investments in Nigeria.

A dividend income is not taxable in the hands of the investor

because it has already suffered 10% withholding tax.

51 | P a g e

Recently, this issue fell for consideration by the Tax Appeal

Tribunal.24Unfortunately the Tribunal upheld the application of

the rule. In the case of Oando Plc v FIRS25, the FIRS sought to tax

Oando on the dividends paid out to its shareholders out of its

retained earnings. The FIRS issued notices of additional tax

assessments on the Appellant for the years in which it recorded

no total profits or where it recorded total profits less than

dividends paid. The Appellant objected and filed an appeal to the

Tax Appeal Tribunal, Lagos Zone. Usually, the amount credited to

retained earnings comprise of profits that have already been

taxed in the accounting year they were transferred to retained

earnings.

The Appellant was able to establish that the amounts posted to

its retained earnings account were derived from its annual income

statements after paying income tax.26 The Tribunal held that when

the tax authority invokes Section 19 of CITA to declare dividend

as profits, it is implicit in the deeming order that such profit

has not suffered taxation, as that is the foundation for

justifiably taxing the profits so declared. This decision has

generated more controversies on this rule of excess dividends.27

The position is now far from settled. 24 Decision handed down on 18th July, 201525 (2014) 16 TLRN 9926 In Oando v FIRS (2009) 1 TLRN 61, the Federal High Court while consideringa similar issue, held that there was no conclusive proof that the dividends inissue were from Oando’s retained earnings. One would have thought that theCourt would have invalidated the additional assessments but for the lack ofevidence. 27 O.K. Obayemi Supra note 17

52 | P a g e

A situation where a holding company receives dividends from its

subsidiary and now intends to pay dividends to its shareholder

presents a scenario where the profits would suffer two or more

layers of taxation, thereby diminishing the return on investment

of investors. This cannot be the intention of the lawmakers. It

is therefore necessary to amend this provision to exclude profits

that have already suffered income tax and profits that are

exempted from tax such as profits of pioneer companies and

capital gains on stock.

3.2.4 TAX ASSESSMENT

The tax administrator is given broad power to assess a company to

tax for the relevant year of assessment. Assessment necessarily

involves the ascertainment of the taxable portion of the

companies income. The tax authority is guided by the financial

statement and returns filed by the company. The method where the

FIRS accepts and relies on the returns filed by the company is

referred to as “self-assessment”. Where the company fails to file

its return, FIRS assesses a company to tax based on its

discretion or the turn-over of the company. The relevant

provision of the law is reproduced below.

65(1) The Board shall proceed to assess every company chargeable with tax assoon as may be after the expiration of the time allowed to such company

53 | P a g e

for the delivery of the audited accounts and return provided for in section55 of this Act or otherwise as it appears to the Board practicable so to do.

(2) Where a company has delivered audited accounts and return, the Boardmay –

(a) accept the audited accounts and return and make an assessmentaccordingly, or(b) refuse to accept the return and, to the best of its judgment, determinethe amount of the total profits of the company and make an assessmentaccordingly.

(3) Where a company has not delivered a return and the Board is of theopinion that such company is liable to pay tax, the Board may, accordingto the best of its judgment, determine the amount of the total profits ofsuch company and make an assessment accordingly, but such assessmentshall not affect any liability otherwise incurred by such company byreason of its failure or neglect to deliver a return.

The assessment of a company to tax usually forms the basis of

service of a demand notice on the company. Secondly, this issue

of assessment is the major reason why the adjudication process is

put in place because it involves a determination of the amount

payable by the tax payer as tax to the government. The issue is

simple where the tax payer files its returns within time and pays

its tax as at when due. However where the company/taxpayer fails

or neglects to comply with the requirements of self-assessment,

the tax authority is left with no option than to resort to its

best of judgment assessment. This best of judgment assessment by

its nature is susceptible to abuse by the tax authority. The

courts have had to intervene on numerous occasions to caution

54 | P a g e

against an arbitrary imposition of tax on companies under the

guise of best of judgment assessment. This is because the company

as a taxpayer has the right “not to be arbitrarily taxed or over

assessed for the purposes of payment of taxes.28

One the other hand best of judgment assessment has been described

as a “very useful tool in the hand of tax authorities”.29 The essence of best of

judgment assessment is that, if a tax payer intends to avoid or

evade payment of taxes by not submitting its returns to the

relevant tax authority, the latter is justified to assess the tax

payer using its best of judgment. Also, a tax authority may

proceed to adopt a best of judgment assessment upon the

expiration of the time allowed a tax payer for the delivery of

the audited accounts and returns or where it appears practicable

to adopt a best of judgment assessment.”30

In FBIR v Omotesho31 NTC 57, the court held that the factors to be

considered in arriving at a best of judgment assessment are as

follows:

1. In making an assessment to the best of judgment against a person whodefaulted as regards a supply of information, the tax authority must not

28 Nnama M. Umenweke “Company Tax Assessment, Objections, Protests and Appealsin Nigeria” in Modern Practice Journal of Finance and investment Law (MPJFIL) Vol. 8, Nos3-4, 2004 page 61729 Bimbo Atilola “Best of Judgment Assessment: A Synoptic Guide to TaxOfficers and Practitioners” in Nigerian Tax Notes Vol. 15 No 11, 2010 HybridConsult Lagos Page 830 FIRS Information Circular No 2005/03 of February, 200631 1 NTC 57

55 | P a g e

act dishonestly or vindictively or capriciously. The assessment must be afair estimate of the proper figure of assessment and must take intoconsideration local knowledge and repute in regard to the assessee’scircumstances well as the previous returns and other matters which thetax authority thinks will assist in arriving at a fair and proper estimate.

2. Reasons should be given for differences in reliefs granted between twoyears where the circumstances are similar.

In Nigerian Breweries Plc v Lagos State Board of Internal

revenue32 the Court of Appeal held that a tax authority must act

reasonably and bona fide in the determination of best of judgment

assessments. From the foregoing, it is clear that the tax

authority is required to be fair and honest in undertaking a best

of judgment assessment which in our opinion is akin to a judge’s

exercise of judicial discretion. The tax authority has a duty to

act judiciously in exercising its discretion in assessment of a

tax payer. We respectfully submit that the provision of CITA

empowering the tax authority to exercise its discretion in

imposing best of judgment assessment on tax payers without any

guiding parameters is likely and has indeed been abused by the

tax authority and its agents.33 We therefore recommend amendments

to section 65(3) of CITA to include certain criteria that must be

used or observed by the tax authority in arriving at its best of

judgment assessment.

32 (2001) FWLR (part 72) 197233 See Nigeria Breweries Plc v Lagos State Board of Internal Revenue (supra)

56 | P a g e

Going by the provision of section 65(2)(b) of CITA, the tax

authority may resort to a best of judgment assessment where it

rejects the tax payer’s return as inadequate, incorrect, not a

true reflection of the company’s income, incomplete or for any

other reason. Where this is the case, the tax authority must

issue the tax payer with a formal rejection notice. This has been

held to be a condition precedent to the raising of a best of

judgment assessment on the company.34 In Reiss & Co. (Nig.) Ltd v FBIR,35

the court held that:

Although no guides are laid down for the exercise of the judgment in myopinion, the provisions of section 49(3) of CITA [now section 65(2)(b)]cannot be exercised where the company has rendered returns which haveneither been rejected as inadequate nor challenged as incorrect. I holdtherefore that there is no basis for the exercise of the discretion conferredon the Board.

The learned jurist also confirmed the absence of guides for theexercise of the best of judgment assessment. This in our opinionis a lacuna that needs to be filled by legislative exercise. Oncethis is done, the best of judgment assignment can then truly be abalanced and useful tool in the hand of the tax authority to beinvoked appropriately in deserving cases to prevent tax evasionand avoidance.

3.2.5 MINIMUM TAX

34

35 (1977)NCLR 443

57 | P a g e

CITA imposes minimum tax on companies that have no taxable

profits or a profit that is lower than the minimum tax. According

to section 33;

Notwithstanding any other provisions in this Act where in any year of assessmentthe ascertainment of total assessable profits from all sources of a companyresult in a loss, or where a company’s ascertained total profits resulted in no taxpayable or tax payable which is less than the minimum tax, there shall be leviedand paid by the company the minimum tax as prescribed by subsection (2) ofthis section.

This effectively means that a company that falls within the

parameters of the above provision will have to pay its tax out of

its capital. Although the provisions of section 33 appears to be

an anti-avoidance scheme, it does not take into cognizance, other

situations were a company genuinely has made no taxable profit or

made a profit less than the prescribed minimum tax.

It is important for the tax authority and by extension the

Federal Government to look closely at some of these provisions

vis-à-vis its economic policies on small and medium scale

enterprises. A government that wants to encourage the development

of small and medium scale enterprises cannot afford to chase

companies making no substantial profit out of business. Rather

the government should device a means to separate the wheat from

the chaff. This can be done by devising an objective mechanism to

investigate the accounts of such companies perpetually declaring

little or no profits. As such it may be necessary for the

58 | P a g e

government to take further steps in the application the provision

on minimum tax either by way of amendment or FIRS circulars

explaining the mode of enforcement of this provision, so that it

remains truly an anti-avoidance measure that it is thought to be.

Although it is true that the government hardly realize 50% of

what it is entitled to collect from all companies in Nigeria as

taxes due the fraudulent activities of company accountants,

lawyers, directors, consultants, and managers. Most companies

prepare two separate books of accounts; one for the normal

business activities of the company and the other which shows a

reduced profit for the accounting period for tax purposes.36

These category of companies need to be detected by extra-efforts

by the tax authority as opposed to applying this provision across

the board to avoid throwing the baby with the bath water.

3.3 THE LEGAL STATUS OF OFFICIAL CIRCULARS OF TAX ADMINISTRATORS

Tax information circulars refers to handbills, leaflets,

publications, press release, or notices commonly issued by tax

authorities as a guide to tax officers, tax consultants, and tax

payers, on the issue to which it relates. It usually contains

information relating to the way and manner a particular tax

provision is to be complied with.37 They are sometimes tendered

36 Meshach N. Umenweke “Understanding Taxation of Companies in Nigeria” inModern Practice Journal of Finance and Investment Law Vol. 8 Nos. 3.4 2004 page 649.37 Bimbo Atilola “Legal Status of Tax Information Circulars” in Nigerian TaxNotes. Vol 16 No 10, 2011

59 | P a g e

as exhibits in courts and tax tribunals to establish a point in

issue. In CBN v. Amao & Ors.,38 the court had this to say about

government circulars; “Government circulars convey government

policy and serve as the mouthpiece of government in such issues

and cannot be ignored by the court”

The FIRS has the statutory power to issue information circulars

pursuant to section 61 of Federal Inland Revenue Service

(Establishment) Act, which provides:

The Board may, with the approval of the Minister, make rules and regulations as inits opinion are necessary or expedient for giving full effect to the provisions of thisAct and for the administration of its provisions and may in particular, makeregulations prescribing the -(a) Forms for returns and other information required under this Act or any other

enactment or law; and(b) Procedure for obtaining any information required under this Act or any other

enactment.

This provision has been interpreted to include the power to issue

tax information circulars.39 This shows that tax information can

be quite helpful in shedding light on a tax issue arising from

the enforcement and application of a tax statute. The FIRS has

pursuant to this provision issued numerous circulars most of

which are readily available on its website.40 These circulars

38 (2007) ALL FWLR (Pt. 1614) 1490 at 152239 Bimbo Atilola Supra note 3740 www.firs.gov.ng

60 | P a g e

have been freely accessed by stakeholders and have been very

helpful.

However, a circular cannot be equated to a statute. Tax

information circulars cannot be used to curtail or expand the

provision of a tax statute.41 It can only explain the application

of a tax provision. This is perhaps the essence of tax

information circulars and no more.

Tax Information Circulars are in the class of subsidiary

legislation made pursuant to an enabling provision of a statute.

As such, the information circular cannot rightfully depart from

the spirit of the substantive law. According to Atilola, “like

subsidiary legislation, they derive their validity from the principal or the enabling

legislation.”42 It is our humble opinion that the tax authority

cannot by the mere issuance of tax information circulars seek to

amend the statute or derogate from any provision of the statute.

It is suggested that any such circular should be challenged in

court. It is trite law that an administrative direction cannot

revoke or override a statutory provision.43 As such the court

would not find it difficult to declare such circular null and

void. For the court to make this declaration, it has to be

established that the circular is contrary to the spirit and

intendment of the substantive tax statute. This issue was

41 Bebeji v. Abubakar (2000) 19 LRN 11742 Bimbo Atilola Supra note 3743 Bebeji v. Abubakar (supra),

61 | P a g e

considered by the Federal High Court in Halliburton West Africa Ltd v.

FBIR44, where the court held:

Exhibit 5 is an information circular dated 22nd March, 1993 issued for theinformation of general public and in particular all taxpayers representatives oradvisers and the staff of Revenue Service. It is neither a law nor a Regulation….The above is what the maker of Exhibit 5 considers to be his interpretation of theprovisions of the various Nigeria Tax Acts as amended to date and the DoubleTaxation Agreement between Nigeria and other countries. That is his personalopinion on a point of law.

The Supreme Court sums it up in the case of MAIDERIBE v F.R.N45 in

the of Mohammed JSC as follows:

Circulars are common form of administrative document by which instructionsare disseminated. Many of such circulars are identified by serial numbers andpublished and many of them contain general statements of policy. They aretherefore of great importance to the public, giving much guidelines aboutgovernmental organisation and the exercise of discretionary powers. Inthemselves, they have no legal effect whatsoever, having no statutory authority.

3.5 TAXATION OF FOREIGN COMPANIES IN NIGERIA

A company is resident in Nigeria under the extant laws if it is

incorporated or registered in Nigeria. Under the old

dispensation, residence was being determined by place of

management or control, which is still applicable in UK. This

means that a company can be resident in Nigeria by incorporation

44 2006) 7 CLRN 13845 (2014) ALL FWLR (part 717)SC 725 at 738

62 | P a g e

and also resident in UK if it is managed and controlled in UK.

This is known as international dual residence. A non-resident

company is any company that is not incorporated or registered in

Nigeria but derives income from Nigeria. The following are the

circumstances under which a non-resident company will be liable

to tax in Nigeria.

a. Income derived through a fixed base or permanent

establishment.

b. Income derived in Nigeria through a dependent agent.

c. Income derived from supervisory activity that last more

than three (3) months.

d. Income derived in Nigeria from a Turn-Key Project.

e. Income derived by non-resident company from professional

consultancy, Management and technical services rendered

in Nigeria. For this income, the withholding tax of 10%

is taken as the final tax.

f. Income derived by a non-resident company from investment

such as dividend, interest, rent and royalties. The

withholding tax deducted from these incomes is taken as

the final tax.

g. Income derived from a contract awarded to a Nigerian

company but sub-contracted to a non-resident company.

For tax purposes, the profit an overseas subsidiary is not deemed

to be derived in Nigerian and will therefore not be liable to tax

63 | P a g e

in Nigeria. It is only dividend received from such overseas

subsidiary that will be considered for Nigeria tax purposes. Also

technical and management fees paid to the Nigerian company by the

overseas subsidiary will be subjected to tax in Nigeria. Capital

allowance will be claimable on the assets of the overseas

subsidiary. Loss can also not be relieved since there is no group

taxation in the Nigerian tax context. CITA defines “Nigerian

company” as any company incorporated under the Companies and

Allied Matters Act or any other enactment replaced by that Act. A

“foreign company” means any company established under any law in

force in a territory or country outside Nigeria.46 Such foreign

companies are also referred to as non-resident company.

While a Nigerian company is taxable on its worldwide income, a

non-resident company is liable to pay tax in Nigeria on the

profits of its income attributable to the business or trade

carried on in Nigeria. Although it may seem impossible for a

foreign company to do business in Nigeria without first

incorporating a Nigerian company, it is nonetheless legally

possible for a non-resident to derive income on portfolio

investments which are legally subject to 10% withholding tax as

final tax payable on such incomes.47 Where a foreign company

earns income other than passive income from or in Nigeria, such

foreign company is required to register for tax and file full tax

returns.48

46 Section 11(9)(C ) CITA47 Section 80 CITA48 Section 60 CAMA.

64 | P a g e

This requirement is enormous for a foreign company on the one

hand and full of challenges for the tax authority on the other

hand. For example, it will be difficult for the tax authority to

verify the actual expenses incurred abroad or to determine

capital allowance attributable to the Nigerian operations of the

foreign company in order to establish the actual profits to be

assessed to tax. A recent decision of the Federal High Court in

Saipem Contracting Nigeria Ltd v FIRS49 appears to suggest that all income

arising from a contract with a Nigerian company is subject to

companies income tax and Withholding tax even if the services are

provided outside Nigeria.

The tax authority has always resorted to the turnover of business

as the basis for taxation under Section 30 of CITA. This is

referred to as deemed profit. In practice, the FIRS has

prescribed a tax of 20% of turnover derived from Nigeria as

deemed profit for the foreign companies as an alternative to

self-assessment which is based on the actual profits of the

company. In a twist of events, the FIRS now insist that foreign

companies must file their respective tax returns based on their

actual profits. The statement of turnover hitherto in use is no

longer acceptable to the tax authority. Foreign companies are now

required to file their annual returns including audited financial

statements and actual profits calculation.

49 FHC/L/CS/1081/2011 delivered on 27th March, 2014 by Hon. Justice Saliu Saidu

65 | P a g e

3.5 CONCLUSION

We have examined the various aspects of the companies income tax

law and administration that are in need of legislative

intervention. The provisions of the tax statute on minimum tax,

excess dividend, and tax assessment are in our opinion deserving

of a closer scrutiny by the government whose focal point is to

encourage the development of small and medium scale enterprises

and to create a conducive environment for business development

for the overall growth of the economy. The amendments suggested

if implemented by the government will not only enhance a

transparent and efficient tax administration system, it will also

go a long way in easing the burden on taxpayer and investors in

Nigeria.

66 | P a g e