By Ibrahim Moshood, Associate and Tozaye Balogun, Director of Tax Services, Centurion Law Group
The Federal Inland Revenue Service (“FIRS”) recently issued a Revised Information Circular on the Tax Treatment of Non-Governmental Ogranisations (NGOs), hereafter referred to the as “Revised Information Circular” or “the Circular”. The Circular, published on 31 March 2021, amends, updates or replaces the FIRS’ initial information circular (issued in 2010) on the tax exemption status of NGOs – but only to the extent that the initial circular contains information that is inconsistent with the Revised Information Circular.
The Revised Information Circular reiterates the tax-exemptions, filing and other compliances obligations of NGOs. It also provides clarification on the application of the term “public character” to NGOs when evaluating their eligibility to enjoy the tax exemptions granted under the Companies Income Tax Act (CITA). It is noteworthy that the FIRS’ clarification on the application of the term public character is issued following an inclusion of a definition for “public character” in the CITA by Finance Act, 2020.
The “public character” issue
The CITA exempts from tax the profits of “any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company” (emphasis ours). Prior to Finance Act 2020, CITA did not provide definitions for “public character” or “activities of a public character”. Taxpayers, the FIRS and even the Courts therefore interpreted these terms and its application, for tax purposes, in varied ways:
a) All ecclesiastical, charitable and educational activities are generally accepted as activities of a public character. Therefore, a company engaged in such activities immediately qualifies for tax exemption on profits from (and proven to be from) those activities.
b) Ecclesiastical, charitable and educational activities are only of public character if those services are freely available for all Nigerians to use, share in or enjoy. If such services/activities are provided at a fee, they no longer pass the public character test because not all Nigerians will find those services affordable.
c) It is only a body or institution whose activities are meant to benefit Nigerians in general, and particularly the public, and its profits are not available for distribution to its promoters that can qualify as a “public character” company eligible to enjoy tax exemption on its profits.
The long-standing debate has been whether the pre-condition for enjoying the tax exemption is that the company seeking the exemption is an “institution of public character” or the activities provided by that company are of “public character”. To clarify, the Finance Act 2020 defines public character as “with respect to any organisation or institution means an organisation or institution that is (a) registered in accordance with the relevant law in Nigeria; and (b) does not distribute or share its profit in any manner to its members or promoters.” The FIRS’, in its Revised Information Circular, expatiates on this point by stating that distribution of assets (even by way of gift) in cash or kind by such company to its promoters or members will qualify as a distribution of profits.
Defining public character by reference to company/institution and not activity, shifts the focus of the tax exemption from the nature of activities provided to the nature of company providing those services. This will appear contrary to the law which provides that “any company engaged in…. activities of a public character” may qualify for a tax exemption. It is therefore arguable that while introducing a definition of “public character” in the law may be helpful in some respects, it doesn’t do much to resolve the age-old dispute between Taxpayers and FIRS on how the tax exemption should be applied. The question what constitutes activities of a public character, which to our minds is the more relevant question given the clear provision of the law, remains unanswered.
Further, more questions may arise based on the definition of “public character”. The requirement that the institution “does not distribute or share its profits in any manner to its members or promoters” is interesting. According to the Companies and Allied Matters Act, it is only a company limited by guarantee that is precluded from distributing profits to its promoters and members. A company limited by shares has no such restriction. Is the intention, therefore, to exclude a company limited by shares from the enjoying the tax exemption? Or is such company eligible for the tax exempt provided if it doesn’t (and can presumably prove) that it does not make distributions to its shareholders or promoters?
Any clarification of a hitherto ambiguous term in a Tax Statute will typically be considered a welcome development. However, the definition of the term “public character” in Finance Act 2020 and the Revised Information Circular may prove insufficient to rest the long-standing issue on the interpretation and application of the tax exemption granted in CITA to ecclesiastical, charitable and educational institutions.
It will be interesting to see how the definition of public character will be applied vis-a-vis the clear provision of the law going forward and how Taxpayers will react to it. Will a company limited by shares that engages in activities of a public character accept that it may no longer qualify for a tax exemption? Or will it continue to contest its eligibility for the exemption in court?