Nigerian Banks have been declaring huge profits and it is expected that huge sums would be paid out as dividends. The question that needs to bother the bank holding companies is how the dividends received by them would be treated for tax purposes. In an explanatory note on the critical tax issues for the operation of bank holding company structure in Nigeria, the Federal Inland Revenue Service under the authority of its Board issued an information circular PC – T12. 2.3. 027 dated April 2012.
The circular addresses issues arising in connection with the taxation of Bank Holding Companies and their Subsidiaries pursuant to Section 61 of the Federal Inland Revenue Service (Establishment) Act, 2007, Cap F36, Laws of the Federation of Nigeria, 2004. The circular applies to all Bank Holding Companies and their Subsidiaries in Nigeria. The circular explained that the Central Bank of Nigeria (CBN) recently issued its Regulations on Scope of Banking Activities & Ancillary Matters, No 3, 2010 (Regulation 3 of 2010), repealing the erstwhile Universal Banking Licence regime and modifying the scope and framework for banking business in Nigeria.
In line with requirements of the CBN Regulations aforesaid, some banking groups in Nigeria restructured their business operations by incorporating one or more Holding Companies to aggregate shareholder capital and hold ownership interest in operating companies conducting Banking and other permitted businesses separately.
The main thrust of the information circular is the clarification on relevant tax issues and avoidance of double taxation on dividends paid. The FIRS clarified that any dividend paid by subsidiary companies within each Group to their parent Holding Company (HoldCo) is Franked Investment Income which would not form part of the said Holding Company’s total profits for tax purposes including consideration of total profits chargeable to tax in the contemplation of the anti-tax avoidance provisions in the Companies Income Tax Act (CITA), Cap C21, LFN, 2004 (as amended) particularly Section 19 thereof.
For purposes of clarity, it is further stated that Section 19 of CITA, CAP C21, LFN, 2004 states that: “Where a dividend is paid out as profit on which no tax is payable due to- (a) no total profits; or (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, the company paying the dividend shall be charged to tax at the rate prescribed in subsection (1) of section 40 of this Act as if the dividend is the total profits of the company for the year of assessment to which the accounts, out of which the dividend is declared, relates”.
The FIRS stated that Section 80 (3) of CITA, CAP C21, LFN, 2004 provides that: “Dividend received after deduction of tax prescribed in this section shall be regarded as franked investment income of the company receiving the dividend and shall not be charged to further tax as part of the profits of the recipient company…” The FIRS then further states that Section 80(3) regards dividend received by a company after deduction of withholding tax as Franked Investment Income (FII), which should not be subjected to further tax (income tax) and by extension WHT. Therefore, FII received by a HoldCo (including Intermediate Holdco), as the case may be, from its operating subsidiaries should not be subjected to further companies income tax.
Accordingly, in the opinion of the FIRS the provisions of Section 19 of CITA will not apply to such FII upon redistribution of dividends to such Holdco’s ultimate shareholders.
In the light of the above, the FIRS states that any Holdco’s income profile which may consist of dividends received from its subsidiaries, will not be subjected to any further tax. It is instructive to note that the FIRS said that the circular is made pursuant to section 61 of the Federal Inland Revenue Service (Establishment) Act 2007, Cap F36, Law of the Federation of Nigeria 2004. The section 61 of the FIRS (Establishment) Act 2007 provides that “The Board may, with the approval of the Minister, make rules and regulations as in its opinion are necessary or expedient for giving full effect to the provisions of this Act and for the due administration of its provisions and may in particular, make regulations 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 or law.”
The requirements of section 61 are clear. It must be with the (1) approval of the Minister of Finance it must be by way of (2) rules and regulation and it must, like paragraph 1 (2) of the fifth Schedule of the FIRS (Establishment) Act be by (3) Notice in the Federal Gazette. What do we have? We have an Information Circular issued under the authority of the Federal Inland Revenue Service Board. It is humbly submitted that this is not what is envisaged by section 61 of the FIRS (Establishment) Act of 2007.
An information Circular issued under the authority of the FIRS Board does not meet the demands of section 61 and therefore cannot be the exercise of the authority contained therein. If it is not an exercise of the purported authority, it then simply means that the power has not been exercised and therefore the dividend received by the bank holdings companies in Nigeria remains taxable under section 19 of the Companies Income Tax Act Cap C21, LFN, 2004. If this is the correct position and it is the correct position then what is the legal status of an information circular? The meaning and legal status of Information Circulars was explained in the case of Halliburton v Federal Board of Inland Revenue N.R.L.R. 2 (2013) p11 where it was stated that “Information Circulars issued by the Respondent are neither laws nor regulations but merely for information of general public and in particular all taxpayers’ representatives or advisers and staff of Revenue Services.
They contain what the makers consider to be their interpretation of the various Nigerian Tax Acts and thus constitute their opinion on a point of law with no legally binding effect”.
Two further issues. The first issue is, assuming that the powers under section 61 of the FIRS (Establishment) Act was properly exercised, the dividend received by the bank holding companies would still be taxable as no rule or regulation can alter or be in conflict with a substantive law as determined in the cases of Ewete v. Gyang (1997) 738 and Kuusu v. Udom (1990) 1 NWLR (pt 127) 421.
We can also not run away from the provisions of section 51(1) of the FIRS (Establishment) Act which states that “In the exercise of the powers and duties conferred upon the Board by this Act, the Board shall be subject to the general direction of the Minister and any written direction, order or instruction given by him after consultation with the Executive Chairman shall be carried out by the Board: Provided that the Minister shall not give any directive, order or instruction in respect of any particular person which would have the effect of requiring the Board to increase or decrease any assessment of tax made or to be made or any relief given or to be given or to defer the collection of any tax or judgment debt due, or which would have the effect of initiating, forbidding the initiation of, withdrawing or altering the normal course of any proceeding whether civil or criminal, relating either to the recovery of any tax or to any offence under any of the laws listed in the First Schedule.”
This simply means that even on a proper application, section 61 of the FIRS (Establishment) Act would have no effect by virtue of section 51 (1) if it does as it seeks to “decrease any assessment of tax … or to defer the collection of any tax” made under section 19 of CITA 2004. Under sections 2, 25, 68 and the First Schedule to the FIRS (Establishment) Act 2007, Information Circulars are not part of the legislation to be administered by the Federal Inland Revenue Service.
To achieve the intention of the Federal Inland Revenue Service to exempt banks holding companies from section 19 of CITA the Tax Act would need to be amended as stated in Northern Nigeria Investments Ltd v. Federal Board of Inland Revenue (1981) 2 P.L. & 517 at 525.
The second issue is, what is next in the present circumstances? This would be an enforcement of the recovery of any outstanding tax debts of bank holding companies as properly stated by the FIRS in its Public Notice on Recovery of Tax Debts issued on 14th August 2013.
All the issues enumerated above is a happy reminder of our childhood years as we strutted about in the Epetedo area of Lagos Island listening to the melodious and evergreen Sakara music of Yusuf Olatunji in B’olowo Bate and his wise counsel to the moneyed class as presently represented by the bank holding companies.
The wise counsel on the implications of various actions in B’olowo Bate is a lesson to be imbibed by all that are concerned in this matter of the taxation of the dividends of Bank Holding Companies in Nigeria.
Professor Abdulrazaq is a Professor of Taxation, Faculty of Law, Lagos State University and former Registrar/Chief Executive of Chartered Institute of Taxation of Nigeria