TAX 2.2C CITA (EXEMPTED PROFITS)
Section 23: EXEMPTED PROFITS.
After profit from all sources have been aggregated, the exempted profits shall be subtracted.
Profits of statutory corporations, cooperative Society, Incorporated Trustees/companies that are non-profit, sporting, Trade Unions (See Section 23A-E)… provided that they are not engaged in trade or business. Once such exempted companies engage in business or trade, they may be liable to pay tax on profits derived therefrom.
In Sodipo V FBIR, the Methodist Church owned the plaintiff company which made money from letting and developing property. Argued that the revenue was used for charitable purposes. This was rejected. In Carlisle and Silloth Golf Club V Smith, A golf club had permitted non-members to play after the payment of “green fees”. The court held that they were carrying on an enterprise. Similarly stand was maintained in Arbico V FBIR and Coman V Governors of Rotunda Hospital Dublin. In Commissioners of Taxation V Word Investment, the court noted that this may apply in relation to fund raising to be applied for charitable purpose.
Section 23(1C) requires that such endeavour must be of public character. Thus a secret cult and a one man business may not meet this requirement.
Ascertainment of Profit: Since Accounting reporting standards of countries vary, Nigeria in 2010 adopted the international Financial Accounting Reporting Standard. Note that it cannot override the provision of the Tax Laws e.g. under the Accounting Standard, depreciation is deductible.
Section 24: Allowable deductions. See the Section.
They include expenses which are; “wholly”, “necessarily”, “exclusively” and “reasonably” incurred. E.g. Interest on loans, rents, repairs, bad debts, contribution to pension, etc.
In Bentleys Stokes and Lowless V Beeson, the commissioners disallowed a firm of solicitors from deducting expenses incurred for entertaining clients during business meetings. Noting that “wholly” (is in reference to the entire quantum of the money which must have been entirely laid out for business purpose). Even in Smith’s Potato Crisp ltd V IRC, the court held that the cost of a successful tax appeal being not wholly and exclusively incurred in the trade was not deductible. As the court noted that necessarily as used in the Section means that the expenditure is such that could not be reasonably avoided.
All four qualifications must be met. In Simpson V Tate, the court held that although the expenses were wholly and exclusively incurred, they were not necessary. In Ricketts V Colquhoun, the court held that the cost incurred by a business man for travelling to London from Portsmouth was not necessary.
Section 25: Deductible Donations. Certain donations are deductible provided:
- They are made to public funds or statutory bodies (listed in the 5th schedule like red-cross).
- It must be made out of the company’s profit rather than capital.
- It must not exceed 10percent of the company’s profit (donations to Universities and Research institutions can reach 25 percent).
Section 26: provides for deductions for research and development.
Section 27: Deductions not allowed: This is an anti-evasion provision. They include: Capital not paid or withdrawn, depreciation, sum recoverable under insurance, and so on.
Section 29: the basis period… i.e. for ascertaining the books and filing returns. Two reference points. Generally Jan-Dec but may vary depending on when the company commences or terminates operations.
Section 31: Total Profits (in this sense should mean taxable profit)
- Step 1: Aggregate all income from all sources.
- Step 2: Deduct the following:
- Exempted profits.
- Allowable deductions: (Remember that expenditure must have been wholly, exclusively, necessarily and reasonably incurred (as noted earlier).
- At this point we have assessable profit. But you can still go ahead to make more deductions viz:
- Deduct capital allowance in accordance with the 5th Note that no capital allowance should exceed 66 1/3 percent of the company’s assessable income except they are engaged in agro allied manufacturing. In Oando Plc V FBIR, the company claimed 100 percent capital allowance arguing that it was engaged in manufacturing of some products like engine oil, brake oil, and so on. Court held that since the ratio of manufacturing was 10 percent and it wasn’t their major operation, their claim must fail. Note also that the person seeking capital allowance must be the owner of the asset in question.
- We then deduct losses and claim loss relief (Section 31(2a)). Note that losses can only be claimed in respect of business which the claimant should be running. Losses can now be carried over ad infinitum.
- Investment allowance: note that Rural investment allowance has been removed. It used to grant 50 percent relief in respect of provision of certain facilities in rural areas.
- There are some other reliefs that are deductible like, Export processing Zone, Relief for companies engaged in mining, tourism relief, downstream gas utilization relief (Under Section 39 (check it)), infant industry relief, interests on loan etc. Worthy of mention is the Companies Income Tax (Exemption of Profits Reliefs) 2012 which provides a relief of 5 percent of assessable profit of a company that employs a certain number of fresh graduates (usually at least 20-30 percent of work force). There is also the Work experience acquisition program relief (also 5 percent), also infrastructure tax relief, and a host of other reliefs which may be claimed.
After all the necessary deductions and subtractions have been made, we have what is called the “chargeable income” i.e. net profit. Although it is wrongly labelled “total profit” under the CITA.
Section 40 provides a rate of 30 percent on the total profit (Remember that total profit used here means net profit). This has been noted earlier in this work.
For for agricultural, manufacturing, mining companies… 20 percent… provided the turnover is less than one million.
Section 40(2) levies excess profit on banks.
Section 40(4) levies a fine on dormant companies that are yet to commence business after 6 months of incorporation. #20,000 and #25,000 subsequently.
Tax clearance certificate is usually needed for some transactions. FIRS has issued some circulars in relation to this certificate however note Halliburton West Africa V FBIR where it was held that information circulars cannot supersede the law.
Minimum tax. Provided under Section 33 to prevent tax liability from being zero, where a company does not make taxable profit, it shall pay minimum tax. This may be 0.5 percent of its gross profit (if the turnover is not more than #500,000) OR the co may pay 0.5 percent of its net assets as minimum tax OR 0.23 percent of its paid up capital or 0.25 percent of the turnover of the company. Whichever (of the above) is higher.
In addition to fulfilling CIT liability, taxable companies would be required to offset tax liability under Tertiary Education Act, National Information Technology Development Act, and under other taxing legislations.
Section 51 provides that where a company is being would up, it must make arrangements for the payment of its CIT liability. Dr Sanni has been able to argue that payment of tax may not be a priority until priority debtors have been paid.
Section 52: mandates companies to file self-assessment returns. Which would be accompanied with a computation of tax liability and evidence of part or full payment of the liability-Section 53. In essence, all companies must file tax returns… whether they are exempted or not. Self assessment regime presumes that the taxpayer is honest.
Section 55 cita provides that Audited account, duly completed self-assessment form, amongst other must be filled with the returns. Not later than 6 months from end of accounting period.
Section 55(6) provides that there should be a designated tax compliant representative that shall be filing the returns. They must be knowledgeable in the field of taxation. It seems that the representative must be a member of CITN or ICAN.
