INSIGHT: Business Implications of Nigeria’s Excess Dividend Tax (Part 1)

Excess Dividend Tax is an anti-avoidance provision that imposes tax on dividends distributed by a company, where the company either has no total profits or the total profits are less than the dividends paid.

The provision of section 19 of the Companies Income Tax Act (“CITA”), 2004 (as amended) on excess dividend tax was applied to treat dividends distributed by the appellant from retained earnings as its total profits for the relevant years of assessment in the recent judgment of the Federal High Court (“FHC”) in Oando v. Federal Inland Revenue Service (“FIRS”) (Appeal No. FHC/L/6A/2014) (“Oando”).

Analysis and Interpretation of Section 19

Section 19 of CITA provides 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, is paid by a Nigerian company, the Company paying the dividend shall be charged to tax at the rate prescribed in section 40(1) 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.”

On the face of it, there is no ambiguity about this provision as it seeks to limit a company’s ability to declare dividends in a year of assessment to which the accounts from which the dividends declared relate in two situations, namely:

(a) where the company has no total profits at all; and
(b) where the company has total profits, it is only entitled to declare dividends up to the amount of its total profits and no more.

Where a company elects to declare dividends in (a) above, or dividends in excess of its total profits in (b) above, the dividends will be taxed as if it were its total profits.

In essence, a robust interpretation of section 19 should not have led to the controversy arising from Oando v. FIRS if both the Tax Appeal Tribunal and the Federal High Court had painstakingly analyzed and interpreted the provision, especially in the context of the key issue before them for determination.

The key issue was whether section 19 should be applied to tax a company’s dividends as total profits in any year of assessment where it has no total profits, or the dividends exceed its total profits, if the dividends are declared from:

• profits that are exempted from tax by CITA, such as export earnings, or franked investment income (as was in the case) in sections 23 and 80 of CITA, respectively, or any other legislation, such as the profits of a pioneer company under section 16 of the Industrial Development (Income Tax Relief) Act; and
• profits declared from retained earnings, such being trading profits of previous years on which income tax has been paid.

It is instructive to note that reference in section 19 to “profit on which no tax is payable” suggests that the provision is not intended to apply to profits on which tax has been paid. And it can inferred that the provision is intended to ensure that companies pay taxes to the government in any year of assessment where they declare dividends from the trading results of the related financial year.

Oando plc v. FIRS

The FHC sought to clarify the issue of excess dividend tax in its judgment in Oando v. FIRS in 2016. Oando Plc (“Oando”) paid dividends to its shareholders in 2004, 2005 and 2006 financial years, when its total profits were less than the dividends paid out for these periods.

The FIRS raised additional assessments on the company for the affected years, and having been dissatisfied with the FIRS’ position, Oando challenged the FIRS’ additional assessments at the Tax Appeal Tribunal (“TAT”).

The TAT ruled in favor of the FIRS on the ground that section 19 of CITA applies in any year the dividend paid is higher than the total profit, regardless of the period to which the dividend relates. Dissatisfied with the ruling, Oando appealed the decision of the TAT to the FHC to address the following issues:

• whether the provisions of section 19 of CITA can be applied to dividends paid out of retained earnings that had been taxed in prior years; and
• whether Oando was liable to pay additional companies income tax on retained earnings constituted by dividends earned from investments in its subsidiaries (i.e., franked investment income).

The judge held that section 19 was applicable on the dividends paid out by Oando in the referenced periods and that there was no double taxation, and thereby upheld the additional notices of assessment raised on Oando.

In coming to this conclusion, he gave precedence to section 19 above section 80(3) of CITA on the ground that section 19 was enacted later in time (section 19 was introduced into CITA by Finance (Miscellaneous Taxation Provisions) Decree No.30 1996 while section 80 was introduced in the Companies Income Tax Act Cap 60Laws of the Federation 1990), and constitutes the new legal order in conformity with changing times and circumstances.

The judge further said, most curiously, that section 19 does not look at the source(s) of dividends and does not by any means exempt dividends from any source from taxation, and that its application in this instance will not lead to double taxation.

Matters Arising

The first question to address is the issue of the precedence of section 19 above section 80 on the basis that, historically, section 19 was enacted and incorporated into CITA later than section 80. By overriding section 80 in the case, the judge has, by implication, nullified section 80 wherever section 19 applies.

Thankfully, this cannot stand as the law leans against “implied repeal” of legislation. Had the legislature intended to repeal Section 80 or subordinate it to section 19, it would have done so directly either in 2004, when the Companies Income Tax Act was re-enacted, or in 2007, when it was amended.

While we acknowledge that section 80 predated section 19, the reasoning and the conclusion of the court are not sustainable. The reality today is that the principal legislation, embodying the two provisions enacted at different times, has subsequent to the introduction of section 19 been re-enacted as Companies Income Tax Act, Cap C21.

Thus, the two provisions are now of equal standing and section 80, being sequentially after section 19, should actually override section 19 assuming, but not conceding, that there is a conflict between the two of them. Indeed, the basis of applying the principle of precedence in interpreting two legislative provisions is not applicable in this instance in the absence of a conflict between the two provisions.

Section 80(3) provides that “Dividend received after deduction of tax…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.”

When this is juxtaposed with section 19, we see an exception in section 80 to section 19, rather than a conflict. Hence, there is no reason why the two provisions cannot co-exist. Section 19 is not intended to apply to income that is specifically exempted from tax by any law since the law will not give anything with one hand and take it away with the other. By this, section 19 will continue to serve as an anti-tax avoidance provision as intended by the law and applied to clear instances of tax avoidance, which a statutorily exempted income is not.

Regarding “double taxation,” the phrase was defined in Delta Oil Nigeria Ltd v. FBIR (1988) as no more than an income being taxed twice in the hand of the same beneficiary. Having suffered withholding tax at source, section 80(3) exempts dividends from further tax in the hands of the recipient.

So, if Oando, as an investment holding company, redistributes previously taxed dividends earned from its subsidiaries to its shareholders, should it be subject to additional companies’ income tax at 30 percent on the basis of section 19?

And where it is so taxed, would the result not be double taxation of the same income? And does this not defeat the purpose of Section 80(3) which clearly exempts the dividends from further tax? In our opinion, the answers to these questions point to nothing else other than double taxation.

We are convinced that in the absence of any apparent contradiction between both sections 19 and 80, Section 19 can be given effect to by excluding franked investment income from any dividend that may be liable to excess dividend tax, where any such dividend or the profit from which it was appropriated is not otherwise tax-exempt.

Lastly, could it really be said that section 19 does not look at the source(s) of dividends and does not by any means exempt dividends from any source from taxation as the judged posited? If the statement of the judge were to be correct, it means that section 19 will be applied to tax a company in the following examples:

1. Where a company distributes dividends from retained earnings made up of profits after tax in prior years.

Indeed, the judge said that retained earnings, being a source of dividend paid, is inconsequential in the application of section 19. But where this happens, it means that if a company had paid tax on its profits in a particular year and transferred its post-tax profits to retained earnings, it would be liable to companies income tax again on any dividend it distributes from the retained earnings in any subsequent year of assessment in which the dividends so distributed exceed its total profits. Surely, section 19 could not have been provided in the law to work such a hardship on taxpayers.

2. Where a company enjoying pioneer status that entitles it to income tax holiday distributes dividends from its pioneer profits earned during its pioneer period when it is tax exempt.

Surely Section 19 could not have been enacted to negate or undermine the benefit of income tax exemption during the pioneer period granted to such company by the Industrial Development (Income Tax Relief) Act (Cap 17, Laws of the Federation of Nigeria 2004).

Planning Points

While the intent of section 19 as an anti-tax avoidance provision is to ensure that a company does not pay dividends in the absence of total profits, it is not, and cannot be the intent of the draftsman of the law to deny a company, that has deferred the distribution of its after tax profits in prior years as dividends, the right to distribute the profits when it chooses to do so in future without further tax thereon.

Anything to the contrary is punitive, which is not the way tax law operates or should be interpreted and applied.

The second part of this article will further consider the implications for business.

Wole Obayomi is Head of Tax and Chima Azumarah is Senior Adviser, Tax, Regulatory & People Services, KPMG in Nigeria