INSIGHT: Commonwealth Tax Relief in Nigeria

Income tax laws often contain different provisions on the treatment of income for tax purposes. This is to enable taxpayers to understand what constitutes the tax base for income tax purposes. For example, some incomes are considered taxable while others are specifically exempt from tax. Similarly, tax laws contain anti-avoidance provisions and provisions on relief from double taxation. Taxpayers are generally keen to take advantage of known reliefs and exemptions in the tax laws when managing their tax affairs.

Section 44 of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) (CITA) provides for Commonwealth Tax Relief (CWTR) as a means of mitigating double taxation in Nigeria. It provides that companies whose profits have been subjected to commonwealth tax shall be entitled to relief from tax paid or payable on the same profit, either in whole or in part.

The CITA defines commonwealth income tax as any tax on income or profits of companies charged under a law in force in any country within the commonwealth or in the Republic of Ireland, which provides for relief from tax charged both in that country and in Nigeria, in a manner corresponding to the relief granted by the CITA.

Simply put, CWTR is available in respect of profit earned from a commonwealth country which is also liable to tax in Nigeria, provided that the commonwealth country has a similar tax relief in place.

How Commonwealth Tax Relief Works

CWTR is a double taxation relief put in place by the Nigerian government. Profit earned from commonwealth countries which is brought into Nigeria qualifies for CWTR, provided the same profit has been subject to tax in a commonwealth country.

Accordingly, for a Nigerian company, the relief granted is 100 percent of the tax rate applied in the corresponding commonwealth country but subject to a maximum limit of 50 percent of the Nigerian tax rate.

In respect of a nonresident company, the relief is 50 percent of the tax rate applied in the corresponding commonwealth country, provided the tax rate applied in the corresponding commonwealth country is less than the Nigerian tax rate; otherwise, the relief applicable is the rate by which the Nigerian tax rate exceeds 50 percent of the tax rate applicable in the corresponding commonwealth country.

This has been explained as follows:

Residents:

if CWRT <= 1/2NRT = CWRT

if CWRT > 1/2NRT = 1/2NRT

Nonresidents:

If CWRT <= NRT = 1/2CWRT

If CWRT > NRT = NRT-1/2CWRT

*CWRT is Commonwealth Rate of Tax. NRT is Nigerian Rate of Tax

There are 53 commonwealth countries across the globe, of which 19 are African countries, including Nigeria. Companies in Nigeria that engage in cross-border transactions with any of the commonwealth countries across the globe will benefit from CWTR.

However, the tax law has placed the burden of proof on the Nigerian taxpayer and as such must provide evidence of tax paid in the event of a tax audit/investigation by the Federal Inland Revenue Service (FIRS). The claim of CWTR for any tax year must be done within six years from the relevant tax year, otherwise the claim may not be granted by the FIRS.

Practical Issues

The practicality of the application of this relief comes into play in certain instances where the profit in question (that is brought into Nigeria) is a profit captured under section 23(k) of the CITA.

Section 23 of the CITA provides for profits that are exempt from tax under Nigerian Law; in certain scenarios, profits exempt under Nigerian Law may have been taxed in another commonwealth country. Can it be said that the taxpayer is entitled to this relief?

Another scenario will arise where the provisions of section 23(k) and section 19 of CITA come into play. Where certain profits are brought into Nigeria (through government approved channel), ordinarily these profits ought to be exempt under section 23(k) but where same is taxed under section 19 as Excess Dividend Tax (EDT) (an anti-avoidance provision), will the relief apply here? For example, section 19 on EDT requires dividend paid by companies to be deemed as taxable profit for income tax purposes under certain circumstances. However, the dividends paid often comprise different components, of which income from commonwealth countries (which has been taxed) is included.

The recent case of Olokun Pisces Limited vs FIRS (Suit No. FHC/L/5A/2016) did not do much to shed more light on what profits or dividend will be computed in calculating EDT. The court, in this case, moved away from the pronouncement in Oando plc v FIRS (Suit No. FHC/L/6A/2014) by simply holding that the appellant, Olokun Pisces Limited, was unable to provide sufficient evidence to demonstrate that it met the conditions for tax exemption under section 23 (1)(q) (exemption of export profits from tax) of the CITA.

The court thereby left the lingering question open-ended. Could it be said that if sufficient evidence was produced, the profits would have been exempt from the EDT? While we wait for the courts to rule properly on this issue, taxpayers may look at the various other options available to them, like the utilization of the CWTR.

Conclusion

In interpreting a law, the plain and literal meaning of the words should be used, but where the plain and literal meaning is ambiguous, one can delve to understand the mischief the law is trying to curb, in order to know how to interpret the law. Discovering the mischief helps in applying the law to various scenarios.

In the present case, the mischief our lawmakers are trying to mitigate by incorporating section 44 on CWTR into our laws is to curb double taxation. In this regard, the intent of the law is not to kill the goose that lays the golden egg.

Flowing from the logic above, the applicability of the provisions of section 44 is easier to discern. A taxable person will be said to be entitled to this relief where a profit or income that is about to be taxed in Nigeria has been taxed previously in a commonwealth country. Where the income is a qualifying income under section 23 of the CITA, it will mean the income is exempt from tax in Nigeria and cannot be said to have suffered double taxation. However, where the profit is being taxed under section 19, and has been subject to foreign tax from a commonwealth country, then the relief should apply.

Adedayo Ojo is Head, Tax Planning, and Boluwatife Ojikutu is a Tax Analyst and Legal Adviser with United Bank for Africa plc.

The authors may be contacted at: adedayo.ojo@ubagroup.com; boluwatife.ojikutu@ubagroup.com