The Tax Appeal Tribunal (TAT) ruled that a company should pay excess dividend tax of NGN1.63billion on the tax-exempt profits distributed to shareholders. In the case between the Federal Inland Revenue Service (FIRS) and Ecobank Nigeria Plc. (Ecobank or the Bank). FIRS conducted a tax audit on Ecobank for the 2015 and 2016 financial years. Even though Ecobank reported a tax loss during the period, FIRS observed that the Bank paid dividends of about NGN5.5bn to its shareholders. The amount was paid from the earnings in the 2015 financial statements.
Section 19 of the Companies Income Tax Act (CITA) provides that where the dividends paid by a company exceeds taxable profits in a year, the company will pay corporate tax at 30% of dividends paid. As a result, FIRS assessed Ecobank to excess dividend tax. Ecobank argued that a large portion of the dividends paid was tax-exempt income, that is, bonds, treasury bills and other government securities which did not attract EDT.
However, the Bank accepted only the EDT liability of NGN352m on dividends paid from trading income. Ecobank argued that FIRS’ assessment was not valid as it did not consider the N352m EDT already paid. FIRS, however, insisted that the EDT provision was applicable irrespective of the source of the Bank’s dividend. The purpose of Section 19 is to prevent companies from distributing dividends to shareholders without paying corporate taxes.
Therefore, the Tribunal addressed the following issues:
Whether FIRS was correct to assess Ecobank to EDT on dividends paid out of profits from Bonds, Treasury Bills and other Government Securities which are exempt from Companies Income Tax?
Companies that invest in bonds will be liable to pay excess dividend tax on their profits. A liability to pay tax arises where a company that pays dividends has either no taxable profits or has a distributable profit that is higher than the taxable profit.
Whether FIRS misdirected itself by ignoring the CIT paid by Ecobank on the portion of dividends declared from non-exempt income streams?
FIRS recognized the sum of NGN351.8m as part payment of the full liability of NGN1.66bn. Hence, the tax authority considered the part payment in the assessment notice.
Whether FIRS was correct in its interpretation and application of the provisions of Section 19 of CITA?
Section 19 of CITA is an independent provision that cannot be impeded by Companies Income Tax (Exemption of Bonds and other Short-Term Government Securities) Order 2011. The section seeks to prevent companies from sharing dividends without paying taxes.
The tax authority will continue to ensure compliance with the anti-avoidance provision of Section 19. Quoted companies that distribute dividends to shareholders should, therefore, take note of the rule on excess dividend tax. A copy of the decision is available here.