Before the passage of the Finance Act 2019 into law in January, certain of its provisions were ambiguous. They were, therefore, subjects of litigation at various courts and tribunals across the country. But the Act introduced changes to seven major federal tax laws to bring clarity to the laws and provide certainty to tax payers. Assistant Editor CHIKODI OKEREOCHA looks at how the Finance Act 2019 amended the ambiguous and outdated provisions in the principal federal tax laws.
For professional services company PricewaterhouseCoopers (PwC Nigeria), amending ambiguous and outdated provisions in the principal federal tax laws was one of the major achievements of the Finance Act 2019.
President Muhammadu Buhari had on January 13, last year, signed the Finance Bill into law.The core objective of the Act was to bring the law into conformity with the Federal Governments’ policies and to generate, in the short term, revenue to fund the 2020 Budget.
PwC said it is expected that a finance act would be passed annually to reflect government policy, bring the federal tax laws in line with modern business realities and raise revenue to fund yearly budgets.
It noted that the Act contains 57 sections and amends seven major federal tax laws – the Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Value Added Tax Act (VATA), Customs and Excise Tariff Etc. (Consolidation) Act (CETA) and Stamp Duties Act (SDA).
PwC, however, pointed out that before the passage of the Finance Act 2019 into law, certain ambiguous provisions of the tax laws were subjects of litigation before various courts and tribunals across the country. It, however, said the Finance Act 2019 introduced changes to these provisions to bring sanity to the law and provide certainty to taxpayers.
PwC in its “Tax Controversy & Dispute Resolution (TCDR) Insight Series” released on April 8, looked at ambiguous provisions in four federal tax laws pre-Finance Act 2019, highlighted some of the implications of these provisions, discussed the related case law and the changes introduced by Finance Act 2019 to cure the ambiguities in the laws.
The four federal tax laws were PwC said there were ambiguous provisions include Companies Income Tax Act (CITA), Personal Income Tax Act (PITA), Value Added Tax Act (VATA), and Stamp Duties Act (SDA). For instance, Section 19 of CITA imposed a tax commonly referred to as Excess Dividend Tax (EDT).
According to PwC’s analysis, a literal construction of section 19 suggested that where a company pays dividends, which exceed its total profits, the company would be subject to additional tax of 30 per cent on the excess dividends it distributes, as though they were profits.
“The literal application of section 19 meant that companies which fail within the ambit of the section were potentially exposed to a total tax charge of 62 per cent,” PwC’s tax expert and lead author of the report, Taiwo Oyedele, said, pointing out that there were other problems with applying section 19 literarily.
He said, for instance, that Section 19 of the Act does not consider circumstances where company pays out dividends from its retained earnings (profits which have suffered tax in prior years), or companies which earn tax exempt income (such as income from government bonds and treasury bills) and have no taxable profits but pay dividends from the exempt income.
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Noting that disputes arising from section 19 of the CITA are before the Supreme Court, with the Federal Inland Revenue Service (FIRS) winning all through the lower courts, the report co-authored by Folajimi Akinla said the Finance Act 2019, interestingly, addressed the shortcomings of applying section 19 literally.
For instance, Section 7 of the Act exempts from EDT the following categories: dividends paid from retained earnings which have been subject to tax under any of the income tax laws; dividends from exempt profits; franked investment income including distributions from real estate investment companies to its holders.
“The amendments are far-reaching given the way and manner section 19 had been previously interpreted. Now, from a tax perspective multinationals and domestic companies can set up holding companies in Nigeria without the fear of a potential 62 per cent tax charge.
“In addition, other laws such as the Exemption Order can now, considering their objectives, be given full effect and are no longer rendered redundant by the operations of section,” the report, which was made available to The Nation, said.
Other ambiguous provisions in the other three federal tax laws identified by PwC, but resolved by the Finance Act 2019 include taxation of gratuities in Third Schedule to PITA; definition of “imported services” in Section 2 of VATA.
There is also registration of non-resident companies in Section 10 of VAT Act; definition of “goods” and “services” in Section 46 of VATA; definition of exported services in Section 46 of VATA.
The report also said the provision for duty on receipts in Section 89 of the pre-Financial Act 2019 Stamp Duties Act (SDA), which imposed a duty of N1.50 on any receipt for money, bill of exchange or promissory note of a sum not exceeding N40, was ambiguous.
Concluding, PwC observed that many of the disputes arising from the tax laws were caused by inelegant drafting, which resulted in ambiguities, while others arose because of outdated provisions of the law.
It, however, pointed out that “With the Federal Government committing to annual reviews of the laws, it is expected that similar disputes can be avoided.”
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