APPROBATING AND REPROBATING: PUNITIVE TAXATION OF HOLDING COMPANIES IN NIGERIA* Few issues typify the inconsistencies in the Nigerian

tax regime more than the case of the corporate dividend income (i.e. dividend income received by a company). Introduction Corporate Taxation in Nigeria is organized via what is sometimes described as a two tier system. First, an initial tax is charged on the profits in the hands of the company under the Companies Income Tax Act (CITA) and then a further tax is imposed on the same income when it is being distributed to shareholders as dividends or bonus shares. This distribution is subject to a ten percent (10%) tax which both the Personal Income Tax Act (PITA) and the CITA1 require the company to withhold and pay over to the relevant tax authorities before paying the dividend/bonus to the shareholders. The two tier system ensures that some tax is paid by the two parties profiting from the success of the business (i.e. the shareholders and the company) so it does not really amount to double taxation. This two tier system of taxation can easily become a three tier system where the shareholder recipient of the dividend is a company who in turn has to distribute its profits (including the dividend income) to its own shareholders. The CITA makes special provisions to preserve the two tier nature of the taxation regime. Section 80 (3) of the Act2 provides "...dividend received after the deduction of tax prescribed in this section shall not be charged to further tax as part of the profits of the recipient company. However, where such income is redistributed and tax is to be accounted for on the gross amount of distribution in accordance with subsection (1) of this section, the company may off-set the withholding tax which it has itself suffered on the same income. "
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Dipo Okuribido is an Associate with the law firm of Banwo & Ighodalo Depending on the nature of the shareholder i.e. a natural person or a corporate body 2 Note that all sections of the CITA discussed in this write-up are as cited in the version of the CITA published as part of the Laws of the Federation of Nigeria, 2004.
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This provision effectively preserves the two tier system by allowing the tax on the dividend income to be transferred to the final recipient of the dividend with a right in any intervening companies to set-off any withholding tax paid against the tax to be deducted on the subsequent distribution. On its own, section 80 (3) of the CITA should not pose any problems. The section is clear and precise and as indicated above, is consistent with the system of corporate taxation adopted in Nigeria. Problems may however arise where section 80 is read together with the antiavoidance provisions of section 19 of the CITA. Section 19 provides as follows: 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 subsection (1) of section 40 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. This section is designed as an anti-avoidance provision to ensure that company profits do not escape taxation. The section was fully considered in the case of Oando Plc v. Federal Board of Inland Revenue3 where the appellant had alleged that, not having any taxable profits for the 2004 accounting year, no tax was due from the company for that year. The appellant had however paid out dividend to its shareholders, supposedly from its retained earnings rather than profits. The Chief Judge of the High Court, in a considered ruling held, Having declared dividends and paid same to its shareholders, the Appellant has in my view
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1 Tax Law Reports of Nigeria (TLRN) p. 61 at 81

represented to its shareholders and indeed the whole world that it has made profit. It must therefore pay tax. The above statement by the Federal High Court captures the essence of section 19 of the CITA. Under strict company law principles, dividends are generally only paid from out of a companys profits (current or retained from previous years). The purport of section 19 is that a company that pays dividend to its shareholders ought to be estopped from denying that it has made a profit for tax purposes. Like the provisions of section 80 (3), read on its own, section 19 of the CITA also seems clear, unambiguous and consistent with the tax strategy of the government as typified by other provisions of the tax laws. The Controversy The question is, what happens where a company, receives only dividend income in any year of assessment and subsequently has to re-distribute this dividend income to its shareholders? Or where a company, due to its being primarily an investment company, receives the majority of its income from dividends? A combined reading of the provisions of sections 19 and 80 (3) of the CITA immediately throws up some concern in such circumstances. Whilst section 80 (3) provides that dividend income ought not to be charged to any further tax however, the purport of section 19 is that where that dividend constitutes the only profit of the company (or the greater part thereof) upon any redistribution, such dividend would again be subject to tax. Interpreted in this manner, the provisions have particularly punitive implications for any conglomerates with a holding company structure whereby businesses are handled from out of different subsidiary entities with a holding company merely in charge of general administrative services. Such holding companies typically hold the shares of their subsidiary companies and therefore receive dividends therefrom. As the holding company will not ordinarily be engaged in any significant businesses itself, its dividend income will typically surpass its normal income. This implies that such a holding company will permanently be caught by the provisions of section 19 and would 3

be subject to tax on its dividend, notwithstanding that such dividend was ordinarily exempt from tax by virtue of section 80. The Way Out It is a trite principle of interpretation of statues that where there are two provisions, one special and the other general, covering the same subject matter, a case falling within the words of the special provision must be governed thereby and not by the terms of the general provision.4 With respect to the case in point, of the two sections, section 80 (3) is clearly the special provision which deals with dividend income, section 19 deals with general circumstances of dividend distribution in the absence of substantial taxable profits. The correct approach to the interpretation of the provisions therefore ought to be that the special provisions for taxation of dividend (s. 80) be applied to the holding company as opposed to the general provisions of section 19. Whilst it may appear that way on cursory check, a closer examination of Section 80 (3) of the CITA ought to reveal that it does not necessarily conflict with section 19. The application of section 19 is limited to circumstances where dividend is paid by a Nigerian company out of a profit on which no tax is payable. In the case of a holding company, tax is paid by the holding company on its dividend income in accordance with the provisions of section 80 (3) which precludes the further imposition of tax on the dividend income. The situation is neither one of 'no total profits' nor one of 'total profits which are less than the dividend distribution' as contemplated in section 19, hence the provisions of section 19 ought not to be applicable, notwithstanding the fact that such a holding company pays out more dividend than its taxable income. Conclusion Although this interpretation seems clear enough, nevertheless, in practice, the Federal Inland Revenue Service (FIRS) has, on occasion, disputed the application of section 80 (3) in holding company structures and insisted that a holding company be chargeable to tax on its dividend income where such income is re-distributed in circumstances where the holding company had no other substantial
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Per Agbaje, J.S.C. in Schroder v. Major & Co. (Nig) Ltd Suit No. S.C. 84/1986 2 N.W.L.R. (pt 101) 1 at 21

taxable income. In some cases, counsel have had to recommend that holding companies abstain from undertaking any other business for profit in a bid to assure the FIRS as to the fact that the holding companys entire income is dividend income and that no other income is being mixed or hidden with the dividend income. One may sympathize with the FIRS as to the possibility of ingenious taxpayers finding ways to hide taxable income in holding companies, nevertheless, the need to trace and capture such incomes cannot be a justification for the subjection of dividend income to a further tax contrary to the clear provisions of the CITA. Often times in Nigerian tax administration, due to poor infrastructure, inadequate skills and lack of sophistication in computing taxable income, especially that arising from complex transactions, the burden is passed on to the taxpayers. This trend ought to be discouraged. The FIRS and the federal government should bear the brunt of any inability to capture taxable income and clearly, incomes such as dividend ought to be taxed strictly in accordance with the provisions of the law and any ambiguities as to whether or not a particular dividend should be deemed profit and therefore taxable ought to be construed against the tax authority. The principles laid down as far back as the 1921 case of Cape Brandy Syndicate v. IRC5 remain valid. There is no room for any intendment and no equity about a tax.

[1921] 1 K.B. 64 at 71