Rules of the Court of Appeal on the taxation of an educational institution – Taxation
Nigeria: Rules of the Court of Appeal on the taxation of an educational institution
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On December 11, 2018, the Court of Appeal (COA or the Court), in the case between Best Children International Schools Limited (BCIS Limited or the Company) against the Federal Inland Revenue Service (FIRS), ruled that the Company is liable Corporate Income Tax (CIT), regardless of its claim to be an educational institution. The Court made this decision on the grounds that BCIS Limited had not proved that it fulfilled the conditions of an educational establishment entitled to the tax exemption granted under Article 23 (1) (c) of the CIT law.
BCIS Limited is an educational institution registered as a private company limited by shares under the Companies and Related Affairs Act (CAMA). On September 1, 2014, FIRS issued an assessment of over NOT30 million to BCIS Limited including CIT, school tax (EDT), withholding tax and PAYE tax for 2008 to 2012.
BCIS Limited has brought an action in the Federal High Court (FHC) to challenge the said assessments on the grounds that it is exempt from corporation tax under the CIT Act because it is an educational institution. However, the FHC ruled in favor of the FIRS considering that BCIS Limited, being a company limited by shares, was subject to tax as assessed by the FIRS because only companies limited by guarantee can benefit tax exemption under article 23 (1) (c) of the CIT law. Unsatisfied with the FHC’s decision, BCIS Limited appealed to the ACO.
The crux of the issues before the COA was whether BCIS Limited could benefit from an exemption from corporation tax under Article 23 (1) (c) of the CIT Act.
The COA ruled in favor of FIRS, affirming the FHC’s decision. More specifically, the Court held that BCIS Limited is a for-profit corporation limited by shares and is therefore subject to tax.
In rendering the judgment, the Court held that BCIS Limited must prove that it is a company engaged in ecclesiastical, charitable or educational activities of a public nature in order to benefit from a tax exemption under Article 23 (1) (c) of the CIT law. In addition, the Court ruled that BCIS Limited must prove that its profits do not come from a trade or business it carries on.
Moreover, while the FHC had ruled that only limited liability companies, to which CAMA was prohibited from distributing profits, are entitled to the tax exemption, the COA simply upheld the FHC’s decision. According to the COA, the Company has not produced evidence demonstrating that it is a company limited by guarantee and has not proved that it was an academic institution or a public institution. eligible for tax exemption under the CIT law.
The judgment in this case implies that only limited liability companies can be exempted from CIT under section 23 (1) (c) of the CIT Act. Thus, educational institutions, charities and ecclesiastical bodies registered as companies limited by shares or other forms of companies other than companies limited by guarantee cannot benefit from the tax exempt status in under Article 23 (1) (c) of the CIT Act.
This judgment departs from the established practice according to which a company engaged only in educational activities should be exempt from CIT. In a similar case between American International School of Lagos (AIS) v FIRS, the Tax Appeal Tribunal ruled that AIS, being a public educational institution, was not subject to income tax. companies. Although AIS is a company limited by guarantee, the crux of the issue in this case was whether AIS was a public educational institution and not the form in which AIS was registered under CAMA.
While section 26 of the CAMA provides that a company which is to be incorporated for the purpose of promoting education must be registered as a company limited by guarantee when it does not intend to distribute its benefits to its members, the clear terms of Section 23 (1) (c) of the CIT Act make no reference to the form of the company in granting the tax exemption. Thus, one would have expected that Article 23 (1) (c) would normally apply to all forms of corporations since tax laws must be interpreted narrowly and strictly and the ordinary meaning of words used in tax laws must be applied.
Nonetheless, this judgment sets a legal precedent until overturned by the Supreme Court, even though it is open to debate by taxpayers and practitioners. It is important that the taxpayers concerned call on their tax and legal advisers to examine their particular situation and provide them with relevant advice on how to mitigate the tax obligations that may arise from the execution of this judgment on taxpayers with structures similar.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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