By OMODELE ADIGUN
Investors of banks operating the Holding Company (HoldCo) structure are in for a raw deal under the new dispensation, as multiple taxes hang over their investment returns like a sword of Damocles. Investigation conducted by Daily Sun shows that the impending tax impact on the new system, if not addressed quickly, is like a time bomb that may soon blow up the tottering confidence in the capital market.
Although the Federal Inland Revenue Service (FIRS) was said to have developed a framework granting tax exemptions to the holding companies, but the failure or reluctance of the Federal Ministry of Finance to officially gazette it may have finally thrashed the idea. According to a tax expert, Mr Taiwo Oyedele, the dean of Direct Taxation Faculty of the Chartered Institute of Taxation of Nigeria (CITN), under the existing tax legislation and practice, the potential tax implications now looming will lead to significant tax cost and value destruction for shareholders.
Supporting this assertion, a tax consultant, Barrister Chukwuemeka Eze, said the tax authorities may not have seen this from the same prism with the shareholders, adding that “to the tax authorities, it is another way of making more money for the government, in order to boost its revenue profile, while to the shareholders, it is multiple taxation.” Oyedele stated that the sore point among the legion of taxes is the excess dividend tax.
“The Nigerian tax law has a provision which states that ‘where the dividend paid by a company is higher than its taxable profit, the company would be assessed on the excess dividend at 30 per cent’. Even though dividend income, which has suffered withholding tax, is regarded as franked investment income and exempted from further tax based on another provision of the tax law, authorities usually apply the conflicting provision of excess dividends tax to further impose tax on dividend income.
In other words, if a bank holding company receives dividends from its bank subsidiary, and then redistributes the dividends, it will be subjected to the 30 per cent excess dividend tax, notwithstanding that the subsidiary that earned the profit had paid 30 per cent income tax and deducted withholding tax at 10 per cent before distributing the profit to the holding company,” Oyedele explains in the current edition of CITN News. Apart from this, Eze also illustrates how the HoldCo can be subjected to double taxation: “There is an assumption that a bank HoldCo. declares dividend.
At the point of paying dividend, a 10 per cent Withholding Tax is deducted.If the bank goes ahead to invest the dividend into a business that same year, it translates into income and payment of tax will take cognizance of the 10 per cent Withholding Tax already paid. But if it is invested in another year, the bank will go on to pay all the necessary taxes.It will not enjoy the benefits of the Withholding Tax again.” Shedding more light on the tax albatross, Prince Rasaq Quadri, the immediate past president of CITN and currently, President of West African Union of Tax Institutes (WAUTI), in his presentation at the 4th Annual Banking and Finance Conference, organised by the Chartered Institute of Bankers of Nigeria (CIBN), noted that: “There is no tax consolidation for group of companies in Nigeria, hence the holding company may be exposed to multiple taxes.
He stated: “Generally, the Companies Income Tax Act (CITA) published as part of the Laws of the Federation of Nigeria is the legislative instrument for taxing companies in the banking industry. The following taxes, therefore, cannot be ruled out. “Capital Gains Tax; Value Added Tax (VAT); potential loss of tax assets, especially tax losses and capital allowances; the impact of commencement and cessation provisions; and Stamp duty payable on restructuring,” he said. On the issue of excess dividend tax, he said that “Section 80 (3) of CITA 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. But, 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.
However, Section 19 introduced anti-avoidance provisions in the tax law 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.
‘It follows, therefore, from practice that a dividend income which has suffered withholding tax is regarded as franked investment income and exempt from further tax under the company income tax and should not subject the dividend declared to its own shareholders to further withholding taxes, having suffered withholding tax before receiving the dividend from its shareholders. Based on the latter provision of the tax law quoted above, the tax authorities usually apply the conflicting provision of excess dividend tax to further impose tax on dividend income.”
To buttress his point, he explained that Section 19 of CITA is further extended in the case of Oando Plc v. Federal Board of Inland Revenue. “The appellant had alleged that no tax was due from the company in 2004 since no taxable profit arose notwithstanding the fact that the company 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 that: ‘Having declared dividends and paid same to its shareholders, the Appellant has, in my view, represented to its shareholders and indeed the whole world that it has made profit. It must therefore pay tax.’In other words, if a company declares dividend from reserves, it must subject it to the 30 per cent excess dividend tax.”