The excess dividend tax (EDT) provision is one of the anti-avoidance provisions in the Companies Income Tax Act (CITA). It seeks to treat the dividend declared by a company, as its total profit, and subject it to tax, where the dividend is higher than the total profits of the company for the year.
As simple as this may seem, the profit to be considered for the purpose of EDT has been subject to several interpretations by different stakeholders in the tax space. In the Federal High Court (FHC) case of Oando Plc v. Federal Inland Revenue Service (FIRS) (Oando case), the crux of the issue was whether dividend declared from retained earnings, which has already been subjected to tax should trigger EDT. In a similar case between Olokun Pisces Limited v. the FIRS (OPL case), the case bordered on whether dividend declared from export profits (a tax exempt profit) should also trigger EDT.
In the Oando case, the FHC ruled that Section 19 of CITA does not consider the source of the dividend being paid, and would apply to profits from all sources. However, in the OPL case, the Court ruled that the appellant (OPL) was unable to provide sufficient evidence to demonstrate that it meets the conditions for tax exemption under Section 23 (1)(q) of CITA, which provides for tax exemption on export proceeds repatriated to and reinvested in Nigeria on the purchase of raw materials, plant, equipment and spare parts. Therefore, the Court dismissed the appeal filed by OPL. Despite these decisions by the FHC, engagement with relevant stakeholders suggest that these cases were unable to fully address the lingering controversy on the applicability of EDT on dividend declared from retained earnings and tax exempt income.
Based on Section 60 of the Petroleum Profits Tax Act (PPTA), no tax shall be charged, under the provisions of any other Act, in respect to dividend distributed from profits taxable under the provisions of the PPTA. The implication of this is that any dividend received from any profit that has suffered Petroleum Profits Tax (PPT) would not be liable to further tax under any other tax law. Therefore, where an entity which is taxable under CITA, redistributes dividend from petroleum profits that have suffered PPT, should it be liable to EDT as provided under Section 19 of CITA?
In this article, we examine the applicability of EDT to a company taxable under CITA that redistributes dividend received from profit that has suffered PPT, irrespective of the decisions in the FHC judgments.
The FHC's Interpretation of Section 19 of CITA (Oando v. the FIRS)1
Section 19 of CITA provides that:
"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."
A key interpretation of Section 19 of CITA in the Oando case is that the source of the dividend declared is irrelevant in determining whether the company making such declaration is liable to EDT or not. Therefore, the Court held that dividend, which is franked investment income (not subject to further tax) based on Section 80(3) of CITA, is not exempt from the provisions of Section 19 of CITA.
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