Taiwo Oyedele the reputable and ever reliable tax professional and partner at PWC in an article on Businessday, lamented at the apparent favoritism granted to Nigerian Bank holding companies in the issue of Excess dividend tax. Section 19 of the Companies Income Tax Act (“CITA”), Cap C21, LFN 2004 as amended states that:
“Where a dividend is paid out as profit on which no tax is payable due to: (a) no total profits (this means taxable profit); 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, the company paying the dividend shall be charged to tax at the rate (that is, 30%) prescribed in subsection (1) of section 40 of this Act (CITA) 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.”
What this means essentially is that when a company pays dividend which is in excess of taxable profits the FIRS will impose a tax of 30% on the excess dividends being paid. Now the problem with this is that it negates the provision of section Section 80 subsection 3 of the CITA which most companies use as a tax shield. For example, a holding company which hold significant investment in subsidiary companies will mostly derive its income from dividends paid by those subsidiary companies. Being a holding company, they can also on their own invest in government bonds and securities which are mostly tax free. Dividends in Nigeria are considered franked investment incomes which should no longer be subjected to tax again. Likewise income received from investment on government bonds are non-taxable so one does not expect that it be taxed again upon distribution. However, since it is apparent that a Holding Company’s income (dividends and fixed income securities) received from its subsidiaries will largely be more than any other income it makes on its own, they will fall under the tax net of Section 19 and therefore be liable to tax.
This was posing a major problem for the Nigerian banks that have decided to retain their subsidiaries under a Holdco structure as mandated by the CBN. It means that they will be subjected to heavy tax on their incomes when distributed as dividends by their banks, asset management companies etc. The banks then went ahead to lobby the FIRS who then issued a
circular exempting banks from Section 19 of the CITA. Taiwo Oyedele also raised some pertinent issues which I thought was very logical?
“why restrict the Circular to banks when the issue is a general one affecting all companies taxable under CITA?….since what’s good for the goose is good for the gander. In order to address the issue permanently, the excess dividend section should be deleted from CITA or amended to exempt profits previously taxed and profits arising from exempt income”.
Since the apparent loss of taxable revenue from the FIRS is not enough for them reject the bank’s request why did they not now extend this to other companies. The Holdco structure has been a problem in Nigeria due to its huge tax inefficient model making nonsense of investors who wish to hold significant stake in companies with good fundamentals and high operational profit margins.
I expect the likes of UAC, Dangote Group and Transcorp to have a say in this matter by lobbying the National Assembly to either amend section 19 accordingly or delete it completely.
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