Dividend: Whose dividend, what tax?
…there is concern whether Section 43 (6) will not become another section 19 (dividend tax rule) with all its controversies …In the “change era”, Nigeria can definitely do without vexatious provisions or those which could potentially attract the dangerous label of “the more you look, the less you see”…
Dividend is the payment received by a shareholder from a company after distribution of profits. Thus, under section 9(3) of the Companies Income Tax Act (as amended) (CITA) “dividend” means in relation to a company not in the process of being wound up or liquidated, any profits distributed, whether such profits are of a capital nature or not including any amount equal to the nominal value of bonus shares, debentures or securities awarded to the shareholders.” It is the primary return that shareholders expect on their investment in a company’s business.
One of the primary goals that the Board or other managers of the business of the company strives to deliver is to increase the wealth of shareholders by paying or owing dividend and/or ensuring that the stock price goes up. Interim dividends are dividend payments made before a company’s Annual General Meeting (AGM) and final financial statements. Interim dividends would appear to be based on the company’s interim financial statements as the case may be from time to time within the accounting period.
The legal basis for declaration and payment of interim dividend remains the provision of section 379 of the Companies and Allied Matters Act (CAMA). Thus, section 379(2) provides, “the company may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company”. That interim dividend in the hands of the receiving shareholder, to the extent that it is not pioneer dividend or dividend arising from profits from a petroleum operations or exclusively free zone operations, is subject to tax is not contestable.
It is the corresponding obligation to pay tax that the declaration or payment of interim dividend triggers for the Company making such declaration or payment that has generated concerns. This follows FIRS Public Notice in relation to the provisions of section 43(6). Section 43(6) of CITA states,“…every company paying dividend to its shareholders shall pay tax at the prescribed rate in subsection (1) of S.40 of this Act to the Board prior to the payment of the dividend. The tax so paid shall be a deposit against the tax due from the company on the profits out of which the dividend is paid….”
Whilst reference to subsection (1) of S.40 implies clearly the applicability of the companies income tax rate of 30%, the mode of determining the relevant income tax that should be paid by a company paying interim dividend would require a bit of clarity. Generally, in determining income tax payable, two parameters must be established; the tax base and the tax rate.
The provisions of S.43 (6) of CITA makes it clear that companies are expected to make use of the rate of tax as stated under S.40 (1) of CITA, which provides that “there shall be levied and paid for each year of assessment in respect of the total profit of every company tax at the rate of thirty (30) kobo for every naira”. In as much as S.43 (6) does not make reference to any other section of the law for the purpose of determining the tax base, reliance should have to be placed on the provisions of the same section in this regard.
The absence of specific pronouncement about determination of tax base creates three potential scenarios. The first scenario would be where the base is expected to be the profit of the Company since the section makes reference to “profit out of which the dividend tax is paid”. More so, FIRS specifically states in its publication that the tax will be “…at 30% on the profits from which the dividends are paid…”
Is this referenced “profit” the interim profit for the year? If the answer is in affirmative, is this the accounting interim profit or are companies expected to determine total / taxable profit based on interim accounts? The determination of the taxable profit based on accounts covering periods of less than 12 months is not often seen in practice except in situations where:
a company is just commencing operations;
changing its accounting date; and
during cessation of business.
The difference here is that the tax law specifically states the rules applicable in each of the above three situations.
Scenario 2 is one in which the tax base is the interim dividend declared. This is based on the assumption that the taxable profit of the company for that year cannot be reasonably determined at the point of declaring the interim dividend. This scenario is influenced by reference to the heading of S.43 of CITA that states “…tax on interim dividend…” However, it is trite that headings are not regarded as part of the provisions of the law. A potential third scenario is to assume the base to be whatever base the company used to declare the interim dividend and slam the 30% tax rate. After all, section 43(6) already assumes 30% tax rate as maximum tax exposure on the Company.
Be that as it may, other questions taxpayers including existing and prospective investors seek answers to include:
To the extent that WHT are an advance payment of income tax, will companies be allowed to use WHT credits to offset any CIT liability imposed by S.43(6)?
Will S.43 (6) be applied where a company declares dividend out of prior years’ profits on which relevant income taxes have already been paid? This question is particularly relevant as the Section is not expected to apply where no tax is due from any such profit.
Will the Section apply in this self-assessment regime considering the fact that tax on interim dividend is a form of provisional tax and S.77 (6) that exempts companies filing self-assessment from provisional tax?
Finally, there is concern whether Section 43 (6) will not become another section 19 (dividend tax rule) with all its controversies within the tax framework in Nigeria. In the “change era”, Nigeria can definitely do without vexatious provisions or those which could potentially attract the dangerous label of “the more you look, the less you see”; or provisions which can become “the elephant and 12 blind men” in the hands of practitioners and taxpayers thus undermining the quest for greater simplicity, certainty and clarity in our tax laws; or provisions which are so slippery as the famous “foot of the Chancellor” in English law.