Nigeria: Are All Educational Institutions Now Liable To Income Tax In Nigeria Under The Finance Act, 2021?

The signing of the Finance Act, 2021 (Finance Act) into law by President Muhammadu Buhari on 31^st December, 2021 brought further sweeping changes to the Nigerian tax regime with notable implications for businesses across various sectors. The educational sector was not excluded from the impact of the Finance Act.

Over the years, the tax laws have been interpreted to confer an income tax exemption status on educational institutions in Nigeria under the Companies Income Tax Act (CITA). Despite this practice, the Federal Inland Revenue Service (FIRS) had, on different occasions, deviated from this general view and successfully subjected educational institutions to Companies Income Tax (CIT) such as in the case of Best Children International Schools Limited v FIRS where the Court of Appeal held an educational institution to be liable to CIT because it was registered as a company limited by shares. However, based on the Finance Act amendment to Section 23(1)(c) of the CITA, the general tax exemption for educational institutions has now been removed. This amendment by the Finance Act suggests that educational institutions that have previously enjoyed tax exemption will now be subject to income tax as applicable under the CITA.

It is however important to examine whether this amendment will impact all educational institutions in Nigeria or whether certain educational institutions can still continue to enjoy tax exemption status.

In this Article, we have examined the Finance Act amendments to Section 23(1)(c) of the CITA and the extent of its impact on the tax liability of educational institutions in Nigeria.

Taxation of Educational Institutions in Nigeria Pre- Finance Act, 2021

Prior to the enactment of the Finance Act, 2021, Section 23(1)(c) of the CITA provided as follows:

This provision was generally interpreted to mean that educational institutions in Nigeria enjoyed a tax exemption status to the extent that they provided educational activities of a public character and their profits were derived from solely such educational activities and not from other trades or businesses.

However, the FIRS, at some point, began to "lift the veil" on such educational institutions in order to scrutinize their activities in a bid to ascertain whether their profits qualified for income tax exemption under the CITA. In this regard, there are two notable cases where the profits of educational institutions were scrutinized as discussed below:

The American International School of Lagos (AIS) v FIRS

In 2014, AIS instituted an action at the Tax Appeal Tribunal (TAT) against the FIRS. In that case, the FIRS had subjected AIS, an educational institution, to CIT for the 2008 - 2013 years of assessment on the basis that AIS did not qualify as an educational institution of public character as described under Section 23(1)(c) of the CITA and thus should not enjoy the tax exemption provided under the CITA. In arguing its position, the FIRS relied on the Black's Law Dictionary (9^th edition) which defined "public" as "Relating or belonging to an entire community, state or nation. Open or available for all to use, share or enjoy". The FIRS further contended that AIS' services could not be said to be available for all Nigerians to use, share or enjoy since its services are not available free of charge and thus the services are not of a public character.

The TAT disagreed with the FIRS' position and held that AIS was not liable to pay CIT on its profits because the school was formed as a company limited by guarantee under the Companies and Allied Matters Act (CAMA) and generated income from the provision of educational services. The TAT further held that the FIRS failed to provide any evidence that any segment of the Nigerian public was excluded from benefiting from AIS' educational services and thus the FIRS' argument that AIS was not of a public character was not tenable.

The TAT subsequently ordered the FIRS to issue a Tax Clearance Certificate to AIS.

Best Children International Schools Limited (BCIS Limited or "the Company") v FIRS

In 2014, BCIS Limited, an educational institution registered as a private company limited by shares under the CAMA, was assessed to over ?30 million tax, consisting of CIT, Education Tax, Withholding Tax, and Pay As You Earn tax for 2008 to 2012.

BCIS Limited instituted an action at the Federal High Court (FHC) challenging the said assessments on the grounds that it was exempted from paying CIT as an educational institution. However, the FHC ruled in favour of the FIRS holding that BCIS Limited, being a company limited by shares, was liable to the tax as assessed by the FIRS because only companies limited by guarantee qualify for tax exemption under Section 23(1)(c) of the CITA. Dissatisfied with the decision of the FHC, BCIS Limited appealed to the Court of Appeal (COA). In December 2018, the COA ruled in favour of the FIRS, affirming the decision of the FHC. Specifically, the Court held that BCIS Limited was a profit-making company limited by shares and was therefore liable to CIT.

The decision in the BCIS Limited case was a clear departure from previously established practice and attracted criticisms from stakeholders. This is because the erstwhile Section 23(1)(c) of the CITA made no reference to the form of the company in granting tax exemption. Thus, it was expected that Section 23(1)(c) should have ordinarily applied to all forms of companies given that tax laws are to be interpreted strictly and where ambiguities arise, it is the construction that is more favourable to the assessee that should be adopted as held by the Supreme Court in the case of S.E Ola v Federal Board of Inland Revenue.

While the decision in the BCIS Limited case remains open to debate, we have examined below the impact of the Finance Act amendment on the various forms of educational institutions in Nigeria as registered under the CAMA.

Application of the Finance Act Amendment to Companies in the Educational Sector

Part B of the CAMA contains provisions that govern companies in Nigeria. Specifically, Section 21 of the CAMA states that companies can be registered as either companies limited by shares, companies limited by guarantee or unlimited companies. While the liabilities of the members of companies limited by shares and companies limited by guarantee are only limited to the shares and amounts undertaken respectively by their members, the members of an unlimited company have an unlimited liability in the event of winding up of the company.

It is important to note that, Section 26 of the CAMA provides that a company, which is to be formed for the purpose of promoting education should be registered as a company limited by guarantee where it does not intend to distribute profits to its members and prohibits such a company from carrying on business for the purpose of making profits for distribution.

Notwithstanding the foregoing, the clear exclusion of educational institutions from any tax exemption under the Finance Act could be interpreted strictly to mean that all educational institutions registered as companies will be subject to CIT regardless of whether they are registered as companies limited by guarantee, companies limited by shares or unlimited companies.

While the foregoing may be the strict implication of the amendment and may open new channels of revenue for the Federal Government, it may be also be deemed unfair to educational institutions operating as companies limited by guarantee which do not carry on business for the purpose of making profit for distribution, especially given the state of public education in Nigeria, which is generally plagued with poor funding, inadequate infrastructure and facilities and poor and inconsistent remuneration for teachers, which often lead to strikes. Thus, imposing a tax on such profits, if a strict interpretation is adopted, could be counter-productive and may discourage local and foreign investments into the educational sector in Nigeria. Furthermore, the burden of the tax on companies that provide educational services will result in increased tuition fees and other costs of providing services in such institutions thereby increasing the overall cost of education in Nigeria.

Taxation of other Business Forms in the Educational Sector

Other business forms provided under the CAMA are Partnerships, Limited Partnerships, Business Names and Incorporated Trustees. Thus, educational institutions that do not wish to be registered as companies can be registered as any of the foregoing business forms.

Where an educational institution is registered in any business form other than a company, such educational institution will not be subject to tax under the CITA. This is because Section 9 of the CITA limits the scope of the application of the CITA to only companies. Thus, any organization or institution that is not a company cannot be liable to CIT.

Conclusion

From our analysis, it is clear that all educational institutions will not automatically be liable to income tax in Nigeria under the Finance Act, 2021 as their exposure to income tax will be dependent on their business form. Strictly speaking, only educational institutions that are registered as companies will be liable to CIT going forward. Even at that, we still believe that there is a need to closely examine the amendments and determine whether the intention is to subject all educational institutions to tax as it seems.

In our view, it is likely that the new taxation regime for educational institutions will be met with resistance by stakeholders. It is therefore important that taxpayers ensure that they conduct their affairs in a manner that ensures compliance with the provisions of the law pending any further amendment by the legislature or a clarification by FIRS on how the amendment will be implemented. Thus, educational institutions should seek advice from their tax consultants and obtain guidance on how their operations may be impacted by the changes in the tax law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.