The introduction of withholding tax (WHT) provisions in the Nigerian tax laws in 1977, imposed on taxpayers the obligation to deduct tax at source on payments for qualifying transactions. The tax deducted are to be remitted to the relevant tax authority within a statutory timeline, with penalty and interest charges imposed on defaulting taxpayers.
However, the drive by taxpayers to comply with their withholding tax obligations appear impaired by the existence of certain vague provisions in the Nigerian tax laws. Where tax laws are difficult to understand, conflicting interpretations are given to these vague provisions and this may have detrimental effect on a country's tax system, through limited compliance by taxpayers and punitive interpretations by the tax authorities.
One key area of contention is the lack of clarity on the Phrase 'sales in the ordinary course of business', which the WHT Regulations issued pursuant to the Companies Income Tax Act and Personal Income Tax Act, have exempted from WHT. While the WHT Regulations lists certain transactions on which tax is to deducted, which include "all types of contracts and agency arrangements, other than sale in the ordinary course of business" (emphasis ours), the WHT Regulations neither defined nor provided any commentary on what constitutes a sale in the ordinary course of business.
Recognising the likely impact of this ambiguity on taxpayers' compliance with their WHT obligations, the Federal Inland Revenue Service (FIRS) attempted to provide some clarity on the phrase via the issuance of WHT Information Circulars in 1998, 2002, 2006 and 2009. Although the aim of the Circulars were to provide clarity and correct any ambiguity and misinterpretation with the operation of WHT in Nigeria, its effort to eliminate the controversy on what constitutes "sale in the ordinary course of business" further exacerbated the ambiguity. Taking the 2006 Circular as a case in point, the FIRS modified the provisions of the Regulations to "all types of contract and agency arrangements, other than outright sale and purchase of goods and property in the ordinary course of business".
While the introduction of these additional words by the FIRS may have sought to clarify the issue, it appeared to focus more on qualifying the word "sale", rather than explaining the Phrase. Furthermore, the FIRS highlighted in the 2006 Circular that where a manufacturer delivers its normal products to its distributors and dealers for sale; and where a distributor earns income from their trading activities, such transactions are sales in the ordinary course of business and are not liable to WHT. In 2009, the FIRS issued another Circular and further attempted to clarify the ambiguity by subjecting "all types of contracts and agency arrangements" to WHT while deleting the 'sale in the ordinary course of business' exemption. While the modification in the 2009 Circular appears a quick fix, it is instructive to note that the Nigerian Courts have held that FIRS' circulars are merely explanatory notes that do not carry the force of law and cannot modify the provisions of an enacted legislation.
What is a sale in the ordinary course of business?
The definition of, and what constitute 'a sale in the ordinary course of business' has not really been tested in the Nigerian Courts. However, the Black's Law Dictionary defines the phrase "ordinary course of business" as the normal routine in managing trade or business. This definition suggests that a sale is made within the ordinary course of business, if the transaction aligns with the routine or customary practices associated with the business of the seller. Therefore, sales made as part of a predominant business practice can be construed as 'a sale in the ordinary course of business'. This position appears consistent with the decisions reached by a United States Tax Court in the case Grober v. Commissioner, where the Court construed the sale of machinery and equipment as a sale in the ordinary course of business; after considering the aims of acquiring and disposing the assets, the continuity of the sales, frequency of sales and the overall history of the sales operations.
The Factors Act of 1889 in the United Kingdom also provides some historical guidance on the 'ordinary course of business' within the context of the ancient mercantile trade. The Factors Act and the resultant cases decided by the English Courts suggests that the ordinary course of business for a mercantile agent revolves round the following:
a. The person disposing the goods received them as an agent engaged in trading activities
b. The transaction was a business transaction
c. The disposition was in the ordinary course of the business of the trade agent
The drive by taxpayers to comply with their withholding tax obligations appear impaired by the existence of certain vague provisions in the Nigerian tax laws. Where tax laws are difficult to understand, conflicting interpretations are given to these vague provisions and this may have detrimental effect on a country's tax system, through limited compliance by taxpayers and punitive interpretations by the tax authorities.
The position above reinforces the notion that sale in the ordinary course of business, may be construed as any sale made by a company within its line of business, for a consideration.
In Nigeria, several sections of the Companies and Allied Matters Act (CAMA) also made reference to 'ordinary course of business'. More notably is Section 159, which prohibits a company from providing financial assistance (including loans) directly or indirectly to a person for the acquisition of its shares. It however issued a proviso, stating that nothing in the definition of financial assistance should prohibit the lending of money by the company in the ordinary course of its business, where the lending of money is part of the ordinary business of a company. It can be easily inferred from the above provision in the CAMA, that ordinary course of business for the implied financial institution would involve the lending of money, as it falls within its regular and normal line of business. This position appears consistent with the definition of 'ordinary course of business' espoused in the Black's Law Dictionary.
In line with the foregoing, we may be able to conclude that the WHT exemption applicable to a 'sale in the ordinary course of business' provided for in the WHT Regulations ought to apply to any sale made from the seller's predominant business, which is consistent with usual practices in that line of business.
The lack of clarity on what constitutes 'sale in the ordinary course of business' may create significant exposures for taxpayers in Nigeria.
In the absence of a clear judicial interpretation of this phrase, taxpayers may be constrained to adopt the conservative position of the tax authorities and this can increase the tax cost for the affected taxpayers. Businesses with margins lower than the WHT rate of 5 or 10% will be worse off, where its customers elect to interpret the provisions of the tax laws strictly to avoid penalties and interest. For these low profit margin businesses, an increase in their tax cost arising from ambiguous provisions in the tax laws, will worsen their cashflow position and may lead to the eventual collapse of the business.
Taxpayers whose businesses can be construed as making sales in the ordinary course of business may seek judicial interpretation of this phrase, to manage their tax-cost exposure.
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