Introduction

The Lagos zone of the Tax Appeal Tribunal (TAT) has ruled in favor of the Federal Inland Revenue Service (FIRS) in a case involving Rand Merchant Bank Nigeria Limited (“the Appellant”) and the FIRS (“the Respondent”). The Tribunal determined that the FIRS’ discretionary powers under section 21 of the Companies Income Tax Act (CITA), as amended, cannot be challenged.

Case Background

The FIRS assessed Rand Merchant Bank to an additional Withholding Tax (WHT) liability of ₦602,590,813.53 for the 2017 financial year, including interest and penalties on undistributed profits. Despite the Company’s objection, the FIRS issued a Notice of Refusal to Amend (NORA), maintaining the additional liabilities. Dissatisfied with this decision, Rand filed an appeal before the TAT to have the liabilities set aside.

Appellant’s Argument

Rand Merchant Bank raised two issues for determination. The Company argued that the FIRS’ powers under section 21 of CITA to treat undistributed profits as distributed and tax them as deemed dividends were not absolute. These powers, the Company contended, were conditional:

1. If the decision to not distribute profits aimed to reduce the overall tax chargeable in Nigeria.
2. If the profits could have been distributed without harming the Company’s business.

The Company argued there was no evidence of tax evasion as the non-distribution of profits was not to reduce the aggregate tax chargeable in Nigeria. Rand Merchant Bank emphasized that the decision to retain profits was driven by legitimate business considerations, such as compliance with Basel II Regulations and the absence of a recommendation from the Board of Directors to declare dividends.

Furthermore, the Company argued that the phrase “without detriment to the company’s business” in section 21 was undefined in CITA and required flexible interpretation. They contended that distributing 2017 profits would have been detrimental given their recent financial losses and the significant capital injection by the majority shareholder.

FIRS’ Argument

The FIRS argued that the WHT on the Company’s 2017 profits became due once the Company remitted its 2017 Corporate Income Tax (CIT) liability. The FIRS asserted that its role was to prevent companies controlled by a few individuals from making decisions that would facilitate tax evasion or avoidance, as outlined in sections 21 and 66 of CITA.

The FIRS also emphasized that the burden of proof lay with the Company to demonstrate that distributing profits would harm its business. They cited several legal precedents to support their position that the Company had not adequately proven this claim.

Issues for Determination

The TAT adopted the Appellant’s two issues for determination:

1. Whether the FIRS’ assessment of the Company to additional WHT on its 2017 profits was wrongful under section 21 of CITA.
2. Whether the Company was liable to pay penalties and interest for not distributing dividends on its 2017 profits.

TAT’s Decision

After reviewing the arguments, the TAT delivered its ruling:

1. Invocation of Section 21 of CITA: The Tribunal upheld the FIRS’ discretionary power to treat undistributed profits as deemed dividends. It ruled that the FIRS was not obligated to establish intent to evade taxes and that the Company failed to provide sufficient evidence to prove that distributing profits would have been detrimental to its business.
2. Applicability of Interest and Penalties: The TAT ruled that interest and penalties applied to the additional WHT assessment were appropriate and consistent with legal precedents. The Tribunal stated that penalties and interest are consequences of failing to remit taxes on time, regardless of whether the assessment had become final and conclusive.

The Tribunal ultimately ruled in favor of the FIRS, dismissing the Company’s appeal and ordering the payment of the additional WHT liabilities, penalties, and interest.

Remarks

The TAT’s ruling underscores the considerable discretionary power granted to the FIRS under CITA, highlighting the challenges taxpayers face in contesting these assessments. This decision may prompt higher courts to clarify the limits of such discretionary powers and the necessary burden of proof for taxpayers.

The case emphasizes the importance of thorough documentation and compliance with procedural requirements for companies, particularly regarding dividend policies and board meeting minutes. These documents are crucial in defending against similar tax disputes.

The TAT’s decision on penalties and interest marks a shift from its previous stance, aligning with the court’s ruling in CMA CGM Delmas v. FIRS. This shift underscores the importance of adhering to tax obligations promptly to avoid penalties, regardless of ongoing disputes or appeals.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.