May 25, 2021
The Non-Governmental Organizations (NGOs) are an important part of the Nigerian society as they are quite impactful in many areas of our daily lives. NGOs are usually not profit-making organizations and there have been some ambiguity in the legislation governing the taxation of NGOs, especially with regard to the definition of the term “public character”.
This article discusses the issues surrounding the legislative framework of taxation of NGOs and the changes introduced by Finance Act 2020.
An NGO is an association of persons registered under Section 590 of the Companies and Allied Matters Act (CAMA) 2020 as incorporated trustees or under Section 26 of CAMA as a company limited by guarantee.
An incorporated trustee is to be registered under S.590 of CAMA for the advancement of any religious, educational, literary, scientific, social development, cultural, sporting or charitable purpose. Meanwhile, under S.26 of CAMA, an NGO can be registered as a company limited by guarantee for promoting commerce, art, science, religion, sports, culture, education, research, charity or other similar objects. An NGO incorporated by guarantee is not allowed to carry on business for the purpose of making profits for distribution to members. While the above two forms of incorporation are common for an NGO, nothing precludes an NGO from being incorporated as a company limited by shares. However, this is rarely the case in practice.
NGOs are required to file annual income tax returns in line with Section 55 of Companies Income Tax Act (CITA) and comply with Value Added Tax (VAT) obligations on the supply or purchase of taxable goods and services. However, Section 23 (1) of CITA and Paragraph 13 of the Third Schedule to the Personal Income Tax (PIT) Act, provide that the profits/income of any institution being a statutory or registered friendly society, company engaged in ecclesiastical, charitable or educational activities of a public character, are exempt from tax, in so far as such profits/income are not derived from a trade or business carried on by such society. However, CITA failed to define neither the meaning of “activities of a public character” nor “public character”. Hence, applicability of income tax to NGOs or otherwise, has been a controversial issue over the years.
In an attempt to clarify the above issue, the Federal Inland Revenue Service (FIRS) issued a Circular on 27 August 2010 on the guidelines on the tax exemption status of NGOs. The FIRS in trying to clarify the issue stated that where an NGO engages in any trade or business, the profit derived therefrom will be subjected to income tax as provided by CITA. The Circular further provided that where the NGO invests its assets in any institution, the income derived from such investment shall be subjected to tax and Capital Gains Tax (CGT) shall arise where assets are disposed by the NGOs at a gain.
The FIRS’ Circular raised controversies as NGOs argued that in so far as the activities or trade are activities of a public nature and the profit is not distributed among its members, such profit is not taxable. Due to the silence of CITA on the meaning of “activities of a public character”, NGOs adopted the position that provided the activities of an NGO were ecclesiastical, charitable or educational activities, aimed at benefitting Nigerians generally and its profits are not available for distribution to the company’s promoters; such activities would qualify for tax exemption from any profit so generated. The NGOs were also of the opinion that the gains from the disposal of any asset used for the above purposes should be exempt from CGT as provided by Section 26 of the CGT Act.
Prior to the FA 2020, CITA did not include a definition for the term “public character”. However, Paragraph 9 of the Requirements for Funds, Bodies or Institutions Regulations, 2011, which was pursuant to FIRS’ Establishment Act, defined the term as “a body or institution whose activities are meant to benefit Nigerians in general and particularly the public and its profits are not available for distribution to its promoters”.