MEANING
OF TAX
The Oxford English Dictionary
defines a tax as “a compulsory contribution to the support of government
levied on persons, property, income, commodities, transactions, etc. at a fixed
rate mostly proportionate to the amount on which the contribution is levied.
Property practice and transactions in Nigeria are taxable. Where
property is acquired or transferred, the parties are to pay taxes to the
government under the various tax regimes.
The primary function and objective of tax being imposed by a
government is to generate revenue to meet with government expenditure.
BASIC FEATURES OF TAXATION
1.
It should be paid in proportion
to the citizen’s income and wealth;
2.
It should be not be random but
certain;
3.
It should be levied in a most
convenient way;
4.
The cost of imposing and
collecting taxes should be minimal; and
5.
It should be convenient and
competitive internationally.
TAX
JURISDICTIONS
There are specific class of taxes to be collected by the Federal
Government in one hand, and the State Government on the other hand. These are –
TAXES COLLECTED BY THE
FEDERAL GOVERNMENT
1.
Companies Income Tax.
2.
Withholding Tax on Companies
(on companies, residents of the Federal Capital Territory, Abuja and
non-residents).
3.
Petroleum Profits Tax.
4.
Value Added Tax.
5.
Education Tax.
6.
Capital Gains Tax (on residents
of the Federal Capital Territory, Abuja, bodies corporate and non-resident
individuals).
7.
Stamp duties (on bodies
corporate and residents of the Federal Capital Territory, Abuja).
8.
Personal Income Tax (on members
of the Armed Forces, residents of the FCT, Abuja, members of the Nigerian
Police Force, staff of the Ministry of Foreign Affairs, and non-resident
individuals).
TAXES COLLECTED BY STATE
GOVERNMENT
1.
Personal Income Tax.
2.
Withholding Tax (for individuals
only)
3.
Capital Gains Tax (for
individuals only)
4.
Stamp duties (on instruments
executed by individuals).
5.
Road taxes.
6.
Pools betting and lotteries and
gaming and casinos taxes by individuals.
7.
Business premises registration
fees.
8.
Development levies (on individuals
only).
9.
Taxes for naming of street
registration fees in State capitals.
10.
Markets (as regards to the
places where finances are involved).
11.
Right of Occupancy fees over
lands owned by State Governments in urban areas of the State.
PRINCIPAL TAXES APPLICABLE
TO PROPERTY PRACTICE IN NIGERIA
These include –
1.
Capital Gains Tax.
2.
Stamp duties.
3.
Personal Income Tax.
4.
Companies’ Income Tax.
5.
Tenement rates.
CAPITAL GAINS TAX
Section 2(1) of the
Capital Gains Tax Act, Cap. C1 LFN 2004 defines
Capital Gains Tax as the total amount of chargeable gains accruing to any
person in a year of assessment (after deduction) from a taxable asset on
disposal of property.
The main reason for taxing capital gains is that capital gains,
whether or not realised, are just as must relevant to ability to pay as income
liable to income tax and therefore should be taxed on grounds of equity, both
vertical and horizontal.
The scheme of the capital gain tax is that for there to be a charge
to tax, there must be a disposal but the sum on which tax is charged is merely
an arithmetic difference. The sum is between that which is determined under the
Act as constituting ‘consideration’, after deduction of certain sums authorised
by statute, and a sum that is specified in statute as ‘acquisition cost’ which
is sometimes actual expenditure or market value, being treated as if it were
expenditure.
Capital Gains Tax are also gains arising from increases in the
market value of assets to a person who does not regularly offer them for sale
and in whose hands they do not constitute stock-in-trade. There are two types
of gains – paper gains and realised
gains. While the former relates to gains where the assets appreciate in
value while still in the hands of the owner, the latter on the other hand relates
to gains when the assets are sold or disposed.
The tax on the gain of the disposed property implies that if no gain
is made, the tax cannot be charged; and it should be noted that the chargeable
gain is the difference between the cost of the asset and the consideration
received on its disposal.
Assets under section 3 of the
Capital Gains Tax Act, is defined as all forms of property that are
disposable including options, debts, any other currency other that Nigerian
currency or any form of property where any capital sum can be derived from the
disposition of assets.
Moreover, on all disposed assets, capital gains tax are payable on
them. Assets that are disposed occurs where any capital sum is derived from a
sale, lease, transfer, an assignment, a compulsory acquisition or other
disposition of assets; where asset is acquired by the person paying the capital
sum is immaterial. It also includes where any capital sum is received for the
use or exploitation of any asset – section
6(1) of the Act. However, under section
7(4) of the Act, it does not include the following – conveyance or transfer
by way of security of an interest or transfer or re-transfer on redemption of
the security for any sum of money.
The rate of capital gains tax is ten per cent (10%) – section 2(1) of the Act; and the
computation of capital gain is the difference between sum accruing to a taxable
person from the disposal of chargeable asset and the amount excluded from
taxation including expenditure incurred in the acquisition of the country – section 11 of the Act. But under section 12 of the Act, money or money’s
worth charged to the income tax or as receipt taken into consideration in the
computation of the tax under the Personal Income Tax is excluded from
consideration.
In computation of the gains there is what is referred to as
‘allowable income’ because it is not considered in computing the gain.
Allowable income is that which is wholly, exclusively and necessarily incurred
for the acquisition of the asset, together with the incidental costs. In IRC
v. Richard’s Executors (1971), the phrases – wholly, exclusively and
necessarily – were said to be subject to a reasonable interpretation. In Administrators
of the Estate of Caton v. Couch (1997) 70 TC 10, the cost paid for
employing a valuer to value shares in a company with a view to disposing the
shares were held to be incidental cost of their disposal that are allowable,
while the cost incurred in negotiating for the taxes and cost of appealing
against an assessment was held not to be allowable. In Oram v. Johnson (1980) 2 All ER
1, personal labour by the tax payer rather than employing another to
renovate the house was held not to be allowable expense since allowable income
must be money actually expended.
ALLOWABLE INCOMES
1.
Cost of acquisition of the
property by the new owner.
2.
Incidental cost of acquisition.
3.
Expenditure incurred for
enhancing the value, state or nature of the asset before disposal.
4.
Expenditure incurred for
establishing, preserving or defending the title, or right over the asset.
5.
Incidental costs towards the
disposal of asset such as cost of advertising to find a buyer, cost reasonably
incurred in making any valuation or apportionment required for the purposes of
computing the capital gains, expenses reasonably incurred in ascertaining
market value where required for the purposes of capital gains computation.
6.
Fees, commission or
remuneration paid to professionals such as surveyors, valuers, solicitors, etc.
7.
Cost of advertisement to find a
buyer.
PAYMENT OF CAPITAL GAINS
TAX
Every person is expected to pay capital gains tax except the
following –
1.
Ecclesiastical, charitable or
educational institution of a public character.
2.
Statutory or registered
friendly society.
3.
Cooperative society registered
under the cooperative society’s law of a State.
4.
Trade unions registered under
the Trade Union Act.
5.
Gains accruing to any local
government.
6.
Gains accruing to any company
and authority established by law to purchase and export commodities from
Nigeria – section 27(1) of the Act,
or to any corporation for fostering economic development of Nigeria – section 27(2) of the Act.
7.
Disposition by way of gifts – section 40 of the Act.
ELEMENTS OF CAPITAL GAINS
TAX
For a liability to capital gains tax to arise –
1.
There must be a disposal of a
type relevant to Capital Gains Tax (CGT).
2.
There must be an asset of a
type relevant to Capital Gains Tax (CGT).
3.
It must be by a person
chargeable to the tax.
4.
There must be a situation on
which a chargeable gain which is computed under the Act arises.
STAMP DUTIES
This is provided for under the Stamp
Duties Act Cap. S8. LFN 2004. These are taxes imposed on and raised from
stamps charged on instruments, parchments and other legal documents. Where a
document is stamped, it is taken to be an evidence of payment of duties. Sections 2 and 23 of the Act states
that it is payment made on several instruments (conveyances, leases, mortgage
deeds, power of attorney, etc.) specified in the Stamp Duties Act.
Some documents like power of attorney in Abuja for example attract
duties at a flat or fixed rate. While others attract duties ad volerem. The collection of Stamp
duties are divided between the Federal Government and the State.
The Federal Government has the legislative right to legislate on
Stamp duties through the National Assembly – Item 58, Part 1 of the 2nd Schedule to the 1999 Constitution,
and also to collect stamp duties on –
1.
Corporate instruments, that is,
instruments executed by companies.
2.
Duties paid by individuals
residing in FCT.
The State Governments charge and collect stamp duties on –
1.
Instruments executed by
individuals.
Sections 3 and 5 of Taxes
& Levies Act, Cap T2. LFN 2004 provides that
duties charged are paid and denoted by impressed stamps only. The rate of three
per cent (3%) is charged as Stamp duties on the value of transactions in
several States in Nigeria like Kaduna.
Section 163 of the 1999
Constitution provides for the method of sharing the
proceeds of tax from capital income tax and stamp duties collected by both the
Federal Government and State Governments. However, where taxes are collected by
State Governments, the taxes are kept as part of the consolidated revenue funds
of the States; but where taxes are collected by the Federal Government, the
taxes are paid to the States on the basis of derivation so long as the National
Assembly by legislation prescribes a sharing formula. Though none exist. In Attorney-General
Ogun State v. Attorney-General Federation & Ors, per Onu JSC, the Supreme Court in interpreting section 163 of the
Constitution observed thus –
“... the money is meant to be paid to each State in
due course in proportion of which it was derived from that State. [And] ....
should be advisedly kept in an account different from the Federation Account.”
It therefore means the Federal Government where it collects such
charges should make the payments to the States on the basis of derivation, that
is, in proportion to the taxes and charges derived from within their State
territory from these heads of taxes. In Attorney-General Federation v. Attorney-General Abia State & Ors
(2001) 11 NWLR (Pt. 725) 689, the Supreme Court held that in the
application of the derivation principle under section 162 of the 1999
Constitution, the proceeds must be derived from within the territory of the
State.
TIME LIMIT FOR STAMPING
INSTRUMENTS AND PENALTY
Where the instruments require the use of adhesive stamp or postage
stamp, it is required to be stamped before its execution – section of 12 of Stamp Duties Act.
Any unstamped or insufficiently stamped instruments should be
stamped within 40 (forty) days from its first execution – section 23 of the Act. The exception to this rule is 30 (thirty)
days where such instruments attracts stamp ad
volerem – section 23(3)(a) of the
Act.
However, where an instrument is not stamped within the time period
stated under section 23 of the Act, the person liable shall be guilty of an
offence and liable on conviction to payment of the unpaid duty and a fine of
N20 (twenty naira), and where the unpaid duty exceeds N20 (twenty naira) there
shall be a further penalty or interest on such duty at the rate of 10% (ten per
cent) per annum from the day on which the document was first executed up to the
time when the amount of interest is equal to the unpaid duty. In Ogbahon
v. Registered Trustees C.C.C.G, the Court of Appeal (Benin Division)
rejected the argument that the agreement for sale of land in dispute (Exhibit
D2) was inadmissible for not being stamped. The court further stated that “it
is trite that where a document is unstamped, it is not inadmissible merely
because it was not stamped since the purpose of stamping is to ensure revenue.”
EFFECT OF STAMP DUTY
1.
The instrument is admissible in
evidence if it contains Commissioner’s certificate – section 19 of the Act.
2.
The instrument if not stamped is
not admissible unless it is paid –
section 22 of the Act.
PERSONAL INCOME TAX
This is a tax made payable on profits of an income nature as opposed
to profits arising on the disposal of a capital asset.
The preamble to Personal
Income Tax Act (PITA), Cap P8. LFN 2004 provides that it is an income tax
imposed on individuals, communities and families, and on executors and trustees
and also for the assessment, collection and administration of the tax.
TAXABLE PERSONS
The following types of persons are liable to be taxed or charged
with income tax –
1.
Individuals – Generally, every
individual is liable to pay income tax in his resident State. The resident
place is the place available for the individual’s domestic use in Nigeria on a
relevant day and does not into
transitory residences such as hotels, etc. Under section 2(2) of the PITA, where an individual has not less than two
(2) residential places on a relevant day, regard shall be to either the places
in which he usually resides or his nearest to his usual place of work or place
in which he usually resides.
2.
Partnerships – Every partnership is
taxed by the authority where the partnership has its principal office or place
of business – section 8(1) of PITA. However,
it should be noted that according to section 8(1) of PITA, it is the income of
the partners that is taxed and not its income as a going business concern. The
chargeable income of partners are –
(i)
Salary paid to the partners;
(ii)
The interest on capital as
agreed between the partners;
(iii)
The leave passages as agreed
between the partners; and
(iv)
The share profit or loss at the
agreed profit and loss ratio.
3.
Communities and families – Under this,
income tax may be imposed on the income of a community by the State authority
in which the community may be found. According to section 2(4) of PITA, tax may be charged on either the estimated
income of all members of the community or the estimated total income of members
whose income it is impracticable to individually assess or the amount of the
community where it is impracticable to apportion with certainty to the members
of the community. Section 2(5) of PITA went
further to state that income of families recognised under any law or custom in
Nigeria as family income in which the several interest of individual members of
the family are indeterminate or uncertain may be taxed by the State in which
the members of the family or customarily receive the income.
4.
Trustees and executors – This is made
under section 2(6) of PITA, which
provides that the income accruing to trustees of a settlement or trust and
executors of the estate of a deceased person may also be taxed by the State
authority where the administration of the trust takes place or where the
deceased person was last resident.
The charging of income taxes is divided between the Federal
Government and the State.
The Federal Government charge income taxes on –
1.
The income of members of the
Armed Forces;
2.
Residents of the Federal
Capital Territory (FCT) Abuja;
3.
Members of the Nigerian Police
Force (NPF);
4.
Staff of the Ministry of Foreign
Affairs Abuja; and
5.
Non-resident individuals.
The State Governments charge income taxes on –
1.
Individuals; and
2.
Direct assessment.
CHARGEABLE INCOME
Income tax is charged and paid by any of the above-mentioned taxable
person in each year of assessment from a source inside or outside Nigeria on
the following –
1.
Gain or profit made from any
trade, business, profession or vacation.
2.
Any salary, wage, fee,
allowance or other gain or profit from employment including compensation,
bonuses, premiums, benefits or other perquisites.
3.
Gain or profit including any
premiums arising from a right granted to any other person for the use or
occupation of any property.
4.
Dividend, interest or discount.
5.
Any pension, charge or annuity.
6.
Any profit, gain or other
payment – section 3(1) of PITA.
EXEMPTIONS OF CHARGEABLE
INCOMES
However, under section 19 of
PITA, certain incomes are exempted from being charged as personal income
tax. They are –
1.
Emoluments of public office
holders such as President, Diplomats, Consular Officers;
2.
Income of foreign nationals
involved in humanitarian works;
3.
Income of local governments;
4.
Incomes of ecclesiastical,
charitable or educational institutions pensions, gratuities;
5.
Death gratuities and
compensation;
6.
Income from rents, dividend,
interest, royalties, etc. from abroad brought into Nigeria by a Nigerian
citizen.
ALLOWABLE INCOME
Certain expenses are allowable for the purposes of ascertaining the
income or loss of an individual for any period. Such expenses and outgoings are
to be deducted before the computation; they must however be expenses that are
wholly, exclusively, necessarily and reasonably incurred by the individual in
the production or generation of the income – section 20(1) of PITA. These income include –
1.
Interest paid on money borrowed
and employed as capital in acquiring the income;
2.
Interest on a loan for
development of an owner-occupier residential houses;
3.
Rent and premium incurred
during a period in respect of lands or buildings occupied for the purpose of
acquiring the income; and
4.
Expenses incurred for repairs
or renewal or alteration of premises, plants, machineries and fixtures employed
in acquiring the income – section 21 of
PITA.
ASSESSMENT OF INCOME
Section 2, 5th
Schedule to PITA, provides that a taxable person is
liable to pay tax in the State where he is resident if on the 1st
day of January in a year of assessment, he has a place or principal place of
residence in that State. However, the percentage made payable as income tax is based
on the assessment of the income (the deductions allowed) on taxable persons for
each year of assessment.
Section 23 of PITA provides that the income of an individual for each year of
assessment from each source of income is the amount of the income of the year
immediately preceding the year of assessment from each source, notwithstanding
that such person may have ceased to possess that source or that the source has
ceased to produce income. Also, section
32 of PITA states that the chargeable income is the amount of the total
income of the taxable person excluding the amount exempted under the Act.
In each year of assessment, a taxable person shall, without notice
or demand made on him file a return of income together with a statement in
writing containing the amount of income from every source of the year preceding
the year of assessment and particulars in respect of the income, relief,
allowances, and deductions. Under section
42(2) and (3) of PITA, the returns are expected to be filed on oath within
90 (ninety) days from the commencement of every year of assessment; and the
individual shall calculate in his returns the tax payable by him – section 44 of PITA. And in
circumstances where an individual fails to file returns, the tax authority will
assess the individual – section 54(1) of
PITA. Further, the authority may also use the returns filed to assess the
individual or reject the returns made and use its best judgement to determine
the amount of the assessable total or chargeable income of that person and make
assessment accordingly.
TAX CLEARANCE CERTIFICATE
Tax Clearance Certificate also referred to as TCC is made for the
sole aim of encouraging taxable persons to pay tax. The TCC on the income of a
person for the three (3) years immediately preceding the current year of
assessment may be issued to a person under the following circumstances –
1.
When the tax has been fully
paid;
2.
When no tax is due on his
income; or
3.
That he is not liable to pay
tax – section 85(1) of PITA.
Assessment Tax Clearance Certificate (ATCC) is required to contain
the following information –
1.
The chargeable income;
2.
The tax payable;
3.
The tax paid; and
4.
The tax outstanding or a
statement that no tax is due – section
85(2) of PITA.
It is required that where individuals wants to deal with Ministries,
Departments or Agencies of governments and commercial banks, such bodies should
require for a TCC. Such dealings include –
1.
Application for government loan
for industry or business.
2.
Application for a Certificate
of Occupancy (C of O).
3.
Application for approval of
building plans.
4.
Application for transfer of
real property.
5.
Application for registration of
a limited liability company or of a business name.
6.
Application for allocation of
market stalls, etc.
TENEMENT RATES
Tenement rates are charges imposed on houses and buildings within a
State. Section 88 of Kaduna State local
Government (Administration) Law No. 16 of 2003, defines tenement as “land
with building on it which is held or occupied as a distinct or separate holding
or tenancy or any wharf or pier but does not include land without building”.
Section 1(j), 4th
Schedule to the 199 Constitution confers the power
for the assessment of privately owned houses or tenements for the purpose of
levying such rates as may be prescribed by the House of Assembly of a State on
the local government.
The above provision means that State legislation must prescribe and
authorise the charge, while the local governments are the sole beneficiaries.
GROUND RENTS
Ground rents are rent paid, usually annually, by the owner of a
building to the owner of the land on which it is built. It is usually charged
by the Governor of a State for a grant of right of occupancy. There is also an
annually rent on the right and the Governor could revise the rent – section 5 of the Land Use Act.
CONSENT FEES
These are usually not applicable to all property owners but only
those seeking to dispose or in any way, transfer their property. The rate
charged varies in different States. In some States, it is a requirement for the
grant of consent of the Governor of a State for alienation of property subject
to a right of occupancy under section 22 of the Land Use Act and also for
registering any deed of transfer or mortgage or lease.
The rate chargeable as consent fee depends on the scale adopted in a
particular State, but it is mostly between 3% - 5% of the consideration paid on
the property transaction.
REGISTRATION FEE
This is a registration rate paid for the grant of consent of the
Governor of a State for alienation of property subject to a right of occupancy.
The Land Use Act
does not mandate the payment of consent fee or registration fee, which is
clearly an administrative act of the Governor of a State or his Commissioner,
but many States make it a point of practice.
LIABILITY FOR FAILURE TO
PAY TAXES
There are certain civil and criminal penalties that are imposed
where taxes are not paid. Unpaid taxes could be recoverable as debt; it remains
tax and the fact that it is recoverable as debt does not change its character
as proceeds of tax – Attorney-General Lagos State v. Eko Hotels
Ltd. (2008) All FWLR (Pt. 398) 235.
The following are situations that may occur when there is failure to
pay tax –
1.
Failure to pay tax attracts
criminal penalty. Section 40 of the
Federal Inland Revenue Service (FIRS) (Establishment) Act No. 13 of 2007 provides
that any person who being obliged to deduct any tax, but fails to deduct or
having deducted, fails to pay to the Service within 30 (thirty) days from the
date the amount was deducted or the time the duty to deduct arose, commits an
offence and shall upon conviction be liable to pay the tax withheld or not
remitted in addition to a penalty of 10 (ten) percent of the tax withheld or
not remitted per annum and interest at the prevailing Central Bank of Nigeria
minimum re-discount rate and imprisonment for a period of not more than 3
(three) years.
Also, section 76(4) of PITA provides
that where a notice of demand is served on a person to pay income tax and he
fails to do so within 1 (one) month of the service of the notice on him, he
shall be guilty of an offence. Where a person contravenes the provisions of
PITA or any rule or regulation made under it, he is liable on conviction to a
fine of N200 (Two hundred naira); and a further fine of N40 (Forty naira) will
be paid daily if the offence has to do with failure to furnish a return,
statement or information or to keep records and in default of payment, a
punishment of imprisonment for 6 (six) months – section 94(1) of PITA.
2.
Any person who gives false information
on his tax liability or obtains a TCC through misrepresentation, forgery or
falsification will be liable on conviction to a fine of N500 (Five hundred
naira) plus twice the tax payable by him or to imprisonment for a term of three
years or to both such term and imprisonment – section 85(7) of PITA.
3.
Where a person fails to pay
tax, the chattels, lands and other assets of such person may be distrained in
order to satisfy the sums that are outstanding against such person. However, it
only occurs where assessment is final and conclusive and a demand notice has
been served on such person – section 104
of PITA.
ETHICAL ISSUES
1.
A solicitor should advise his
clients on reasons why they should pay their taxes not forgetting to tell such
client or clients the effect of not paying.
2.
A Solicitor should not refrain
from paying his taxes collected from his professional services.
COMPUTATION OF CAPITAL GAIN TAX BASE ON CASE STUDY 5
Chief Alabi
Yahaya bought a plot of land from Lagos State Government in 1990 for N50,000.00
(Fifty thousand naira). He completed a building consisting a block of 4 flats
(3 bedroom each). He spent N950,000.00 (Nine hundred and Fifty thousand naira)
to complete the project. In 2007, he sold the block of flats to Madam Ayinke
Gbajumo, the Iyaloja of Mushin market, Lagos for N4 Million (Four million
naira).
Omowe, Esq. is
the solicitor handling the sale on behalf of the parties. He advised Chief
Yahaya not to pay any taxes. Madam Gbajumo wants the sale perfected as quickly
as possible as she wants to apply for a mortgage facility from Sky Bank Plc and
the block of flats is to be used as
security. Madam Gbajumo has asked Omowe Esq. To do everything possible to
assist her so that she does not pay consent and registration fees to government.
The assessment
and computation of the Capital Gains Tax (CGT) in respect of the above
transaction may be as follows –
DISPOSAL OF A BLOCK OF 4 FLATS
1.
Consideration received - N4
Million.
2.
Cost of purchase of property - N50,000
3.
Gain made - N3,950,000
Less
a)
Building of 4 flats - N950,000
Total allowable
expenditure - N950,000
Gain made minus
Total allowable income = N3,950,000
– N950,000
= N3,000,000
CGT ten per cent
(10%) of N3,000,000 (N3 Million) = N300,000 (Three hundred thousand naira).
Therefore, Capital
Gain Tax (CGT) payable is N300,000.
N. B: in computing Capital
Gains Tax (CGT), the difference in the cost of acquiring the asset and the
consideration received when disposing it is calculated, after taking into
account any allowable expenses
.
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