There is now a new legal development in Nigeria’s education sector that further pushes the envelope on the question as to whether schools in Nigeria are subject to corporate taxation. The new development races towards the conclusion that schools of a certain character and/or structure must be subject to corporate taxes like every other company.
The otherwise settled view is that schools (and educational institutions generally) are not subject to corporate taxes because of the public character of the services that they provide. The section of the Companies Income Tax Cap C21, LFN 2004 often cited as the legal basis for this settled view is Section 23(1)(c). This section provides that the profit of any company engaged in ecclesiastical, charitable or educational activities of a public character are exempt from tax in so far as such profits are not derived from a trade or business carried on by such company.
In 2015, the FIRS sought to bring the American International School into the corporate tax net in the case ofAmerican International School (AIS) vs. Federal Inland Revenue Service (FIRS). The crux of FIRS’ argument was that the AIS could not be said to be engaged in educational activities of a “public character” because the services provided by the AIS cannot be said to be available for all Nigerians to use, share or enjoy since, its services are not available free of charge. On the other hand, the AIS argued that its educational activities were of a public character because (a) its educational services benefit the Nigerian public in general and (b) its profits are not available for distribution to its promoters.
In coming to a decision, the Tax Appeal Tribunal (TAT) observed that the FIRS did not provide prove that (a) any segment of the Nigerian public was excluded from the educational services provided by the AIS or that (b) any profits or income are distributed to the directors or guarantors of AIS (c) that AIS generates income from other sources other than the provision of education services. The TAT therefore declared that the educational services provided by AIS were of a public character and that AIS could not be subject to corporate taxes. The TAT also discountenanced the submission by FIRS that the ‘high’ tuition charged by AIS supported the conclusion that the services provided by AIS were not available to the general public. Although, the TAT did not give a reason for this view.
However, in December 2018, the Court of Appeal reached a different decision in the case of Best Children International Schools Limited (BCIS Limited or the Company) vs Federal Inland Revenue Service (FIRS) and held that the BCIS is liable to Companies Income Tax (CIT). The material difference with this case was that BCIS was registered as a limited liability company whilst American International School was registered as a company limited by guarantee at the Corporate Affairs Commission. On a general construction of the judgement of the court of appeal, it would appear that the fact that BCIS was registered as a limited liability company operated in the mind of the judges in reaching a decision.
We welcome the decisions of the courts to the extent that it advances the law relating to public character of educational, ecclesiastical and charitable organisations. The decision of the FIRS to push the envelope in some cases, is welcome and accords with the interest of the public and with the practice of tax authorities in developed countries. We do not find it gross or sinful, that their may be reasonable grounds upon which any educational or other tax-exempt institution may rightly lose its tax exempt status
Our interpretation of the wording of section 23(1)(c), is that there is no presumption of “public character” in favour of educational, ecclesiastical or charitable institutions. Inevitably, our courts must exercise caution in assuming that such presumption exists. In our view, the wording of section 23(1)(c) clearly indicates that it is possible for there to be companies that carry out educational activities of a private character. Educational institutions may decide to be ‘for profit’ and structure there affairs accordingly, if they so choose. Accordingly, our view is that “public character” must be shown & proved as a matter of mixed law and fact, in every case and on case by case basis. We think that the onus of proof must necessarily originate from the tax payer.
We think that the notions of public character and public benefit are coincident and co-existing. Accordingly, our view is that an inquiry into the public character of an educational ( or other charitable) institution is one into whether or not, the institution provides public benefit. Our courts must therefore provide further interpretive precedent and guidance for determining what is “benefit” and/or “public”, within the context of section 23.
Generally, we think that an attempt to statutory define “public character” or “public benefit” will unduly fossilize the law and thereby, rob the law of its pristine functionality as an instrument of social change. We take the view that what amounts to public character and/or public benefit should be left to judicial precedent which should appropriately respond to social and economic change. To our mind, the notion of “public character” or “public benefit” within the context of tax liability is “continuously floating” and ought to remain so.
Implications for School Owners & Investors
It would be erroneous to assume that the AIS case laid down a general principle of law that all educational institutions that are registered as companies limited by guarantee are exempt from corporate tax. In the same manner, it would be erroneous to also assume, as with the BCIS case, that educational institutions registered as limited liability companies will necessarily be subject to corporate taxation.
What is clear is that FIRS will continue to push the envelope. As earlier mentioned, FIRS would be well within its statutory mandate to so act. Accordingly, educational institutions must now be more deliberate about the operational and structural considerations of their organisations. It would be very appropriate for schools to seek professional counsel, to consider reviewing their current legal , operational and extraction structures with a view to structuring appropriately, for tax–exemption, to the extent that tax-exemption aligns with the overall strategy of the promoters.
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