Tax Liabilities of Educational Institutions in Nigeria – The “Public Character” Twist

By A.S. ABDUL ESQ. 

In a recent decision, the Court of Appeal (COA) in the case between Best Children International Schools Limited (BCIS Ltd.) and Federal Inland Revenue Service (FIRS) affirmed the decision of the Federal High Court (FHC) that BCIS Ltd is liable to Companies Income Tax (CIT) notwithstanding its status as an educational institution. This decision was reached after the court considered the mode of registration of the school and found that its business objective was to make profit coupled with the fact that it was set up as a limited liability company rather than a company limited by guarantee.

Background

Although the position of the law seems clear on the taxability of educational institutions, the recent COA decision on the subject matter has cast a doubt on the true position of the law. A swift examination of the relevant sections of the Companies Income Tax Act (CITA) and the Companies and Allied Matters Act (CAMA) bordering on the taxability of educational institutions in Nigeria will not be out of place.

Generally, under the CITA, all Nigerian companies are subject to tax on their profits. This general rule is engraved in the provisions of Section 9 of CITA which provides that profits of a Nigerian company accruing in, derived from or brought into Nigeria from any trade or business shall be liable to tax. However, Section 23 of CITA which is a more specific section exempts companies, institutions and societies engaging in specific activities from paying tax. Section 23(1)(c) categorically states that profits of companies engaged in ecclesiastical, charitable or educational activities of a public character are exempt from tax provided such profits are not derived from a trade or business carried on by such company.

Furthermore, Section 26 of CAMA provides that where a company is to be formed for the purpose of promoting education or other similar objects, and the company has no intention to distribute its profits to its members, such a company should be registered as a company limited by guarantee.

In addition, under the Tertiary Education Trust Fund (Establishment, etc) Act 2011 (which repealed the erstwhile Education Tax Act Cap. E4 LFN 2004) all Nigerian companies are liable to education tax at 2% of their assessable profits (tax adjusted profit before capital allowances). Non-resident companies and unincorporated entities are exempt from Tertiary Education Tax.

Having examined the above provisions of the law, it is apposite to briefly discuss the facts of BCIS Ltd v. FIRS in order to review the decision of the Court of Appeal in that case. 

Facts of the Case

BCIS Ltd is an educational institution registered as a private company limited by shares under CAMA.  On 1^st September, 2014, the FIRS issued an assessment of over N30 million to BCIS Limited consisting of CIT, Tertiary Education Tax (TET), Withholding Tax, and PAYE Personal income tax (PIT).

BCIS Ltd challenged the said assessments at the FHC on the ground that it is exempted from paying corporate tax under the CITA because of its status an educational institution.  The FHC however held that BCIS Ltd, being a company limited by shares, was liable to the tax as assessed by the FIRS because only companies limited by guarantee qualify for tax exemption under Section 23(1)(c) of the CITA. Aggrieved by the decision of the FHC, BCIS Limited appealed to the COA.

The fundamental issue before the COA was whether or not BCIS Limited qualified for exemption as an educational institution with public character under Section 23(1)(c) of the CITA.The COA upheld the decision of the FHC. The COA categorically stated that BCIS Ltd being a profit-making company limited by shares cannot be held to be an institution of public character and is therefore liable to tax.

The COA further stated that BCIS Ltd has to prove that it is a company engaged in ecclesiastical or charitable or educational activities of a public character to qualify for tax exemption under section 23(1)(c) of the CITA.  Additionally, the COA held that BCIS Ltd has to prove that its profits are not derived from any trade or business it carries on.

The COA thus affirmed the decision of the FHC. According to the COA, the Company failed to adduce evidence to demonstrate that it is a company limited by guarantee and failed to prove that it is an academic institution, or an institution of public character qualified for tax exemption under the CITA. 

Analysis

From the foregoing, certain criteria have been established by the COA in determining whether a company qualifies to be exempt from tax as an educational institution. Some of the criteria put forward by the court include:

1. Mode of Registration: The court in affirming the position of the FHC clearly stated that a company limited by shares cannot be regarded as an institution of public character due to its nature as a profit-making company. The court relied on the provisions of section 26 of the CAMA that provides that a company created with the purpose of promoting education or other similar objects must be registered as a company limited by guarantee. Hence, if BCIS Ltd had been registered as a company limited by guarantee, the COA would have held that it was not liable to tax due the general nature of companies limited by guarantee as non-profit making institutions.
2. Nature of activities of the company: It is trite that the company must have an outlook of purely educational intents. The company must have as its primary objective, the promotion of education and other similar objects, not profit making even where the profit arises from such objects.
3. Such Educational Institution must be of a “Public Character”: Perhaps this criterion is the most controversial of all the criteria to be satisfied for a company to be qualified to be exempt from tax under section 23(1)(c). The reason for this is not far-fetched. Neither CAMA nor CITA proffers a working definition for the phrase “public character”. Due to this, the phrase is capable of attracting diverse interpretations which are capable of smothering the true intents of the provisions of the law on tax liabilities of educational institutions in Nigeria. The issue of the definition of “public character” came up in the case between American International School (AIS) and FIRS which was decided before the Tax Appeal Tribunal (TAT) at Lagos in 2015. In that case, the Appellant, the American International School of Lagos (AIS), a school incorporated as a company limited by guarantee under CAMA was assessed by the FIRS to Companies Income Tax (CIT) and Education Tax for the years 2008 to 2013. AIS objected to the assessment on the ground that it engaged in providing educational activities of a public character and is therefore exempt from paying the taxes assessed by the FIRS. The FIRS refused to amend the assessment hence the appeal to the TAT. AIS argued that its activities are of a “public character” using an analogy of “institution of a public character” as defined in Paragraph 9 of the Requirements for Funds, Bodies or Institutions Regulations, 2011, pursuant to FIRS’ Establishment Act, which defines such body 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.” The FIRS contended that AIS did not qualify as an educational institution of a public character because its services are not free and therefore not available for the benefit or use of all Nigerians. It further argued that the fees are so high as to limit its services to a select few and therefore strips it of public character. The TAT found that the AIS, being a not-for- profit entity established as a company limited by guarantee to provide educational services, is tax exempt. The TAT also found that it was not uncommon for schools to charge tuition fees to enable them carry out their object (provision of educational services). This is regardless of the fee levels. Based on the foregoing and the failure of the FIRS to provide evidence that any segment of the Nigerian public is excluded from benefiting from the AIS’ educational services, the TAT held that AIS was not liable to pay CIT and consequently, there was no basis to charge it education tax.

From the decision of the TAT in the foregoing case, it can be logically deduced that an educational institution that has not been shown to exclude any segment of the populace from attending the institution can be said to be of public character.

4. Non-derivation of profits from the trade or business such educational institution carries on- Another criterion that must be satisfied by an educational institution in order to qualify for exemption under section 23(1) is that the institution must not derive any profits from the business or trade it carries on. 

Submission

The decision of the COA in BCIS v. FIRS comes along with certain formidable implications. Although section 23(1)(c) of CITA clearly uses the word “any company” without qualifications, the court has clearly stated that “any company” within the context of that section translates to mean “any company limited by guarantee.” The implication of this is that educational institutions, charitable organisations and ecclesiastical bodies that are registered as companies limited by shares or other forms of companies other than companies limited by guarantee are not shielded from payment of tax under Section 23(1)(c) of the CITA notwithstanding the fact that CITA did not categorically state specific types of companies that are to be exempted. This position appears not to be in tandem with the provisions of CITA. However, a joint reading of section 23(1)(c) of CITA and section 26 of CAMA goes a long way to show that the decision of the court is in order.

Also, the definition of “public character” within the context of section 23(1)(c) remains uncertain. The decision of the TAT in the case of AIS v. FIRS implies that an educational institution that has not been shown to exclude any segment of the populace from reaping benefits from its educational activities can be said to be of public character. This interpretation lacks merit and can be said to betray the true intents of the provisions of that section. The interpretation has failed to signify the extent of exclusion that will deny an educational institution from being of public character. The fees charged by most of the educational institutions alleging to be of public character are so prohibitive and non-affordable for an average Nigerian. Only the rich can afford such schools. The poor are therefore excluded from benefiting from their educational services.  How then are such institutions qualified to be of public character? Until there is a proper definition of “public character” by the CITA or any other relevant legislation, owners of private educational institutions will keep on hiding under the umbrella of companies limited by guarantee and shielding themselves with the provisions of section 23(1)(c) of the CITA while they continue making exorbitant returns from such institutions without paying the necessary taxes required of them.

Endnotes

1. https://andersentax.ng/court-of-appeal-rules-on-the-taxability-of-an-educational-institution/ Last accessed on 18/02/2019 by 4.00 am
2. https://www.proshareng.com/news/Taxes%20%20Tariffs/Court-of-Appeal-Affirms-Educational-Institutions-Companies-Income-Tax-Obligation/44026 Last accessed on 18/02/2019 at 12.21 p.m
3. http://www.orandcconsultants.com/Downloads/Companies%20Income%20Tax.pdf
4. https://pwcnigeria.typepad.com/files/tax-alert_exemption-of-educational-institutions-from-income-taxes.pdf
5. Companies and Allied Matters Act Cap C20 LFN, 2004.
6. Companies Income Tax Act Cap C21 LFN, 2004.
7. Trust Fund (Establishment, etc) Act 2011
8. Education Tax Act Cap. E4 LFN 2004