Tax and Ecclesiastical Bodies in Nigeria

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This paper seeks to shed more light on the provisions of the law relating to taxation of religious bodies. This has become necessary to balance the state of our laws with the emotion-laden clamor for enforcement of tax collections against such entities in view of the eerie display of wealth and ostentatious living of some ecclesiastical leaders.

Religious/Ecclesiastical bodies are registered under PART C Companies and Allied Matters Act 2004. Entities registered under this Part are referred to as Incorporated Trustees with special features which include:

  1. The income and property of a body or association whose trustee or trustees are incorporated under this part of the Act shall be applied solely towards the promotion of the objects of the body as set forth in its constitution and no portion thereof shall be paid or transferred directly or indirectly, by way of dividend, bonus, or otherwise by way of profit to any of the members of the association.
  2. Nothing in subsection (1) of this section shall prevent the payment, in good faith, of reasonable and proper remuneration to an officer or servant of the body in return for any service actually rendered to the body or association.
  3. With the exception of Ex-Officio members of the governing council, no member of a council of management or governing body shall be appointed to any salaried office, of the body, or any office of the body paid by fees.
  4. No remuneration or other benefit in money or money’s worth shall be given by the body to any member of such council or governing body except repayment of out-of-pocket expenses or reasonable and proper rent for premises demised, or let to the body or reasonable fee for services rendered. See section 603 of the Companies and Allied Matters Act CAP C20 2004 for reference.

It is discernable from the above that the law places stringent constraints on the utilization of proceeds earned by such entities except for activities that promotes its objects. The question that begs therefore is what is the state of our tax legislation in relation to such entities?

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By the combined effect of Section 23 (1) of the Companies Income Tax Act 2011 (as amended), Section 26 of the Capital Gains Tax Act and Section 19, Para 13, Third Schedule of Personal Income Tax Act 2011 (as amended), Ecclesiastical institutions are expressly exempted from taxation with a caveat that the exemption is not applicable where the religious body engages in trade or business. These provisions as well as the overriding provision that Ecclesiastical institutions ought to be registered as non-profit entities under part C of CAMA give rise to three interesting scenarios:

Scenario A: Where the Ecclesiastical institution does not undertake trade of business would it be subject to tax laws? The express reading of the above referenced laws clearly indicates that such an entity would not be subject to taxation of any kind except Personal Income Tax payable by its employees.

Scenario B: Where the Ecclesiastical institution undertakes trade and business in its registered name as an incorporated Trustee, would it be subject to tax laws? The argument has been advanced that since Incorporated Trustees are by law not expected to make profit, they ought not to be subject to taxation. This argument in my view is flawed by the fact that the law only restricts incorporated trustees from distributing its earned profits as dividends or benefits to Trustees and instead insists that every income earned be ploughed back into promoting the objective of the entity. This includes income made from trade and business.

Furthermore, profit for the purpose of determining taxable income is different from that referred to in CAMA as it assumes a more technical meaning. The Net Profit of the entity is determined from its profit and loss account then Disallowable deductions are added to this figure. Allowable expenses/deductions, deduction of capital allowances and relevant percentage of the income tax are subtracted to arrive at taxable profit. This in my view leaves the entity with a sizeable amount to plough back into the business and fulfill the intent of CAMA. In fulfilling the intent of CAMA there appears to be a contravention of the provision of our tax legislation which invariably is the yardstick for the organization’s tax exempt status. This is due to the fact that our tax laws is explicit in its provisions that any income from trade or business by these bodies is taxable.

The next consideration then is what constitutes trade. The fifth schedule of the Personal Income Tax Act (PITA) attempted a definition provided thus:

“Trade or business to mean trade or business or that part of a trade or business the profits of which are assessible under this Act”.

This definition has provided little or no clarity as it is simply a repetition   of the keywords. In Arbico Ltd. v. FBIR (1996) 2 All NLR 303, the Supreme Court attempted to address the fluidity in the definition of trade by exemplifying two important axioms:

  • Firstly, that the word “trade” should be interpreted in its widest sense in accordance with its common everyday meaning;
  • Secondly, that an isolated one-off transaction can still constitute a trade.

Scenario C: What is the fate of Ecclesiastical institutions not expressly exempted in other tax legislations? I submit that such legislations like Value Added Tax are applicable to Ecclesiastical Institutions except in respect of items listed in the Schedule to the Act and humanitarian services were they enjoy zero VAT rate. There is however a misconception that these institutions are exempted from all income taxes when in reality it is simply its income as an organization that is exempted except of course it engages in trade. The income of its staff are subject to personal income tax and this institutions are also required to file tax returns.  .

In the US, while some bodies are automatically tax exempt, others are required to specifically apply for this status. The Internal Revenue Code also similar provisions with CAMA in that it prohibits the sharing of its income by its members. The same legislation however prohibits these bodies from engaging in substantial lobbying activities, political campaign activity, contravention of these would result in the loss of its tax exempt status (Section 501( c )(3) of the IRC).

Religious bodies are required to meet certain requirements these are nonprofit, cannot use the organization’s assets to provide a benefit to a related person or entity. Also trade or business income not related to its exempt purpose are generally taxable provided that these activities are not the organization’s primary or a substantial party of their activity. Where these occurs the income is subjected to Unrelated Business Income Tax (UBIT); there are however certain exceptions (www.irs.gov.). Where the income is from trade related to its tax exempt activities, same is not taxable

It appears apparent that tax exemptions to religious bodies are not uncommon. Where their law permits the organizations to do related businesses, our Law expressly states that any profits from trade or business is liable to tax.

The clamor for the taxation of these bodies is premised on the eerie display of wealth and ostentatious living epitomized by some ecclesiastical leaders and this is quite understandable. In the face of this, it is important that we are reminded of the fact these bodies have helped shape social and moral development and this must have been a consideration before it was confirmed tax exempt. Rather than broaden the scope of our tax legislations to accommodate business activities by these bodies, it is my humble opinion that these bodies have been suitably recognized by the government for their contribution to public good and it only fair that they contribute to the government revenue should there be any gains or profits from any business transacted by them. It is to this extent and bearing in mind the provisions of our tax legislations that I humbly opine that the income of religious bodies are not taxable. However, any income from any trade or business transacted by them is liable to tax.

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