A key question that remains unresolved following the enactment of the 2021 Finance Act is whether all private educational institutions in Nigeria are liable to pay corporate income tax to the Federal Inland Revenue Service of Nigeria.
Prior to the enactment of the Finance Act 2021, section 23(1)(c) of the Companies Income Tax Act (CITA) provided an exemption for “interests of companies engaged in ecclesiastical, charitable or public educational activities”. was stipulated. Such profits shall not be of that nature unless derived from a trade or business carried on by such a company. ”
As a result, the profits of companies that provide educational services of a public nature are exempt from corporate income tax, despite the controversies created by this position, and in 2013, American International School Lagos (AIS) v. A lawsuit arose between the Internal Revenue Service (FIRS). 2014 and another case between Best Children International School Limited (BCIS) v. FIRS in 2018.
In the AIS v. FIRS case, FIRS held that the services provided by AIS are not of a public nature as they are not available to all Nigerians and therefore the profits derived should be taxed. insisted. However, the court rejected FIRS’ argument, holding that AIS was registered as a company limited by guarantee and therefore should be entitled to the exemption provided for in section 23(1)(c) of CITA. I did. And FIRS did not prove that: (a) No segment of the population was excluded from the educational services provided by AIS. (b) profits or income have been distributed to the directors or guarantors of AIS; or (c) AIS generates income from sources other than the provision of educational services.
On the other hand, in BCIS v. FIRS, the court ruled in favor of FIRS, holding that BCIS is a commercial company limited by shares and should pay corporate income tax in accordance with the provisions of CITA. The court also held that only companies that are restricted by a surety company or a corporate trustee are eligible for the CITA section 23(1)(c) exemption.
The dispute resolution resulted in a clear agreement between private education stakeholders and practitioners regarding the legal framework and direction of tax credits for educational institutions. Taken together with the above precedents and existing legislation prior to the Finance Act 2021, for a company to be exempt under section 23(1)(c) of CITA and other laws in Nigeria, there are three conditions: This means you need to prove it.
Engaged in ecclesiastical, charitable, or educational activities of a public nature. The profits that the company derives from its activities are not derived from any trade or business carried on by the organization. Limited companies are for profit and must pay taxes. The mere fact that a company is a school or educational institution is not sufficient to benefit from tax exemption.
This consensus was further confirmed by the enactment of the Finance Act 2020, which defines “public nature” in CITA to mean an organization or association (i). is registered under the relevant laws of Nigeria; and (ii) does not distribute or share its profits in any way with its members or promoters.
However, with the enactment of the Finance Act 2021, the above position no longer applies. This amended section 23(1)(c) of CITA, which removed the word “education” from pre-2021 section 23(1)(c) of CITA. This means that companies carrying out educational activities in Nigeria may be subject to income tax. Furthermore, FIRS asserts in its information circular dated August 2023:
that profits derived from companies engaged in educational activities are subject to income tax irrespective of their incorporation status under the Companies and Allied Matters Act (CAMA) and whether the profits are distributed to shareholders; and Schools, educational institutions are subject to income tax Other companies that carry out educational activities must pay income tax on their profits. These educational institutions include nursery schools, kindergartens, elementary schools, secondary schools, high schools, and universities. Classification of all educational institutions should be based on annual turnover, similar to other commercial small, medium, or large enterprises classified by CAMA. An exemption shall be granted if the educational institution can demonstrate that its educational activities are charitable. That is, it is necessary to satisfy the following three conditions. We solve educational needs based on kindness and charity, without charging fees, and surplus/profits are returned to educational activities.
The Federal Inland Revenue Circular took advantage of the uncertainty created by the Finance Act 2021 to make a number of bold assumptions. This legislative and administrative attitude towards private education does not seem like a good way to generate income, as it could further adversely affect the already terrible educational situation in the country.
From a legal perspective, section 7 of the Finance Act 2021 significantly amends section 23 of CITA by removing the word “education” from the list of charitable purposes of public nature, replacing the existing contradicts the law. In particular, CAMA sections 26 and 838 specifically prohibit profit distribution and require all corporate trustees and limited guarantee companies to automatically return operating surplus to charitable purposes. Additionally, the Third Schedule to the Personal Income Tax Act (PITA) still maintains the exemption from personal income tax for educational institutions.
Another notable legal issue is that whenever the executive branch of government exercises powers beyond those granted to it by law, such conduct is said to be egregious and is subject to judicial review. It is. The FIRS information circular contains many bold statements. It also went so far as to prescribe conditions for granting tax exemption to institutions beyond those already provided for in existing legislation. The practical application of these assumptions and instructions may result in inconsistencies and subjective interpretations, which may lead to legal disputes. These recent legal issues are yet to be challenged in court and it is likely that Section 7 of the Finance Act, 2021 and the accompanying FIRS notification will become the subject of litigation in the near future.
From a public policy perspective, there are several arguments against taxing private educational institutions. Private educational institutions often provide important public benefits, such as educating future leaders, fostering innovation, and contributing to societal development. Taxing these institutions would reduce their ability to provide scholarships, invest in research, and maintain high educational standards, as these institutions rely heavily on tuition and donations and operate on tight budgets. There is a possibility that Imposing taxes can lead to higher tuition costs, make education less accessible to students from low-income families, and negatively impact education funding and investment.
FIRS does not demonstrate an adequate understanding of what constitutes a charity of a public nature. In the social sector and nonprofit management, regardless of the sector (education, health, sports, religion, etc.), charging for services does not generate sales in the sense of making a profit. Technically, such an amount does not amount to making a profit. It is considered operating surplus rather than profit. In many countries in Europe and Africa, private schools and NGOs receive large subsidies from the government.
Given Nigeria’s persistent budget deficit, the government is always keen to increase revenue from various sectors. However, given the challenges in the education sector and the need for human capital development, imposing an income tax on educational activities would deter potential investors, increase education costs, and generate only minimal additional revenue for governments. There may not be. This could further worsen the educational situation in Nigeria, as the Nigerian government struggles to meet the public’s demand for quality education. Nigeria’s education sector faces many challenges, including a lack of government funding and a lack of human and material resources. Therefore, stakeholders in this sector should advocate for an overhaul of the Finance Act 2021 in future finance legislation to increase educational funding and investment opportunities.
Chima (NFP) is a nonprofit management professional and executive director of the Ikota Educational Foundation.
