Tax exemption for educational institutions: Is the court redrafting the tax law?

The recent judgment by the Court of Appeal (COA), in the case between Best Children International Schools (BCIS) Limitedvs Federal Inland Revenue Service (FIRS), delivered in December 2018, has once again brought to the fore the question whether being an educational institution of a public character, is in itself, sufficient for exemption to Company Income Tax in line with the provisions of section 23(1)(c) of the Company Income Tax Act (CITA). Or are there other supervening conditions that if not met will cause the income of an educational institution to be liable to tax and if so, what is/are the relevant provision(s) either in the CITA or Companies and Allied Matters Act (CAMA) where it is so stated?

Facts

In 2014, Best Children International School (BCIS), a private company limited by shares engaged in educational activities, rejected a tax assessment of about N32.7 million by FIRS for 2008-2012 assessment years out of which about 88% or N28.9 million relates to Company Income Tax. The assessment was challenged at the Federal High Court (FHC) on the ground that its activities as an educational institutionis tax exempt.

At the FHC, the Court in 2016 ruled in favour of FIRS holding the view that only companies limited by guarantee are qualified for tax exemption and that by virtue of BCIS’ status as a company limited by shares, it does not fall under the exemption as contemplated by section 23(1)(c) of the CITA. Dissatisfied with the judgement of the FHC, BCIS proceeded to the Court of Appeal, Abuja Division.

Court of Appeal’s Decision: A review

The COA upheld the decision of the lower court and premised its decision on two grounds thus;

• that the exemption under Section 23(1)(c) contemplates companies limited by guarantee as stipulated in section 26 of the Companies and Allied Matters Act (CAMA). In other words, the Court is of the view that the form of registration is one of the qualifying criteria for tax exemption
• the failure of BCIS to prove that it is an educational institution that engages in educational activities of a public character

It is important to interrogate the judgement of the COAwhether the form of business registration matters for tax exemption within the context of the relevant statutes specifically by examining the section 23(1)(c) of CITA and section 26 of CAMA. The provisions of section 23(1)(c) of Companies Income Tax Act, 2007 (as amended) addresses exemption to income tax by companies operating in Nigeria. The section provides that the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character shall be exempt from tax in so far as such profits are not derived from a trade or business carried on by such company. Nevertheless, should an educational earn income from other sources other than from education activities, CITA provides for taxation of such passive income (dividend, interest, rent or royalty).

From the foregoing, the view held by the COA appears inconsistent with the law based on the relevant provisions of CITA. Save for two constraining conditions that, if not met, disqualify an educational institution from tax exemption, any other imputation is alien to the Act. The two conditions that must be met are that the educational institution must be of a public character and the income must be strictly from educational activities otherwise the exemption shall not apply. In fact, the CITA provides that any company engaged in ecclesiastical, charitable or educational activities, without qualification as to the form of registration – whether limited by shares or guarantee (emphasis on “any company”).

In my view, reliance on section 26 of CAMA by the Court of Appeal as the basis for the affirmation of the assessment by FIRS and the endorsement of the decision of the Federal High Court is a judicial misstep – the reason is not far-fetched. Section 26 of CAMA states thus; “where a company is to be formed for promoting commerce, art, science, religion, sports, culture, education, research, charity or other similar objects, and the income and property of the company are to be applied solely towards the promotion of its objects and no portion thereof is to be paid or transferred directly or indirectly to the members of the company except as permitted by this Act, the company shall not be registered as a company limited by shares, but may be registered as a company limited by guarantee”

For the purpose of emphasis, section 26 of CAMA specifies that the form of registration of a company formed for the purpose of promoting education shall be determined based on the application of the income of such a company. What CAMA did not say, either expressly or by implication, neither can it be construed as such, is that the form of registration shall be the basis for exemption from Company Income Tax. This is precisely because the CAMA is not a revenue statute and it does not lay pretense to be one. Therefore, the interpretation by the Court of Appeal with regards to the relevance of section 26 of CAMA to the BCIS case appears to go beyond stretching the scope of both CITA and CAMA. The decision is tantamount to redrafting the Acts and it is a clear departure from the decision of the Tax Appeal Tribunal (TAT) in the case between American International School vs FIRS.

However, if the decision was based solely on BCIS failure to prove that its activities are of an educational character, it is an issue for distinction and a justifiable ground for disqualification from the exemption contemplated by CITA. Therefore, I take the position that BCIS’s argument may have been impaired by the its inability to prove that it is an educational institution and not because the school is registered as a company limited by shares. As the court noted “in the instant case, the appellant from the record before the court never exhibited her particulars of its registration as an academic institution or an institution of a public character. What was placed before the trial court was the affidavit of urgency deposed to by the appellant’s accountant “.Therefore, I do not hesitate to assert that the Court is manifestly wrong to have partly predicated its decision on the form of business registration. The key issue in this case was whether educational activities of a public character is exempt from tax.

The Judgment by the COA has set a judicial precedence at least for now, whether rightly or wrongly, unless the decision is appealed and subsequently overturned by the Supreme Court. What this implies is that educational institutions, and other companies listed in section 23 of CITA that are registered as a company limited by shares may be liable to Company Income Tax. Proper guidance from tax advisers is therefore required by affected companies who may find themselves in similar situations in order to avert unintended tax consequences.

Glenn Ubohmhe

Ubohmhe is a tax practitioner