FHC Declares Unconstitutional the 0.005% NPTF Tax Imposed on Corporate Net Profit
Tuesday 08 March 2022 / 5:56 p.m. / by Banwo & Ighodalo / Header image credit: DNA India
The Nigerian Police Trust Fund (Establishment) Act 2018 (as amended) (the “Act”) was signed into law by the President of the Federal Republic of Nigeria on June 24, 2019. The Act established a framework for the management and control of the Nigeria Police Trust Fund (the “Investment fund”). Essentially, the trust fund is designed to provide funds for the training and retraining of Nigerian police personnel (“NPF”). It also aims to fund state-of-the-art safety equipment and machinery for NPF, improve personnel welfare and enhance their preparedness to effectively discharge their constitutional duties to protect life and property, among others. Goals.
Pursuant to Section 4(1)(a) and (b) of the Act, the constitution of the Trust Fund includes:
a) An amount representing 0.5% of the total revenue accruing to the Federation’s account; and
b) A levy of 0.005% of the net profit of companies operating in Nigeria.
The Federal High Court, Abuja Division, presided over by Hon. Judge AR Mohammed (“FHC” or the “To research”), recently considered the constitutionality of the provisions of the law, in the case of Rivers State Attorney General v Federation Attorney General and 3 Ors. (“AG Rivers vs. AG Federation”)1. The Court declared the provisions of the law unconstitutional. The decision has far-reaching implications for the ability of the Federal Inland Revenue Service (“FIRS”) to enforce the provisions of the Companies Act in the future. The decision also raises questions regarding the distribution of taxing powers in Nigeria and the ability of the FIRS to enforce certain miscellaneous federal taxes.
Facts and decision in the case
The Federal Government of Nigeria, relying on the provisions of the Act, had deducted 0.5% of the total revenue accruing to the Federation account for the month of March 2020 and paid it into the trust fund. Injured, the Rivers State Government, acting through the Office of the Attorney General of Rivers State, brought an action in the FHC against the FGN, challenging the constitutionality of Section 4(1) (a) and (b) of the law. The RSG urged the Court to declare the said provisions unconstitutional, null and void, and to prevent the FGN from pursuing the implementation of the said provisions. The RSG also sought orders requiring the FGN to repay all monies deducted pursuant to its implementation of the provisions of Section 4(1)(a) and (b) of the Act.
The main assertion of the RSG in AG Rivers vs. AG Federation is that in accordance with the provisions of Section 162 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) (the “Constitution”), the FGN is required to maintain a special account called the “Federation Account”, into which all revenue collected by the FGN will be paid (with the exception of a few identified revenues).
Further, the RSG argued that any amount credited to the Federation Account should only be distributed to three (3) sets of beneficiaries, namely the FGN, State Governments and Local Government Councils in each State of the Federation, and that no organ or agency of the FGN shall have the right to collect revenue as a first line charge of the account of the Federation other than revenue due and distributed to the FGN. The RSG further argued that under the provisions of the Constitution, the responsibility for establishing, funding and maintaining the NPF rests solely with the FGN (i.e. it does not extend to the income due to state governments).
The RSG maintained that all taxes (with the exception of a few exempted cases), levies and revenues collected by the FGN, including those collected from companies, should be paid to the Federation’s account, the total balance of which must be distributed to the FGN. , state governments and LGCs in accordance with the provisions of the Constitution. Direct allocations from the Federation account to agencies or bodies of the FGN, such as the NPF, were considered a violation of constitutional provisions.
On the other hand, the FGN argued that it had the constitutional power to prescribe the mode of distribution of funds collected from the Federation Account, and that the provisions of Article 4(1)(a) and (b) ) of the Act had been made pursuant to that power. The FGN further argued that the FPN was created for the Federation as a whole and not just for the FGN and that as such, funds may be allocated to the FPN by an Act of the National Assembly.
To further support its arguments, the FGN argued that the “the total revenue accruing to the Federation”, as stated in the law, is distinct from the “total amount credited to the account of the Federation”, as stated in Article 162 of the Constitution. It has been argued that charges may be validly withdrawn from the Federation’s account and that the balance (after such charges) shall be deemed to be the full amount credited to the Federation’s account (to be apportioned among the FGN, State Governments and LGCs), in the framework of article 162 of the Constitution.
In its judgment, the FHC found that, from the wording of Article 161(1) of the Constitution, it is very clear that all revenue collected by the FGN (with the exception of tax proceeds Personal Income of the Federation Armed Forces, NPF, Ministry of Foreign Affairs and Residents of the Federal Capital Territory, Abuja), shall be paid to the Federation Account maintained by the FGN. Consequently, the Court declared unconstitutional, null and void section 4(1)(b) of the law, which empowers the FGN to pay the revenues collected by means of a levy of 0.005% on the net profit of the companies operating in Nigeria; for non-compliance with the provisions of Article 161(1) of the Constitution.
The Court further held that, taking into account the provisions of Article 162, paragraph 3, of the Constitution, the income credited to the account of the Federation cannot be deducted directly from the account or subjected to a first line tax. for the benefit of any organization, agency or body, including the NPF (or its Trust Fund), except the FGN, State Governments and LGC. The FHC found no basis for the FGN’s assertion that the use of the word “credit” in Section 162(1) of the Act makes it clear that a debit can also be made from the income of the Federation account before they can be distributed. to FGN, State Governments and LGCs. The Court held that to adhere to such an argument would amount to reading into the Constitution what is not there. Ultimately, the Court ordered reimbursement from the RSG of all sums unconstitutionally deducted by the FGN from the Federation’s account and applied directly to the trust fund as a frontline charge. However, the Court declined to make the same order with respect to the other States of the Federation which were not parties to the case.
Nigeria is a constitutional democracy that operates three (3) levels of government – Federal, State and Local Government. The Constitution delineates the legislative powers of government between the three levels, including the power to impose and collect taxes. Therefore, a level of government in Nigeria can validly tax a person only on of which he hascompetence to exercise legislative control. The level of government must also have the competence to exercise legislative power over the subject matter of the tax. Thus, any taxation without a legal or constitutional basis/authority is void.
In our opinion, the decision of
AG Rivers vs. AG Federationis unassailable, insofar as it reinforces the constitutional distribution of fiscal powers in Nigeria. It validates the adage that taxation is an absolute power that knows no limits other than those expressly provided for by the Constitution. It therefore seems logical that the FHC declared the provisions of Section 4(1)(a) and (b) of the Act null and void to the extent of their inconsistency with the Constitution.
After invalidating the taxation provisions of the Act (i.e. Section 4(1)(b) thereof), for authorizing a frontline tax on Federation Account income in violation of the provisions of the Constitution, the decision in AG Rivers vs. AG Federation may also have provided a ground for challenging the legality of the trust fund. Similarly, the decision could have an impact on the powers and ability of the FIRS to now collect the 0.005% levy imposed on the net profit of companies operating in Nigeria, as well as certain miscellaneous federal taxes of the same nature. Given the significant impact the FHC ruling could have on taxable entities in the future, it is prudent for companies operating in Nigeria to seek advice from their legal and tax advisers regarding their liability to pay the 0.005% levy imposed on their net profits by law..
1. Unpublished judgment, rendered on January 26, 2022, in case no.: FHC/ABJ/CS/511/2020
This statement was first published in the Issue #: Alert 23/March 2022 Grey matter Tax collection – a specialized newsletter by Banwo & Ighodalo on Monday, March 07, 2022. For more information, please contact the author via [email protected]
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