- - f— ^ 1 1 Attention is drawn to the fact that the copyright o f this thesis rests with its author. This copy o f the thesis has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests i with its author and that no quotation from the thesis Oasnd no information derived from it may be published without the author’s prior written consent. |7 S ■, 3 J PROBLEMS IN TAXATION IN NIGERIA: A COMPARATIVE ANALYSIS Being a Thesis Presented by AHMED ABDULA1 For the Internal Degree of Doctor of Philaophy in the Faculty of Lavs of the University of London London School of Economics and Political Science September 30th 1974 ( i i ) ABSTRACT Working on a comparative basis, the objective here is to review certain aspects of Nigerian taxation. While the primary concern is with legal problems, an analysis of tax principles in the abstract is thought to be of limited value unless account is taken of the underlying economic problems which they are designed to regulate. Hence, wherever possible, legal principles are examined in the context of the country’s programme for economic development and the role of foreign capital and technology in fulfilling that objective. The introductory chapter sets out the aims of this thesis in more detail and emphasizes the inter-disciplinary approach. Also highlighted, are the division of taxing powers within the federal set up and the legal framework for economic activity. Chapter Tiro, a thorough analysis of the charging provisions, establishes the essential philosophy behind the general scheme of taxation Subsequent discussion is based on two principles - liability on all "source” income and on "remittances." In Chapter Three, problems relating to the taxation of business income are considered. Namely, the concept of "carrying on" business in Nigeria — the determination of taxable profits - accounting and related problems - allocation of income and expense between related entities - and the tax treatment of losses and a number of special trades (viz., shipping, insurance and the import and export trade). Chapter Four deals with the taxation of employment and professional income. Some of the areas explored include valuation of benefits in kind - expenses - and the machinery for assessment and collection. The tax treatment of investment income (i.e. interest, royalties and dividends) is reviewed in Chapter Five - especially as regards the "source principle and the inflow and outflow of foreign investments. Nigeria’s tax treaties are examined in Chapters Six, Seven and Eight. This takes place in the light of the OECD Draft Double Taxation Conventior on Income and Capital. Cognisance is also taken of recent developments on the international scene. A resume of the principal findings and recommendations is offered in Chapter Nine. Although considerable thought was given to the taxation of oil companies, material on this subject had to be dropped at the last minute because of the present confused state of the international oil industry and its direct influence on Nigeria’s internal law. References in the text to our proposed chapter on Oil Company Taxation must, therefore, be disregarded. (Please see note at page 610 infra.) This thesis states the law \s at 30th September 1974* 4 A. A. (iii) ACKNOWLEDGEMENTS I an very much indebted to my Supervisor, Mr. L. Lazar, Senior Lecturer in Law at the London School of Economics and Political Science. I wish to record my thanks and appreciation not only for his critical advice and numerous suggestions at every stage of this work but for the never failing interest and help which he accorded me. I also wish to seize this opportunity to thank the various indivi:’ ,*ls and organisations who in one way or another assisted in the preparation of this thesis. Mention must be made in particular of Messrs. C.I.O. Oyediran and E.M. Boye of Cooper Bros., Nigeria and Ghana respectively and Mr. A.A. Ani of Peat, Marwick and Casselton Elliot, Nigeria, who gave me several interviews as -well as plenty of materials on the accountancy side of my subject. Also helpful from the practical point of view, were officials of the U.K. Board of Inland Revenue; the Chairman and Staff of the Federal Board of Inland Revenue, Lagos; Dr. C.S. Ola, Commissioner of Internal Revenue, Western State; the Chairman and Staff of the Internal Revenue Department, Accra; and Mr. A.L.A.L. Balogun, formerly of the Federal Ministry of Justice, Lagos. The encouragement and help of the following staff members at the University of Lagos is gratefully acknowledged: Professor T.O. Elias - sometime Dean of Law at Lagos, Drs. M.I. Jegede, M.O. Adesanya, E.O. Oloyede, L.O. Aaegbite and Mr. A.A. Adeyemi all of the faculty of law; and Professors T.M. Tesufu, M.A. Adeyemo and R.A. Akinola of the Departments of Economics, Accountancy and Geography respectively. My special thanks go to the Staff of the following libraries: The British Library of Political and Economic Science, the Institute of Advanced Legal Studies, the Institute of Commonwealth Studies, the Nigerian High Commission and the U.K. Board of Inland Revenue. On the secretarial side, I am particularly grateful to Miss Gail St. Margaret Chester for typing the preliminary drafts of this thesis, and to Hiss Josephine Johnson (assisted by Mrs. Joyce Williams) for their painstaking and efficient work in producing the final draft. The editorial assistance of Mr. Tosefaly Serugo-Lugo is noteworthy and also to be re-called was the assistance at various stages rendered by the following: Drs. H.O. Kusamotu and J.A. Adepoju and Messrs. Kolapo Lawson, Mutare Dangana and Senas Ukpana. Special thanks are due to the Government of the Mid-Western State of Nigeria who sponsored a part of my research programme. Finally, I owe a debt of gratitude to my parents whose meral support has helped to sustain me throughout my school career. Besides, I shall always remain indebted to them not only for enduring the long years of aj absence but for their financial and other sacrifices. Ahmed Abdul&i (iv) CONTESTS Page Title ........... ........ i ABSTRACT ........... ........ ii Acknowledgements ill Contents .......... ........ iv Abbreviations xiv Table of Cases ........... ....... . xv Table of Statutes ........... ........ xxiv CHAPTER ONE 1 INTRODUCTION 1 I. PRELIMINARY REHARKS ............ v V......... 1 II. THE NIGERIAN TAX SYSTEM; A PERSPECTIVE......... • 3 A. Evolution and History ...... 3 3. Taxation and the Federal Set Up ......... 4 C. The Principal Taxes and Enactments ......... 3 D. Machinery for Assessment and Collection .. . - Tax Avoidance and Evasion ......... 6 III. OTHER REMARKS ........... ......... 7 CHAPTER TWO 9 IN SEARCH OF A TAX PHILOSOPHY 9 I- BASIS OF TAX LIABILITY, IN GENERAL ......... 9 * II. LIABILITY TO NIGERIAN TAXATION:"INCOKE ACCRUING IN. OR DERIVED FROM 10 A. A "Source" Approach? 10 B. Legal Meaning of Source - Application of Principle 23 (v ) I III. LIABILITY TO NIGERIAN TAX:"INCOME BROUCHT INTO OR RECEIVED .... " ......... 32 A. A Remittance Rule? ......... 32 B. Legal Meaning of a Remittance - Deemed Remittance ...... ......... 34 IV. CONCLUSION 42 CHAPTER THREE ' A 44 44 I. INTRODUCTION .......... ........... 44 A. What is a "Trading" or "Business" Income? ... 45 B. Legal Framework for Economic Activity ...... 58 (i) The Sole Proprietor ......... 59 (ii) Commercial Representatives ......... 59 (iii) Partnerships......!** ......... 60 (iv) Companies ....... ......... 60 II. LIABILITY TO NICERIAN TAX ... ......... 64 A. General Principles: Trading or*Carrying on Business"in Nigeria .......... 64 B. The Place of Contract Test ......... 66 C. The Situs of Control or the "Control" Test .. 70 D. The "Activities" T e s t .... ......... 79 E. Multiple Tests - a solution for Nigeria .... 85 Ill DETERMINATION OF PROFITS - ACCOUNTING AND RELATED PROBLEMS ......... ......... 91 A. The Basic Rule as Supplemented Ly good Accounting Practice ........ ...... . 92 B. The Concept of "True and Fair Accounts*'...... 100 C. Computation Without Records: An African Dilemma 104 D. Mechanics of Profit Adjustment ......... 110 E. Scrutiny of Accounts ......... 115 IV DETERMINATION OF PROFITS - ALLOCATION OF INCOME AMD EXPENSE BETWEEN RELATED ENTITIES ........ 118 A. Why Rules of Allocation ........ 119 B. Rules of Allocation Under Nigerian Law .... 122 C. Allocation Rules in Practice ....... 128 V. TAX TREATMENT OF LOSSES: TWO BASIC ISSUES 132 A. General Principles ....... ........ 132 B. Tax Treatment of Foreign Exchange Profits and Losses ... . ..... ......... 133 C. Transfer of Losses Between Related Entities 145 VI. SOKE SPECIAL TRADES ......... ....J...r - 149 v > A. Shipping and Air Transport ........ 150 (i) General Principles ......... 150 (ii) Liability under Nigerian Law ..... 151 B. The Insurance Business ....... 156 {i) Significance of Insurance to the National Economy ....... 156 (ii) "Carrying on" Business in Nigeria 157 (iii) Computation of Tax Liability ..... 161 (a) Life Insurance Companies .... 161 (b) Non-Life Insurance Companies.. 163 C. The Import and Export Trade ....... 164 VII. CONCLUSION .'...... ....... 166 CHAPTER FOUR .167 TAXATION OF EMPLOYMENT AND PROFESSIONAL INCOME 167 1. BASIC ISSUES OUTLINED ....... ........ 167 A. Tax jurisdiction, Mobility of Labour, Balance of Payments Consideration and other Issues. 167 B. Who is a "Professional" and who is an "Employee"? 174 (i) Income from a "Profession" or "Vocation" 174 (ii) Income from an "Employment"........... 182 (iii) Income from an "Office" ...... 188 (iv) Legal distinction between "Employees", •Professionals" and"Officeholders".. 190 ( v i i ) I I . LIABILITY TO NIGERIAN TAX ...... 194 A. Liability on Nigerian "Source" Income? ... 194 B. Social Phenomena and the Determination of Taxable Gains or Profits 212 C. Social Phenomena and the Determination of Taxable Emoluments ...... 220 (i) Gratuitous Payments by Employers ... 223 (ii) Gratuitous Payments by Third Parties 230 (iii) Contractual Payments not Arising from Employment ....... 236 (iv) Lump Sum Payments - Nigeria's Retro­ grade Step ........ 237 (▼) Pension and Other Payments after Termination of Employment ..... 247 III. PROBLEMS OP COMPUTATION - V. OF BENEFITS IN KIND ..... 250 A. The Indigenous Concept "Allowance" 250 B. Valuation of Benefits in Kind to Employees.. 254 (i) Valuation of Living Accommodation... 257 (ii) Valuation of Cars ......... 261 (iii) Loans to Employees ......... 266 (iv) Share Options ....... . 267 C. Valuation of Benefits in Kind to Professionals 270 IV. PROS COMPUTATION - EXPENSES 271 A. The Tax Problem ....... ....... . 272 B. Expenses "Wholly and exclusively" incurred: Duality of Purpose ..... ........ 276 C. Expenses "necessarily" incurred .... . 279 (i) Employment or Office Income ....... 280 (ii) Income from a Profession, Vocation or Trade ....... ......... 284 D. Expenses Must be "Incurred in the Production of Income" ......... ....... . 287 E. Incurred During the Tear of Assessment 290 7. Travelling Expenses: A Special Case...... 290 (i) Expenditure Incurred in Travelling to Vork 291 (ii) Travel Expense and the Itinerant Taxpayer 294 (iii) Overseas Travel: When are Expenses Allowable? ........ 297 G. Expenses "Actually" Incurred: A New Approach for Nigeria ........ ........ 300 V. ASSESSMENT. COLLECTION AND SIGNIFICANCE OF 302 A. Basis of Assessment . 302 B. Method of Collection 503 C. Elimination of Internal Double Taxation: The "Residence T e s t "....... .... . 304 (i) Internal Tax Jurisdiction 304 (ii) Definition of Residence for Tax Purposes: Not akin to Domicile .y..... 305 (iii) Cessation of Residence: A proposal for Change ....... 3 ....... 308 VI. SOME SPECIAL PERSONS ... 310 A. Directors: Liability to Nigerian Tax ..... 310 B. Cultural Visitors, Professionals and the like 316 (i) * Cultural Visitors ........ 316 (ii) Visiting Professionals ..... . 318 C. Foreign Diplomats in Nigeria ..... . 320 D. Foreign and Armed Forces Personnel and Decree No. 51, 1972 .......... ....... 322 VII. CONCLUSION 324 CHAPTER FIVE 328 TAXATION OF INVESTMENT OR PROPERTY INCOME 328 I. THE PROBLEMS HIGHLIGHTED ....... ........ 328 A. Control Structure of businesses. Capital forma­ tion, Transfer of Technology, Conflicts of interest and jurisdiction, Re-investment of Profits, etc............ ........ 328 (lx) B. The Nigerian Enterprises Promotion Decree 1972 and the Future of Foreign Capital and Technology 335 II. INTEREST AND ANALOGOUS PAYMENTS ......... 337 A. Definition and Concept ......... 337 B. Liability to Nigerian Tax: The "Source" of Interest ........ ......... 345 C. Computation of Profits: Interest as Allowable Deduction ........ ......... 365 D. The "Expense" Component of Interest: Taxation Gross or Nett? Deduction at Source .... 368 S. Interest Exempted From Tax ....... .. 371 / O x Ill. ROYALTIES. RENTS AND SIMILAR PAYMENTS ......... 374 A. Definition and Concept v ......... 374 B. Liability to Nigerian Tax: The Source of Royalty payments ......... ........ 384 C. Computation of Profits: "Expense" Component of Royalty Taxation Gross or Nett? Deduction at Source ......... .......... 393 IV. DIVIDENDS AND OTHER COMPANY DISTRIBUTORS ....... 396 A. Definition and Scope ....... . B. Liability to Nigerian Tax: Source of Dividends - The Situs of Shares Test ......... 408 C. Direct Assessment or Deduction at Source? A Total Exemption for the Foreign Shareholder 410 D. Exempted Dividends: Unjustified Revenue Sacrifice? ......... ......... 413 j s S T V. CONCLUSION ......... ......... 414 CHAPTER SIX * 417 DOUBLE TAXATION (l) 417 DEFINITION. SCOPE OF CONVENTIONS AND OTHER PRELIMINARY ISSUES 417 I. INTRODUCTION 417 II. WHAT IS INTERNATIONAL DOUBLE TAXATION ? ........... 420 III. ORIGIN OF NIGERIA'S TAX TREATIES .......... 423 IV. DOUBLE TAXATION TREATIES AND THE NIGERIAN LEGAL ORDER 427 A. Adoption of Treaties ........... 427 B. Tax Treaties and the Federal Set Up .......... 430 C. Conflict of Tax Treaty with Internal Lav ..... 432 D. Entry into Force and Termination of Tax Treaties 435 V. THE COMMONWEALTH INCOME TAX RELiIEF ........... 436 VI. SCOPE OF THE CONVENTIONS ............ 437 A. Identity of the Contracting Parties .......... 437 B. Taxes Covered ......................... . 439 C. Personal Scope and the Question of fiscal domicile 442 _ & 453 “ ....... ...................... CHAPTER SEVEN DOUBLE TAXATION (il) 455 I. INTRODUCTION rv ........... ............ 455 II. BUSINESS INCOME AND THE CONCEPT OP"PERMANENT 456 A. Permanent Establishment in Nigerian Treaty Law.. 456 B. Exclusions from Permanent Establishment ....... 464 (i) Purchasing offices and other fixed places for Preparatory or Auxiliary Activities 464 (ii) Building Construction or Assembly Projects 469 C. Commercial Representatives and the Concept of Permanent Establishment - Agents, Brokers, General Commission Agents .............. 474 ui; D. International Carrier Enterprises and the Concept of Permanent Establishment-Shipping, Air and Road Transport ........ ......... 483 E. Associated Enterprises and the Concept of Permanent Establishment ...... . 489 III. SCOPE OF BUSINESS PROFITS 491 A. "Effectively Connected with" or the "Force of Attraction Doctrine"? 491 B. "Industrial or Commercial Profit" - what are they? 495 IV. COMPUTATION OF PROFITS AND PROBLEMS OF ALLOCATION 501 A. Allocation of Profits - The Direct Accountancy Method 501 (i) Intra-Company Transfer of Goods and Services and Problems of Valuation 506 (ii) Intra-Company Loans and the tax treatment of Interest and Royalty Payments 508 (iii) Expenses - Management and other Expenses 511 (iv) Losses - Treatment between parent company and permanent establishment .... 513 B. Allocation of Profits - The Indirect Method 514 C. Allocation of Profits - The Reasonable Estimate Method - Significance for Developing Countries 522 D. Attribution of Profits - Some Cases .... 524 (i) Carrier Enterprises - Shipping, Air and Road Transport ..... 524 (ii) Agencies - Allocation of Income from Sales 527 B. Nigerian Law and the Attribution of Profits - An Appraisal ............ ........ 535 F. Apportionment of Capital ........ 538 V. INVESTMENT INCOMB ........... ........ 539 A. Interest 539 B. Royalties 543 C. Dividends 544 txilj I VI. THE TAXATION OF PERSONAL SERVICES AND CULTURAL EXCHANGE 549 A. Independent Personal Services ....... 549 B. Pensions 594 C. Cultural Visitors - Artistes, Athletes, etc 999 D. Visiting Scholars, Students and Apprentices 596 E. Directors Pees .......... 997 VII. CONCLUSION 998 CHAPTER EIGHT DOUBLE TAXATION i m ) 964 METHODS OF RELIEF. EXCHANGE OF INFORMATION 964 I. INTRODUCTION 964 II. METHOD OF RELIEF 964 A. General Principles - No relief without Double Taxation .......... .......... 964 B. The Exemption Method and the Credit Method .. 969 (i) The Exemption System 969 (ii) The Tax Credit System 970 C. Relief under Nigerian Tax Treaties 971 D. Unilateral Relief ........ 979 E. Tax Incentives and the Role of the "Tax - Sparing Credit" ............ .......... 981 III. ADMINISTERING THE TAX TREATIES ....... 987 A. Exchange of Information ....... 987 B. Problems of Treaty Interpretation - Mutual Agreement Procedure - remedy of Last resort 992 C. What are the Rights of the Taxpayer? 999 IV. CONCLUSION 999 CHAPTER NINE CONCLUSION 603 I. OPENING REMARKS ... • • • • • • • • • • • • 603 II. HIGHLIGHTS - CHAPTERS ONE TO EIGHT • • • • • • 603 III. OIL COMPANY TAXATION -- A NOTE ... • • • • • • 610 IV. CLOSING REMARKS ... • • • • • • • • • • • • 611 SELECT BIBLIOGRAPHY ... • • • • • • • • • • • • 612 APPENDIX I • • • • • • • • • • • • • • • ... 620 APPENDIX II ••• ••• • • • • • • • • • 620 V J r & ABBREVIATIONS A.C. Law Reports, Appeal Cases (U.K.). All E.R. Law Reports, All England Law Reports. A.I.T.R. Australia and New Zealand Income Tax Reports. A»J .I.L. American Journal of International Law. A.L.J. Australian Law Journal. A.L.J•R• Australian Law Journal Reports. A.L.R. Annotated Law Reports (Israel). All N.L.R. All Nigeria Law Reports. A. S.C.L. Annual Survey of Commonwealth Law. Ba I aPaDa Bulletin for International Fiscal Bocumentation. B. T.R. British Tax Review. B. Y.I.L. British Yearbook of International Law. Cahiers Cahiers de Broit Fiscal International. C. B.N. Central Bank of Nigeria Ch.D. Law Reports, Chancery Bivision (U.K.). C.G.TaBa Capital Gains Tax Becree 1967, No. 44» 1967* Cmd., Cmnd. COMMAND Paper. CITA Companies Income Tax 1961, No. 2, 1961. C aLaRa Commonwealth Law Reports, Australia. C.T.C. Canadian Tax Cases. B.L.R. Bominion Law Reports, Canada. B.T.C. Bominion Tax Canes. E.A.L.Ja East African Law Journal. E.A.L.R. East African Law Reports. E.A.T.C. East African Tax Cases. PaSaCa Law Reports, Federal Supre Court, Nigeria. H. K.L.R. Hong Kong Law Reports. I. C.C. International Chamber of Commerce. I aC .La Qa International and Comparative Law Quarterly. I.C.TaAa Income and Corporation Taxes Act 1970, U.K. I.T.J. Indian Tax Journal. n m Income Tax Management Act 1961, No. 21, 196l. I.T.R. Indian Tax Reports. J aWaTaLa Journal of World Trade Law KaBa Law Reports, Kings Bench. L.L.R. Lagos High Court Law Reports. L.R.B.G. Reports of the Supreme Court fBritish Guiana). K.N.R, Minister of National Revenue (Canada). N.L.CaBa National Liberation Council Becree (Ghana). N.L.R. All Nigeria Law Reports. N aZ aLaRa New Zealand Law Journal. N.Z.T.B.R. New Zealand Tax Board Review. OBCB Organisation for Economic Cooperation and Bevelopmen OPEC Organisation of Petroleum Exporting Countries. P. Ba Law Reports, Piskei Bin, Israel. . QaB a Law Reports, Queen’s Bench. Q. B.B. Law Reports, Queen’s Bench Bivision. S aAaLaRa South African Law Reports. S aAaTaC a South African Tax Cases. T.C, Law Reports, Tax Cases (U.K.). T.L.R. Times Law Reports. T. R. • Taxation Reports, U.K. U. K. United Kingdom. UNCTAB United Nations Conference on Trade and Bevelopment WaAaC aAa Law Reports, West African Court of Appeal. W.L.R. Weekly Law Reports, U.K. TABLE OF CASES Name Page Abbot v. Philbin [1961] A.C. 352 266, 268 Adcrawo*s Timber Trading Co. Ltd, v. Federal 46, 50 Board of Inland Revenue. 119&6] L.L.R. 195 Alianza Co. Ltd, v. Bell. 5 T.C. 172 615 luniniun Industries Aktien Cesselshaft v. Federal 349,, 359, 362, 363 Board of Inland Revenue. Suit No. SC/64/70 American Thread Co. Ltd, v. Joyce. (1913) 10$ L.T. 353 71 Anderson and Co. Ltd, v. Collins. 0928] A.C. 34 66 Andiappan v. C.I.T. (Madras'). (1971) 82 I.T.R. 567 Arbico v. Federal Board of Inland Revenue, 0966] 50, 51, 178 2 All N.L.R. 303 Architects* Registration Council v. Breeze. Times Lav; Report, April 1973 C.A. Armco (Australasia) Pty. Ltd, v Fed. Com, of Tax. 142,, 143 [1948) 22 A.L.J. 234 Arnautoghi v. C.O.T., 0-967] E.A.L.R., p. 312 305 Ashanti Goldfields Corooration Ltd. v. Marrifield. 440 19 T.C. 52 Ashenheim v. C.O.T.. 0973] 3 W.L.R. 455 320 Assessing Officer v. Giora Gordik Int. Promotions 18 Ltd.. 11965T T 1) 23 P.D. 3£> Assessing Officer v. Gross, (i960) 14 P.D. 668 18, 24 Associated Portland Cement Manufacturers v, f 55 27 T.C. 103 Xc > B Baker v. Archar-Shee, 0927] A.C. 844 39, 315, 407 Balfour v. Mace. 13 T.C. 539 476 Barclays Bank v. C.O.R.. 0958] L.R.B.G. 470 Barr and Gonbe & Co. Ltd, v. I.R.C.. 26 T.C. 406 187 Barson v. Airey, 10 T.C. 609 223 Batham v. Torbay Corporation. Times Law Report, 227 April 23rd, 1974 Beak v. Robson, 0943] A.C. 352 53 Beare v. Carter. 0940] 2 K.B. 187 219 Bennet v. Marshall. 0938] 1 K.B. 59 202 Bennet v. Ogston, 15 T.C. 374 338 Bentleys. Stokes and Lowless v. Beeson. 33 T.C. 491 111 Blackiston v. Cooper. 0909 I A.C. 104 230,r 231 Bolam v. Barlow. 31 T.C. 136 288 Bookers Demerara Sugar Estates Ltd, v. C.O.T.. 112 L.R.B.G. l66 Borneo Airways Ltd, v. I.R.C.. 0969] T.R. 509 Bowater Corporation v. Murgatrovd. 0969 ] 3 W.L.R. 412 573 Bowden v. Russell and Russell. 11965] T.R. 89 298 Boyd v. C.I.R.. (3) S.A. 525 32, 408 Bradbury v. Arnold, 37 T.C. 655 217 v. Colenbrander, 0953] A.C. 503 202 ( x v i) Name British Dyestuffs Corp. Blackley Ltd, v. I.R.C.. 378 12 T.C. 586 " ' Brovm v. Bullock, 41 T.C. 1 282 B.S.C. Footwear Ltd, v. Ridgeway. D97l] 2 W.L.R. 95, 99 1313 Butterfields Ltd, v. M.K.R., D965] 1 Ex.C.R. 302 74 B.W. v# | 4 E#A*T.C« 225 33 C 240 499, 553, 55' 253, 260 472, 473 Chancery Lane Safe Deposits and Offices Co. Ltd, v. 96 I.R.C., 119 66 I A.C. 85 Chelvanayakan v. C.O.T.. (1939) Vol. 1 Reports of 284 Ceylon Tax Cases, p. 144 C.I.R. Black. [1957] 21 S.A.T.C. 226 27 C.I.R. Blo_t_t, L1921J A.C. 171 398 C.I.R. v« Directors of A.Y. Ltd.. 2 E.A.T.C. 414 189, 311 C.I.R* v. Epstein, L1954 I ( 3) S.A.L.R. 689 46, 80, 204 C.I.R. v. Hang Sena: Bank Ltd.. D-972] H.K.L.R. 484 134, 136 C.I.R. v. Humphrey. L11970 JI H.K.L.R. 4.4..7 228, 253, 292 C.I.R. v. J. ae Fonseka,, [1968] New Ceylon L.R. 328 224 C.I.R. v. Kirk, 11900j A.C. 588 13, 359 C.I.R. v. Lever Bros, and Unilever Ltd.. 14 20, 26, 195, 204, S.A.T.C. 441 206, 211, 355, 36( C.I.T. v. Carew and Co. Ltd.. (1973) Vol. 87 565, 566 I.T.R. 459 C.I.T. v. Clive Insurance Co. Ltd., D-972] 85 I.T.R. 565 531 C.I.T. v. Gangadhar Baner.jee & Co. (Private). 400 U965] I.T.J. 339 C.I.T. v. Girdhardas & Co., (1967) I.T.J. 81 (S.C.) 402, 403 India CjJtVT. v . Ogale Glass Works Ltd.. 8 BIRD 270 38 C .I.T. v. V.'illiamson Diamonds Ltd , [1958] A.C. 41 400 y City Motor Services Ltd, v. I.R.C.. 10 A.I.T.R. 585 52 Clavton v. Lavender. 119651 T.R. 461 239 Collis v. Hore. 31 T.C. 173 289 Collco Dealings Ltd., v. I.R.C. [.19623 A.C. 1 Colquhoun v. Brooks. [1889J A.C. 493 10, 72, 78 Coltress Iron Co. Ltd, v. Black. 1 T.C. 287 615 Construction Industry Training Board v Labour 183 Force, Ltd.. L1970j 3 All E.R. 220 Courtaulds Investment v. Fleming. [1968] T.R. 345 39, 409 Cowan v. Seymour. |_1920] 1 K.B. 500 245, 246 Name Pa£e C.O.T. v. Akticbolaget Tctra Pak, [1966] Rhodesia 496 L.R. 539 C.O.T. v. Baooo. [1958] E.A.L.R. 223 49 C.O.T. v. British Australia Wool Realisation 518 Association. 11931 I A.C. 224 C.O.T. v. British United Shoe ITachinery (S.A.) (Pty) 390 Ltd.. LI964J (3) S.A.L.R. 193 C.O.T. v. D. and W. Murray, 3 A.L.J. 192 68 C.O.T. v. Diamond Corporation Tanzania Ltd., [l970] 134, 136, 143 E.A.L.R. 552 C.O.T. v. Finn. [1961] 106 C.L.R. 60 298 C.O.T. v. French. [1957] 98 C.L.R. 398 C.O.T. v. Kotecha Estates Ltd.. [l97l] E.A.L.R. 63 C.O.T. v. Hchanga Consolidated Copper Nines Ltd., TT964] A.C. 948 C.O.T. v. Noorani. [1969] E.A.L.R. 685 307 v# PjCo*Ltd« j 1 S.A.T.C. 131 13, 20, 312, 359 C.O.T. v. Parker, [T966] Rhodesia Law Reports, 144 28 C.O.T. Rhodesia v. R. [1966] (2) S.A.L.R. 342 28 C.O.T. v. Shein [1958] Rhodesia and Nyasaland L.R. 195, 210, 211, 31S p. 384 Craib v. C.O.T. [1939] Vol. 1 Reports of Ceylon 226 Tax Cases, p. 138 Dale v de Soissons, 32 T.C. 11 247 )ale v C.I.R., 34 T.C. 468 189 Davies Braithwaite, [l93l] 2 K.B. 628 179, 190, 193 Davies Premium Investment Co. Ltd., 27 T.C. 27 339 Davies Shell Co. of China, 32 T.C. 133 139 Davy v. Corey, L1901 1 A.C. 477 101 Beers Consolidated Gold Mines Co. Ltd. v. Howe. 71, 89, 312, 449, L190£J A.C. 455 486 Dewar v. I.R.C., [l935]_2 K.B. 351 340 Down v. Conpston, [1937] 21 T.C. 60 177, 180 Puckering v. Gollan [1965] 1 W.L.R. 680 568 Durga, Pass Bawa v. C.O.T., [1963] E.A.L.R. 695 183 E S ' les v. Levy 19 T.C. 23 279 Ed’ward's v. Bairstow, [i960] A.C. 14 48 Egyptian Delta Land and Investment Co. Ltd. v. Todd, 75, 76 U 929J A.C. 1. Eli Lilly (Canada) Ltd. v. M.M.R., 55 d .t .c . 1139 139 Ellis v. Lucas, 43 T.C. 276 2*f4 Elmiger v. I.R.C., (1967) 10 A.I.T.R. 349 127 Elwood v. Utitz, 42 T.C. 482 283 Emmanuel v. Fed. Com, of T ., [1968] 10 A.I.T.R. 672 565 English Scottish and Australian Bank Ltd., v. C.O.T. 539 43 A.L.J.R. 234 Ericksen v. Last, [l88l] Q.B.D. 414 518 Esso Standard Eastern Inc, v. C^O/T., [l97l] 13, 18, 21, 26, 3 E.A.L.R., p. 127 207, 353, 354, 35 362, 363. Name Fvans Medical Supply v. Moriarty, 37, T.C. 540 376, 377, 380, 393 F Fall v. Hitchen. [1973] 1 W.L.R. 286 191 Federal Board of Inland Revenue v. Aluminjam I 30, 32 Industries Akitichgcschischoff, Suit Ho. SC/64/70 Federal Con, of T . v. Berber and Sons Ltd.. 39 C.L.R, 69 “455" Federal Cora, of T. Mitchum. [1966] A.L.R. 29 31, 519 Federal Com. of T. United Aircraft Corporation. 385 t>8 C.L.R. 525 Fincon (Construction) Ltd, v. I.R.C., [1970] N.Z.L.R. 94 Firestone lyre and Rubber Co. v. Llewellin, T.R., p. 19 [1957] 5 ^ Fleming v. London Produce Co. Ltd., [1968] T.R. 97 476, 478 Fumess, Withy & Co. v. I-'.N.R.', [1968] L.R. (2nd) 152 FT557 Garland v. Archer-Shee, [l93l] sA.C. 212 40 Gavazzi v. Mace, 10 T.C. 698 476 Glasson vV.# Rougier, C2U6 Tle.vCy.* 86 376 H. Glifallan (Borneo) Ltd, v. I.R.C., [1969] T.R. 147 5°9 Graham v. Amott, [1941] 24 T.C. 157 177 Grainger & Son v. Gough. [1896] A.C. 325 66, 86, 87 Gramophone and Typewriter Co. Ltd, v. Stanley. 73 'L 1968J 2 k'.b . 89 Greap.t Western Railway Co. Ltd, v. Bater [1920] 3 K.B. 188260 Greenwood v. F. L. Smith & Co.. 8 T.C. 193 67, 86 Griffiths v. J. P. Harrison Twatford) Ltd.. [1962] 2 W.L.R., p. 909 49 H Haig*s Trustees v. I.R.C.. 22 T.C. 725 218 Harmel v. Wright. [1974 J 1 W.L.R. 325 36 Harvey v. Breyfogle, [1953] A.C. 503 202 Heaton v. Bell. L19691 2 W.L.R. 715 265, 266 Hanley v. Murray, 31 T.C. 351 238, 240 Kenriksen Grafton Hotels Ltd., 24 T.C. 453 459 Henry v. Foster, l6 T.C. 605 244, 247 Herbert v. McOuade, 4 T.C. 489 221 11 Olivier. L1952] Ch. 311 53, 54 _H_o_b_h_s Hussey, 24 T.C. 153 218 Hochstrasser v. Mayes, [i960] A.C. 376 233, 236 Hose v. Warwick, 27 T.C. 45i 53 Housden v. Marshall, 38 T.C. 233 218 Household v. Grinshaw, 34, T.C. 366 179 Hughes v, The British Burmah Petroleum Co. Lt td. 17 T.C.'“255 Humbles v. Brooks. 40 T.C. 500 282 Humphreys v. Peare. 6 T.C. 201 179 ( x ix ) . Name Pa^e I Ihekwoaba v. C.O.T., [1958] F.S.C., 67 106 Imperial Tobacco Co. Ltd, v. Kelly, 25 T.C. 292 137, 138, 139 Inchyra v. Jennings L1926] 2 All E.R. 714 39, 133, 407 Ini ail d Revenue Board of Review Decision Case No. 231 • 20/71. 11972 1 H.K.L.R.. p. 40 In the Hatter of Non-Native Income Tax Ord. 1931. 15, 21, 42, 19 5 W.A.C.A., p. 142 In re A.B. and the Land ana Income Tax Act 1910. 204, 208 (I929) 3 A.L.J., p. 155 International Pipeline Co. Ltd, v. M.N.R., (1968) 575 67 D.L.R. (2nd) 753 I.R.C. v. Australia Ifatual Provident Society, [1947] 498 A #C •. ,* p. 605 I.R.C. v. Bromder and Cruickshank. [l97l] 2 W 191, 243 p. 212 I.R.C. v. Duke of Westminster, [1936] A.C. 1 236 I.R.C. v. Educational Grants Association. [1967] 27 6 2 All E.R., p. 893 I.R.C. v. Fraser, 24 T.C. 498 49 I.R.C. v. George Burrell. [1924] 2 K.B. 52 402 I.R.C. Gordon. [1952] A.C. 552 41 I.R.C. v. Incorporated Council of Lav? Reporting 56 [1888] 22 Q.B.D. 279 I.R.C. v. Naxse. [1919] 1 K.B. 647 174 I.R.C. Nev;castles Brewries Ltd., 12 T.C. 927 55 I.R.C. Oswald. 26 T.C. 448 340 I.R.C. v. Parson, (1968) 10 A.I.T.R. 557 268 I.R.C. v. _N_._ _W_._ _P_h_i_l_l_i_p_s,* C1955] N.Z.L.R. 868 19, 353, 362, I.R.C. v. Reid Trustees, L19491 A.C. 361 39, 407 J Jahki Ram Bahadur Ram v. C.I.T.. [1965] 2 I.T.J. 230 50 Jarrold v. Boustead, 41 T.C. 701 236 Karam v. C.I.R.. [1948] 12 W.A.C.A. 331 13, 21, 24, 25 Kaum Timber Co. Ltd, v. C.O.T., [1913] A.C. 771 615 Kelsall Parsons & Co. Ltd. v. C.I.R., 21 T.C. 68 187 Kodak Ltd, v. Clack.' 119031 1 K.B. 505 73, 78 L Laidler v. Perry, [1966] A.C. 16 223 H. K. Lakha v. The Voi Sisal Estates Ltd., [1965] 397 E.A.L.R., p._38Y Lai v. C.I.T.. [1971] Vol. 79 I.T.R. 147 520, 521, 532 v# | 20 S.A.T.C.f p« 1 409 Landes Bros# v. Simpson# 19 T.C# 62 137 Lawson v. Rolfe, (1969) T.R. 537 39, 407 Laycock v. Freeman, Hardy, Willis, (1939) 2 K.B. l 516, 518, 532 Name Page Leaky v. Hawkins, 34 T.C. 28 180 Lee v. Leo’s Air Fanning Co. Ltd., (1961) A.C. 12 182 Leeming v. Jones, 15 T.C. 333 51 Liquidator Rhodesia Metal Ltd, v. C.O.T., [1940] 21. 22, 23, A.C. 774 46, 48, 359 Lomax v« Peter Dixon and Son, [1943] K.B. 67I 339 Lomax v. Newton, 34 T.C. 558 289 London Bank of Mexico and South America v. 25, 73 Apthorpe, LI891J 1 Q.B. 383 Lovell v. C.O.T.. [l908] A.C. 16 505,, 518 Loventhal v. A.C., [i>48] 1 All E.R. 295 448 Luncjr v# C .0.T.| A « L « J | p» 139 228 Lunton v. F.A. and A.B. Ltd., [1971] 3 W.L.R. 670 56 Lupton v. Potts, 45 T.C. ^43 282 M MacLaine v. Ecott, [1926] A.C. 4?4 67 KcCslnon^ v* 22 T.C• 533 440 McMillan v. Guest, [1942] A.C. 561 188 McKinley v. T. Jenkins and Son Ltd., 10 T.C. 372 136, 213 MMaalayan Shipping Co. Ltd. v. Fed. Com. of Taxatlion, 78, 89 20i A.L.J. 27 Mallows v. C.I.R.. [l1 964] 66 N.L.R. 321, (Ceylon) 258 Maop v. Oram, [1969] 3 W.L.R. 557 261 Marsden v. I.R.C., [l1964] 1 W.L.R. 734 295 P. Merchant Ltd, v. Stedford, [1948] 30 T.C. 496 101 Millin v. C.I.R., 3 S.A.T.C. 170 389, 390 Mitchell v. Egyptian Hotels Ltd., [1915] A.C. 1022 72 • Mitchell v. Fed. Com, of Taxation, [1928] A.L.R. 25 69 Mitchell and Eden v. Ross 11960 | Ch. 498, [1962] 189, 192, A.C., p. 814 ~ -- M.N.R. v. Aaron’s Ladies Apparel Ltd.. [1967] 60 74 D.L.R. (2nd) 448 M.N.R. v. Dworkin Purs Penhroke Ltd., 60 D.L.R. 74 (2nd), p. 450 M.N.R. v. Taylor. [1956] C.T.C. 189, 56 D.T.C. 1125 50 Moors v # 10 S«A*T«C« 20 409 !»?oorhouse v# Dooland, 36 T«C* 1 230, 233 M^fulira Copper Mines Ltd, v. C.O.T.. [1958] 83 Rhodesia and Nyasaland L.R. 336 Murgatroyd v. Evans Jackson, 43 T.C. 581 277, 278 Musker v. English Electric Co. Ltd., 41 T.C. 556 378, 393 Nathan v. Federal Com, of Taxation, 25 C.L.R. 183 23, 363 National Bank of Greece v. National Westminster 358 Bank. 11971 I 2 W.L.R. 105 National Bank of India v. C.O.T.. Vol. 1, Ceylon 355 Tax Cases, p. 121 Nethersole v. Withers, 28 T.C. 501 219 New York Life Insurance Co. v. Public Trustees, 355 Ll924j 2 Ch. New York Life Insurance Co. v. Styles, [1889] 14 499 App. Cas., p. 381 Newson v. Robertson, [1953] Ch. 7 228 Name Page Newton v. Birmingham Small Arras Co. Ltd»t [1906] 10? 2 Ch. 3?S Newton v. Fed. Com, of Taxation. [1958] A.C. 450 127 3 . W. Kobes & Co. Ltd, v. I.R.C., [1966] 1 W.L.R. Ill 113, 114 Nolder v. Waters, 15 T.C. 3&0 289 .'oraan v. Evans, 42 T.C. 188 181 Odeon Associated Theatres Ltd, v. Jones, [1971] 97 1 W.L.R., p. 442 Qgilvie v. Kitton, 5 T.C. 338 78 Opnenheimer v. Cattermole, [1972] 3 W.L.R. 815 442, 446, 449 )stine v. Australia Mutual Provident Society, 38 498 T.C., p. 492 Owen v. Southern Railway Co. of Peru, [1957] A.C. 334 101 P* Co* L td . v . C*0*T*y X E .A .T .C . , p . 1 3 1 v T 353 Palestine D isc o u n t Bank L t d , v . T e l Avl Ass 17 O f f i c e r ^ (_1947j A .L .R . 4 1 8 ( I s r a e l ) Paramac Printing C o. L t d , v . F e d e r a l Com., o f 298 Taxation, [ l 9 o 5 1 A .L .R . 5 0 1 ( A u s t r a l i a ) P a r l e n e n t B e ig e , [ 1 8 7 9 - 8 0 ] 5 P .D . ( U . K . ) , p . 1 9 7 427 ■P -a —t —ri—dge v . M a l la n d a in e , [ 1 8 8 6 ] 1 8 Q.B.D. 2 7 6 177 Perry v. M.N.R. , L1 9 5 2 I 6 Tax A .B .C . 3 1 0 461 _P_i_c_k__l_e_s v Foulsham , [ 1 9 2 5 ] A .C . 4 5 8 202 P i e r i s v . C .O .T . , V o l . 1 , R e p o r t s o f C e y lo n Tax 247 C a s e s , p . 62 Pook v . Owen, 4 5 T .C . 5 7 1 280, 294, 295 Port Elizabeth Tranway Co. v . C . I . R . , 8 S . A . T . C . 13 287 Re Potter, [ 1 9 3 4 I H N .L .R . 1 4 4 14, 16, 42, 196 Prince v. I'app, 46 T.C. 169 111 Punjab Distilling Industries Ltd, v. C.I.T.. 65, 396 I.T.J., p. 110 ■S 1 R. Burg r, ex parte Henry, [1936] 55 C.L.R., p.608 431 R. Home retary, ex parte Henry [1945] K.B., p.7 448 |tv. [1932J K.B. 44 102 Rae v. Laa Investment Co. Ltd., 41, T.C., p.125 39, 133, 407 Ra.jaoakse v. C.O.T., Vol. 1, Reports of Ceylon 293, 296 Tax Cases, p. 127 Razzel v. Snowball, [1954] 3 All E.R. 429 177 Regent Oil Co. Ltd, v. Strick. [1966] A.C. 295 53, 96 Republic of Italy v. Hambros Bank Ltd., [1950] 427 1 All E.R. 430 Reynolds v. Crompton, 33 T.C. 288 213 Re Russian Bank for Foreign Trade, [1934] Ch. 720 355 Re United Railways of Havana and Regia Houses Ltd.. 357 L1961J A.C., p. 1007 Rhodesia Metals Ltd, v. C.O.T., [1938] A.D. 282 212 Riches v. Westminster, [1940 1 A.C., p. 390 338, 340 Ricketts v. Colcruhoun. [1926] A.C.l 279, 289, 291, 295 Name Page Rolls-Royce Ltd, v. Jeffrey, 40 T.C. 443 378, 380, 393 A. G. Ross v. R_.• [1957J I E.A.T.C. 507 20, 81 Ross v . H.N.R., [1967] D.T.C. 421 88 J. Rowe & Son Pty. Ltd, v. C.0»T»t [l97ll 45 A.L.J.R. 94 p. 21 Rutledge v. I.R.C., 14 T.C. 490 49 Salmond Spragon Ltd, v. C.T.R., 10 A.I.T.R. 689 19, 30 San Paulo (Brazilian) Railway Co. Ltd, v- Carter., 71 LI696J A.C.,’ pV 31 A. Seni v. I-T.N.R.. 33 Tax A.B.C. 88 175, 176, 181, 1 Seymour v. Reed, U927] A.C. 554 221 Schioler v Westminster Bank Ltd., D-970] T.R. 167 35, 37, 348 Schulze v. Bensted, 7 T.C. 30 337 Sharkey v. V.'emher, [1955] 3 W.L.R. 671 107, 507 Short Bros, Ltd. v. T.R.C.. 12 T.C. 955 55 Simpson v. Tate, [l925j 2 K.E. 214 284 Skiov7ay v. Skipmore. 16 T.C. 748 187 Smith v . Anderson, LI88O] Ch. D. 247 47 Smith v. The Assessment Committee, [1956-60] 208 Jamaican Law Reports, p. 38 Stevenson Jordan and Harrison v. NacDonald and Evans, 183 L1952J 1 T.L.R. 101. St. Lucia and Estates Co. Ltd, v. St, Lucia 340 (Colonial Sec. ), L1924i A«C. 508 Strathalmond v. _I_._R_._C .,. _[ 197. 2]_ 1 W.L.R 1511 442, 444 Stoeck v. Public Trustee. [l92l] 2 Ch. 67 447 Sully v. Attorney-General, 2 T.C. 149 66, 69, 71 Sutherland v. C.O.T., I19511 Report of Ceylon Tax 225, 247 Cases, p. 403 Swedish Central Railway v. Thompson, [1925] A.C. 75, 76, 77, 450 P- 495 < $ ■ ttTw v. C.O.T.. [1959] Rhodesia and Nyasaland L.R. 3 66 P. 349 r n Tariff Reinsurances Ltd. v. C.O.T., U.938J A.L.J. 158, 353 P- 567 ‘ _ Taylor v. Provan, L1974J 2 W.L.R., p. 394 294 Temoerley v. Smith. 37 T.C. 18 180 Tennant v. Smith, [.18923 A.C. 130 255 Texas Co. (Australasia)’ Ltd. v. Fed. Com. of Taxation 141 L1940J 63 C.L.R. 3^2 The Provincial Treasurer of Manitoba v. Wn. Wrigley 532 Jimior Co. Ltd., Ll945 I Man. R. 213 Thea Corporation v. M.N.R., [[1967D D.T.C. 175 87 • Thomson v. Koyse, [l9^lj A.C. 34 , 35 , 315 Name Page Thomson v. White, £1966] T.R. 51 ?99 Tilley v. V.’ales, [1943] A.C. 386 248 impsons Sxecutors v. Yerbury, 20 T.C. 155 34, 315, 345 Tip Top Taylors Ltd, v. K.N.R., 57 D.T.C., p. 1323 136 Transvaal Hyde and Skin Merchants v. C.O.T. 28, 457 (Botswana) 29 S.A.T.C., p. 97 U Unit Construction Co. Ltd, v. Bullock, £1960] A.C. 351 74, 312, 450 United Geophysical Company of Canada v. M.N.R., ftfl L1961J D.T.C. 1099 ' Uther v. Federal Com, of Taxation, [1965] A.L.J.R. p. 326 — V Vacu-Lug (Pvt.) Ltd, v. C.O.T., [1963] Rhodesia and 378 Nyasaland L.R. 194 Van den Berghs v. Clark, [1935] A.C. 431 53 Vestey v. I.R.C.. 40 T.C. 112 ' 343 1 k * Woodend (K. V. Ceylon) Rubber and Tea Co. Ltd, v. 433 C . I.R.. L19'7'0'J T.R., p. 115 Woodhouse v. I.R.C., 20 T.C. 673 341 Wolf Electric Tools Ltd, v. Wilson, 45 T.C. 326 377, 380 Wright v. 3oyce, 38 T.C. 138 231 4 > (xxiv) TABUS OF STATUTES n i c s r i a Page Capital Gains Tax Decree 1967. No. 44 of 1967 8.1 383, 393 s.2 383, 392 , 393 B. 140, 383, 392, 393 S. 383 8.5* 141 8.14 384, 394 s.22 382 8.24 381 S.25(c) 355, 364 8.25(e) <3 408 s.43 429 s.46(3) 6, 384 Companies Decree 1968, No. 51 of 1968 s • 1 • 60 8.28 60 ss. 67-73 403 s .108(2) 409 s. 140 104, 489, 535 s.141 100 8.142HI: $ 100 ss. 143. 144, 145 146 s.145(1) 100 8.146 100 8.368 60, 310 8.369 61, 62, 88, 146, 162, 310, 451 S.370 61, 88, 146, 162 .... J . , 310, 409 Companies Income Tax Act (1961) No. 22. 1961 s.2. 63, 345, 399, 410 8.9 l) 115 s.9(3)(a) ,115 s.10 115 s.ll(3) 115 ss. n(4)(a), ll(4)(b), (ii), ll(4)(c) 115 8.13 115 s.17 10, 33, 44, 45, 47, 50, 346, 347, 355, 357, 364, 385, 396, 398, 402, 406, 470 8.17(b) 374, 384, 391 8.17(c) 337, 345 s.l7A(l)(a)t (b) 373 s.l7A(2), (3), (4), (5) 373 8.18(1) 63, 154, 535 8.18(2) 26, 30, 63 B.19 149, 151 8.19(2), (3) 153 (x x v ) Pare s.20 149 b.21 149 8.21 163 s.21 162 8.21 163, 164 8.21 161 8.24 399 8.25 56, 122, 35?, 366 381, 618 8.25(1} 125 s.25(2] [ii) 123 s.26ll] s .2 6(lj , 154 s.27 , 106, ill, 123, 162, 393 s.27(l)(a) 352, 365 8 . 2 8 92, 106, 123 8. 30(1) (a) 107 s.30(l)(b) 107, 131 s.30A 65, 537 s.31 114, 371 s.3l(2)(a)(b) 132 s.31(5) 132 s.32 412 s.34 410 s.34(2) 411, 548 s.34(3) 548 8.36 436, 580 8.37 ♦ 428 s.37(l) 432, 434 8.37(b) 435 8.39(b) 475 8.61 368 s.6lA 368 b .61A(1) 393 s .61A(2), (3) 368 Companies (S ial Provisions) Decree 1973. No. 19 470 s 471 Cons on of the Federal Republic of Nigeria 1963 77tZ 304, 412, 430 s .76(2) 105, 430 B.76(2)(a)f (b) 5 8.76(4) 5 Income Tax Kanarenent Act, 1961, ITo. 21 S# 2m 63, 188, 189, 346 399, 410 8.3(2) 33, 304, 307, 308 317, 470 (xxvi) Page 5 • A* 10, 33, 44, 45, 47, 50, 406 s.4(l) 315 s.4(l)(a) 174, 194, 199, 271, 317 s.4(l)(b) 194, 220, 227, 241, 248, 250, 255, 273 s.4(l)(c 374, 384, 391 g.4( lnd 337, 345 S.iflMf 213, 219, 234 s.4(2)(d 182 b .4(3) 396, 398, 402 s.4A 216, 271, 282 s.4A' (b) 261 S.4A1 262, 267 s.4A(2 c 262 b.4A( 3 (a)-(c) 257 s..44AB((14 257 s 257 s.4B(2 257 s.4B(2 bj(i)-(ii) 257 s.4B(3 257 s# 5* 26, 30 s.5(l) 131 s.5A 65, 107 s.5A(l)(b) 537 s..7 149 e 8(1 207 s.8(l (aj(i)-(iii) 197, 198 s.8(l 200 s.8( 3 197 s.8(4 208, 209 8b..1851 . 201 346 b .13 580 6.14 57, 122, 302, 352, 366, 381, 618 125 123 8.16 321 s.17 . 92, 106, 123, 393 111, 273, 278, 290 352, 365 243 273 92, 106, 123, 273, 316 8.18(a) 291, 293 s.20(1», (2), (3), (4), (10) 303 8.20(5) 302 ■8.•21 273 8.21(1]' 114, 371 21(2 290 8.2l(2)(l>) 132 ( x x v i i ) Page s.23(l), (2) 436 s.24 322 s . 2 4 ( l ) 428, 432, 434 s.2A(4)(5) 429 3 .2 d ( b ) 429, 435 e .29(1) 475 Income Tax (Amendment) Decree 1966, No. 65 S 220, 248, 250 S s'*2(M2 ... .... .......... 241 396 s.5(l), (2) 111 ss.5(2)(a) 290.9 s.22 Industrial Development (income Tax Relief) Decree s.10 586 ss. 16, 17 413 National Insurance Corporation of Nigeria s.S V e o v e e ^ l 157 Nigerian Enterprises Promotion Decree s.l u r n 58 Personal Income Tax (Lagos) Ac t., 19&(61, No. 23 227 8.24 304 s.50(l), (2), (3) S 303 303 -B.5215(l)(b) 475 Petroleum Profits Tax Ordinance (1959) No. 51 s.2. 608 8 . 8 625 s.9(l)(a), (b), (c) 608 s.lO(l) 613 s.lOilHa), (b), (c), (d), (e), (f) 614 s.lOflMg) 612 s.ll(lHa), (b), (c), (d) 617 s.ll(lj(e), (f), (g) 618 8. 11( 2) 367, 617 s.13 618 s.l4(l), (2) 623 s.15 623 8.16 625 s.l7(2)(a), (b) 626 s .17(3) 627 6.17(4) 626 s .17A(5) 608 e b . 52, 53 414, 429, 627 ( x x v i i i ) Pafie Petroleum (Amendment) Decree, 1973 6.13 624 CANADA Canadian Income Tax Act, 195? as amended 86 GHANA Companies Code, 1963 s.303(3)(b) 88, 90 Income Tax Decree 1966, IT»L»C»D» 78 s.5. 6 • 6 m 130 s.6(l)(a) 90 s.6(3) 198, 204 s.8 284 b.9(*) . 259, 263, 284 s.20(l) 302 hidia Indian Income Tax Act, 1961 ss. 4» 5, 9 and s.lO(7) 11 ISRAEL Palestine Income Tax Ordinance 17 204 s.5(2)(3)1 91 SOUTH AFRICA Income Tax Act, JL241 s.7 47 Income Tax Act, 1962, No. 58 of 1962 s.l(xi 11 s.Ilfa 302 s.23(g 302 ( x x ix ) Page UNITED KINGDOM Finance Act, 1953 6.24 41 Finannice Act, 1965 s • 19 ( ' 46 s.47w( 404 Finance Act, 1966 s.25 270 Finance Act, 1968 ' A s. Income Tax Act, m i 5.137(a) 277 Income and Corporation Taxes Act, 1970 ss.49» 50 10 s.109(2) 46 s.122(4), (7) 41 s. 177 620 s.185 225 ss. 187, 188 243, 246 s.192 284 SS. 195, 196 225 S.233 124 s.233(2)(a) and (d) 341 s.386 379 s.412 & 242 s.457 237 Taxes Management Act, 1970 s.79 474 s.118(1) 47 > SUBSIDIARY LEGISLATION Exchange of Notes (No. C.02737/60) Actober i960 424 The Double Taxation Relief (Taxes on Income) (U.K.) 424 Ordej>-in-Council, 1948, No. 5, 1948 The Double Taxation Relief (Taxes on Income) (N.Z.) 424 Ordei^-in-Council, 1951, No. 43, 1951 The Double Taxation Relief (Gold Coast) Order-in 425 Council, 1950, No. 16 of 1950 The Double Taxation Relief (Sierra Leone) Order 425 1950, No. 17 of 1950 The Double Taxation Relief (Gambia) Order 1950, 425 No. 18 of 1950 The Income Tax (Double Taxation Relief) (U.S.A.) 424 Order, 1958, L.N. 207 of 1958. The Income Tax (Double Taxation Relief) (Sweden) 424 Order, 1954, L.N. 176 of 1954 (xx x ) Page The Income Tax (Double Taxation Relief) (Norway) 424 Orderf 1956* L#N# 64 of 1956 The Income Tax (Double Taxation Relief) (Denmark) 425 Order 1955t L.N. 110 of 1955 Income Tax (Technical Assistance Personnel) 253 Exemption Notice, 1963 Income Tax (Exemption) (Prof# L# C# B# Gower) 253 Order, 1962 Income Tax Interest on Loan Granted to the Nigerian 372 Ports Authority (Exemption) (No#2) Order, 1963 Income Tax Interest on Loan Granted to the Nigerian 372 Sugar Co# Ltd# (Exemption) (No#2) Order, 1962 Income T1 aclxa. (Deductniuonn a.t o Suouurxcvec) j Ruuli eos E.N.#Lu.#Nn# •, , 259 122 of 1962 Income Tax Emoluments Rules, W.N.L.N# 350 of I96I 259 Personal Income Tax (Lagos) (Employment) 259 Regulations, L#N# 38 of 1965 Personal Tax Law (Employments) Regulations, N#N.L*N# 259 73 of 1964 N Personal Tax Law (Employments) (Amendments) 259 Regulations, N#N.L#N# 28 of 1965 OECD DRAFP Article 2< 439 4( 2j(a)-(c) 444 4( 451 5 64, 551 5( < ? 460 5( 461 5( (e) 466 5( 467 5(4 y, (5) 479, 48O 5( 490 i 538 7(1 493, 501 7( 2 506, 527 7(3 511 7((4 504 [6 505 7(7* 491 8 453 8(1) 486, 525 9 , , 150, 152 10(1 1 545 10(2Ma), (b) 545 10( 3) 545 10(4) 491 10(5) 546 11 375 ♦ ' ( x x x i) 11(1), (2) 541 n(4) 491, 12 * 544 12(3) 491 14 550 14(l) 551 1.4(2) 550 15(2)(a), (b), (c) 553 17 555, 18. 19 554 - 24(4) 538 25 4— 5m2m 26(2 26(2 a), (c) 590 NIGERIA - U.K. TRSATY 00 439 439 465 437, 438 438 442 449 443, 449 442, 495 & 459, 475, 478, 479, 480, 490, 2 441 31 493, 504 3i 434 , 493, 504 3i 503, 504, 506, 527 3 505 V 453, 483, 525 s . 495, 571 435, 545 f e 545 7 495, 571, 588 434 87(1), (2) 554 554 |lj(a), (b), (c) 549 555 10 554 10(1) 554 11 556 12 556, 557 14 588 14(i) 590 14(2) * 588 •V (xrxii) Page. NIOSRIA - NORWAY 71’1 540, 543, 544 7 2 539 7( 2 t o 543 7(.3 540, 543 71(64J 543, 544 £ i(s) ll(l)(f) 1 CHAPTER ONE INTRODUCTION I. PRELIMINARY REMARKS Conceived initially as a study of Nigeria's tax treaties, the scope of this thesis has been enlarged in order to embrace other important and yet untreated aspects of the country's taxation. In the choice of subject-matter, we have been influenced by the following factors: (l) the need to present a logical argument; (2) the importance of breaking new grounds - thus avoiding a duplica­ tion of earlier efforts,^ and above all, (3) the desire to relate our discussion to the contemporary issues facing Nigeria as an example of a developing country* Conscious of the fact that taxation is essentially an instrument of fiscal policy as well as being a part of the general law, an inter­ disciplinary treatment of selected problems have been adopted. Whereas, other writers have adhered strictly to an examination of tax principles, our discussion takes place in a much wider context. Wherever relevant, account is taken of the inter-relationship between the tax law and other branches of law; notably, the principles of 1 1. Particular notice has been of the works of these writers: S.O. Fashokun, Personal Taxation in Nigeria - unpublished Ph.D., 1971 (London); I.S.L. Agboola, Company Taxation in Nigeria, with special reference to the Anti-Avoidance Provisions and the Investment Incentives - unpublished Ph.D.. 1968 (London); G.O. Orewa, Taxation in Western Nigeria - O.U.P. 1962; C.S. Ola, Income Tax Law and Practice in Nigeria - Heinneman, 1974. 2 of conflicts of law, company law, commercial law, public international law and international economic law. In addition, due to the paucity of Nigerian authorities, 2 the subject-matter is treated on a compara­ tive basis. Much reliance is placed on Commonwealth cases^ in order to interpret or illustrate principles of local taxation. In our analysis, two dominant themes emerge. Firstly, the question of how best to stimulate foreign investments, desirable trade and services, and the tax consequences of such activities. In other words, attention is focussed on the interaction of the national tax law with that of the foreign investor. Secondly, the internal workings of the present system as influenced by various social phenomena is examined, (i.e. illiteracy, social attitudes, cultural conflicts with statutory law. scarcity of skilled personnel, etc.) A broad outline of the topics covered has been given in the ABSTRACT. These are spelt out in further detail in the introductory section of each chapter. What follows immediately is a brief outline of the Nigerian tax system as a necessary background to our subsequent discussion. 23 2. Whereas, there are thousands of cases in other branches of law, until 1972 there were less than a dozen reported cases on Nigerian taxation. However, with, the introduction of the Federal Revenue Court the picture is rapidly changing. 3. There is much similarity in the tax laws of moat Commonwealth countries; evidence, perhaps, of their common legal heritage. 3 II. TEE NICERIAN TAX 3T3TEM: A PERSPECTIVI A. Evolution and History The origins and evolution of Nigeria’s tax statutes are well 4 documented. For our purposes, it is sufficient to note that these were derived from a Colonial Tax Model prepared in the U.K. and sub­ sequently introduced in the colonies and other overseas territories. Shortly before the attainment of independence in I960, the Raisman Commission recommended 5 the setting up of a study group, or more accurately that a special conference be convened attended by the representatives of all the governments of the Federation - the object of which was to draft a tax code adopted to the peculiar needs of the country. Regrettably, the Commission's recommendation was not followed. Yhat the country, therefore, has at present is a tax system too complex to be intelligible to the average citizen and with no other major objective save that of providing governmental revenue.^ The suitability or otherwise of the present law in achieving its limited but yet important objective is our principle concern in this thesis. 4. For example, see 3.0. Fashokun, Personal Taxation in Nigeria - op. cit. Chapter 1, pages 1 - 136. The author traces the develop­ ment of the taxation system from the pre-Lugard era (i.e. the indigenous system) to the introduction of modern statutes. See also Adedotun Philips, Nigeria's Companies Income Tax - In this article the author traces the evolution of the present Income Tax Act - (1968) Vol. 10, No. 3 Nigerian Journal of Economic and Social Studies, pp. 321 - 323. 5. Report of the Fiscal Commission: Nigeria - (1958), Cmnd. 481, page 21, para. 92. The Report was compiled by Jeremy Raisman and R.C. Tress. * . 6. Although the rates of taxes are progressive, the law does not aim at shifting wealth from the rich to the poor. There are no wealth or gifts taxes and no estate duty. However, there are specific statutes to attract foreign investors and to aid pioneer industries. B. Taxation and the Federal Set Up The federal structure of Nigeria after 1954» and the need to provide sources of revenue for each of the governmental units led to a division of taxing authority between the Federal Government at the 7 centre and the then Regional governments. In accordance with the 0 recommendations of the Raisman Commission, and following the pre­ independence pattern, the Federal Government is still vested with the tax authority in respect of the income and profits o companies. Evidently, "the fundamental reason for making companies tax a Federal subject is the difficulty of dividing up the profits of companies which operate in the whole of Nigeria, so as to attribute particular 9 parts of the profits to particular regions". The position remains as true today as it was ^tw enty years ag„o. 10 7 Now 'state' governments. Cf. States Creation Decree 1967 which divided the country into twelve political units called "states". For a more detailed account of the division of taxing powers within the Federation, see V.R. Cotter, "Taxation and Federalism in Nigeria" - (1964) B.T.R. 97- Even after 1967 the position remains very much the same. 8. Cmnd. 481 (195 ) para. 99. 9. H.R. Hicks and Sydney Phillipson, Report of the Commission on Revenue Allocation (1951) para. 87. 10. Although this tax is centrally assessed and collected, it goes into the Distributable Pool Account of the Federation and is then shared out among the states according to a pre-determined formula. Several experiments have been made in the past as regards revenue allocation. Even today, the matter is far from settled. See recent statement of Federal Commission of Finance, "Government to Evolve New Revenue Allocation Formula - Daily Times (Nigeria) January 21st 1974, page 2. 5 Jurisdiction over personal income has always been reserved to ihe states,^ the Federal Government having only a limited authority in this field to provide uniform rules for the computation of tax and as regards the administration of the state tax lavs.2 Apart from the above, it is important to note that the Federal Government is solely responsible for making laws for the purpose of: (a) implementing any treaty, convention or agreement between the Federation and any other country ... with respect to taxes on income and profits;^ (b) securing uniform principles for the taxation of income and profits accruing to persons in Nigeria from countries other than Nigeria and of income and profits derived from Nigeria by persons out­ side Nigeria.4 The problems inherent in this type of constitutional arrangement are examined in the appropriate chapters, e.g. in Chapter Six as regards the double taxation agreements, and in Chapter Four as regards dividends. C. The Principal Taxes and Bn lactments Individuals and companies in Nigeria are liable to taxation on their 1 1. 8.76(4), 1963 Federal Constitution as amended. This position may how­ ever be changed in the near future. According to General Yakubu Govan in his 1974/75 Budget speech - "the Supreme Military Council has approved in principle the introduction of a uniform system of personal income taxation throughout the country .... (involving) the same rates and similar personal reliefs and allowances ... (in order) to facilitate the mobility of high level manpower ... etc". - Daily Times (Nigeria) 2nd April, 1974 * 2. s.76(2) 1963 Constitution. The use of the "residence" criterion for avoiding internal double taxation where an individual's activity transcends state boundaries is discussed in Chapter 17. 3. Ibid. s.76(2)(a) 4. Ibid. s.76(2)(b). 6 income and to a lesser extent on their capital gains.^ The liability of companies is regulated by the Companies Income Tax Act 1961, (No. 22) as amended by subsequent legislation and hereinafter referred to as CITA. The liability of individuals and partnerships on the other hand, is regulated by the state tax lavs modelled on the Income Tax Management Act 1961, (No. 21) as amended by subsequent legi«s- lation and hereinafter referred to as ITMA. ' This latter enactment is a federal statute made in pursuance of that government's constitutional I povers to provide uniform rules of taxation in the country. The Capital Gains Tax Decree 1967 (No. 44 of 1967) as amended by subsequent legislation and hereinafter referred to as CGTD is applicable to all companies in Niger6ia and to individuals and partnerships in Lagosand the Mid-Vest states. p Companies engaged in the petroleum industry are assessed and taxed in accordance with the provision of the Petroleum Profits Tax Ordinance 1959, (No. 15 of 1959) as emended. Other relevant statutes are referred to in the appropriate context. D. Machinery for Assessment and Collection - Tax Avoidance and Evasion ^ A . ’ - Like several other countries, income tax assessment and collection is a major problem in Nigeria. As V. Arthur Levis observed in 1966, 5. Until recently companies vere liable to a Super Tax in addition to income tax but the first mentioned tax has now been abolished by s.3 of the Finance (Miscellaneous Taxation Provisions) Decree 1972, No.47 of 1972. 6. 8.46(3) CGTD. Note that the decree can only be applicable to matters of personal taxation if specifically adopted by a state just as the Mid-Vest and Lagos states have done. •the direct taxes on individuals (in Nigeria) can be doubled by better administration, reducing evasions, even without increases in rates".^ rhis assertion which is probably true, is now generally recognised by O the governments of the Federation. Wherever necessary in our discussion, the machinery for the assess­ ment and collection of taxes i3 described and examined in outline. A fuller investigation of the problems in this area of taxation would merit a completely different study.9 QWWB BTTMARK3 Two recent events are likely to inflQuence the development of the Nigerian tax law. While the newly introduced Federal Revenue CourtJ O is likely to help in clarifying obscure aspects of the country's taxation, and is a clear manifestation of the government's resolve to get a maximum yield from direct taxation; the increasing revenue from oil1 may relegate direct taxation toU tWAhAte? bIackground as a major source of governmental revenue in future 7. Part of mimeographed notes entitled "Reflections on Nigerian Growth* distributed during a seminar series at the University of Ibadan, Nov. 1966; Adedotun Philips in his article already cited highlighted the very low yield from direct company taxation. 8. For example, in May 1973 a National Conference on the problems and prospects of Income Tax Enforcement in Nigeria was held at the Ahmadu Bello University, Zaria. 9. For a helpful analysis of the situation see Milton C. Taylor, "The Relationship between Income Tax Administration and Income Tax Policy in Nigeria" - (1967) The Nigerian Journal of Economic «gid Social Studies, Vol. 9» No. 1, p. 203. 10. Established in 1973 by Federal Revenue Court Decree (No. 13 of 1973) 1. The Federal Government's revenue from the oil exploration industry was - 206.037 million for the first quarter of 1973, i.e. more than £100 million sterling. Figures from the Central Bank of Nigeria . Monthly Report, October 1973 page 6. However, until that happens, direct taxation would continue to be an important subject. 9 CHAPTER TWO IN SEARCH OF A TAX PHILOSOPHY . BASIS OP TAX LIABILITY IN GENERAL Whereas, the right to levy taxes is an attribute of state sovereignty, and is in theory unrestricted, 1 for all practical purposes t be a link between the taxing authority and the person or pro taxed. Nowadays, the scope of taxes is determined in the light of two well known criteria. Namely, the personal link of the taxpayer to the country, and the link between the income and the territory of the country imposing the tax. The imposing of tax on the second of these criteria is known as the "source of income" approach. 2 3r A similar term to the doctrine of source was used in the British in- come tax system to denote a different theory. 3 That theory was based on the idea that all income must have a source and that no one may be taxed in a given year unless it can be shown that he had a source from which in­ come could be derived in that year. It should be noted, however, that notwithstanding the linguistic resemblance between the two terms used for the two theories, in fact, they deal with different matters. Hence, apparently related, the two concepts should not be confvised.12 1. Cf. D.P. O'Connell: International Law - (1970) Vol. 2, 2nd ed., page 715 et seq. 2. For a description of the "source" approach in one country, see Butterworth South Africa Income Tax Practice - edited by H.J. Wells, being a revised edition of - Law and Practice of South African Income Tax by I. Isaacs, W.D. Fielding and L. Lazar 1970, page 882, para. 572 et seq. See also SiIke on South African Income Tax Law - by A.S. Silke 7th ed. Juta, 1972 at page 124 et seq. 3* Whiteman and Wheatcroft: Income Tax and Surtax - 1970, Butterworth, page 18, para. 1 - 28. 10 Generally speaking, most tax systems do not adhere to one of the tests which have been mentioned above, but adopt elements of both. The English tax system for example, is based on the assumption that with certain exceptions, a domiciled resident of Great Britain is to be taxed on his income wherever derived, 4 and that a non-resident of the U.K. may 5 be subject to tax if his income is derived from a source within the U.K. The objective of this chapter is to establish the basis of liability under the Nigerian law where tax is payable for each year of assessment upon income (or profits): "accruing in, derived from, brought into or received (in Nigeria) ................. etc".^ ...... I. LIABILITY TO NIGERIAN TAXATION: "3INCOME A!CCRUING IN. OR DERIVED PROM A. A "Source" Approach? A The terms"accruing in" and "derived from" are not defined in the In­ come Tax Acts and neither do we get much help in interpreting them from the jurisprudence of the Courts. Historically, the provisions charging tax on income "accruing in" or "derived from" Nigeria seem to derive their origins from s.5 of the Model 4. A non-domiciled resident is taxed on a remittance basis as regards his non-U.K. income. However, there are proposals in the 1974/75 Budget to make him liable on his world income if permanently resident in the U.K. . - 5. Sections 49 - 50 Income and Corporation Taxes Act 1970 (U.K.) - herein after referred to ICTA 1970. Cf. Colquhoun v. Brooks [1889] A.C. Page 493. 6. s.4 ITMA; s.17 CITA, emphasis supplied. For a general discussion of the problems in this area of law see B.H. Rahim: "In Search of the True Meaning of ’Accrued in or Derived from*". (1971) Vol. 7, E.A.L.J. 258. li Ordinance prepared in England in 1922 by the Inter-Deparrmental Committee on income tax in the Colonies not possessing self government. Quite clearly, an indication that the notion of "source" is implicit in the terms "accruing in" and "derived from" which appear in the tax laws of several U.K. ex-colonies,^ can be found in the explanatory comments of the fiscal Committee. They submitted that after careful consideration, they had come to the conclusion that the most appropriate scheme for the colonies generally, was one which imposed tax "upon income which either has its origin in the colony, or while having its origin outside is received in the colony".® Be that as it may, it must be stressed that the Nigerian provisions do not speak of income "accruing in, or derived from a source .... in Nigeria" as do parallel provisions in the tax legislation of some other territories within the Commonwealth; for instance, South Africa.^ The South African Income Tax Law adopts as its fundamental principle the test of the connection between the income and the territory of the country. In so doing,it probably resembles the Nigerian system, but un­ like the Nigerian Law, the South African Income Tax Act 1962 contains an 7. For example, see Ghana s.5, 47 (3), Income Tax Decree 1966. (N.L.C.D. 78)(as amended). Also India, Income Tax Act 1961 ss. 4,5, 9 and 10(7) (as amended). It is interesting to note that the original words are still used in the tax laws of many new countries even though they have parted ways economically with Britain for several years. 8. Cmd- 1788, page 5. 9. s.1(xi). Income Tax Act 1962, No. 58 of 1962. Note that South Africa was once within the Commonwealth. 12 explicit reference to the source of income. That is, income is chargeable to tax in South Africa, if it is "derived from a source" located in the Republic of South Africa.1^ The personal circumstances of the taxpayer are a secondary issue. The above may be contrasted with the income tax legislation in Colombia which rests on the principle that the tax powers are confined to persons, property and business within its territory. Its concept of taxable in­ come, is any income regardless of source, obtained by the taxpayer during they year - less the costs incurred in producing such receipts. In other words, the over-riding criterion is "enrichment" - that is, anything that adds to the taxpayer's wealth and, hence, to his taxing capacity, is a taxable receipt; unless, of course, it is expressly exempted from tax by l, aw. . * Apart from the contention of one Israeli writer, 2 and the inferences from historical data, is there further evidence in support of our equating the Nigerian charging provisions to the "source" approach? What is the difference, if any, between the expression "accruing in" and "derived from" *12 10. For a discussion of the concept of "Gross income", see L. Lazar: "Income Tax Provisions which affect the foreign Investor in the Republic of South Africa". Mq64) B.T.R. page 4-19 at 420-421. 1. Taxation in Colombia - World Tax Series (1964) at page 352. Harvard Law School publication. 2. A. Lapidoth, analysing similar provisions in Israeli tax laws, suggested that the intention of the Legislator in using these terms seem to have been that income is chargeable if was"created or arose" in Israel - "The Tests for the Determination of the Scope of Taxes: The territorial location of the object and the personal link of the Taxpayer to the country" - (1969) Israel Law Review, Vol. 4, No. 3, p. 392 at 393- 13 as used in the taxing statutes? Even though there is language in at least one West African decision3 which may be interpreted as a tacit recognition that a distinction exists between "derived from" and "accruing in", 4 this writer is of the opinion that the terms are synonymous. In this, we are supported by a number of Commonwealth authorities. For example, according to Lord Davey in C.I.R. v._*” ’ "their Lordships attach no special meaning word 'derived' which they treat as synonymous with 'arising' or 'accruing'". 6 Also, in Esso Standard Eastern Inc, v. C.O.T., 7 Duffu3, P., had no difficulty in agreeing8 with the trial judge that the expressions "accruing in" and "derived from " as used in the Kenyan Law^ can be regarded as synonymous. Without belabouring the point, for our purposes, the expressions 3. Cf. Roper, J. in Karan v. C.I.R. [1948] 12 W.A.C.A. 331 at 337. See also Herbert Cox, C.J., in C.O.T. v. P. Co. Ltd. 1 E.A.T.C. 131 at 165 where he observed as follow; "I am inclined to the view that while it is clearly possible for 'derived' and 'arising and accruing' to be synonymous in certain cases, it may well be possible that be not so in all". 4. It may be observed that to identify these terms would appear to be in conflict with the principles of statutory construction whereby every word in a statute is presumed to have an independent meaning unless a contrary intent clearly appears. 5. [1900] A.C. 588. 6. Ibid.. at p. 592 7. [1971] E.A.L.R. 127 8. Ibid., at p. 143 9. The charging provisions are in all material respects similar to the Nigerian Law. »- 11 'accruing in" and "derived from" would be regarded as coterminous. Sub­ sequently, they would be employed as alternatives - the use of one implying the use of the other. To take our discussion one step further, what then do we understand by the expression "derived from" or "accruing in"? The meaning of "derived from" has been the subject of litigatAion in two Nigerian cases concerning remuneration and employment. It has also been judicially considered in three East African cases; one involving director's salaries, another the source of a sales agent's commission and the third the source of interest income. In Re Potter. a case concerning the inteSrpr'etation of charging provisions similar to the present Nigerian law, theT petitioner, an employee of a shippingcompany in Nigeria, was assessed to income tax on a year's income including salary paid to him while on leave in England. He objected to the assessment, as his contract of service in Nigeria expired on his reaching Liverpool, and as he was paid salary on leave only under the following clause of his contract "(13) If after the expiration of the said term of twelve months or such subsequent period as aforesaid on the Coast, the Employee shall return to England and shall during such term have given full satisfaction to the company, and if the company agree to renew the engagement hereby entered into, the Employee shall be entitled to three months leave of absence to be computed from the date of his departure from the coast until the date of his sailing from Liverpool on his return and during which time the company shall pay him a salary at the rate of £41.18s.4d."* 1 10. [1934] 11 K.L.H. 144 1. Op. cit., at page 144 15 Carey, J.,had no difficulty in holding that the salary paid to the petitioner while on leave, was derived in respect of gains or profits from his * V. employment and was, therefore, rightly included in the assessment for income tax. In the rather scanty and unsatisfactory judgement in which not one single legal authority was cited, one finds it difficult to know the reasoning behind his Lordship's decision. Therefore, the judgement, though, in our opinion right, 2 cannot be much of a legal authority today. For example, did the learned judge specifically address himself to the question whether th. provision, "accruing in" or "derived from" were synonymous? - and if so, whether these terms can be said to mean the sam» thing as the "source" of assessable income? Secondly, did the learned trial judge consider the various legal theories about the source of employment income - a matter examined by us at great length in another chapter, and on which there is much learning?^ The above decision may be compared, with another Nigerian case with fairly similar facts and concerning the interpretation of the charging provisions of the same Income Tax Ordinance. In the Hatter of the Non-Native Income Tax Ordinance 1951, the petitioner, a bishop working in Nigeria, contended that he was assessed to pay income tax on salary received during a period of leave in England; that his salary was paid from a fund subscribed in England and not contributed to from Nigeria; and that his leave salary, being neither derived from nor received in Nigeria was not assessable to tax. The Crown on the other hand submitted that the leave salary was derived from employment in Nigeria and was, therefore, taxable. - 2. Why we consider it right would become clear when we discuss the "originating cause" of income and its place of location in the chapter on employment income. 3. Post., Chapter IT 4- [ 1931 ]5 V.A.C.A. 142 7ue Vest African Court of Appeal, confirming' the Judgement of the Court :el:v distinguished the present case frcn Fotter'3 Case. 7ne Court adopted *i9 statement of the trial Judge, .here the latter said as follows: "with great respect to the decision in rotter's case, I an unable to apply it here. If the section read 'chargeable inc:ne derived from rains tr profit; fron an? vocation. enolo7- nent etc, in Nigeria'." there is no doubt the petitioner’s leave salary would be assessable, rut these are not the words c: the section. I io not thir> the vtrds of the section c • vocation etc, ’" can bear that intertretation. £ a distinction must be ornvn oetveen tne peto.to.tner s case, a m one cases ror ezanp-a, of a remnant or public servant in 5igeria, where the income iemves f m sirerda dn restart cf the gams from ho a trade or vocatim no ratter wnere the recitdent receives it”. Jinally, tne anneal ._cit. 33 if its source is there. In addition, income^though having its source abroad, may be chargeable to Nigerian tax if "brought into" or "received 3 in Nigeria". The only persons exempted from this rule are non-residents who come to the country, staying for a period of less than 183 days in all.^ But when precisely is income "brought into" or "received" in Nigeria? The question whether or not income is "received" or Nigeria has either never arisen in practice, or else if it ha3, has been settled by the Revenue before reaching the courts. This is the only reasonable explanation we can offer for the lack of Nigerian case law on this point. In another country where the problem has arisen, it has been decided that reference to income "received" in East Africa concerns income which accrued or was derived abroad and which was received in East Africa.3 456 In other words, liability on a foreign source income is on a "remittance basis". On that authority, it would seem that the Nigerian law is quite similar to the U.K. law. In that country, the law provides that certain income of foreign source will be taxed in the United Kingdom only if received there.^ The meaning of this basis of taxation known as the 3. See s.4 ITMA, s.17 CITA 4. Note the residence test in s.3(2) ITMA and in Schedule 3 ITMA Income Exempted item (x). 5. Cf. B.V. v. C.O.T. 4 E.A.T.C. 225. The East African provisions are similar to the Nigerian law. 6. This basis for imposing tax is provided for in English income tax law in respect of certain types of income chargeable under Schedule D Cases IV and V; certain types of employment income taxable under Schedule E, and until lately certain short term capital gains taxable under Schedule D Case. VII. 31 remittance rule, has been dealt with extensively in English case law. And to those cases the Nigerian Courts may have to turn for guidance in interpreting the expression "income brought into, or received in Nigeria". B. Legal Meaning of a Remittance - Deemed Remittance? In considering what is a remittance, two situations must be dis- • tinguished; firstly, when the income is received in the country by soneone other than the owner of the income; secondly, when the owner himself receives it. For example, it has been hve lId> in Carter v. Sharon 7 that income received by a taxpayer abroad which he effectively alienates there, but which is subsequently brought to the United Kingdom by the 0 recipient, does not give rise to any charge to tax. But where the in­ come has not been so alienated, it is clear that the rule does not require that the income must be received physically by the person chargeable. B q is sufficient for tax liability as in Timpson’s Executors v. Yerbury, if it is still technically the taxpayer’s income when it arrives in the United Kingdom. Thus, if the taxpayer pays his butcher in the country with money from abroad, it is nevertheless regarded as his income when the butcher receives it. 78910 7. [1936] 20 T.C. 229 8. This point has been expressly left open by the Court of Appeal in the Timpson’s Case. 9. [1936] 1 K.B. 645; 20 T.C. 155 10. See Lord Denning in Thomson v. Hoyse [1961] A.C. 967 at 1003; 9 T.C. at 340. In the case of gifts by cheques or drafts drawn on the instructions of a resident in the United Kingdom by his agent abroad on a foreign account in favour of donees in the United Kingdom, the test is whether the cheque or draft was revocable when it arrived in the United Kingdom by the law of the country from which it was sent. If it was so revocable, then it was regarded as income of the donor received by him in t]h e United Kingdom. < F Much difficulty has arisen in cases where the has obtained ‘“ payer 1 the benefit, in the United Kingdom of income from abroad witlhout it being directly transferred to him. For instance, in Thomson v. Moyse,1 a resident of the United Kingdom who drew in the United Kingdom, a cheque on his American bank account, which contained income taxable on a remittance basis, and sold that cheque to a United Kingdom bank in London, was held by the House of Lords to be taxable on the proceeds of the cheque. It wss argued by the taxpayer that no part of his income was ever remitted. Indeed, that may be true, for no money may have crossed the Atlantic at all because when the bank sent the cheque to New York for collection where they were credited with the money. The House of Lords, however, un­ animously decided that where a customer employs a banker to collect by means of a foreign cheque money abroad which is part of his income^ the sum which the customer receives in this country is a sum "received" within the meaning of Cases IV and V of Schedule D, and that it is immaterial that no money v;as ever brought into this country in the course of̂ or in connection with the transaction. 1. ri9611 A.c. 967; 39 T.C. 29. See also Sch'der v. Westminster Bank Ltd. [1970] T.R. 167. In this case a claim for damages was based on liability for tax resulting from a Guernsey bank sending Guernsey remittances from Malaysia to London for conversion from Malaysian dollars into sterling. Previously, the remittances had been sent in sterling direct to Guernsey. Also relevant in the context of our present disuussion is the case of Hamel v. Wri/rht. 2 In that case, the taxpayer an employee of a South African company working and resident^ in the United Kingdom devised a scheme whereby his salary was remitted to the United Kingdom in form of a loan from a foreign company. The scheme involved the application of a major part of his salary each year to the purchase of shares in a South African company under his control. The company lent the money received to a second South African company in which he held no shares. That company then lent the money it received to him in the U.K. The loans received by him were interest free and payable on demand. The taxpayer was assessed to income tax under Schedule E for the years 1962-3 to 1964-5 in amounts which in eluded the sums received by him in the United Kingdom by way of loans. Dismissing the taxpayer's appeal from the Special Commissioners, it was held by Templeman, J., in the Chancery division that since it was possible to trace the loans through from the money used to purchase shares in the South African company to the money received by the taxpayer in the United Kingdom, the money received in the United Kingdom had been derived from the application of the taxpayer's income in South Africa, and accordingly were emoluments received in the United Kingdom for the purposes of the Income Tax Act. *3 2. [1974] 1 W.L.H. 325 3- The taxpayer retained his South African domicile. iWrds j ka. 0O«js not li’abla. -to u-fc. -tzv* C M k 5 s Id ovilj «rvl S i/ tx rc s , cxMtft j v i " re-t'w T tta/u cc-S. - 37 The above case may be compared with two other cases in which the "receipt" of income was at issue. In Schioler v. National Westminster Bank Ltd, 4 a claim for damages was based on liability for tax resulting from a Guernsey Bank sending remittances from Malaysia to London for conversion from Malaysian dollars t into sterling. The United Kingdom Revenue assessed the taxpayer, (a Danish national domiciled in Denmark but resident in England) to tax on the grounds that his Malaysian income had been remitted to the U.K. Mocatta, J., in the Queen's Bench Division hel4d tFhat the defendants (i.e. the bank) had implied authority and a contractual duty to credit the plaatiff's account with dividends received by them on her behalf and were bound to discharge that duty with reasonable care; but that in the absence of express instructions to them they were not negligent and did not exceed their implied authority in sending the dividend warrant to England for realisation. In his Lordship's opinion, to hold that the defendants were negligent in acting as they did without first consulting the plaintiff or her accountant because of possible tax repercussions would be to place an impossible and unreasonable burden on banks generally. 5 In the opinion of this writer, the judgement in this case was unduly hard on the taxpayer especially since the Bank had acted contrary to her interests. Apart from that, however, this case illustrates the highly technical nature of the "remittance rule". 45 4. [1970] 3 W.L.R. 68 5. Ibid.. at page 75 33 Squally intriguing is the decision of the Supreme Court of India in C.I.T. bcmbav South v. Ogale Class Works Ltd.̂ in which the concept of "received" income vas considered. In that case, the taxpayer was a limited liability company incorporated and carrying on business in Aundh which in those days was an Indian state outside British India. It was accordingly a non-resident company for the purposes of the Indian Income Tax Act. The taxpayer was a manufacturer of lanterns and other gla ires at its works in Aundh State. In the relevant accounting years the taxpayer secured some contracts for the supply of lanterns and other glasswares to the Government of India. The price of the goods supplied under the contracts were paid by cheques drawn on the Reserve Bank of India, Bombay. The cheques used to be received by the taxpayer in Aundh and cashed through its bank at Bombay. The taxpayer being a non-resident company, its liability to British Indian income tax depended upon its receipt of income within British India. In the course of the proceedings for assessment to income tax the taxpayer contended that its profits on the sales "accrued" and were "received" in the Aundh State where it received the payment by the receipt of the cheques. Reversing the decision of the High Court,the Supreme Court of India held that the posting of the cheques in Delhi amounted to a payment and that the tax- payer was accordingly in receipt of taxable income within British India.7 In many cases where the question arises whether or not income has been remitted, the answer must depend on whether the sum remitted can be identified 67 6. This case is reported in (1954) Vol. 8 B M ) p. 270. 7. Alternatively, it could probably have been argued that a proportion of the taxpayer's gross profits arose from the act of "sale" within British India. a3 income or as representing the proceeds of income. In other words, for tax liability, we have to examine the nature of the taxpayer’s interest under the foreign transaction and the character of that interest as capital or income under the local law. For exemple, a distribution of shares in pursuance of a "partial liquidation" of a Maryland (U.S.A.) company under that local law, was held in P.ae v. Lazard Investment Co. Ltd.** not to be income liable to U.K. tax. As Lord Pearce stated inter alia: J r "By the law of Maryland, this Maryland corpor•aattiion has made a distribution of capital. In the hands of the shareholder the distribution is received as capital and not income... 9 Similarly, in Courtaulds Investment v. Fleming^ a return of capital by an Italian company was held not to be income for the purposes of Schedule D, Cq s«- V. In all these cases, the test applied was whether the local law treated the receipt as one of capital; if it did, then the payment was not assessable to income tax. Relevant too in the context of our present discussion is the problem of vested and non-vested income. In the U.K., a domiciled and resident taxpayer is liable on his world income whether or not remitted to that country. Diffi­ culties, therefore, arise when he becomes vested (i.e. according to U.K. law) with foreign income which is not remitted. In Baker v. Archer-Shee1 the House of Lords held that a domiciled benefi- 6 6. [ 1963] 41 T.C. page 125 9. Ibid., at p. 131 10. [ 1969 ] T.R. 345; see also Inchyra v. Jennings 1926 2 All E.R. 714; I.R.C. v. Reid’s Trustees 1949 A.C. 361; Lawson v. Rolfe 1969 T.R. 537 1 [ 1927] A.C. 844 40 ciai-y under a New York trust was liable to O.K. taxation. This was on the assumption that the laws of New York and the U.K. were the same. But in Sarland v. Archer-Shee 2 the same taxpayer proved that under the law of New York the income under a trust is vested in the trustees and that the beneficiary only has a right in equity to compel the trustees to discharge their duties. Relating the above specifically to Nigeria, we are of the opinion that the Nigerians provisions are not concerned with the taxpayer's foreign income and whether or not it has vested in him. For purposes of li there must be an actual or deemed remittance of income into Nigeria. From the foregoing discussion, it is evident that liability to tax on a remittance basis, or as under the Nigerian lavr, on "income brought into or received in Nigeria", potentially involves complex problems of administration. With no evidence of a tangible inflow of overseas income, it would appear that in the case of Nigeria, the effect of these provisions have been nugatory. Surely, it cannot be seriously argued that there are no Nigerian residents bringing into or receiving income in Nigeria from foreign sources. Where tax is charged on a remittances cm similar basis, it is quite possible to avoid liability without much effort or risk. What prevents a U.K. taxpayer deriving income from Nigeria and a Nigerian taxpayer deriving income from the U.K. from doing a deal avoiding any actual transfer or remittance of funds? For example, A, a Nigerian taxpayer with U.K. income can pay it over to B in the U.K. where the latter is resident, while B, deriving income from Nigeria gives the equiva­ lent to A resident in Nigeria. Or, as regards professional or employment in­ come, it may be possible for a Nigerian resident to be paid abroad for work 2 2. [ 1931] A.C. 212 51 done in Nigeria and for him to remit the same to the country by unorthodox means.3 Another favourite scheme to avoid ( or evade) tax liability was as follows: Where the taxpayer derives income from abroad, he does not transfer it to the country tut proceeds to borrow a similar sum from somebody abroad and it is this second sum which because of legal technicality is not "income", that is repatriated. The debt is repaid by transferring to the creditor the income derived abroad.4 In the U.K. this loophole wa3 closed by section 24 of the English Finance Act 1953 (now S. 122(4), (7) of the English Income and Corporation Taxes Act 1570. This statutory provision aimed at tax avoidance has no counterpart in the Nigerian Income Tax Acts. But it should be remembered that questions of this kind, have not yet reached the courts in Nigeria, and if they ever arise. the Revenue may try to invoke the general. anti-avoidance provisions of the law. Eowever, it would seem that the strict legislation concerning foreign exchange control in force in the country has discouraged taxpayers with foreign source income from remitting such income into Nigeria. In our opinion, it should theoretically be more beneficial to the country if instead of a remnittance basis, tax was charge on global income wherever it aiay have arisen, and whether or not, remitted to Nigeria. But such an approach is thought to be futile for a number of reasons. Firstly, how does the Revenue find out those residents deriving income from foreign sources without resorting to a process of witch-hunting or arbitrary assessment? The dangers inherent in any method adopted have to be stressed considering that in Nigeria the majority of the people are self-employed and 34 3. There is very strong suspicion that a lot of this goes on all the time. 4. For example, see I.R.C. v. Gordon [1952] A.C. 552, 33 T.C. J j that their activities are less well documented than in other countries. Secondly, attempt to tax foreign source income creates problems of double taxation. In view of these, it is submitted that with a tax exemption or lower rate of tax on foreign source income, there is a greater chance that taxpayers would repatriate their money into Nigeria. What the country endures under the present law is the worst of two worlds. Not only have the charging provisions failed to provide governmental revenue in form of taxes on foreign source in- come, they have probably deterred people from bringing mhome their funds where they would have been willing to do so. :v. CCNCLU5ICN From the foregoing discussion, we have seen that until presently, the Nigerian courts have had very few opportunities to consider the charging pro­ visions under the Tax Acts. The meaning of the words "income accruing (in), or "derived from" was dealt with by the Onitsha High Court in Potter's Case: and by the West African Court of Appeal in the Natter of Non-Natives Income Tax Ordinance 1951. Regrettably, however, in these two cases the judgements of the courts were sketchy and generally unsatisfactory. No great elucidation of principles emerged. For example, in the latter of the two cases the Court j>i-rferred to inter­ pret those words literarily and rejected the idea that they really referred to the "source" of the income. In Karam's case. another West African Court of Appeal decision, the majority judges while accepting the idea that the words refer to the "source" of income, were not ready to extend this concept beyond its purely geographical meaning. The Chief Justice on the other hand, took cognisance of the reality of the situation by extending his concept of "source" to the "originating cause" and its place of location. This, we submit, is the better view and is perhaps the view which the Supreme Court of Nigeria would adopt were it to be faced with this issue today. The term "received or brought into the subject of thorough consideration by the courts. _ he term’s meaning does come up, it seems a reasonable guess that the court will interpret the term in the light of English case law on similar questions relating to the n.'remittance rule". In conclusion, we wish to been stated above already - that the Nigerian tax lsre extensive than the former, which seeks to tax only the profits or gains from a "trade...... or adventure in the nature of trade". 2 This point was, at least, tacitly recognised by Sowemimo, J., in Arbico v. Federal Board of Inland Revenue.^ In their application, however, it is doubtful whether the U.K. and Nigerian laws would yield results which are materially different in any given set of circumstances. For our purposes, it is considered that income from a trade or business is essentially income from the same specie of activity* In *23 1• Smith v. Anderson [1880] Ch. D 247 at 257. Jessel, M.R., pointed out at page 259 that "business" is a word of large and indefinite import, having a more extensive signification than "trade". See also Halsbury's Laws of England. 3rd ed., Vol. 38 10* 2. i.e. comparing Nigeria's s.4 ITMA, s.17 CITA with U.K. Tax Management Act 1970 s. 118 (1 ); and s.109(2) ICTA 1970. 3. [1966] 2 All N.L.R. 303 at page 305. 43 our discussion, therefore, the use of one tern implies the use of the other. Under the Nigerian law, a trade would perhaps include "trade, manu­ facture, adventure or concern in the nature of trade", that is, if we follow the circuitous definition adopted in the U.K. This definH;ion, needless to say, is unhelpful. Turning as usual to case law for guidance, we find that despite the large number of cases which have been decided, no -~ 52 The above case may be contrasted with the New Zealand case of City Motor Services. Ltd, v. I.R.C.̂ In that case, certain costs of alterations and additions to the taxpayer petrol service station were paid by the Mobil Company and did not appear in the taxpayer's trading records. The Mobil Company super­ vised the work to ensure that its products were properly handled, and included work which the taxpayer did not require for its business. The taxpayer, as was the common practice, had decided to deal only in one brand of petrol and oil products, and had chosen Mobil who had offered it a loan .at iinterest, but unsecured, to conduct its business. The taxpayer's principal business was the exploitation of a motor vehicle franchise. The Commissioner included as income in the taxpayer's return an amount equal to the amount paid by Mobil on additions and renovations to the taxpayer's premises. The taxpayer, dissatisfied with its assessment, requested the Commissioner to state a case for the opinion of the Supreme Court. Henry, J., upheld the taxpayer's objection - that the gain to the taxpayer was of a capital nature and so did not form part of the taxpayer's assessable income. Commenting on the meaning of the words "profits or gains derived from any business" his Lordship made it clear^ that the words do not alter the essential differences between capital items and income items, though they may well tip the scale in any borderline case into the income area. According to his Lordship, the essence is that the profits or gains must be derived from "the business" with the consequence that if the item is not proved to be capital it Eight well be caught up by the charging section. At this juncture, what ought to be emphasized again is that the ultimate 34 3. 10 A.I.T.R. p. 585. For a review of this case see L. Lazar (1969) A.S.C.L. at page 238. 4. Ibid.. at page 588. 53 question of "trade" or "no trade" is one of law to be answered in the light of all the circumstances which it is reasonable to be taken into account, the weight to be given to a particular circumstance to depend rather on common sense 5 than on strict application of any legal principle. Assuming that our reasoning thus far is correct, what is the tax treatment under the Nigerian law of payments for "not trading"? Are these sufficiently analogous to "trading" or "business" income to be taxable; or, are such payments outside the-scope of the charging provisions? The real point is this: if receipts from "trading" or "doing business" (positive acts) are taxable, can receipts from "not trading" or "not doing business" (negative acts) be equally taxable? \ \ Not many cases have been decided in Nigerii or elsewhere on this question. In order to deal with the problem, howeve: would seem that the approach adopted in the U.K. in Higgs v. Oliveris the correct one. In that case, a well known actor made an agreement with a film company by which in consideration of £15,000 he agreed not to act in, or produce or direct any film anywhere for a period of 12 months, except for the company. The object of the agreement was to protect the exploitation of a film which he had produced for that company and in which he had acted the principal role under an earlier agreement with them. The sum of £15,000 was included in his assessment to income tax as part of his income from his "vocation" as an actor under Case II of Schedule D to the 5 Per Lord Reid in Regent Oil Co.. Ltd, v. Strick [1966] A.C. 295 at 313, approving Van den Berghs Ltd, v. Clark [l935 ]a .C.431 at 438-439 (L®1* MacNillah). 6 [ 1952 ]ch. 311. See also Beak v. Robson D 943] A-C. 352; Hose v. Warwick 27 T.C. 459. 54 Incore Tax Act 1918. The Commissioners for the special purposes of the In­ come Tax Acts discharged the Assessment, holding that the £15,000 did not come to the taxpayer from the "exercise" of his "vocation", but from refraining from carrying on that vocation. The Court of Appeal considered that the whole question was one of mixed fact and law. It confirmed the decision of the Special Commissioners and held that the sum which the taxpayer received was outside the formula "profits or gains arising or accruing" "from" the taxpayer's "profession" or "vocation" as an actor and, hence,was not taxable under Case II of Schedule D of the Income Tax Act 1918. According to Lord Evershed, M.R., profits or gains in order to be taxable must: "'arise or accrue from a profession' in the sense that it arises from the exercise of a profession".7 On that analogy, it is submitted that payments for "not trading" (i.e. for restrictive covenants) are not taxable under the provisions of the Nigeria law. One important specie of payments must be distinguished from payments for "not trading". Vhat may be noted here is that sums of money received in the course of carrying on a trade but not as a result of the trade as it was contemplated that it should be carried on in the normal course of events may, nevertheless, be taxable. Several cases of this kind arose in the O.K. out of the restrictions placed upon trading companies during the first World War. 7 7- [1952] Ch. 311 at p. 316. 0 For example, there was the case of I.R.C. v. Newcastle Brewrles Ltd;. where rum produced by a brewery company was requisitioned by the Admiralty and compensation paid; there were also cases where contracts for shipbuilding were 9 cancelled; and so on. In all these cases, it was decided by the courts that the sums paid by way of compensation were taxable. If according to our submissions payments for "not trading" areAtaxable in the hands of the recipient, what is the tax treatment of such sums from the point of view of the payor? 5 For an answer, we may refer to the Privy Council decision in C.O.T. v. Nchan?a Consolidated Copper Hines Ltdl^ where it was held that the payment by one company of a group to another to cease production for one year was an "operating cost" and, hence, an allowable deduction. According to the Court, what the payor company bought was the right to have the payee company out of production for 12 months. In that regard, the money expended had no true analogy with the expenditure for the purpose of acquiring a business or the benefit of a long term or enduring contract. In other words, the money in question was a revenue expense as distinct from a capital expenditure. One important inference may be drawn from both the Olivier and Kchanga cases. To wit, that the Revenue may have the worst of two worlds. This is so because a payee may not be taxable since the sum he receives is not of an income nature not being derived from the "exercise" of his "trade" "business" or "profession". At the same time, a payor may be allowed to deduct the kind *I 3. 12 T.C. 927 9- E.g. Short Brothers Ltd, v. I.R.C. 12 T.C. 955I * 10. [ 1964] A.C. 94B (P.C.) Decision from the Federal Supreme Court of Rhodesia and Nyasaland. Contra Associated Portland Cement Manufactures, v. C.I.R. 27 T.C. 103, where it was held that payments by a company to retiring directors in consideration for worldwide covenants by them not to compete with the company after retirement were of a capital nature and, hence, not deductible. S3 of sums under consideration being of a revenue character incurred in the pro­ duction of income. In our opinion, there is a strong case for the Nigerian provisions to be amended so that payments for "not trading" are deemed to be income in the hands I of the recipients. In the U.K., it has been the taxpayers who for many years have denied that their activities constituted a "trade" while the Revenue has b iakctivities of a resident or non-resident may take place partly in Nigeria and partly else­ where.^ Again the jurisprudence of the Nigerian courts is of little help, for as indicated in the previous chapters, income tax cases appear not to arise in the country, or if they do, never seem to reach the courts 0 or get reported. With less than a dozen cases in forty years, one g wonders whether the Revenue has been applying the law. However, in such few cases that have arisen, the attitude of the Nigerian courts have been V " to follow English precedents while recognising that the Nigerian law which is in several respects similar to the U.K. law is nevertheless different.^ Having adopted a "source" approach as its basic philosophy, to deter­ mine whether or not "trading" has taken place "within" Nigeria it is necessary to identify the location of the dominant, or real or substantial cause of trading income. This proposition is easier stated than applied since there is no universal criterion for isolating the "real or dominant" cause of trading income. Three tests have been applied by common law countries to determine "trading" or "carrying on business" for tax purposes. Firstly, the place of the contract, secondly the situs of control, and thirdly the "activities" 7. E.g. s.5A ITKA; s.30A CITA (as amended). 8. Starting with Re Potter in 1951 to the Alunaco Case decided in 1970. The position is likely to change soon with the establishment of the Federal Revenue Court. 9. S.O. Fashokun noted the paucity of Nigerian tax cases but attributed it to the poverty of the people and the use of administrative remedies. J.E.A. Kills commenting on the Ghana position observed that the lack of income tax cases is due to the shortage of lawyers in the Income Tax department. There is clearly some truth in both assertions. 10. , J* , Aoig-rquJo’s 1i k a A x n o & L H ' S o a ,rri j |. ^ 1 * ^ 5 2 ­ M 66 test. Analysis of these tests involves difficult problems of conflicts of law. B. Place of the Contract Test Abe re the incidents of a business transaction transcend the taxing juris­ diction of two or more countries, the attitude of the English courts have been to regard the place where the business was concluded as the most important criterion for the location of a trading activity and, hence, the taxable income. 1 This is so, particularly, where the transaction involves the sale and purchase of goods. In that country, there is a broad distinction between trading "with" a country and trading "within" a country - a distinction well expressed by 2 Lord Herschell in Grainger & Son v. Gough where his Lordship noted inter-alia that; -X "many merchants and manufacturers export their goods to all parts of the world, yet .... no one would dream of saying that they exercise or carry on their trade in every country in which their goods find customers......." 3 The above decision shows that to a certain extent the question of a non­ resident trading in England depends on whether or not the contracts of sale were made in the country or abroad. This was a case where a French wine merchant and champagne manufacturer employed an English agent to obtain orders 123 1. Wilcock v. Pinto & Co. 9 T.C. at p. 133; Sully v. A-C 2 T.C.149; Kelson Anderson & Co. v. Collins [1928] A.C. 34. 2. [ 1896 ] A.C. 325; 3 T.C. 462. 3. Ibid., A.C. 335; 336; at pp. 467-468. in England. Any orders, however, had to be transmitted to France for acceptance, which took place when the wine was sent by the foreign principal to England. It wa3 held that the French wine firm was not trading in England because "no contract wa3 ever made by the appellants on behalf of the French company. All that they did was to transmit orders received and until (they) had agreed to comply or complied with them, there was no contract". The fact that the place where the contract is made *\ay not ee miay be contrasted with Ogilvie v. Kitton 4 where a Canadian business was held to be partly carried on in England because the taxpayeistration office, factory, mine, or other fixed place of business but does not include an agency unless the agent has and habitually exercises, a general authority to negotiate and conclude contracts on ibehalf of the body corporate or maintains a stock of merchandise be(lloonnging to that body corporate from which he regularly fills orders on its behalf. A body corporate is not deemed to have an established place of business in Ghana merely because it carries on dealings in Ghana through a bona fide broker or general commission ageht acting in the ordinary course of his business as such. 5 _ .\S y As would emerge subsequently, this solution is similar to that adopted in double taxation agreements generally. But since no cases have yet arisen on their interpretation it is not clear how actually significant they are in practice. In the case of isolated transactions the general law should apply as 4 4. (1966) Ghana Income Tax Decree s.6(l)(a). 5. s.503 (3) Ghana Companies Code 1963* 91 discussed in Section 1 of this chapter. To make the position very clear, however, it should be provided categorically in the tax code that a non­ resident deriving income from on isolated transaction of a trading character 7 shall be held liable to tax as having carried on a trade in Nigeria. It is obvious that all the criteria hitherto discussed cannot be satis­ factorily applied to every kind of trading or business activity in order to determine "tax presence". The test3 applicable to some special trades e.g. shipping and airwayrbusiness, insurance and re-insurance, the export and import trade etc. have been deliberately omitted here as it is believed that they are better considered within another context. DETERMINATION OP PROFITS - ACCOUNTING AND RELATED PROBLEMS Thus far, various problems relating to the taxation of trading or business income have been examined, and in particular the concept of a trading or business income, the criteria for determining "tax presence" in Nigeria etc. This section is devoted to the computation of taxable profits. The approach remains the same, that is, to highlight the major issues especially those relating to matters not yet sufficiently dealt with by other Nigerian writers.® 6. i.e. on the question of "trade" or "no trade". It may be noted that the line between an isolated transaction and a "cursory activity" may not be all that clear. 7. Jamaica appears to have taken a similar steps. See s.5(2)(3) Jamaica Income Tax Act 1954 as amended. f ®* The commencement and discontinuance of trades; the basis periods and a number of other issues have ̂ ceen sufficiently dealt with by other Nigerian writers. E.g. 3ee C.S. Ola: Income Tax Law and Practice in Nigeria. • t Vhr? Basic Rule as supplemented by good Accounting Practice A taxpayer earning business income in Nigeria pays Nigerian tax on jross Nigerian source income less Nigerian source expenses. In order to arrive at the appropriate taxable profit the Income Tax Acts provide a 9 list of allowable and non-allowable expenditure. Since these rules are not nearly detailed enough, over the years the courts have been obliged to rely on “good accounting practice" to fill in gaps where the statutory rules are silent. However, because v/ords like "profit" have no single objective meaning, we immediately find ourselves in a predicament. Experience has shown that "good accounting practice" in many instances is an illusion because accountants are as divergent and subjective in their views and methods as psychiatrists or economists. Also, we know as a fact that there is no universally accepted system of accounting and that there are, perhaps, as many systems as there are countries.^ Strictly speaking, there is nothing in the Nigerian law compelling c,o mpanies to computAe their taxable profits according to recognised principles of accounting, except by an extended view of s.140 of the Companies Decree which requires that proper books of account be kept and stipulates that proper books are only deemed to have been kept where the books give a 9. Sections 27 , 28 CITA; ss. 17, 18 ITMA. 10. See The Times (London) December 7th, 1972. "ESC Problem for Accountants". In this article Sir Henry Benson, senior partner in the firm of Cooper Bros., pointed out that the accountancy standards and procedures in Europe are different from, and in some cases lower than the U.K's and that within the EEC countries standards varied widely. S3 "true and fair view" of the companies affairs and help to explain its transactions.^ It is interesting to note that unlike many o'ther countries, doing business in Nigeria does not imply the use of Nigerian accountants or accountants who are resident in the country. 2 Foreign subsidiaries in­ corporated in Nigeria may have their accounts audited by the same accounting firm employed by their parent company overseas. This gives room for wide variations in standards depending on whether the accounts are prepared in , Tokyo, London, New York or Amsterdam;^ and would seem to make nonsense of the concept of "separate and distinct entities" between subsidiaries and parent companies as envisaged in the 1968 Companies Decree. Further­ more, the use of foreign based accounting firms by Nigerian companies suggests the ipso facto acceptance of the accounting practice of several overseas countries. Vhile such a situation may not be objectionable per se, what is definitely objectionable is the unjustifiable and unnecessary strain on the Nigerian Revenue in trying to grasp the so-called "good accounting practice" of diverse oversea countries. Some would probably justify the use of foreigners on the ground that there is a shortage of locally based accountants. That was probably the case twenty years ago, but whether this is still so is very much doubtful. 1- The concept of ̂ 'true and fair view" is discussed presently. 2. Compare the position with Sweden where all companies have to use Swedish accountants. See J. Muten: "Tax Problems of Doing Business in Scandinavia" - (1968) B.T.R. 291 at 300. 3. The recent attempts to harmonise the accounting standards within the ESC may be noted here. See John Plender: "Agreement on EEC Accounting Principles" - The Times, London April 10, 1973* T 94 The compulsory use of locally based accountants would undoubtedly enhance the understanding of the business machinations of multinational, corpora­ tions.^ To allow these entities to engage oversea based accountants is a great mistake, the full implications of which have not yet dawned on the iligerian authorities. To illustrate how vague and elusive this concept of "good accounting practice" can be, and how difficult it is to apply let us look at a few decided cases."5 In the Australian case of J. Howe and Son Ptjy Ltd, v. C.O.T.^ store in Toowamba opened a credit saleiservice for the supply of household goods. The customer signed an undertaking to pay for the goods over a | period of years and the price included a service charge calculated at 11/j on the cost price of the goods. The taxpayer argued that the only item to be brought into his trading account, should be actual receipts in any year. The Court did not hesitate in rejecting this approach on the basis that it would give a result totally at variance with the true 4 4. Little is publicly known about the activities of multinational companies. But they are generally believed to conduct their affairs to the detriment of host states. The ESC,for example,is seeking ways to put multinational companies under tighter surveillance, and so narrow their scope for avoiding or reducing taxation in Europe. See Clyde J. Farnsworth;"ESC Tax Watch on Multinationals" - The Times, July 25th, 1973- 5- For a discussion of some of the problems in this area of law see Robert Burgess: "Revenue Law and Accountancy Practice"- (1972) B.T.R. 308. See also S.T. Crump;"Accounting Profits and Tax Profits," - (1959) B.T.R. 323. 6. [1971] 45 A.L.J.R. 21 affirmed by the full Court in [1971] 45 A.L.J.R. 428. See also FIflCON (Construction)Ltd. v. I.R.C. (1970) N.Z.L.R. 469. 95 prox'itability of the enterprise. In reality, as soon as the sale was nadc, the price was earned. Some discount could he allowed for the fact that the debts owing might not all be realised, but the proper valuation would be their worth to the company, not the value which they would fetch in the open market. The Court accepted that more sophisticated accounting techniques based on the concept of an "emerging profit" might produce a more accurate result, but doubted whether this was feasible. It concluded that in any case it was for the taxpayer to he wished to sustain. What is significant about the above case, is that the Court while recognising that there are substantial difference* between the English and Australian tax laws, nevertheless thought the differences were scarcely relevant to the questions of accounting and business procedure. Apart from the test of good accounting practice articulated by the courts, it would appear that this is not the only test because an accounting principle adopted in computing gross profits, though sound, may yet be n rejected. In B.S.C. Footwear Ltd, v. Ridgeway for example, the sole question in a case which finally divided the House of Lords three to two, was the method which the taxpayer should adopt for valuing his stock at the end of an accounting period. The traditional method which has been adopted for this purpose is "cost or market value whichever is the less". The taxpayer had for more than 30 years adopted a more sophisticated technique which was thought to give a better picture of the company's financial position by fairly allocating profits and losstjto different periods. This was, in essence, to value the stock at the price which the * 7* [1971] 2 W.L.R. 1313. For a review of this case see H.F. Bessemer Clark (1971) B.T.R. 318. 06 company would have been prepared to pay for it at the close of the account­ ing year given the price at which they then anticipated being able to sell it; which might be substantially less than cost. The taxpayer had 790 retail outlets for their shoe selling business, and they thus bought very large amount of stock. Changes in fashion or even vagaries of the weather might make these difficult to sell, save at special sale prices. The method of discounting the anticipated retail price by the company's normal retail mark up was disallowed by the House of Lords even though it was of long standing, gave a fair picture of the company's business, had been adopted on the advice of eminent accountants and would not result over the years in producing lower overall profit figures for tax purposes. It was con eded that the onus was on the Crown to show that the accounting method was wrong but the Court held that this burden had been discharged. It took the view that the company's method was artificial and unreal, and might result in tax liability being deferred even if not evaded. The favoured method for calculating profit for tax purposes was to value the stock at the price which can be obtained in the retail market taking into account salesmen's commission on each sale. To further illustrate the point, we may refer to the case of Chancery 0 Lane Safe Deposit and Offices Co. Ltd, v. I.R.C. the facts of which were as follows; The taxpayer company borrowed huge sums on mortgage from 1954 to 1957, reaching £650,000 in 1957. On the advice of its auditors it charged a certain proportion of the mortgage interest payments to capital in the accounts. During the years in question there were profits 8. [1966] A.C. 85. See also Regent Oil Co. v. Strick [1965] 3 V.L.H 636. 97 out of which that portion of interest might have been paid. The company was assessed to tax for the years 1954-1955 to 1958-1959 inclusive under s.170 of the Income Tax Act, 1952, on the ground that the portion of interest that was debited to capital account was in fact paid out of capital and not out of profits and gains brought into charge to tax. The company appealed to the Special Commissioners, claiming that these sums had been paid out of taxed income, although charged to capital in the accounts. It was held by the House of Lords, (Lord Reid and Lord Upjohn dissenting;, that the company having of its own free choice made a deliberate attribution having practical effects of the sum in question to capital, was precluded from subsequently making an inconsistent attribution and could not treat a payment actually made oCut orf capital as notionally made out of income; accordingly, it was liable to tax under s.170 of the Act. i/hile the correct principle of commercial accountancy was rejected in the above two cases, it was expressly accepted in Odeon Associated Theatres Ltd, v. Jones.^ In that case, the main question at issue was whether or not certain sums spent on "deferred repairs" could be properly treated as revenue. The facts were that during the last war Odeon acquired a number of cinemas, among them the "Regal" in Marble Arch. During the war years because of restrictions then in force, it had been impossible to spend more than minimal suns to keep cinemas in repair. So, at the time of the purchase, January 1945, the Regal was somewhat run down and in need of repair. In 9. [1971] 1 W.L.R. 442 93 e^ch year fron 1945 to 1959 Odeon spent substantial suns of noney on repairs and renewals. Sonc of this noney was charged in their accounts as revenue expenditure spent on current repairs and renewals; other sums spent during this period were charged in the accounts as revenue expenditure nude in respect of deferred repairs and renewals. The reuson for this distinction was that Odeon wished to take the benefit of s.57 of the finance Act 1946 which provided that suns spent on deferred repairs could be credited against liability to excess profits tax. . . The Revenue contended that these latter sums were capital and, there­ fore, not allowable. Odeon claimed that they were properly so made and that as such they were properly allowable revenue expenses. Allowing the taxpayer's appeal from the decision of the Special Commissioners, Pennycuick, V.C., held inter-alia that since the expenditure was referrable to revenue account according to t he correct principles of commercial accountancy, and since there was no contrary authority it was deductible. To continue our discussion on the concept of good commercial accounting practice, it ought to be emphasized that not always is a point of law at issue, (i.e. whether an item is to be credited to revenue or capital). Often, the sole task of the court may be to choose between two competing figures produced by two competing accountancy techniques. In order to impeach a particular system the Revenue must do two things/ First, they must establish that the method used by the taxpayer has defects and that the results of these defects is that the accounts 1• See Robert Burgess, op. cit., at page 317. present an inaccurate picture for the purposes of income taxation. As Lord Pearson said in the B.S.C. Footwear case: "In order to do this I think that the Inland Revenue must show that the system is likely to produce (results) which are seriously and substantially incorrect and there­ by cause a distortion of the assessment of the profits and gains for the year. If this is the effect of the system, the taxpayer cannot succeed Secondly, the Revenue must provide an alternative and "3how that their method is, if not the right one, at least a better one".^ If nothing else, the cases discussed thus far show that it is usually possible for honest and skilled men to produce widely different calculations of profit from the same trading figures depending on the purpose for which the calculation is required. In tax cases, the taxpayer normally benefits by showing a low profit, therefore, it is not surprising if figures are produced which show a lower profit than would quite properly have been produced had the taxpayer been concerned to sell his shareholding or resist a take-over bid. The essential point to note is that accounts must be drawn up in a way which is not only accurate, but also fair and reasonable. And the Courts must be prepared to rule on that issue in the light of the sometimes divergent interests of shareholders and the Revenue. 23 2. Op. cit.. at page 1331 3. Per Viscount Dilhorne [1971] 2 W.L.R. p. 1313 at page 1328. B. The Concept of "True and Fair Accounts" The Nigerian law requires that a "Profit and Loss" account or an income and expenditure account, as well as a Balance Sheet be produced at intervals for the benefit of the members of the company. A These documents are required to give a "true and fair view" of the profit or loss of the company for the corresponding period in question.5 Similarly, group accounts must give a "true and fair view" of the state of affairs and the profit and loss of a company and its subsidiaries. • .O v All accounts are required to fulfil the same detailed requirements spelt out in Schedule 8 of the Decree, 7 and as far as possible it is expected i that a holding company and its subsidiary would have the same financial year. 8 The parent-subsidiary relationship referred to here is one in which both companies are incorporated in Nigeria, something which must not be confused with the more importmt situation where only the foreign subsidiary is incorporated or vice versa. A critical analysis of the words "true and fair" show that unless the words are given an adequate interpretation, the accounts of companies may represent a set of figures which have some meaning to those who were 4. s.141(1); s.14l(2) Cos. Decree 1968. 5. 8.142(1); « " ■ 6. 8.145(1); " " " 7. 8.142(2) Cos. Decree 1968. 8. 3.146(1 ) Cos. Decree 1968. 101 party to the preparation of the accounts but to no one else. Historically, when the words "true and fair" were first introduced, a literal or almost literal meaning was given to them. However, it will appear that today a technical interpretation has been adopted by accountants which does not allow the investor, shareholder or the Revenue to gain an accurate insightinto the affairs of a company.”9 A The primary purpose of the annual accounts of a bustiinneess iis to present information to the proprietors showing how their fundsQ hra>ve been utilized and the profits derived from such use. But it has 3long been accepted in accountancy practice that a balance sheeft prepvareVd for this purpose i3 an historical record and not a statement of current worth. 10 Kuch to our regret, the courts have been reluctant to interfere, 1 with the result that we are left to the mercy of the accountant who has been given full reign to prepare company accounts in accordance with what the law imagines are well "defined rules of accountancy" aimed at representing the "true and fair", or correct state of affairs of a company. Indeed, so much latitude have been ^iven to accountants that Buckley, J., once stated inter alia that / / 9. H. Bait: "True and Fair Accounts" (1970) A.L.J. 54. See also A.A. Berle Jr., and Frederick S. Fisher Jr: "Elements of the Law of Business Accounting" 32 Columbia L.H. 573. 10. This is the view of the Institute of Chartered Accountants of England and Vales as endorsed by the Jenkins Committee Cmnd. 1749 para. 333 and the Cohen Committee before it. Cmnd. 6659 P* 54, 55. For a pro­ posed modification of the orthodox view. See "The Times" London, January 17th, 1973. The Accounting Standards Steering Committee has proposed to "establish a standard method for calculating the effect of changes in the purchasing power of money on conventional historical cost accounting, etc. etc." 1 . The courts will intervene, however, where an accountant has taken a mistaken view of the Law. e.g. in Ifeter Merchant Ltd, v. Stedford (1948) 30 T.C. 496; Owen v. Southern Railway of Peru [1957J A.C. 334; 36 T.C. 602. Lord MacNaughten in Davey v. Corey L19°1 J A *c* 477 at p. 488. 102 "If a balance sheet be so worded as to show that there is an undisclosed asset (e.g. a secret reserve) the existence of which makes the financial position better than shown, such a balance sheet will not in my judgement, be necessarily inconsistent with the Acts of Parliament. Assets are often^by reasons of pruJtrtce., estimated, and stated to be estimated,at less than their probable real value. The purpose of the balance sheet is primarily to show that the financial position of the company is as good as there stated, and not to show that it is not or may not be better." 2 The implication of the above is #<£ ac< counts are not necessarily to show the true position of a company; and that all that is required i3 that a company is not worse off than shown. Luckily, the view taken by ♦ 3 Buckley, J., was subjected to criticism in R. v. Klysant and "overruled" by the Cohen Committee. K The objections urged against undisclosed reserves can be summarised as follovs: If assets are under-valued or liabilities overstated, the balance sheet does not present a true picture of the state of the company's affairs; the balance of profit disclosed as available for dividends is diminished and the market value of the shares may accordingly be lower than it might otherwise be. The creation, existence, or the use of *3 2. Newton v. Birmingham Small Arms Co. Ltd £19063 2 Ch. 378 at 387. . 3- [1932] K.B. 442. 4. Paragraph 101 pp. 56 - 5 7 . reserves known only to the directors may place them in an invidious position when buying or selling shares. On the other hand, if there ie no detailed disclosure in the profit and loss account, undisclosed reserves accumulated in past periods may be used to swell the profits in years when the company is faring badly and the shareholders may be misled into thinking that the company is making profit when such is not the case. Where there is an impeding expropriation, therefore, there is always a lot of controversy about what the actual value of a company's assets are, particularly, in the oil industry. To say the least, we agree with R. Bax:tt ^ and others who suggest that there is no reason why the accounts of a company should not reflect its true position. 6 The requirement of the balance sheet which appear in the relevant schedules of Companies Acts are not exhaustive enough. This is probably why the common law countries have tacitly allowed the accounting profession to lay down its own rules for the purposes of the Acts. That the profession has failed to present any set of rules which may be referred to as "generally accepted accounting principles" is not open to much doubt. The phrase "generally accepted accounting principles", it is submitted, is an empty one. But whether the courts or legislators are prepared to allow these "principles" to remain as "law" is a matter to be seen in due course. 5. Op. cit.. at page 550* Only recently John Plender has suggested that only a government inspired change can alter the situation, and that to expect the Accounting profession to produce a more meaningful system of financial reporting from within is wishful thinking. Cf. "The Times" London January 17th 1973* 6. Except where tax policy decides otherwise. From our foregoing discussion certain conclusions emerge. Firstly, the need for a harmonisation of accounting concepts and procedures as a part of any process of economic integration;? and, in particular, in double taxation agreements etc. Secondly, the mistake already alluded to of allowing foreign subsidiaries in Nigeria to employ oversea based accountants. Above all, the very worthless and misleading nature of company accounts generally. rganisations etc. In this section certain aspects of the problem are examined. Whereas, all companies incorporated in Nigeria are legally bound to keep proper books of accounts the activities of the majority of individual traders are hardly documented. This is due partly to the migratory or seasonal nature of their trade, and partly to the illiteracy and lack of expertise by the traders themselves. Generally speaking, no proper books of accounts are kept and there are no clear-cut commencement or termination of trading activities by petty traders and the like because of the often . q intermittent nature of such activities. 789 7. In this regard, some progress has been made tovards international co­ operation. Cf. E. Kenneth Wright (President of the Institute of Chartered Accountants in England and Wales): "Towards World Standard of Accounting" - The Times (U.K.) 5th July 1973* 8. s. I40(l). Companies Decree 1968. Note that proper books of accounts are deemed to have been kept only if the records are such as to give a "true and fair" view of the state of the company's affairs and help to explain its transactions. 9. For Income Tax Purposes, there is usually a Basis Period. See Part IV. ITMA "Ascertainment of Assessable Income" 105 The Nigerian authorities have been at pains for years in an endeavour to determine the volume and exact nature of trade between Nigeria and her neighbouring countries. The exercise has not been very successful due to a large number of factors peculiar to Africa. Firstly, traders are difficult to identify because every African is potentially one. To understand the position, just imagine a situation where the houses in a town are unnumbered or if numbered, are done in a haphazard manner without any logical sequence. Or, consider the position where the movement of persons across frontiers are not properly recorded. Under these conditions it is clearly difficult to keep track of any trading or business activity done. The issue is further complicated by the fact that where an individual is liable to Nigerian tax on his Nigerian source income, it is left to the Revenue authorities of his place of residence to actually assess and collect the tax.1^ This provision, ostensibly to prevent internal double taxation in a federal set up, is exploited by African merchants who come into Nigeria. They are able to evade tax because of a technicality of the law since they would probably have no identifiable place of residence in any of the twelve states of the Federation. The other point we wish to. make is that in countries where people make little use of banking facilities and do not bother to claim capital allowances or loss relief, it is very difficult to determine their taxable income with any degree of accuracy. Because of the magnitude of the prvfc>U*vv 10. 8.76(2) 1963 Constitution reserves the right of personal taxation to the States. Note ITMA Schedule 3 for rules on the determination of Residence. 106 a public call has recently been made on Nigerian traders to adopt an accounting system. Professor Tugbiyele believes that it may, in fact, be necessary for the Federal Government to decree that all small scale business-men in Nigeria must adopt a basic accounting system. The authorities could help, it is argued, by printing simple accounting forms for free distribution or at a nominal fee. 1 r * income tax computation. From these it is seen whether the company has made a "net profit" or sustained a "net loss”. But the "net profit" of a company and its "statutory income" are two different things. Since it is on 1he latter that tax is levied, the former must.therefore.be scrutinised and adjusted in order to arrive at the latter. This process of adjustment is necessary for two reasons: (a) Firstly, in the preparation of business accounts, accountants take into consideration the fact that capital is consumed in producing income thus necessitating an appropriation for depreciation. Under the tax Acts, however, depreciation is not an allowable item as it is taken care of by the Capital Allowances Schedule, (b) Secondly, certain peculiar "expenses" or "application of income" allowed by accountants in pursuance of their so-called "good accounting practice" are, in actual fact, contrary to the provisions of the tax Acts. The general proposition is that deductions allowable in ascertaining the income or loss of an individual, or the profit or loss of any company are restricted to outgoings and expenses which are "wholly, exclusively and necessarily" incurred during the year of assessment for the purposes I / • '• 111 of obtaining income.^ From the above, two conclusions come to mind. Firstly, that the proper interpretation of the expression "wholly, exclusively and necessarily" incurred is of fundamental importance as much else depends on it. Secondly, that the most significant item in the preparation of the profit and loss account are "expenses". On a purely domestic level, the expression "wholly, eOxcl-u*sively and necessarily" has been the su■bject of countless judicial decisions in several tax jurisdictions. 4 To these, the Nigerian courts would likely turn for guidance. Interesting as some of these cases are, they show how strict, arbitrary and inflexible the rule is. This is especially true in the case of the United Kingdom where no 3um is allowed as an expense incurred in the production of income once there is a duality of purpose. 5 On a higher level of abstraction,and of much more relevance to our study, are the criteria for the allocation of items of income and expense between related corpor-atio ns in different states who are not parties to a tax conventiLon. 1" The precise example we have in mind are the parent- subsidiary relationships of foreign companies who dominate the Nigerian economy. The issues are more fully considered subsequently. 3« s.17(l) ITMA; 3.27 CITA as amended by s.50)» (2) of the Income Tax (Amendme t) Decree 1966 Do. 65 of 1966. 4* E.g. Bentleys, Stokes and Lowless v. Beeson [l952J 33 T.C.491 (C.A.); Norman v. Colder 1*19441 26 T.C. 293 (C.A.); Prince v. Mapp [1969] 46 T.C. 169. 5* For an analysis of these provisions in relation to the Nigerian law see Chapter IV. 6. The allocation of items of profits and expense between corporation* in different states which are party to a tax treaty are considered in Chapter VII. 1 1 The mechanics of profit adjustment involves a series of "add backs" and "deductions". 7 In other words, adding back to the net profits shown per account any expenses which have been debited before arriving at the profits but which specifically disallowed by the Acts, as well as certain other classes of expenditure normally met with in conducting a business or exercising a trade. The latter category of expenses dis­ allowed include expenses which are not "wholly, exclusively and necessarily incurred for the purposes of the business; losses which\ a>re not connected with, or arising out of the trade or business; expenses or losses of a capital nature which may have been charged in the profits and los3 account as a matter of prudence e.g. improvements to premises or plants etc. Also disallowable are ostensible expenses which are in reality an application of profits. For example, income tax paid in another juris- diction has been held in Bookers Demerara Sugar Estates Ltd, v. C.O.T. 8 to be an appropriation of profits, and not a charge in arriving at the profits. In that case, the appellant was a company incorporated in England and registered in the then Colony of Guiana. The question was whether income tax payable in the U.K. was a deductible expense for the purpose of the colony tax. The Court rejected the appellants contention on the grouni /d)so Hthat U.K. income tax was not an expenditure laid out by the appellants for the purposes of earning profits. Also to be added back to the net profit are all transfers to reserves (whether or not made against anticipated losses); voluntary gifts; dividends and sums apportioned to the proprietors of the business etc. 7. i.e. in accordance v£ch a statutory list of allowable and non­ allowable expenditure. $ 8. [l955] L.R.B.G. 166. On the other hand, certain items of income which have been credited in the accounts may be deducted from the net profits. For example, items of income which have been specifically exempted from income tax by virtue of the Third Schedule of ITMA of s.26 of CITA. These include interests on Post Office Savings Account, or interest on other government securities; dividends which are categorically exempt from tax; (e.g. Pioneer dividends and dividends from Petroleum Companies). Also deductible from the net profits are items which are not taxable at all (i.e. Capital receipts and profits or gains not derived from a trade or business). Usually, in the adjustment of accounts for income ten purposes the taxpayer may charge revenue to capital or vice versa as the case may be. But a taxpayer, is not permitted to claim for income tax purposes, that a payment it has made is an income as opposed to a capital payment if it has clearly asserted in its company accounts that the payment was of a q capital nature. In B.W. Kobes and Co. Ltd, v. I.R.C. tha taxpayer company had set off, in its company accounts, certain annual payments made by it under a share transaction agreement against capital receipts of identical amounts in each instance. It claimed that was entitled to adjust its accounts for income tax purposes so that the annual payments were set off against taxed profits. The company had also distributed dividends out of it3 trading profits broadly equivalent in amount to such profits. Under company law, the carry forward on the profit and loss account each year was not sufficient to enable both the dividends and annual payments to be made out of profits and revenue reserves but under that law the annual payments could be properly 9. [1965] 1 V.L.R. 229 (C.A.); Decision affirmed by the House of Lords [1966] 1 V.L.R. 111 114 debited to capital account . The Court of Appeal reversing the decision of Plowman, J., in the High Court, upheld the Revenue's contention that once the company had clearly asserted that the payments were made out of capital, it could not thereafter claim that for tax purposes they were in­ come payments. What must be emphasized is that the Nobes Case illustra* tea an imoortant principle of public election which binds the taxpayer in preparing his tax accounts from company accounts. The process of profit adjustment is complete only when the "total profits" 10of an individual or company are determined. Since a taxpayer Kp * may derive income from several sources, these have to be summed up in order to arrive at his total profits. For example, a company whose main business is wholesale trading may also own property from which it receives rent. If the two or more operations are unconnected, they may be regarded as separate sources for the purposes of ascertaining his total profits. Briefly then, the total profits of a company for a year of assessment consists of the total assessable profits from all sources for that year; plus any balancing charge arising from the disposal of assets; less any capital allowances claimed; and taking into account any claims for losses. As a background to Section IV, we now wish to comment on a hitherto unused provision of the Companies Income Tax Act 1961 which could be of the utmost importance.viz The Scrutineer Committee. 10. s.31 CITA; s. 21 (1) I Tiwft * E. Scrutiny of Accounts In anticipation of incompleteness of submitted company accounts, the Act provides that there shall be established one or more Scrutineer Committees for the purposes of making recommendations in relation to the ’ 1 assessment of profits of companies and to clainufor losses by companies. The criteria for membership of this Committee is that the appointee shall "have had experience and shown capacity in the management of a substantial trade or business or the exercise of a profession in Nigeria". Once a Scrutineer Committee is established, the Board of Inland Revenue cannot make any tax assessment on a company without the consent of the Committee. It is, therefore, obliged to prepare a list of companies and to indicate the amount of the assessable profits which to include in the computation of for the purposes of making any tax The duty of the Scrutineer Commit ee as the name implies is to dissect and scrutinise accounts. And in order to accomplish this, it is vested 4. with wide powers. With respect to-the proposed amount of assessable profits shown against the name of any company on the list produced at its meeting, the Committee may inquire of its secretary, inter-alia, the nature of the source and the period over which such profits arose; whether the proposed amount was estimated either in the absence of a return, statement, or account, or upon the rejection thereof as unsatisfactory; or was estimated or computed having regard to any such returns, statement or account. The Secretary is further obliged to furnish at the chairman 1 * 8.9(1) CITA. 2- s.9(3)(a) CITA. 3. 8.10 CITA- 4* 3.11(3) CITA. 5• s.1l(4)(a) CITA. 1 1 6 request any return, statement, account or other document received by the Revenue in connection with the determination of such profits; and if considered necessary to inform the Committee of the assessable profits of a particular company for the three preceding years.^ The important point to note is that if after making the above inquiries and using its local or general knowledge of a particular company or of any trade or business, the Committee is of the opinion that the proposed amount of assessment is insufficient, the chairman shall at such meeting record in writing against the proposed amount the revised amount which the Committee recommends and the reasons for such recommendation. 7 Subject to the usual right of appeal, the Revenue must compliyy.. Where any company has incurred a loss, before the amount of the loss is admitted or determined, the Committee must scrutinise the amount of Q assessable profits. (Calling for books, statements etc.). Having outlined the position above, a few observations may;be made. Firstly, that the provision for a Scrutineer Committee is one of those numerous instances in which Nigeria has a good law which is not put into effect. Why for example has a Scrutineer Committee not been set up? The second point we wish to make is that were such a Committee to be established in future, the present laid down criteria for membership must be reconsidered. It is believed that a man who has "had experience and shown capacity in the management of a substantial trade or business or in 6. s.1l(4)(b)(i)(ii) CIT1 . 7. s.11(4)(c) CITA . 8. s.13 CITA . t r the exercise of a profession in Nigeria" may yet be totally unacquainted with the intricacies of international business, the complex operations of multinational corporations, and the technicalities of the tax law. What is clearly needed is the use of accomplished experts. In other words, the appointment of accountants, economists, lawyers and other similarly skilled men on Scrutineer Committees. It must be accepted that taxation i3 a highly specialised subject and that the best "Scrutilneers" of company accounts prepared by accountants are the accountants themselves. The third point we wish to highlight is the modus operandi of the Scrutineer Committee as prescribed by law. How exactly is thi3 Committee to make or revise an assessment using its "local or general knowledge" of a particular company or trade? If the papers submitted do not reveal the whole truth about a company, how is ommittee to obtain further in­ formation? Can it be by hearsay evidence or the use of informants, spies etc.? What is the position when the activities of a company transcends several tax jurisdictions? Without appearing to be cynical can it not be said that the procedure to be adopted by the Scrutineer Committee is analogous to the so-called "best of judgement assessment"? 9 At the present stage of Nigeria's economic development a much more sophisticated approach would be required. Fourthly, what are the rights of the taxpayer before the Scrutineer Committee to know the allegations against him; to make representations, to be represented by accountants, lawyers etc.? Apart from a general 9. This is a rough and ready method of assessment adopted sometimes by the Revenue when proper records are lacking. / 113 right of appeal to the Commissioners and to the High Court, the law is silent on these important matters. In these circumstances, our submission is that the taxpayer must be given the opportunity to explain his transactions when his books are being examined by a Scrutineer Committee prior to the making of an actual assess­ ment. To be given the right to appeal only when an assessment has been made is unfair. One area in which the Scrutiny of accounts is a must, is the alloca­ tion of income and expense between related entities under common control. Such is the importance of the subject that it formed part of the agenda of the 25th Congress of the International Fiscal 4Association held in Washington in 1971. 10 The next section liooks in more detail at the issues involved. DETERMINATION OF PROFITS ALLOCATION OF DJCOKE AND EXPENSE BSTWEEN RET,ATCT> EttTTTTES The discussion here is in terms of a parent corporation and a sub­ sidiary assumed to be resident in different countries hereinafter referred to as the parent's country and the subsidiary'3 country. That is, Nigeria and an overseas country a3 the case may be. The tax involved referred to as "income tax" must be understood to cover corporation tax. 10. Cf. Stanley S. Surrey and David R. Tillinghast: "Criteria for the allocation of items of Income and Expense Between Related Corporations in different states. Whether or Not Parties to a T&* Convention". Cahiers de Droit Fiscal International (1971) Vol. LVI lb) General Report page 1/1 et seq. 113 super tax or profits tax usually applicable under income tax law and to some extent withholding taxes imposed on various payments to foreign entities. A. Why Rules of Allocation? The economic stakes for tax systems and tax authorities make rules of allocation necessary. Where for example, the parent's country has a relatively high income tax (say 50^) and the subsidiary's country a much lower rate (say 20̂ >), the differential in rates can be a temptation for the parent corporation to lodge in the subsidiary corporation income arising from the activities of the two corporations. This can happen when the parent sells goods to the subsidiary for a resale by the latter, which retains a larger share of the profit with the idea of securing a tax advantage for the related entities. An overall tax saving on the trans­ ♦ action results if two conditions exist; first, if the parent's country does not concurrently tax income of the subsidiary when earned (and most tax systems do not), and secondly if either (i) the parent's country does not tax dividends or other payments to the parent from the subsidiary, or (ii) the subsidiary has a use for the income it receives either on its own operations or as an investment in operating companies which it controls and thus will not return it as a dividend or other taxable payment to the parent. The real question is, will this temptation be acted upon by companies engaged in international business? If tax systems permitted such companies to arrange their inter—company transactions to take advantage of the differential in tax rates, experience has shown that in many cases companies would respond to the situation, and achieve the tax saving. Income like water flows to areas of lower taxation. In theory, therefore, the country with the higher rate will lose revenue, and the country with the lower rate will gain. But since transactions may flow from parent to subsidiaries,from subsidiaries to parent, or between subsidiaries, there cannot be any general assumption as to which country - parent's or subsidiary' 3 - will be the ul timate loser. There are, of course, a variety of situations < & h i iL ch other factors may exert a stronger and contrary pull to the attraction of tax rates. An example that comes to mind is the presence of losses in one country against which international profits can be offset. Examples of non-tax considera­ tions are the effect of exchange controls, monetary or governmental in­ stability in a particular country, a desire to satisfy the national economic aspirations of a given country and a variety of other commercial considera­ tions. As international business grows in volume and concentration and among larger enterprises, would the tax authorities around the world be content to allow the executives of these enterprises to allocate the revenue of the countries touched by their operations? Most countries recognise the economic stakes and their tax systems provide their tax authorities with powers to examine international transactions so as to protect the country's revenue. Modern tax treaties too provide for such examination. 1 1 1 • For a detailed discussion of the various methods of profit allocation under the tax treaties see Chapter VII. Looking at the other side of the coin, the problem faced by the taxpayer in a situation where each country can assert its own tax sovereignty and stipulate its own rules of allocation must be acknowledged. Often, the taxpayer has to comply with rules of allocation which are not well articulated. If the Revenue of one country applies its rules of allocation to change the international division of profit arising under the taxpayer's arrangement of a transaction, the immediate dilemna facing the taxpayer i3 whether the tax authorities of the other country will recognise the allocation so as to permit the latter country's portion of the transaction to be recast in a complementary manner. This is crucial because rules of allocation between countries may vary in content and application. X ) ' /vX Where for example, the tax authorities in the parent's country require interest to be charged on an inter-company loan, and, therefore, tax such "interest income" to the parent, the question is whether the subsidiary's country will recognise the interest charge and permit a resulting payment from the subsidiary to be treated for purposes of its laws as an "interest coat". Similarly, if the tax authorities in the parent's country, increase the price at which goods are transferred to the subsidiary, would the subsidiary's country recognise the price increase and, hence, reduce the subsidiary's taxable profit on its resale of the goods? A failure by the subsidiary's country to permit necessary complementary adjustment could result in two countries together finding a total taxable profit on a transaction greater than the "economic profit", since the allocated item is considered an element of profit on both sides. This raises the spectre of "economic double taxation" which may be no less costly than "juridical double taxation". Furthermore, it is interesting 1 9 ? — >V r * to observe that if the parent's country uses an exemption system for foreign income, then the parent in effect bears the additional cost of the subsidiary country's tax on the duplicated profit. The same is equally true where the parent's country uses a foreign tax credit system but does not recognise the tax paid by the subsidiary as creditable, iihere the parent's country use3 a foreign tax credit which takes into account the corporate tax paid by the subsidiary, the additional cost may or may not be borne by the parent. To the extent that it is, the parent country will in effect suffer the same revenue loss that it sought to avoid in initiating the allocation. The problem faced by taxpayers when rules of allocation are applied, are genuine and substantial. As a consequence, while taxpayers on the one'hand can be asked to recognise the national needs of countries to have rules of allocation based on the economic stakes earlier described, « • the tax authorities on the other hand must accept that rules of allocation and the procedures for applying them should take account of the problems faced by taxpayers. The fact that a particular country, for whatever reasons, may not desire to initiate many allocations on its part does not relieve that country of the responsibility for responding in a proper manner to the allocation initiated by other countries. B* Rules of Allocation Under Nigerian Law The Revenue on legal grounds may re-adjust transactions between related or unrelated parties which do not meet certain requirements. 2 2. s.25 CIIA; s. 14 ITMA. Broadly speaking, the applicable rules fall into two categories (a) pro­ visions dealing specifically with the readjustment of transactions between related entities,^ (b) re-adjustment of transactions achieved by applying the general rules governing the determination of income. 4 The former provisions basically state that transactions which differ from those which would have been made between independent parties dealing at "arm's length" and which consequently reduce the taxpayer's income shall be disregarded by the Revenue. Example of the latter are provisions discussed in Chapter IV which stipulate that only expenses "wholly, exclusively and necessarily" incurred for the production of income can be deducted in computing taxable income, and that other expenses cannot be deducted. The intercompany transfer of goods and services and the prices paid thereon is a major problem of international tax law. With developing countries it is a very crucial problem indeed. For instance, where there is a strict foreign exchange regime governing the repatriation of profits, interests, dividends and other factor payments, foreign subsi­ diaries can yet take out substantial amounts of profit by irregular inter­ company pricing of goods and services. Phenomenal increases in cost could arise by means of what is politely called a transfer price mechanism viz, a "discretionary pricing of inter-company transfers of goods and services at a higher or lower amount than for value received""* 345 3. s.25(2)(ii) CITA; s . U (3)(ii) ITMA 4. s.17, 18 ITMA; s. 27, s.28 CITA 5. Olaseni Akintola - Bello: Transfer of Industrial Technology to Developing Countries through Direct Private Investment. M.A. Thesis (l971), Sussex University at page 109. For a recent example see Daily Times (Nigeria) November 19th 1972 page 24* Report of probe into an Ikeja (Lagos) company for several malpractices e.g. transferring money abroad by raising the prices of all goods coming to Nigeria through the company from abroad. Evidently, by the proper application of the allocation rules under iiigerian law, prices paid or prices received differing from those which would have resulted from transactions between unrelated parties dealing at "anas length" may not be taken into account for the determination of taxable income. But the great fl<*w in the law is the presumption that an objective price can always be arrived at on the basis of a hypothetical transaction between unrelated parties dealing in the same or simil.ar goods under comparable circumstances. Experience tells us, however, that this is not always possible. Where an objective price cannot be determined, a price based upon cost plus a predetermined percentage profit can be used. This is supportable on an assumption that implicit in an "arm's length" dealing is a profit element; even though, relatively sophisticated concepts such as "incremental costing" and "market penetration" are cited as examples of situations when a profit element need not be present. As it seems, the Nigerian allocation rules are applicable to both domestic and foreign related taxpayers. This is different -f>o« what obtains in some other countries where the treatment of transactions between related corporations if both are domestic, is not the same where one is non-resident. The substance of these rules in the latter situation is to disallow the deduction of certain payments made by the domestic subsi­ diary to its foreign parent and automatically, therefore, to consider these payments as a distribution of profits. Such a provision exists in the United Kingdom for certain interests and royalties paid by a British company to a foreign parent.^ In many instances, Argentine law and 6. Cf. s. 235 ICTA 1970 - Meaning of a "distribution" under the U.K. tax laws. 1 administrative practice follow a similar rule» the rule is based on the principle that when a subsidiary forms an "economic unit" or has a "community of interest" with it3 parent company, the payments made to the parent have the character of a distribution of profits.7 In these situations, there is no need for the tax authorities to consider a "re­ adjustment" of these payments. Considering the volume of inter-company transactio ly the inter-company pricing of goods and services between Ni idiaries and their oversea parent companies, it is quite clear that the Revenue must be vigilant in order to ensure that profits which are properly liable to Nigerian tax are not transferred Since the purpose of the provisions dealing with re-allocation is to reflect the profit which would have rVessu/lted from transactions between unrelated parties, must a tax avoidance motive be present or proved to sustain a re-allocation under Nigerian law? The relevant section of If the law provides that: ( £ > "where the Board is of the opinion that any disposition is not given effect to, or that any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, it may disregard such dis­ position or direct that such adjustment shall be made as respects liability to tax as it considers appropriate • etc. etc.^ There has been no Nigerian case on this section but it is, perhaps, 7. Stanley S. Surrey and David R. Tillinghast o p . cit at page 1/8 8. 3.25(1) CITA; s. H(l) ITMA I'O c;? •*. —* correct to state that a tax avoidance motive must exist to sustain a re- allocation. 9 Irfe take thi3 view because not all transactions "which reduce" or are likely to "reduce the amount of any tax payable" are artificial or fictitious. It is a fact of life that there are perfectly legitimate reasons why transactions between parties may be based entirely on non-commercial considerations. The above may be compared with the Australia 1„0 and New \ taxed if the "freedom of commerce and navigation" as envisaged by inter­ national law is to have any meaning? (2) What exactly are the specie of profits to be covered? (3) Recognising that the majority of ships and aircraft are owned by residents of developed countries, how can developing countries exercise their tax jurisdiction to ensure that they get an adequate share of the profits resulting from the carrying of passengers and goods to and from their territories? lii) Liability under Nigerian Law: Where a carrier enterprise other than a Nigerian company carries on the business of transport by sea or air, and any ship or aircraft owned or or chartered by it calls at any port or airport in Nigeria, its profit or loss deemed to be derived from Nigeria are the full profit or los3 arising from the carriage of passengers, mails, livestock or goods shipped or loaded into an aircraft in Nigeria. 2 This in effect is an application of the "source" concept although not so explicitly stated. It is interesting to note that in spite of the often quoted Companies Decree 1968, the Nigerian authorities have not insisted that all ships or aircraftsjccalling in Nigeria must belong to companies incorporated in Nigeria. This approach i3 correct as international trade is likely to •X be hampered were nations to behave otherwise. 23 2. s. 19 CITA. 3. Where ships from non-resident companies carry on trade with Nigeria, they are nevertheless liable to local taxation. 132 Although the tax Code is not quite explicit on this point, what is clearly intended to be covered are profits from the operation of ships or 4 aircrafts in international traffic. This is in accordance with inter­ national usage a3 evidenced in the various double taxation treaties, 5 noteably, the OECD Draft. The proviso to s.19 CITA exempts from taxation in Nigeria incidental profits arising where passengers, mails, livestock or goods have been brought into the country solely for trans-shipment or for transfer from one aircraft to another. As we understand it, this amounts to a restriction of the "source" concept. Perhaps, also taxable are other classes of profit, that is, those which by reason of their nature or their close relationship with the profits directly obtained from shipping and aircraft transport may be placed in the same category. For example, the profits obtained by leasing a ship or aircraft on charter fully equipped, manned and supplied must be treated like the profits from the carriage of passengers and cargo. Unless this is so, a great deal of business of shipping and air transport would not come within the scope of the tax provisions. 6 ________________ d r .:...-________ 4. We can easily infer this from s.26(l)(g) CITA. The case of Furness, Withy and Co. Ltd, v. H.N.R. (1968) 66 D.L.R. (2nd) 657 (S.C.)(Canada) is also helpful here. The taxpayer in that case tried to claim an exemption under the Canada - U.K. double Taxation Agreement which is usually accorded to shipowners on the grounds that the profits from his stevedoring activities in Canada were analogous to the profits from the operation of a ship. 5. Cf. OECD Draft, Article 8. 6. Cf. Commentaries on OECD Draft at pages 0̂-91 where the whole specie of profits anciliary to international carrier enterprises were explains' While the profits from the sale of tickets on behalf of other enter­ prises may be included, a bare boat charter was excluded. 153 If under the law, an international carrier enterprise is to be taxed on its Nigerian source income, how precisely is this to be achieved? Theoretically, it would seem that where the company furnishes a ratio certificate from the taxing authority responsible for assessing its full profits (showing the ratio of the gross profits and of the relevant allowances for depreciation to the total receipts for fares and freight), its profits for tax purposes in Nigeria are obtained by applying the first ratio to the receipts for Nigerian fares and freight and the allowances for depreciation are computed by applying the second ratio to those receipts. 7 Where the ratio basis cannot be satisfactorily applied at the time of assessment, the profits in Nigeria may be computed, on a fair and reasonable percentage of the receipts for Nigerian fares and freight, subject to the company's right to claim within six years after the relevant year of assess- ment that its liability be recomputed on the ratio basis.8 Where there is no tax treaty, the Nigerian Revenue has chosen to follow what was meant to be an exception to the mle, rather than the rule itself.. To avoid complicated calculations it assumes that the amount of taxable profits accruing from Nigeria is ten per cent of gross freight earned by carrying passengers, goods etc.to and from Nigeria, multiplied by the standard rate of income tax. The great virtue of this method is its simplicity, but whether Nigeria is getting as much as it ought to get is difficult to say. The precise mode of taxing a "Nigerian company" 9 derivi• ng profi•ts 7. s. 19(2) CITA 8. s . 19(3) c m 9. As defined in s. 2 CITA,i.e., a company whose management and control are exercised in Nigeria. / - T N a \v 154 fron international traffic is obscure because the Code is silent on this « vital point. It is, however, a matter of doubt whether a shipping company whose "control and management" are exercised in Nigeria and, there­ fore, technically a "Nigerian company" would be taxed on it3 global profits as provided by law without regard to the fact that such profits might have been subjected to taxation elsewhere. 10 In our view, the appropriate thing to do is to tax Nigerian carrier enterprises engaged in international traffic on their Nigerian source income determined as i. case of a non-Nigerian company. Admittedly, our suggestion, though realistic, seems contrary to the tax Code. In common with many other countries, Nigeria exempts the profits of a foreign carrier enterprise from tax provided that the country of residence of the operator gives an equivalent exemption to Nigerian Companies.^ Several legal problems are raised by these provisions. To which country does the tax exemption apply? Is it to the country of residence of a company operating a ship or aircraft or to the country under whose flag the ship or aircraft operates? Suppose an English company resident in England owns a ship registered in Liberia, that is, under a "flag of convenience", to which country does Nigeria look in order to grant an 2 exempt;iioonn/? It would seem that the Liberian provisions are the relevant *1 __________________________________________________________________ 10. The double taxation implications here are obvious. According to s.18(l) CITA - "The profits of a Nigerian company shall be deemed to accrue in Nigeria wherever they have arisen and whether or not they have been brought into or received in Nigeria". 1. s. 26(1 )(g) CITA. 2. For a discussion of the international economic problem created see - Valton J. MacLeod: "The Flag of Convenience Problem". (1963/4; Vol. 16. South Carolina Law Review at p. 409. / r ^ Y l ones because under international law a ship belongs to the country where it is registered; and its activities are regulated by that law. This is the generally accepted view however fictitous it may appear. The second criticism against the Nigeria law is thisr For the A purposes of the Nigerian tax exemption, is the mere existence of^reciprocal provision, in a foreign country for Nigerian shipping companies sufficient by itself, without further enquiry into whether or not Nigerian companies are in actual fact enjoying the benefit? This question is of fundamental importance because Nigeria's merchant navy is in its infancy and the bulk of the country's import and export are carried by foreign vessels at grossly inflated and discriminatory freight rates. In view of the foregoing discussion our conclusion are as follows ; (1) Nigeria must adhere strictly to &thXe m As a corollary to the above, how flexible is the Nigerian tax law as a means of encouraging or discouraging the emigration of indigenous skilled personnel either to (a) countries less developed than Nigeria where they are sorely needed; or, (b) to highly advanced places where n the personal remuneration may be greater. The policy and other related issues which necessarily arise are duly considered bearing in mind that a substantial proportion of the country's indigenous high 0 level man power were educated or trained at public expense. 7. See Daily Times (Nigeria) March 23rd 1973- Study by Professor F.O. Okediji and 0.0. Okedi.ii:"Nigerian Brain Drain to America - A Sociological Perspective". Same authors: Daily Times (Nigeria) March 24th 1973: "Social and Psychological Causes of Brain Drain". On the other hand, we may note the tendency among African Countries to look up to Nigeria for high level manpower, e.g. General Amin's appeal to Nigeria to loan teachers and skilled personnel to Uganda. - Daily Times (Nigeria) November 25th 1972. 8. Faced with this dilemma the Soviet Union until lately imposed a head tax on Jewish emigrants with higher education because of the loss of their services to the states which had financed their education. Henry Shapiro: The Times U.K. March 22nd 1973 - Soviet Tax on Jewish Emigrants no Longer Being Collected". Considering the serious opposition to this kind of tax it is extremely doubtful whether such a scheme can be introduced in Nigeria. 174 As a prelude to our discussion, Section B below clarifies the basic terms and concepts as employed herein in this chapter. B. Vho is a "Professional" and who is an "Employee"? The terms "profession" or "employment" are nowhere defined under the Nigerian Code. They are certainly not synonymous except, perhaps/ to the extent that they relate to natural persons. In that regard, therefore, a more appropriate title to this chapter could have been "The Taxation of Persons". Yet, we have rejected this because on a proper understanding of the Nigerian tax provisions, the law is not so much concerned with the taxation of "individuals" or "persons" as such, but with the taxation of various species of income. Hence, the slight concern shown for the personal circumstances of the taxpayer e.g. his place of residence, domicile or nationality. For our immediate purposes, what is important is to distinguish clearly between "professional income" and "employment income" because of the different treatment accorded to each under the law. The logic . of our treating these two categories of income together in one chapter is basic. They both accrue to individuals and we,therefore, find it convenient to look at the two categories of income within the same context. (i) Income from a "Profession" or a "Vocation" The Nigerian Code employs the terms "profession" and "vocation" which though not defined, are presumably sui generia because of the context in which they appear.^ A most helpful judicial exposition 9. ITMA. *1961 S. 4(l)(a). < 1 7 5 of the meaning of "profession" is to be found in the judgement of Scrutton, L.J., in I.R.C. v. Kaxse where he stated inter alia1® "that a 'profession' in the present use of language involves the idea of an occupation requiring either purely intellectual skill.' or of any manual skill controlled, as in painting and sculpture or surgery, by the intellectual skill of the operator^ as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities". While the line of demarcation may vary from time to time, the decided cases do little more than provide illustrations of what the courts have or have not regarded as professions. With the older professions like Medicine, Law and Theology, there would be little difficulty in recognising them as such.1 However, in places like Africa problems could arise because of the existence of "professions" which are not known in the Western world e.g. the ( employed persons are professionals,^ not all professionals are self employed. There are, of course, "professional employees" e.g. an If accountant or lawyer working for a private concern or government. C The word "vocation" employed in the Nigerian law which is undefined,' has been held in Patridge v. Mallandaine to be analogous to a "calling". And according to Denman, J., "it is a word of wide significance meaning the way in which a man passes his life". 7 In the instant case, it was held that a bookmaker who accepts bets is carrying on an organised vocation. Similarly, in Graham v, Arnott 8 it was held that an individual who habitually supplied racing fore to newspapers for reward was chargeable to tax under Case II of Schedule D. On the other hand, it .•ncuj be noted that in Graham v. Greena, an individual was held not to be so chargeable in respect of gains derived from betting. Again in Down v. Co.mpston1^the winnings of a golf professional on bets on his own matches were held not to be the earnings of a vocation. 4. e.g. RHzzel v. Snowball /T95^73 All E.R. 429* A specialist doctor held to be an employee of the Minister of Health. 5. S. 4(1)(a) ITKA 1961. 6. ^1886/18 QBD 276; 2 T.C. 179. 7. Ibid K.B. at page 278; T.C. at page 180. 8. £(941724 T.C. 157. . 9. £T92^72 K.B. 37., 9 T.C. 309. 10. 7^937721 T.C. 60. See Whiteman and Wheatcroft op.cit., para 5-43' A dramatist, a land agent, and jockey have all been regarded as carrying on a vocation*,whereas, a film producer was not so treated, It is suggested here that the Nigerian courts and the Revenue must for a long time to come construe the word "vocation" in its widest possible sense. This is necessary because of a number of social and economic factors peculiar to Nigeria. Statistics show that only about yjo of the adult population are in salaried and regular employments, while only a slightly higher percentage can be said to be carrying on a profession or trade.1 A substantial number engage in agriculture, but the truth is that the vast majority of Nigerians indulge in what can only be called vocational activities. For this reason, it is considered that an unduly legalistic or restrictive interpretation of the word "vocation" would be self defeating. One general point on both "professioi and "vocation" may be noticed at this stage, namely, that alt "trade" includes "an adventure or concern in the nature of trade", there is no similar statutory or judicial extension of a "profession" or "vocation".2 Accordingly, it has been stated that an isolated transaction in the nature of a professional activity at least as far as the O.K. is concerned cannot be taxed qua professional income under Case 11 of Schedule D, as the practice of a profession implies some degree of continuity.3 Stri ctly speaking, this may be so. But in Nigeria, where most of the activities generating taxable income can be classified as "non­ trading", "non-professional", and "non-agricultural" but simply as 12 1. For a general discussion of the employment scene in Nigeria, see 0. Teriba and A.O. Philips: Income Distribution and National Integration" (1971) Vol.11* No.1 Nigeria Journal of Econ. and Soc. Studies, p.77 et seq. 2. See chapter three. Supra wh?re it would be seen that the word "trade" or "business" is given the widest possible interpretation. Note in particular the judgement of Sowemimo, J., in Arbico v Fed. Board of Inland Revenue /19667 2 All N.L.R. 303, 3 Whiteman and Wheatcroft para. pag® 221, "vocational” it is doubtful whether the U.K approach here should be followed. Clearly, if a "vocation" is interpreted as a "calling” or simply regarded as the way in which a person "passes his life", it is obvious that the taxpayer can be a man of "multiple vocations". In Nigeria, he is certainly so to a very large extent because a lot of economic activities take place on a seasonal basis. And sUt*. no degree of skill or formal training is required for a vocation, the majority of Nigerians pass their lives doing several things and playing several roles without any notable degree of continuity or re€ gularity. In practice, what is important is not whether an individual is carrying on a profession or vocation, but whether some particular activity of a person who is admittedly carrying on a profession or vocation is, or is not, within the ambit of that profession or vocation. In Davies v. Braithwaite, considered in more detail subsequently, the taxpayer's chargeable income was held to include not only receipts from her acting profession exercised in the D.K, but sums received under a contract for appearances in the United States. Similar to this is Household v.Grimshaw,^ the facts of which were as follows: An author entered into an agreement with a film company which provided that for a minimum period of twelve weeks in each of three successive years he should render exclusive services to the company by way of writing and composing stories and other film matter. The agreement also provided that the company should have the option of acquiring at specified prices the film rights of any novels written by the appellant and published Z^93l7 2 K.B. 628. 5. T.C. 366. Also Humphreys v. Peare ^191^6 T.C.201 where a land agent's Commission on sales were held to be professional receipts. prior to the expiration of the three years. The court held that the agreement was an engagement in the course of the appellant's profession as an author, and that receipts derived from it were, therefore, properly assessable to tax under Case II of Schedule D. These two cases cited should be contrasted with Mitchell and Eden v. Ross examined in more detail later), - where a doctor in private practice was said to hold a separate office in respect of his part-time salaried appointment under the National Health Service. In this case, the doctor's income from his part-time appointment was held to be chargeable under Schedule E. The real trouble here is that it is not clear where the line should be drawn, a conclusion which is reinforced by two other conflicting cases relating to doctors. In the first, Leaky v.Hawkins57,? a doctor who under superannuation regulations of the National Health Scheme elected to take from the Ministry during each year of his service under the scheme a sum equivalent to 8% of his remuneration, in lieu of being pensioned off at the end of his service, was held not to receive that sum as part of his profession. In contrast, in the second case, Temperley v. Smith, a doctor who received the surrender value of some endowment policies when a voluntary hospital came under the health service scheme was held to have received the sums as professional receipts. An illustration in a somewhat different context of a receipt that was held to be outside the ambit of the taxpayer's profession is provided by the previously cited case of Down v.Compston • There, a 6 . / 1 9 6 o7 C h .4 9 8 . 7. T.C. 28. These sums were held assessable as annual payments under Case III of Schedule D. 8* ^ 1951^37 T.C. 18. 9. ^T93^21 T.C. 60. ro'ecsiov-l olfcr ■ ’10 1-id 1-rre "bets on the results of his ĝ -mes i' he usually ’.on) "as held not to be exercising his orofession "hen n \in- the bets. Also, in the judgement of Buckley. J v in TTorm~* i 2*n v. Evans it ~3 stated that a racehorse breeder who races his horses and tins ->ri-es at race meetings is not rerruired to brim* those prices into account s -refits of his trade of breeding horses. Finally, in deciding* "hat income is derived from the e::ercise of a ”Tofession" or "vocation”, the Nigerian Revenue must maintaiAn a, flexible nnro-ch bearing in mind the folio*. *ing facts. (’) That, the .decree of -roficienev required of a professional must be related to the reneral level of education in the country. ,(2)1 That, there asre? thousands of de fee to "professionals" in the country vrho never had any formal training and do not possess any pacer cualifications. (3) That, to facilitate intra- Ifrican mobility of skilled manpower automatic reco,coition should, where possible, be accorded to diplomas and 2certificates obtained in other African countries." The basic assumption here is that there is a "minimum standard" of expertise requiread of professionals in all countries which should be universally acceotable. However, where all the above prove unhelpful, the Revenue may simply regard the taxpayer's independent activities as the pursuit of a 10. / 9eJJ £2 T.C. 133 at p.19^. . 1. For example, the native doctor who acquires his skill, by oral instruction and on-the-job training. 2. Note that the countries of the EEC are currently faced with the problem of working out an acceotable formula for harmonising educational, especially professional. Qualifications obtained in member countries. See Patricia Tisdall: "Accountants worried by EEC Rules on Oualifvins” . The Times U.K. October 17th 972 at p.l7. 3. The case of A. Seni v. !*.TT.R Supra suggests this. "vocation" - the income from which may for tax purposes may be treated like the income derived from the exercise of a "profession". (ii) Income from an "Employment" The term "employment" is not statutorily defined within the Tax Code. All that we are told is that "employment" includes "any service rendered by any person in return for any gains or profits". I* The various state income tax legislations do no more them lay down a list of those who are considered to be employees and in some cases the employers.^ Basically, it would seem that the concept of &an> ,employment the income of which the law contemplates involves a master-servant relation­ shi. p 6 - that is, one man providing his services to another. Where there is a contract of service as distinct from a contract for services between the parties -the employer requiring the other party to perform a certain service - the existence of an "employment" is not difficult to infer. But it may be necessary to infer this relationship from the facts whether 7 or not there is a contract of service. k. S.4(2)(d) ITMA 1961 incorporating amendment introduced by s.1(2) of the (1966) Income Tax (Amendment) Decree. No. 65 of 1966. 5. For example, Western and Mid-Western States where the Income Tax Law (1957) Cap.^b S.61(1) provides for theP.A.Y.E. system and sub-section (5) provides that it applies to emoluments of any employment or office and any pension. In the Income Tax Emoluments Rules, legal notice 350 of 1961 the word "employee" is not defined. The Lagos State personal Income Tax (Employments) Regulations 1965 para.2. defines "employee" as any person including a director receiving emolument etc. The Eastern Nigeria States: Finance Law 1962 S.8 defines "employer" by enumerating those whom the law regards as such. The Northern States: The Personal Tax Law (1962) S.45 (10) defines "employee" as including any employee or office holder etc. 6. Whiteman and Wheatcroft supra page 49^ para et seq. Also S.O. Fashokun op.cit., 41b, ^23. 7. For example, Lee v.Lee’s Air Farming Ltd. i/196i/7A.C.12 ^P.C). Where it was held that a controlling shareholder and governing director of a company who also flew aircraft for company was capable of functioning in a dual capacity - giving orders in one capacity and carrying out these orders in another capacity. The legal relation­ ship here was nevertheless that of Master and Servant. 133 The correct approach seems to be to distinguish between a "mere employee" and an "independent contractor" on tort lines. Thus Lord Denning comparing and contrasting a "contract of service" and a "contract for service", observed that whilst "it is often easy to recognise a contract of service when you see it, it is difficult to lay wherein lies the difference" between the two types of personal contracts. Clearly, while a "ship's master, a chaffeur, and a reporter on the staff of a newspaper are all employed under a contract of service, a ship's pilot, a taxi-man,a newspaper contributor are employed under a contract for servi. ce.8 The one feature which appears to run through his Lordship's examples is that under a contract of service a man is employed as part of a business, and his work is done as an integral part of that business; whereas, under a contract for services, his work although done for the business is not integrated into it but only accessory wto it. It is, however, important to note that the inference or de facto existence of a Master-Servant relationship as a factor in determining whether or not there is an employment per se, or whether a specie of income received by the taxpayer relates to it, may not be an issue to which the court averts its mind especially if not raised by the parties. To illustrate the type of situation contemplated, we refer to the a East African case of Durga Pass Bawa v„ C.O.T. which is considered interesting in several respects. The facts of that case were as follows ; *1 8. cf, Stevenson, Jordan and Harrison v.Mac Donald and Evans (1952) 1 T.L.R. 101 at page 110. Also Construction Industry Training Board v Labour Force Ltd. ^T97C^3 All E.R. 220. 9- ^ 9 ^ E.A.L.R. 695. The appellant was an agent of the British American Tobacco Company Ltd., in Tororo from 1928-19^9 during which period the last mentioned company was succeeded by the East African Tobacco Company Ltd. The taxpayer was offered and he accepted the post of distributor in the Tororo area for the successor company in 19**8 under an arrangement subject to termination by three months notice in writing from either side. On January 6th 19^9* a private limited company under the name of D.D. Bawa Ltd. was incorporated and thereafter operated the appellant's agency with the consent of the company. On March l6th 1957* the East African Tobacco Company Ltd. informed the appellant that for business reasons it was obliged to terminate his employment as distri­ I butor with effect from the 17th, of June 1957. The letter of termination stated in part that the company had decided: "as a mark of our appreciation for the long and loyal^Q service you personally have rendered to this company, to grant you a personal gift on an ex-gratia basis and without admitting any legal liability for doing so, the payment of the sum of Shs.100,000/- which will be paid to you in quarterly instalments as follows . . . ." The taxpayer accepted the payments which were assessed as income liable to tax under the East African Income Tax (Management) Acts 1 1952 and 1958. 10. Emphasis supplied. 11. Ibid., at page 696-697. 1. The appellant was assessed to tax in respect of the first two instalments under S.8(1)(l)(b) of the 1952 Act and the last two instalments under the 1958 Act. The differences in the wording ». of the two laws were not relied on as being material,therefore, only S.8(l)(i)(b) of the 1952 Act is set out: viz "Tax shall subject to the provisions of this Act, be charged in respect of each year j of income at the rate imposed for that year by the appropriate Territorial Income Tax Ordinance upon the income of any person accruing in, derived from or received in (i) East Africa in the case of a person who is resident in the territories . . . . in respect of ( a ) ...................... (b) gains or profits from any employment or services rendered . . . . etc." 1 3 The only issue in this case was whether, in fact, the purported gifts were taxable. The East African Court of Appeal reversing the decision of the High Court of Uganda held as follows in favour of the taxpayer. (1) that, a payment is not taxable merely because it had "something to do" with one's employment, if "the occasion for making it arises out of his 2 past services". (2) That, while the taxability of a gift is not conclusively determined by the way an employer describes it, there could be no doubt about the intent conveyed by the wording of the letter in the present case. (3) That there fact that the letter was written before the actual termination of the appellant's employment; and finally (*0 that too little weight had been attached to three factors. Namely, that the made after termination of the employment, that it was not recur rent, and was not made pursuant to any legal obligation or any custom or legitimate expectation on the part of the appellant arising from the nature of his employment. The Court of Appeal concluded that the payment was a "personal gift" made after the termination of employment and was not taxable as "gains or profits" from employment or services rendered. Although it is believed that the above decision is correct for the reasons contained therein, yet, it is our view that several other relevant legal points were not raised by counsels on either side and not commented upon by the Court# CJ? Firstly* it seems that insufficient consideration was given to the fact that the business of the agent company was separate and distinct from that of its principal, the East African Tobacco Co. Ltd., and that as between them the relationship was one of contractual liability and not on a Master-Servant basis as between an employer and an employee. In law, an agent though bound to exercise his authority in accordance with all lawful instructions given to him by his principal, is not usually subject in its exercise to his direct control or supeerr'vision.-' In our opinion, this basic distinction between an agent and a servant was relevant to the determination of the nature of employment the Court was called upon to decide. Clearly, the agent company was not a servant, and its assessable income as a distributing agent was only subject to assessment under the provisions of the ^law governing the assessment of profits or gains of a business or trade. o According to S.O. Fashokun, k with whom this writer agrees, the issue to be decided by the Court was whether the sum of Shs.100,000/- paid by the principal company to the agent company, but specified to be made in appreciation of the service of its director was the property of the agent company or that of the director in his personal capacity. In obability, it should be regarded as belonging to the company s'_ on sound principles of company law, the appellant as a X? v director could not make a secret profit out of his position in the 3. Halsbury's Laws of England 3rd ed, Vol. 2 at p.1^6. **• op.cit., at page ^21. 1 8 7 company.'’ Where as in this case the payment was in,actual fact, received first by the agent company, and then paid over to its controlling director in accordance with the letter of 16th March 1957,^ it seems that the question to be determined w<*x whether or not it formed part of the "gains or profits" from his employment. How ver, it is difficult to see how the company could give the sum away to the appellant without any consideration having regard to the well known law relating to limited liability companies and their inability to make presents out of the junds of the company to directors. in any case, the voluntary payment was no less taxable simply b the agency contract had come to an end if it was referrable, as it apparently did, to the services previously rendered. 7 If on the other hand the sum was retained by the agent company as it should have been in this case, then, the issue to be determined was whether it was an income or capital receipt. And in this regard, it could be argued that it was a payment made for the cancellation of a contract of agency in the ordinary course of the business of the agent company and therefore, an income receipt assessable to tax in g accordance with the principle in Kelsall Persons 8c Co. Ltd, v. C.I.R. 5« L.C.B. Gower: Principles of Modern Company Law 3rd ed. Directors Duties pp.515 et seq. 6. ^9637 e .A.L.R. 695 at p.697. 7. Skipway v. Skipmore ^ 9 3 ^ 1 6 T.C. 7^8. 8. <^938721 T.C. 608 (Court of Session). The taxpayers in this case were manufacturers' agents, that is, they had contracts with a number of manufacturers whose products they sold on a commission basis. Payment on preraeture termination of agency contract held taxable. Contra with Barr and Gombe &■ Co. Ltd, v, I.R.C. 26 T.C. kOG where similar termination receipts were held to be capital receipts because the whole structure of the business was affected. 1S3 The crucial point we wish to stress here is that the East African Court of Appeal did not give any consideration to the fundamental point that, as regards employments, the type of income contemplated by the charging clause is one resulting from a Master- Servant relationship. As far as the tax law is concerned the decision of the Court of Appeal which turned on the contents of the notice of termination is at best misleading, (iii) Income from an "office1* 5 ^ Although said to be a word of "indefinite context"^ Greeny M.R., put it accurately, when he noted that the word "office" is not " infrequently used as a synonym for employment.^ This exactly is the position under the Nigerian law which defines an employment to include "any appointment or office whether public or otherwise, for which renumeration is payable . . What should be stressed, however, is that an ■office" is different from a "mere employment", in that in the words of Rowlett, J., with whom this writer agrees, it denotes* •a subsisting, permanent, substantive position which has an existence independent of the person who fills it, and which is filled in succession by successive holders."2 ____________________________________________________________________ 9. per Lord Wright in McMillan v. Guest /19427a.C. 561 at p.566} 24 T.C. 190 at p.202. It may be noted that an office is usually a position of a more or less public character. 10. Ibid., T.C. at p.197. 1. S.2 ITMA 1961. Definition Section. 2. Great Western P -.ilway Co. v,Bater /1920/3 K.B. 260 at 274» cited with ap,. ; val by Lard Atkin and Wright in McMillan v» Guest Z1942/A.C. 56l at pp.564 and 566; 24 T.*C. 190 at 204 respectively (in each case). See also S.0. Fashokun, op.cit.., P.431. T'>/ r 133 Typical examples of officeholders are trustees,^ bishops, company directors, and in Nigeria would,perhaps,include local chiefs, Obas,^ town criers, and the high priest or priestess of the village Oracle. When construing the meaning of an "office" three distinct situations implicit in Eowlatt, J's dictum must be recognised. Firstly, instances where professionals and skilled men are appointed to an "office'e.g. consultants, judges etc. - which essentially involves a master-servant relationship, as between an employer and a mare employee. Secondly, where as a contrast to an ordinary employment, a clear master-servant relationship is non-existent as in the case of a company director; although technically an employee, 5 but in reality a manager or an employer. Thirdly, from his Lordship's dictum one can draw a line distinguishing the above two situations from the case of an 'independent contractor" who may be engaged to do specific duty for a fee. * By way of criticism, it is believed that the present arrangement of the provisions of the Nigerian Tax Code whereby income from an office is taxable only by way of inference is unsatisfactory. The charging provisions should be re-arranged so as to categorically include income from an "office" as a separate head.^ 3. For example, in Dale v. C.I.R. /1954734 T.C. 468 (E.L.) especially Lord Normand at page 490 4. Head Chief in a native community who were men of considerable authority in the past, and in the colonial days were the bastion of Lord Lugard's Indirect Rule system. 5. Held in C.I.R. v. The Directors of A.Y. Ltd. 2 E.A.T.C.4U. That a director whether controlling or otherwise, of a company is an "enlployee" of the company. 6. At present income from an "office" is not charged under a separate head. Such specie of income is taxable only because it is defined as being a type of employment income. - S.2 . ITUA. 1961. (iv) Le.?al distinction between 11 Employees11 . "professionals11 and 11 Officeholders11 As a result of the lack of Nigerian authorities much reliance is placed here on commonwealth authorities as it is thought that these would be of very strong persuasive authority were the type of problems discussed nereiu .o come before the Nigerian courts. The leading case in the U.K on the distinction between '•professions* and "vocations" chargeable to tax under Case II of Schedule D, and "employments" charged to tax under Schedule E, is Davies v. Braithwaite7 V cited above. It may be recalled that in that case an actress V< 2 v contended that every one of her separate theatrical engagements was a contract cf employment so that the emoluments therefrom should be charged to tax under Schedule E. Rowlatt, J., rejected this contention and in so doing stated: 'that when the legislature tooyk 'employment’ out of Schedule D, and put it into Schedule E, alongside 'offices', the legislature had in mind employments which were something like offices and 1 thought of the expression 'posts' <8 Furthermore, his Lordship continued, observing that: "where one finds a method of earning a livelihood which does not consist of the obtaining of a post and staying in it, but consists of a series of engagements and moving from one side to the other, . . . then each of those engagements cannot be considered an employment but is a mere engagement in the course of exercising a profession, and every profession and every trade does involve the making of successive engagements and successive contracts, and in one sense of the word,employments" . f. Z1931/2 K.9. 628; 18 T.C.199. See also Fall v.Hitchen /197lJ ' T.L.R. where a Ballet dancer was taxed as employee. 8. Ibid., at page (635 K.B.) and 204 T.C. 9. At the time this case was decided the word 'employment" was still in the charging provisions of Schedule D but it is thought that the principle enunciated by Rowlatt, J., would still be followed - See H.G.S.Plunkett:"The Finance Act 1956 - The Effect of Residence and Domicile on the Taxation of Employment11 (1957) B.T.R. p.210. The author explains the historical background to Schedule E. Under the ldl8 Act.the charge to tax under Schedule E only applied to " public offices and employments" while income from other -Lcj employment was charged to tax under Schedule D. 191 Although it is a question of fact in every case whether a tax­ payer is 'employed" or is carrying on a profession or vocation, two factors which will tend to show that the individual in question is properly charged to tax under Case II of Schedule D are first, that the activities of the taxpayer are of their nature professional or vocational, and secondly, that the number of different engagements fulfilled by the taxpayer over a period of time is considerable. That these points especially the second, are only factors to be taken into account in reaching a conclusion and not decis>iivve "tests to b; (i)-(v) that is, categories of payments etc., made to an employee which are not deemed to be part of his taxable emoluments e,g. reimbursements for expenses incurred in the performance of his duties, medical expenses etc* . explicitly, we came to the conclusion that the Nigerian tax law rests on two principles! (a) Liability to tax on Nigerian "source" income, o and (b) liability to tax on a " remittance basis" . The personal circumstance of the taxpayer being of secondary importance}^ The real question here on which we wish to focus attention is this; When is employment or professional income derived or deemed to be derived from a Nigerian source? According to our previous analogy, the answer is, "when the originating cause and its place of location" are to be found within the territory of Nigeria} But then, what is the criteria for determining the "originating cause" under the law? Is it the place of ++*e contract of employment, or the place of payment for services rendered or work done, or the place of actual performance of services or duties? Is there any practical difference between the "originating cause* and fO 2 "ultimate cause" of an income as a number of cases seem to suggest? Although much of the discussion here is based on the applicable principles for determining the source of employment income, it is thought that what is said would apply mutatis mutandis for the determination of the source of professional income. The Nigerian courts have been called upon to consider the source of employment income only on two occasions in a period of more than forty years. The two cases which are contradictory, are also very *12 9. See the Concluding section of Chapter Two. 10. The significance of Residence under the system is considered subsequently. 1. See C.I.R. v, Lever Brothers. 2. For example, as was pointed out in C.O.T. v, Shein /19t>8/ Rhodesia and Nyassaland L.R. 384» Discussed in more detailed t presently. unexciting Because no clear eluciaation of legal principles emerge. In tne earlier one, re John Potter? tne High Court at Unitsha held tftat tne leave salary paid to tne petitioner, an employee of a shipping company in Nigeria, ^while away on leave in tne U.K;, was derived from Algeria as part of tne gains or profits of his employment and was tnereby rightly included in his assessment for income tax.^ Jiscerniole, perhaps, from this judgement is tne concept of "source" , but since tne learned judge failed to adduce any reasons lor nis decision, and considering that not a single legal authoroty was cited tnrou^iout tne proceedings, the reasoning oenind this case is obscure. v V * not It is therefore^surprising that the West African Court of Appeal In the Hatter of Kon-flatives Income Tax Ordinance 1931^ refused to follow Potter1s case, distinguishing it, even though the relevant section of the law which the Court had to construe was the same and that the material facts were substantially similar. In that case, the petitioner a clergy working in Nigeria was assessed to tax on his leave salary paid to him while he was abroad. The Court held that the petitioner's leave salary was "neither received in Nigeria nor derived from Nigeria" . In the opinion of the Court, interpreting the words "derived from Nigeria" to mean "derived from employment in Nigeria" would amount 3. 11 N.L.R. 144. 4. Ibid.. Carey.J, at p.147. The relevant S.4(l) of the Non­ Natives Income Tax (protectorate) Ordinance 1931. is very similar to the present S.4 of ITUA 19^1. 5. 5 W.A.C.A. 142, 197 to "reading into the Ordinance words that are not there, and which would materially affect the meaning" ̂ One other basis for the Court's decision was that the fund from which the petitioner's salary was paid was subscribed in England and not contributed to from Nigeria. From the two cases above, the following conclusion*may be reached, (l) That the Nigerian courts have not yet adopted a clear- cut "source" approach as regards the taxation of employment or professional income since the Tfest African Court of Appeal in the o Non-Natives Case did not categorically overrule Carey, J., at first instance in Potter's case. (2) That the correct interpretation of the charging provisions is still a matter of doubt. For a probable answer to the problem, attention may now be turned to Section 8 of the Income Tax Management Act 1961 which elaborates on the charging provisions of S.4 of the same Act. In that section, two things seem to be emphasized viz - the place of performance ̂ gf duties and the place of residence of the employer. Income from an employment is deemed to be derived from Nigeria if n the duties are wholly This clearly suggests that the source of employment income is the situs of the employment itself. In other words, once an employment is exercised in Nigeria, the gains or profits from such employment nvus be deemed to be derived from Nigeria whether or not they are 0 actually received in the country. 678 6. Ibid., at page 143. 7. S.8 (1) (a) ITMA 1961 8. S.8(3). 133 However, this general proposition is modified where, even though the situs of employment is Nigeria, the duties had been performed for an employer who is in a country other than Nigeria, provided further that the employee is in Nigeria for less than 183 days and his remuneration is subject to tax at the place of residence of the employer.7 The last mentioned provisos which amount to a restriction on the "source" principle are in no way unique. 10 They are intended to facilitate the international mobility of labour between countries especially where the duration of stay abroad is of a cursory nature. Implicit in them too is an attempt to avoid double taxation while at the same time preventing fiscal evasion, hence^the stipulation that to obtain an exemption from Nigerian tax such income must be liable to tax in the home country of the e; mployer. One criticism may be ventured here. The provision exempting an employee from tax says nothing about the size of his remuneration. To avoid tax, is it not possible for multinational companies to move their highly paid staff around the world at frequent intervals, since to enjoy the exemption, the employees only has to stay abroad for less 910 9. Note Sections S.8(l)(a)(i) - (iii). 10. Similar provisions can be found in the laws of several other countries. However, the Ghana provisions which provide that "The gains or profits derived from any employment exercised in Ghana shall be deemed to be derived from Ghana whether the gains or profits from such employment are received in Ghana or not" - (Income Tax Decree 1966 - S.6(3)) is better and more straightforward than the Nigerian provisions because there is no time duration before liability arises and the place of residence of the employer is completely immaterial. i 99 than 183 days; 11that is, assuming that the income involved iG technically taxable, (though not necessarily taxed) in the home country of the employer? Cur submission is that the size of the remuneration must be a relevant factor. Following the Israeli example, 12 once the earnings of an employee is above a certain amount it should be taxable in Nigeria; subject, of course, to whatever relief may be available under double taxation arrangements. There need to be no unusual difficulty created by our suggestion if the present situation with professional or vocational income is anything to go by. With these kinds of taxpayers, there is no stipulation of a time duration before there can be tax liability. Theoretically, tax is payable for each year of assessment in respect of gains or profits from any • "profession or vocation, for whatever period of time 13 such . . . profession or vocation may have been carried on or exercised". In other words, a non-resident accountant or lawyer undertaking a special assignment in Nigeria is liable to the country's tax on fees received, however,brief the duration of the assignment. If this is so for a professional, why not for an employee? It is fascinating to note that the Nigerian law as it stands today seems to have adequately taken care of the kind of problem which 1 11. This is the usual time duration in the laws of most countries. 12. S.5(2) of the Israeli Income Tax Ordinance as amended. 13. Emphasis supplied 1**. S.Ml)9a ITMA 1961^ 290 arose in Re Potter and in the Non-Native’s Case 1931» Subsection k of section 8, ITKA 1961, categorically provides that the: "gains or profits from any employment the duties of which are wholly or mainly performed in Nigeria shall be deemed to be derived from Nigeria during any period of leave of the employee from the employment and during any period of his temporary absence on duty from Nigeria".*^ Where an employer is resident in Nigeria, any income paid to an employee is deemed to be derived from Nigeri. a^1 Here the cri teria for liability seems to be the source of payment and its place of location. This broad principle is again modified to the effect that where an employer is resident in Nigeria, but the duties of the employment are wholly performed and remuneration paid outside Nigeria, there is no liability to Nigerian tax on any income received by the employee. In our opinion, this is only reasonable and consistent with the "source philosophy", since the nexus between the income and territory of Nigeria (i.e. the employer's residence or presence) is too tenuous or insufficient per se to render such income liable to the country's tax. As regards income from an employment with a government in Nigeria, the position is slightly different from that stated hitherto. Such income is deemed to be derived from Nigeria wherever paid, if it is 1 15. Emphasis supplied. 1. S.8(1)9b) ITMA 1961. 2. The law provides that . . ."the gains or profits from an employment shall be deemed to be derived from Nigeria if . . . (a) . . . (b) the employer is in Nigeria . • • etc. It is not clear whether the underlined words are intended to signify*residence" or mererpresence“. The precise legal distinction is crucial. Cf O'Connel International Law Vol.2, page 715 et seq. 231 exempt from tax in the country where the duties are performed, either as a result of a specific tax agreement or diplomatic usage. The practice now firmly entrenched in international law is that the servants of one state are not taxed by another state.^ In addition to all what has been said above, the law provides that income from any employment the duties of which are mainly performed outside Nigeria shall be deemed to be derived from Nigeria to the if extent that those duties are performed in the country. This provision is significant in that unlike the law of some other countries, it gives room for apportionment between two or more sources especially where the duties of an employment of necessity takes the taxpayer across several tax jurisdictions? From the foregoing exposition of the provisions of S.8 ITMA, it can be inferred that the overriding criterion for determining the "location" of employment income is the place of performance of the duties of the employment; the place of the contract or the place of pay­ ment being relatively unimportant matters. In other words, the overt act generating the income is the "performance of the duties" rather than the mere formal act of signing a contract of employment which is something preceding the real "action", or the act of payment which comes subsequently. The merit of this approach for developing countries is obvious. Because countries like Nigeria are at the receiving end of the one way 3. Stated positively by the Royal Commission (1955) Cmd. 9**7̂ , para. 307. S.8(5) ITMA 1961. 5. The Ghana Law is less specific on this point. migration of skilled personnel, unless they are permitted to tax on a "source basis", there could be an intolerable burden on their balance of payments position. One further advantage is that of all the possible applicable criteria, the "place of performance" is the one which is least capable of manipulation.^ Although quite logically the most realistic test for determining the source of an employment income, somehow,the "place of performance" did not receive the support of the courts until comparatively recently. To illustrate this point, we refer briefly to the U.K position prior to 1956. 7 Roraer, J's, dictum in Bennet v. Marshall80 wktLk wevi uph-iij Karvey v. Bre.yfogle 9 and Bray v. Colenbrander 10sums up the position admirably. As it seemed to his Lordship, "the House of Lords in Pickles . have definitely decided that, in the case of an employment the locality of the source of income is not the place where the activities of the employee are exercised but the place either where the contract for payment is deemed to have a locality or where the payments for the employment are made, which may mean the same thing".^ The case of Bray v. Colebrander related to a Dutch journalist who was appointed to act in London as the representative of a Dutch paper. 6. Cmd. 9̂ 7*4 para.299« The Royal Commission stated inter alia that "all other elements are capable of fairly simple manipulation for tax purposes: the place of work is not." 7. For a brief historical analysis of the law prior to the changes brought about by S.10 of the Finance Act 1956, see H.G.S. Plunkett; "The Effect of Residence and Domicile on the Taxation of Employ­ ments", (1956) B.T.R. 210 at pp.210-216. 8. /T93^1 K.B. 591; ^193871 All E.R. 93; 22 T.C.73* 9•& 10. Both reported in^19537A.C. 503; 5^7 2 W.L.R. 927; <^9537 1 All E.R. 1090; JM T.C. 138. 1» / i 92jpA.C. ^58; 9 T .c. 285. 2. 22 T.C. 73 at 9**; JA T.C. 13** at 157. Almost all the duties of the employment were carr: d out in London. Upon the taxpayer’s request, a part of his salary was sent to him in London, otherwise,the whole thing was payable in the Netherlands. Harvey v. breyfogle on the other hand, related to an American citizen who was appointed the manager of the London branch of an American bank ant whose remuneration was paid into a banking account in New York. Like the Dutch journalist, this gentleman also was resident in England and carried out most of his duties in London. It was held in the first mentioned case that the employment was not a "public office" within paragraph I of the old Schedule EL,** and in both was made abroad, the locality of the employment liability to U.K tax was on remittances. This was notwithstanding that almost all the duties were carried out in the United Kingdom. The U.K. position was charged If following the recommendation of the Royal Commission which concludOed )as follows: "In our view, the place in which the work is done is much the most important single test of the locality of an employment, though it is the one to which the courts have hitherto given least weight, if indeed they have not treated it as having no weight at all."^ It may also be noted in passing that the South African law like that of the U.K. emphasizes the place of performance as the "source" 3. See H.G.S. Plunkett, op.cit., pp.210-216. Whiteman and Wheatcroft op.cit., p.^92 para.1^-01 giving a brief history of Schedule E. By S.10 of the Finance Act 1956. Cmd. 9̂ 7*f para.299. The changes proposed by the Commission were set out in para.305 of the same Report. t 204 of employment income, D while according to A. Lapidoth/7 S.5(2) of the Israeli Income Tax Ordinance 1965 has been interpreted by the Supreme Court of that country as expressing the intention of the Legislator to introduce one single 'test for determining the source of employment income, namely, the place where the work was performed. Be that as it may, it must be pointed out at this juncture that the "situs of employment" test which is favoured by many developing countries is fraught with difficulties in its actual application. This is evident from the-jurisprudence of other Common law countries. For example, in the Australian case of In re A.B and the Land and Income Tax Act 19108, which came before the Supreme Court of Tasmania on appeal, the question submitted for decision was whether the salary and bonus received by the appellant in the following circumstances was "income arising, received in, or derived from the state". The facts of the case were as follows: T'he appellant was employed under a written contract by a company which carried on business in Tasmania, New South Wales and South Australia but whose head office was in Victoria. He was general manager of the company, and as such was to supervise, manage and conduct all the company's operations in Tasmania or elsewhere if called upon. The 6. A.S. Silke, op.cit.,, at p.141. See C.I.R. y Epstein /l95f*7 (3) S.A. 689 at 698. C.I.R. v,Lever Bros. (19^0) A.dT̂ -11 at V+9» •- 7. (1969) Israeli Law Review Vol.V. No.3 page 398 at p.402 et seq. The Ghana Law also adopts the "place of performance" test u Cf. S.6(3) Income Tax Decree 1966. N.L.C.D. 78 - "The gains or profits derived from any employment exercised in Ghana shall be deemed to be derived from Ghana whether the gains or profits from such employment was received in Ghana or not". 8. /T92973 A.L.J. 155. UNIVERSITY OF IBADAN LIBRARY 2 0 5 contract provided that his salary should be £3,500 per annum payable 4 0 monthly, (the place of payment was not stated in the contract) and that he should reside as near the company's works in Tasmania as should be reasonably necessary for the discharge of his duties. During the year ended 30th June 1927, the appellant visited England and America on behalf of the company for the purposes of investigating the erection of an electrical refinery for copper and of consultations in connection with the company's superphosphate business. He was absent from Tasmania on the company's business for an aggregate olf 157 days. In that year, the company paid the monthly salary into the appellant's bank at Melbourne, as requested by him, and also paid him a bonus of £175 in respect of his services for the year ended 30th June 1926, which sun was also paid into his Melbourne tank account.V The resolution to pay the bonus was passed by the company at Melbourne. Counsel for the appellant contended that a portion of the salary and bonus attributable to the period during which he was absent from Tasmania was not assessable against him on the ground that it was not income which "arose" or "accrued", or was "received in", or "derived from1 the state of Tasmania; and that it "arose" and "accrued" either in places where the services of the appellant during the period in respect of which it was paid were rendered or at the place where according to the law the salary was payable. He submitted that that place was Melbourne. Clark, J, who delivered the principal judgement was of the opinion that the salary was not "received" in Tasmania as it was paid ib Melbourn and was not "derived from" Tasmania, as it was payable by a Victorian company from whose territory it was derived. 206 His Honour then had to consider whether it "arose" or "accrued" in Tasmania. Disagreeing with the appellant that it arose or accrued 0- where the services of the employment were rendered, his Honour held that while the performance of services was no doubt a condition precedent to the right to receive the salary, the consideration, that is, the company's promise to pay the salary, was not based on the appellant's performance of the services but on his promise to perform them. The contract, therefore, and not the services was the •s K ource Wo*f* the sa•lary which must be considered as having arisen at the place appointed by the contract for payment. And what was that pla Since no particular place of payment wa-s named, his _Lordship tried to get round this by stating that there must be a specific place of payment presumed to be appointed by some general law; or, * • alternatively, read into the contract by way of interpretation of its express provisions.1 0 Ey this reasoning, he came to the conclusion that the appellant should be deemed to have been paid at Queenstown, Tasmania, where he was required to reside, and where he was to be principally employed. In addition, his Honour argued that it could not have been contemplated that the taxpayer should be entitled to require the company to pay his salary at any place which he might designate. And that the mere fact of payment in Melbourne did not alter the proposition that the place of payment under the contract was at Queenstown. *10 9* It is submitted that there is some logic in this argument. Whereas the contract may be the "ultimate source" of employment income, it is not what a practical man would regard as the "orz cause" of employment income. Ref. C.l.R. v Lever Bros. 10. Cf. Cheshire and Fifoot: Law of Contract 8th ed. page 1^1: Implied Term6. In conclusion, Clark, J., held that as the salary was under the contract payable in Tasmania, the whole thing "arose and accrued" in Tasmania and was, therefore, correctly included in the taxpayer's assessment. Nicholls C.J., and Crisp, J. concurred with the view expressed by his Honour. With regard to the bonus, the view taken by the Court was that it appeared to be a voluntary payment apart from contract, made by a not income which was "received" "derived from" Tasmania.^ The above case which undoubtedly is very interesting from several points of view invites a lot of comment. (1) It is fascinating to note how the judge had ascribed different s to the words "derived" on one hand, and "arising" and "accruing" on the other. With due respect, whilst we concede that his Honour's reasoning is basically sound in law, yet we are unable to agree with his findings, for the very detailed reasons advanced in the second chapter of this study. It is submitted that "income arising, accruing . . . or derived from the state", simply means income the "source" of which is located in the state.^ (2) In our view, the suggestion that the place of payment is the source of employment income is one which is difficult to suppor 1« Note that under S.8(1) ITMA 1961 Nigeria, this would be deemed to be derived from Nigeria. 2. Generally, see the detailed arguments in the case of Esso Standard v. C.O.T. /T9717e .*.C.A.127. This case was reviewed in Chapter Two and would be considered again subsequently as regards the "source"of Interest income. * 2 0 3 This was in fact evident in Clark, J's judgement, because as it happened in this particular case, no place of payment was specified in the contract of employment. Therefore, when in the prevailing circum­ stances the employee was paid in Melbourne, the judge nevertheless refused to accept this as the "source", but preferred to read an implied term into the contract of employment, inferring therefrom that the appellant was in actual fact supposed to have been paid in Queenstown, Tasmania. Clearly, this is unsupportable considering the general rule tha1t taxing legislation must never be ambiguous, vague or incomplete, and that in case of any doubt or ambiguity, 't hi.s. .m.u.s.tS .resolved in favour of the taxpayer.3-" (3) It would seem that this decision was influenced by public policy at the time it was made. It is, therefore,very doubtful whether the Australian Courts today would arrive at a similar decision as it did in 1929« (^) Finally, we wish to add here that were a situation parallel to that under review to arise in Nigeria, there would be no need for the Courts to apply any unconvincing analogy because the provisions of S.8(^) ITHA 1961 is quite specific on this point. "Income from any employment the duties of which are wholly or mainly performed in Nigeria" is "deemed to be derived from" the country "during any period of leave or any other temporary absence". The case of In re A.B. etc., may be contrasted with Smith v The Assessment Committee. k In the latter case, the appellant, a taxpayer. 3* Whiteman and Wheatcroft op.cit., at page 31 et seq, paras 1-53 et seq. % (1956-1960) Jamaica Law Reports page 38. domiciled in Canada was employed by a company registered in Jamaica. By his contract of employment a portion of his salary was lodged monthly into his bank account in Canada. The appellant's full salary was * debited in the accounts of the Jamaican company and for income tax purposes in Jamaica was allowed as a deduction. The appellant was assessed for interne tax on the whole of his salary but claimed that by of S.4(2) of the relevant law, he was not liable for assessment on that portion of his salary which was paid in Canada, as it was "income derived from sources out of the Island", and that in any case he was not domiciled in Jamaica. It was held that the whole of the appellant's salary paid by the Jamaican company was income "accruing to him from employment carried on in Jamaica"; that the portion paid into his bank account in Canada was not income derived from a source outside the Island, and that the assessment to tax was lawfully made. The above case in which it is considered that the "source" principle was correctly applied, demonstrates how easy it could be to avoid tax were any other test apart from the "place of performance of services" to be applied as the criterion for determining the source of employment income. Although the point seems to have been adequately covered by a specific statutory provision^ the case of 5. 3.8(4) ITMA 1961 UNIVERSITY OF IBADAN LIBRARY ro ?.l g-n'th y. The Assessment Committee should be of strong persuasive authority for Nigerian courts when confronted with a problem similar to that which the Jamaican court had to examine. Another important point emerges from our discussion thus fari iThat is the legal position when a person is engaged to perform work in one place and purely as a matter of convenience he does part of the actual work elsewhere, while producing the final result in the place contracted? Difficult questions arise. Take for example, a foreign artist or decorator, who is commissioned to decorate a building^"a in one country but who actually carries out a substantial part of his work in his own country, where precisely is the "situs of employment” and hence the source of his income? Such a matter has not yet reached the Nigerian Courts but> theoretically, it would seem that the two countries touched by the taxpayer's activities have a right to levy taxes. The position, of course, could be resolved according to the provisions of a double taxation agreement if there is one between the countries concerned. However, to support our basic contention, we refer to the case of g C.O.T v. Shein decided by the Appeal Court of Rhodesia and Nyasaland as it then was. In that case, the respondenttemployed to manage a store in Bechuanaland resided in Bulawayo and at his own expense employed a full-time storekeeper who resided in Bechuanaland running the day to day business of the store. The main issue here was 5a. That is, to provide suitable paintings, carvings and other ornaments. 6* ^9587Rhodesia and Nyasaland L.R. 384. 211 whether the source of income accruing to the respondent was Bechuanaland or Southern Rhodesia. The Court of Appeal, confirming the judgement of the High Court, held that in ascertaining the source of the Respondent's income from the store the work he did himself must be equated with the work done by the storekeeper on the spot, and that the Respondent's profit must be regarded as being derived from their joint work in 3echuanaland. What must be noted in particular is that the principle of apportionment was accepted to be legally correct once it can be established that income is derived from more than one source.7 But in this case it was rejected because the work done by the appellant Q in Bulawayo insignificant in amount, was trivial and incidental and did not affect the main issue which was the running of the store. Put in another way, the Court found that it would be quite artificial and unrealistic to all^t part of the taxpayer's earnings to his activities ,i n Southern Rhodesia. w 1 Finally, even though the tax systems of most common law jurisdic­ tions provide that the source of a payment for services rendered is the place where those services are rendered, in strict logic this may not < be correct. If the "ultimate” test of source is the "originating cans*.* then in the case of employment income it is certainly not the performance of the work but the "agreement” or "contract" in pursuance of which the work is performed. 78 7. Tregold, C.J., ibid.. at page 389. 8. These were mainly secretarial duties. 9. C,I.R. v Lever Bros, supra at p.450. C.O.T, v Shein at page 387. 212 However, thi3 approach in our opinion is unduly legalistic aixi is, therefore, not an approach to be adopted by any practical man having to determine the real source of employment income}^ Having basically adopted the situs of employment as the "source" of employment income, the actual problem which the Nigerian Revenue has to face is how to determine the precise scope of the taxpayer's •gains or profits from any . . . profession or vocation" , or the enoulments from any employment or office. As we shall discover presently, this is something which is not always easy. > r $ ....... 3. Social Phenomena and the Determination of Taxable Gains or Profits Sven though a taxpayer is admittedly carrying on a profession or vocation, a particular receipt may yet be excluded in the computation f of his gains or profits for tax purposes. Such receipts fall under four main heads. The first relates to receipts arising from activities outside the scope of the taxpayer's trade, profession or vocation. The second head concerns the fact that income tax is only charged on revenue as opposed to capital receipts. The third relates to receipts which are taxable by deduction and are not taxable again in the hands of a trader or professional person. The final head under which a receipt may be excluded from a professional account follows from the fact that there are a number of statutory provisions which exclude receipts otherwise chargeable.^" 10 10. See de Villers, J.A., in Rhodesia Petals Ltd v C.O.T. /l9387 A.D. 282 at 300. For a l i s t a | ulc-ovvic. • n % -* -* — IUa >1 SoUxlulx ot S- 3-6 C( T”A • IhvW- cry\ | ° o £*- S o - V l O . c c_» t p j_ tt+ V o L « -C l« vi In the context of our present discussion, we consider the first category of receipts the most important. '.Then a person indulges in activities outside his profession, the general rule is that a receipt arising therefrom is irrelevant in computing the profits of hi. s profession. 2 But the difficulty always is to determine the extent to which income from activities which have some connection with the taxpayer's profession or vocation, may yet be outside its scope for tax purposes. In other words, how is the Revenue to distinguish between three kinds of receipts, (a) Income accruing to a professional in return for services rendered, (b) income accruing to him from isolated non-professional activities, and (c) income accruing to a professional by virtue of the fact that he is a professional per se. This last point which has never been seriously canvassed may be difficult to grasp by foreigners who know very little about Africa? Visitors to Nigeria have always been overwhelmed by its rich cultural heritage, the diversity of languages and the boisterous and 2 2. Capital Gains Tax Liability may follow or more likely it would be caught by the sweeping up provisions of ITMA. S.4(l)(f)» Since the computation of the profits of a "professionals" is along the lines of a trade or business, some cases which illustrate our point involve "non-trading receipts" e.g. - Reynolds v. Crompton ^1952/33 T.C. 288. Here the purchasers of a business received payment in full of a book debt which they had taken from the vendors as bad. Held that the resultant profit was not a* trading receipf*since purchasers did not trade in book debts. See also Imperial Tobacco Ltd v. Kelly /1943/ 25 T.C. 292; KcKinlay v H.T. Jenkins and Son Ltd /1926/10 T.C. •.•72. Both were cases involving foreign exchange profits which were held to be non-trading receipts. 5. S.0. Fashokun does not make the point. 6 x 4 exuberant nature of the people. Quite discernible,too, i3 the great respect for elders and the idolization of learned or wise men. But the emphasis is changing. Today, the men who command the respect and admiration of the people are the "New Nigerians" - That is, the educated Nigerians, people whether young or old, who are doctors, lawyers, engineers, architects, accountants etc. Indeed, such is their unique status that much of the tributes paid hitherto to Chiefs, O'oas, Emirs and other indigenous rulers now go to these"New Nigerians” . Relating the above specifically to the tax law, we know a3 a fact that it is not unusual for a doctor practising privately in a rural district to receive substantial cash gifts or other valuable presents from the local community, especially at harvest time or during one of those innumerable celebrations. In the same manner, a barrister may find himself showerecd Owith presents from clients, past, present or potential. Such is the abundance of goodwill all round. Since most*of these unsolicited presents are neither professional fees nor income derived by the taxpayer from any casual non-professional service rendered, one wonders whether they are taxable as being part of the profits or gains of a profession or vocation. From our subsequent analysis of the scope of employment income, it can perhaps be argued that they are.4 The generally accepted proposition is that a payment, be it in cash or in kind,is a profit arising from the recipient's employment or office if it is of such a character that any other individual similarly 4, Infra at page 1X0 et seq, 215 employed might reasonably have expected that he too would receive such a payment in similar circumstances. Usually, it is immaterial whether the expectation is founded on contract or custom, and the relationship of payer and recipient need be no more than the contact 5 which is the occasion of the payment. According to the above reasoning, it would seem that any payment in cash or kind accruing to a professional by virtue of the fact that he is a professional per se is analogous to income which accrues to an officeholder simply because he holds that office. Furthermore, since the latter specie of income is taxable, it is our submission that the former should be taxable too. NX The crux of the matter is this, to what extent can the provisions of the tax code, supposedly very strict, be interpreted to reflect the social norms of the local community? Is there sufficient positive proof of the alleged custom of unsolicited gifts to professionals, and if so, is it a reasonable custom of which the law must take cognisance? In their efforts not to unduly disturb traditional social institutions based on customary law, Nigerian courts frequently make an effort to adjust conflicts between customary and statutory laws. This is not unlike the principle followed in British and American practice that a law will not be declared void or invalid by reason of a conflict with another overriding statute or by operation of a constitutional principle, or rule of statutory construction, if the conflict can be so as to save the statute by judicious interpretation. 5. H.H. Monroe: 'Fees, Wages. Perquisites and Profits T/hatsoever1,1 - (1959) B.T.R. 25. To illustrate the point we refer to the case of Pawa v. Akangbe. In that case, decided by the High Court of T7estern State of Nigeria, the customary law of Hausa cattle trading was under attack. This rule gives the head of Hansa cattle traders a right, (i.e. '♦ladas11) on the sale of each cow. The defendant contended that the custom violated his constitutional right to choose his own cattle associations. In arriving at a decision, the Court took into account the nature of the local tribal society and held that the said custom • . was beneficial rather than detrimental to the cattle trader* andithus, was "reasonably'1 justifiable in the democratic society of Qyo tribe. How far the ratio decidendi of this constitutional law case is applicable to tax matters is open to doubt. What is not open to any doubt,however, is the basic principle it stresses. That statute law, which hapoens in this case to be the Federal Constitution, must be interpreted in a way to reflect ssoQciayl norms. Even though within a purely.y theoretical framework one is inclined to suggest that where there is no consideration any payments to a ■ professional should be regarded as part of the "gains or profits" from his profession, and therefore taxable, enforcing this may prove to be a practical impossibility. At present, it is fair to admit that the Nigerian Revenue lacks the administrative capacity to find out the facts in all cases especially if one remembers that the "giving" and "receiving" of these gifts are not documented and that 7 some may be difficult to quantify in monetary terms. For our 6. N.L.R. 268. See also Thomas ti. Franckt Comparative Constitutional Law Process - Cases and .Materials. i'HP » 7. It must be pointed out that there are detailed provisions for the valuation of benefits in Schedules I and II of the 1966 Income Tax (Amendment) Decree, now secs. 4A and 4B of ITI*IA 1961. 211 purposes it is sufficient to recognise that there is a problem which may either disappear as society becomes more industrialised and urbanised, and as people become more individualistic and less communal. Or, alternatively, as the Revenue acquires more expertise and operational know-how. Briefly, attention may now be turned to the tax treatment of isolated non-professional receipts. In the U.K a payment for service rendered on an isolated occasion and which is outside the taxpayer's ordinary trade or profession, may be an "annual profit" for the purposes of Case VI of Schedule D. This principle was judicially stated by Upjohn, J., as follows:8 "There is no doubt that a contract for services may and clearly does, form a matter for assessment under Case VI of Schedule D, and not the less so that the services are trivial or that they are to be rendered once and for all so that the remuneration may be regarded as a casual profit arising out of a single and isolated transaction." The principle embodies in this dictum is particularly relevant where the taxpayer has engaged in a single transaction for services of a professional nature. As has been pointed out earlier on, whereas an isolated business transaction can be taxed under Case I as an adventure in the nature of trade, there is no similar statutory extension of the word "profession" so that a single transaction of a professional nature cannot normally come within Case II of Schedule D, for such a transaction can hardly be held to constitute a profession. To be taxable, therefore, profits of this nature must come under Case VI of Schedule D. 8 8. Bradbury v. Arnold ̂ 957? 37 T»C. 855 at p.669» j; 213 Thus, in Hobbs v. Hussey, athe appellant, who was not an author by profession agreed to write his life story for a newspaper. The amount so received was assessed to tax under Case VI. The appellant contended that the transaction was an isolated sale of property, namely, the copyright in the series of articles and that the payments made were capital receipts. It was held that the true nature of the transaction was the performance of services by the appellant, the sale of the copyright in the articles being subsidiary thereto, with the consequence that the payments received were annual profits or gains assessable under Case VI of Schedule D. In Housden v. Marshall,^ the court reached the same conclusion, although in this case the appellant merely agreed to make reminiscences of his career available to a newspaper' and the articles in question were in fact written by someone else. The above cases must, however, be distinguished from those where the receipt is for a genuine transfer a$ property and so a capital receipt. In Haig's Trustees v. I.R.C.^ the appellants received certain sums which were held not to be chargeable in respect of the use of Earl Haig's Diaries for the purposes of publishing a biography because that publication largely exhausted the value of the Diaries. The court of session reached its decision on the basis that the sums in question were capital receipts in return for the realisation of 9. zh T.C. 153. 10. ^195* 7 38 T.C. 233. 1• Z^9397 22 T.C. 725. (j Jl J an asset. Again, in Beare v. Carterf an author of a work published many years previously gave a licence for a new edition in return for £150, and it was held that this was a capital sum. As a contrast to the U.K. position, the Nigerian law is quite straightforward. It is categorically provided that "tax shall . . . be payable for each year of assessment upon income accruing in, derived from, brought into, or received in Nigeria in respect of . . . any profits or gains not falling within the listed categories."'* Accordingly, there is no need to decide whether or not a particular receipt is an "annual profit" as is the position under Case VI of Schedule D. Where the taxpayer contends that a particular receipt is not income from professional activities, what the Nigerian Revenue has to decide are as follows: (l) Is the receipt of an income or revenue nature? (2) Is it something accruing to the recipient without consideration? In other words, is it a true gift? If the conclusion is that the taxpayer's receipt is of an income nature, and that it has been given in return for some consideration however casual or inadequate, then as a miscellaneous receipt it would be liable to Nigerian tax. The great significance of S.b(l)(f) can only be fully a0ppLr eTc iated when one recalls the fact that the majori.ty of Nigerians engage in activities which are of a vocational nature. 2 several of which are on a seasonal basis. 2. (19^0) 2 K.B. 187. Also Nethersole v, Withers / 1 9 W 28 T.C. 501 where a lump sum paid for ten years film rights in a play and not calculated on royalties has been held to be a capital receipt. 3 S.lKl)(f) ITKA. 1961 As admirable as the sweeping up provisions are, nevertheless inherent in them is a fundamental problem. In other words, the need to inquire into the legal nature of a casual activity engaged in by a taxpayer, and decide whether it is a "contract of service" or a "contract for services". If it is a "contract of service" then the net income is determined within the rules governing the computation of the profits of an employment or office and tax is deducted at source under the Fay As You Earn provisions. But if on the other hand,the taxpayer’s activity^ a "contract for services" his net profit is arrived at on the same principles as net professional income. C. Social Phenomena and the Determination of Taxable Emoluments Nowhere is the disparity between the provisions of the Tax Code and Revenue practice more glaring than in the determination of taxable emoluments. In Nigeria, tax is payable "on any salary, wages, fees, allowances or other gains or profits from an employment including gratuities, compensations, bonuses, premiums, benefits or other prerequisites allowed given or granted by any person to an employee".^ No case has yet arisen as regards the correct interpretation of these provisions, but if the D.K law is any guide, the authorities show that to be a profit arising from an employment the payment must not only be in the nature of a reward but must be made in reference to services rendered i.e. "Profit from office employment, salary" - The Concise Oxford Dictionary of Current English. 5th ed. 196^ at p.397. 5. S.*»(l)(b) as amended by S.l(2)(a)(i) Income Tax (Amendment) Decree 1966. « I £ £ i or to be rendered. Expressed differently, this means that the employment must be both the condition causa sine qua non as well as the condition causa causans. But the above proposition is not the same as saying that every payment to an employee which is in some way connected with his employment is subject to tax. The cases where a payment to an "employee" has been held not to be part of the emoluments of that employment can be classified into three categories. Firstly, where the payment made was gratuitous. Secondly, cases where an employee has received a payment under a contractual right which was held to be outside the scope of his employment. Finally, cases where an employee has received a payment after his employment has ceased.^ In the U.K, as regards gifts and other voluntary payments, the general principle in relation to their chargeability to income tax under Schedule E, was summarised by Lord Cave, L.C., in Seymour v„ Reed as follows: 8 O' "It must now I think be taken as settled that the (words "salaries, fees, wages, perquisites and profits whatsoever") include all payments made to the holder of an employment as such, that is to say, by way of remuneration for his services, even though such payments would be voluntary, but o not include a mere gift or present (such as a testimonial) which is made to him on personal grounds and not by way of payment for services". 67 6. See Collins, M.R., in Herbert v. McQuade ^190§7^ T.C. *»89 at 500. "The test is whether from the standpoint of the person who receives it, it accrues to him by virtue of his office1.1 Also Stirling L.J., at p.501. "A profit accrues by reason of an office when it comes to the holder of the office as such in that capacity and without the fulfilment of any further or other condition on his part." 7. Whiteman and Wheatcroft, op.cit., para. 1**-08. 8* @927/ A.C. at p. 559; 11 T.C. 625 at pp.6^5-6. O <■» ■) (* (v As we shall illustrate presently, the English rule is extremely harsh and unfortunately too has been interpreted in such an inflexible manner by the courts. A recent survey by TIME Magazine shows that for the "executive interested in money and fringes, Britain is less than ideal" and that "within the EEC, only the Irish executive earns less than the heavily taxed British".^ How true these findings are in view of is a matter of, conj- ect ̂ure. 2 Wtnh. at ̂ i. s i.mportan to a hour is from one country to another. Relating the matters outlined specifically to Nigeria, we ask the following pertinent questions which no other writer on the country's tax law has raised. How strictly should the expression "any salary, wages, fees, allowances or other gains or profits from an employment" be construed in revenue practice and by the courts? ; Considering, (l).$,the indigenous custom of the people and the traditional tendency of Nigerians to rever: people in authority — and that as a contrast to the developed 12 1. Time Magazine: April 2nd 1973 at page 9: "Executives Living on the Fringe". 2. The Lonrho affair was an attempt by eight directors to dismiss the Managing Director on the grounds that he conducted the affairs of the company in an unorthodox manner. Among the facts disclosed were huge payments to an individual as compensation for loss of office, excessive benefits in kl*«/ enjoyed by the M.D.tax-free — including a house valued at £350,000. The "Times" U.K. - Bernard Levin;"Putting our £350«000 houses in order" May 15th,1973* Also, editorial of the same paper, "Mr. Rowland Must Go." According to Robert Jones the four main issues spotlighted by the Lonrho affair were directors "perks", dealings with companies in which the directors have interests, the relationship of the chief executive to the Board, and the ultimate responsibility of the Board: The Times, U.K. May 21st, 1973* 223 countries, where the usual practice is for the employer to grant additional remuneration in form of perquisites to his employees, in developing countries the usual thing is for employees to give •’presents" in cash or kind to their employers in a manner reminiscent of the feudal era; (2) the need to attract talented men from abroad on one hand and to prevent a brain drain from Nigeria on the other; (3) the extent to which the tax law can be allowed to undermine the existing social and economic order in view of the ever pressing fiscal needs of the country. For the sake of clarity and depth the subject-matter is considered in two parts. In sub-sections (i-v) immediately following, the scope of taxable emoluments in cash or cash equivalent is probed drawing our analogies as usual where necessary from experiences in other countries. The more complex issues of benefits in kind, deductibility of expenses and tax computation are treated subsequently in separate sections. O ' (i). Gratuitous Payments by Employees In theory, where a gratuitous payment is made by the employer to his employe circumstances will have to be truly exceptional if the payment is not to be treated as merely an additional remuneration of the employee. Moreover, in such circumstances it will make no difference that the payment made by the employer is not money but money's worth, i.e. stamps, vouchers etc. For example in Laidler v. Perry.^where a group of companies gave each employee who 3 3. 16. 42 T.C. 351. Also a bonus paid to a single employee as a reward for special services outside his normal work is taxable under Sch.E. e.g. Barson v. Airey ̂ 1925/ 10 T.C. 609. has worked for them for more than a year a voucher for £10 as a Christmas present, the House of Lords held that the vouchers which were available for use in the shop of the employee's choice were properly charged to tax under Schedule £ as an "emolument" of each employee's respective employment.4 On the other hand, as indicated by the dictum of Lord Cave, L.C., cited previously,^ a payment to an employee on purely personal grounds, and r.ot by way of remuneration for services rendered is not taxable. From other illustrations given herein, we find once more that propositions of law are not as easily applied in practice as they are stated; due, of course, to the infinite variety of human transactions or relationships. First, we refer to the Ceylone;se case of C.I.R. v J.de Fonseka which in our opinion was wrongly decided by the Supreme Court of that country. The question of law which arose in the case stated’under S.78 of the Income Tax Ordinance for determination by the Court was whether the value of a free air passage 7 granted by the body called Air Ceylon to the assessee-respondent who was an employee of that body was part of his "profit from any employment" within the meaning of S .6 of the said Ordinance. *567 See the observations of Lord Hodson , ibid., at p.35 A.C., and p.336 T.C. 5. Supra at page 121. 6. (1968) New Ceylon L.R. 3^8. 7. The value of a free air ticket can also be regarded as a "benefit in kind" which shows that the distinction between a cash payment or cash equivalent etc., is not a rigid one. According to the staff travel scheme set out in the "case stated,* a free air passage granted under the scheme was described as a "favour" granted in his discretion by the officer of Air Ceylon competent to do so to an employee who has rendered service for not less than one year, or to a member of his family. Abeyesundee, J., delivering the judgement on behalf of the Court, and purporting to follow English law, held that the free air passage was not a reward or consideration for services. With due respect, it is submitted that this was a misapplication of the law. If the "free air passage" was not a reward for services then what was it? Certainly, it was not a testimonial for the personal qualities of the recipients, but rather, it bore a direct relationship to the terms of their employment, the fact that there vas a discretionary element in the administration of the scheme notwithstanding. o In Sutherland v, C.O.T., the Supreme Court of Ceylon seem to have applied the law correctly. In that case, the main issue was whether or not an ex-gratia payment made by a company to the wife of an employee after his death was taxable. The Court came to the conclusion that the payment in question was a gift to the appellant personally of a sum of money to which the deceased was not entitled and was not payment made to her in her capacity as executrix. Therefore, it was not a "profit" from the deceased's employment within the meaning of S.6(l)(b) and S.6(2)(a)(i) and (v) of the Income Tax Ordinance. As regards payments or purported gifts from employers to employees on personal grounds, the difficulty which must be recognised 8 8. (1951) Report of Ceylon Tax Cases. Decision affirmed by the Privy Council at page ^03 of the same Report. is that often what is involved is an enquiry into the motive as distinct from the consideration for payment. For example, in the 9 case of Craib v C.O.T., the directors of a company in whose estate the appellant was employed as a superintendent, by a special resolution granted him a special bonus of Rs. 10,OCX) in view of his "exceptional services to the company", and in consideration of the fact that he had to undergo medical treatment at home. In the retur "urnished by the company, this sum was mentioned as a "bonus" paid to the appellant. The Revenue regarded this sum as part of the appellant’s income and assessed it to tax accordingly. But the Court upheld the taxpayer's contention that the payment was personal to him and so could not be regarded as profits from any employment within the meaning of S.6(2)(a) of the Income Tax Ordinance 1932. The main difficulty in this case was the phrase "exceptional services" mentioned in the resolution which was,in actual fact,the motive and not the consideration for the payment. Reflecting on the practical application of the law in Nigeria vhat do we find? Employers make no strenuous effort to disguise additional remuneration paid out to employees. Gratuitous payments in cash or cash equivalent are paid out every day by the Federal and State governments as well as by private concerns. These include a "car basic allowance" paid on a monthly basis to employees who own 9, (1939) Reports of Ceylon Tax Cases at p.13& 227 cars;*0 a "mileage allowance which is usually well above the actual expenses incurred; a "leave bonus" which may be upwards of £200 depending on the status of the employee; a "rent allowance" where accommodation is not provided which could vary in amount from £300 p.a. to £1,500 p.a.*, an "inconvenience allowance' ;* a wife's or children's allowance which i3 quite different from personal reliefs allowed.2 etc. Somehow, it has escaped the Nigerian Revenue that & so- Co.|/« T.C. 276 especially at p.288, per Ungoed-Thomas, J. 4. TThiteman and TTheatcroft op. cit., para 14-23 at page 509. H 7 and employment income not withstanding. 5 (v). Pension and other Payments after Termination of Employment V'ithin the ambit of taxable emoluments are some payments which by their very nature the employee receives only after the termination of his employment. These include "pensions" paid in consideration of past services.^ But pensions must be distinguished from payments which are emoluments for past services as will be the a case if the payment is made.under condition of the employee's service agreement. In other words, arrears of salary or■ conmumnission paid after the employment has ended are treated as remuneration in re's pec t of the period of employment. And it would seem that payments made to an employee at, or after the termination of his employment by reason of some provision in his service agreement, even thought expressed to be in lieu of notice are equally taxable.^ The result will be the same where the payment falls to be made 0 on the death of the employee to his executors. The Nigerian law specifically provides that any "pension. charge or annuity" having its source in Nigeria is liable to the _______________:_________ __________. 5. The rules governing the deductibility of expenses are reviewed presently. 6. e.g. Fltrsv C.O.T. Yol.l (1936) Reports of Ceylon Tax Cases at p.62. Held inter alia that a pension is a profit from an employment, although that employment was in the past. 7. Henry v. Foster /l9317l6 T»c* 6°5 op.cit., See also Dale v. de Soissons , Since pensions and arrears of salary are taxable rigid classification is unimportant. 8 Note the attempt to levy tax on an executrix in Sutherland v, C.O, Supra. 248 q country's tax. This provision would probably be interpreted to include pensions paid voluntarily at is the case in the 0.K . ^ It is interesting to note that being an ex-colony, a substantial number of pensioners deriving income from Nigeria, are people living abroad especially in the United Kingdom. In theory, these category of persons are liable to double taxation, i.e. liability on Nigerian source income, and liability to U.K. tax on a "remittance basis" as well as by reason of their residence and domicile in that country. We examine how these potential conflicts are resolved in the chapters on double taxation. Whereas, a "pension" is clearly taxable, ao lump sum paid by an employer to his employee during the course of his employment in commutation of pension rights is not taxable in the hands of the recipient. This is because such a payment is not technically "income" so that it is netther caught by the specific nor general clauses of the charging provisions. The case of Tilley v- Wales^- highlights the position admirably. In that case, a director received a single sum of £40,000 in consideration of both his acceptance of a lower salary in the future than that stipulated by his service agreement and his release of the company's obligation to pay him a pension. It was held by the House of Lords that part of the sum ascribeable to the commutation of pension rights was not taxable. 9. 3. 4(l)(e) ITUA. 1961. 10. The Nigerian law does not categorically cover voluntary pensiony but the words of S.4(l)(b) ITia as amended by S.l(2)(a)(i) of the 1966 Decree would seem to cover a voluntary pension. 1. ^ 9 4 ^ 0 . 386; 25 T.C. 136. * . t 2*9 Viscount Simons, L.C., reasoned as follows!2 "Neither the pension nor the sum paid to commute it constituted in my opinion, profits from the office . . . . I agree with the unanimous view of the members of the Court of Appeal that a pension is in itself a taxable sub.ject-matter distinct from the profit of an office and if- an individual agrees to exchange his right to a pension for a lumpsum that sum is not taxable under Schedule E. S.'*Ce- the House of Lords held that part of the sum paid in consideration for the reduction of salary and forfeiture of pension rights was taxable, an apportionment to ascertain the non-taxable portion was necessary. The importance of this decision has been the "Solden Handshake" provisions introduced by the I960 Finance Act. As far as Nigeria is concerned, there is no reason why a payment in commutation of pension rights should not be taxable, especially, since pensions and gratuities are taxable. An unnecessary doctrinaire approach is unhelpful here and there is no reason for treating this specie of payment as capital receipts. For the sake of equity and because of the progressive nature of the tax burden, a lump sum paid out in commutation of pension rights could be spread out notionally over say ten years and then taxed accordingly. Finally, it must be established by now that the task of determining the scope of an employee1s taxable emolument paid in cash or cash equivalent is not an easy one. It becomes even more complex with the question of benefits in kind and expenses. To these matters we may new turn our attention. 2 2. Ibid.. at page 392 (A.C) and p.147 (T.C). 3 Emphasis supplied, 2 3 9 III. PH0BL5I.:S OF COMMUTATION - VALUATION OF BENEFITS IN KIND In a country where a substantial amount of remuneration or part of remuneration is in kind, the determination of taxable personal incomes strictly in accordance with tax principles may -rove unrealistic. Under the Nigerian law, the gross taxable receipts of an individual from an office or employment, (and perhaps a profession), includes not only receipts in cash but other benefits in kind, convertible or inconvertible.* Before analysing the statutory rules governing the valuation of benefits in kind, it is however considered necessary fiTst, to examine another related matter already referred to above, that is, the unique Nigerian concept of an "allowance" . A. The Indigenous Concept of an 11 Allowance” An "allowance" whether in cash or kind is specifically stated by the law to be a taxable receipt. 2 But in practice this is clearly not the case. 1 On a strict construction of S.4(l)(h) as amended it appears that any benefit convertible or inconvertible is taxable. The section provides inter alia that a taxable emolument includes "any benefit or other perquisite given or granted by any person to an employee . . . etc" . A benefit in kind is convertible if it is of such a nature that the recipient can turn it into money and it is inconvertible if it can only be enjoyed by the recipient, e.g. a servant's board and lodging, or an employee's free meals. For a general discussion of the principles of taxability of benefits in kind, see Royal Commission Report. U.K. Cmd 9474 Chapter 9. 2 S.4(l)(b) ITIAA 1961 as amended by S.l(2)(a)(i) Income Tax (Amendment) Decree 1966, No. 65 of 1966, 251 In Nigeria, the popular concept of an "allowance" is something given "free" . The term is understood in a very general or literal sense and it is absolutely unthinkable for anybody to suggest now that it is a taxable receipt. On an enquiiy into the tax treatment of "allowan es" and other perquisites in the country, a top executive of a government company put it this wayi^ *M7e are taxed on our salaries, and we live on our allowances". However outrageous this statement may seem to a foreigner, the truth is that it is to a large extent correct. As was pointed out previously, the Federal and state governments as well as the majority of companies are constantly paying out all sorts of "allowances" to their officials which nobody has dared to suggest are taxable. Nigerians are net alone in their misconception of the term "allowance". 4 In a recent Hong Kong case'5 for example, a policeman contended that a "hard-lying allowance" of f> 15 a day which he received during the 1967 civil disturbance was not part of his taxable emoluments. The Board of Review in rejecting the taxpayer's submissions noted, and we think rightly too, that the Revenue is not bound by the tag which the employer choses to ascribe to a payment. And that what is important is to examine what the payment really amounts to, deciding whether from the standpoint of the person who receives it, it accrues to him by virtue of his employment* 345 3. The gentleman interviewed is somebody of considerable importance in the country. Another officer put his own opinion as followst "Why pay me an allowance if it is going to be taxed" ? 4. The general misconception of the term "allowance" might be due to vernacular translation. 5. /19727H.K.L.R. p.ll. Case No.13/69 decided by the Inland Revenue Board of Review. N. B. The fact that a case like this could arise in 1969 shows the fundamental nature of the misconception. 252 The obvious question to ask in the given circumstances is whether the present status quo in Nigeria is the result of deliberate government policy or a Revenue concession. In our opinion, it is neither the former nor the latter. The present gross anomaly is more likely the result of two historical accidents, ’>7e know as a fact that these schemes of generous allowances or rather thinly disguised remuneration are the product of the colonial past designed by the British for themselves at a time when it was never envisaged that the indigenous people woulId be in the position to enjoy them. Secondly, after independence, the people who were in a position to rectify the anomalies were precisely those who stepped into the shoes of the departing expatriates and who themselves began to enjoy these so-called "allowances" . Apart from the above, there was, and still is, a genuine lack of awareness of the provisions of the tax law or more accurately of their implications, Were it more generally known that,in actual fact,the so-called "allowances" were emoluments, the government might have been inclined to react for a r r of reasons; (1) On grounds of ̂ especially the need to narrow down wage differentials. At present, the scale of "tax free allowances" is in direct proportion to the employee's salary or wages, so that the greater his stipulated earnings, the larger his "1'tax free allowances" are likely to be. In fact, there are many instances where a taxpayer Jr ’allowances" amount to more than • double his stipulated earnings. (2) Since there is no fixed statutory upper limit as to what can be paid as an "allowance" , to avoid tax is quite simple. For a moment let us assume that the intention of the law is for a citizen to be taxed on his salary while being permitted to t 253 live on his "allowances" as was suggested by that government official, then thousands of people would avoid tax simply by taking a cut in their salaries while accepting a corresponding increase in "allowances" , (3) lastly, we believe that were the government a7;are of the true position, it might have exploited it a3 a tax incentive for the attraction of international talant, and for encouraging hundreds of qualified Nigerians overseas to return to the country. On this premise too, there would be no need to grant complete exemption from personal income tax to vis iting foreign personnel. In view of the unsatisfactory state of thi Lngs, it is hereby submitted that the concept of an "allowance" in the tax code is a technical one, meaning anything which is a remuneration or part remuneration. The Hong Kong cases previously cited are sufficient authority for our proposition. 67 6. Note the unilateral tax exemption granted under the Income Tax (Technical Assistance Personnel) (Exemption) Notice 19&3. This notice amends the Third Schedule of ITL1A 1961 by introducing a new section (z), and it exempts from tax the income of personnel seconded to Nigeria as a result of a treaty or in pursuance of any other inter-governmental arrangement. The exemption extends only to emoluments under the arrangement and not to other incomes like interests, bonuses etc. - S.l6(3) ITL1A I96I. Furthermore, the exemption extends only to personnel seconded under governmental arrangements and not to those working for private concerns. Professor L.C.3. Gower was exempted from Nigerian tax while acting as legal adviser to the Federal Government - see Income Tax (Exemption) (Professor L,C.B, Gower) Order 1962. 7 i.e. C. I. R. v. Humphrey, supra at page 585 Board of Review decision. Case No. 13/69 /.1972/ H.K.L.R. p. 11. 254 Finally, it is also our submission that since most of the taxpayers who enjoy these so-called allowances are presently taxed under the P.A.Y.E scheme, no undue hardship will he created by bringing these allowances within the taxable emoluments of the persons concerned. 7/hat must be stressed is that the law must be enforced as it is and that the Revenue cannot remove or restrict a liability imposed by the Tax Code. The non-enforcement of the law as is the case now is inexcuseable. If in spite of our suggestion, the government deemsi i t necessar•y to make "allowances" non-taxable either on a genetral or selective basis, then the necessary amendment to the law must be made. P. Valuation of Benefits in Kind to For tax purposes the general rules governing the valuation of benefits in Nigeria are set out ivn y 720 Cedis per annum. Quite simplej is — 9. The crux of the matter is that the purchase price of the car remains a constant in our equation. 10. S.l of Table A, Second Schedule - Income Tax Decree 1966; Ghana as an extension of S.20(l) N.L.C.D. 78 of 1966. 1 1. Ibid., S.2 Table A. ’.Thile thinking along the above lines the Nigerian provisions need not be so rudimentary. Some unsatisfactory features of the Jhana lan can be improved. Firstly, the apparent assumption under that law that all cars are the same. In reality, cars differ so very much in size, quality and price that the tax law cannot ignore this. For the sake of convenience, cars should be classified into, say three categories, i.e. standard, executive and luxury using 3uch indicia like price, engine power and size. The^adopting the formulae some predetermined amounts on a progressive scale can be automatically added to the chargeable income of a taxpayer in Nigeria who is given the use of a car depending on the class of car, and whether or not fuel is supplied and a chauffeur provided. In order to mitigate any hardship and recognising the depreciating nature of all assets, the useful life of a car could be fixed at a 2 maximum of 10 years. The taxpayers additional remuneration for the use of the car could be reduced yearly by substracting a tenth of the standard figure for a new car. The net result is that an employee who is given the use of a car which is ten or more years old is deemed to derive a nil benefit from it.2 It is thought that the proposals set out above would be much easier to administer than the present Nigerian rules. At this juncture it might be necessary to stress that any method, formula or technique of valuation to be adopted must be based on ---------------------------------- ------ -— 1 ■ 2. Our suggestion is analogous to the straightline method of writing down the value of an asset under the *• Capital Allowances'1' system. compromise and not dogma. The futility of any legal reasoning in the valuation of money' 3 worth as regards cars etc., is demonstrated by the case of Ho-iton v. Bell. ̂ Briefly, tie facts were as follows; The taxpayer participated in a car loan scheme and the employer subtracted a sun whose amount depended on the type of car on loanJ.f The taxpayer was assessed to income tax on his gross wages without subtracting the loan amount for the car. The taxpayer's contention regarding the nature of this transaction was that it involved him accepting a wage calculated at the amount which remained after the car loan amount was subtracted (about £2.103 per week). The taxpayer argued that there was no benefit to him from the transaction, or alternatively if the loan of the car was a benefit, it could not be converted into money or money's worth. On the contrary, the Revenue contended that the car loan transaction was separate from that relating to the taxpayer's wages. Therefore, the amount subtracted was a deduction from the taxpayer's wages and the loan of the car was a benefit, a perquisite which could be converted into money or money's worth by the taxpayer giving 14 days' notice to terminate the loan. 4 At first instance, Ungoed-Thonas, J., was sure that the taxpayer did enjoy a perquisite but the Court of Appeal reversed his decision because it found it impossible to arrive at a basis for 34 3. T.R. 147 (C.A.) U.K. Reversed by H.L. ^ 969/2 W.L.R. 715. For a review of the case see L. Lazar (1968) A.S.C.L. 608 et seq. 4. ^1962/ T.R. 199. This was in the Chancery Division. the evaluation of what was money's worth (if any) of the car which was loaned to the employee. In the opinion of the Court,the measure of benefit was clearly not the weekly amount which the taxpayer was charged as was suggested by the trial judge. Following the principle established in Abbot v,Fhilbin^ that to be taxable,money's worth had to be capable of conversion into a monetary equivalent, it was decided that the taxpayer was not taxable. A . In all circumstances similar to Heaton v. Bell the provision of a rough and ready formula by the taxing legislation will be most appropriate. A v vV . Turning once more specifically to Nigeria, it can be observed that whereas a substantial number of persons enjoy the use of vehicles provided by the employer, a greater number of taxpayers in the country are granted loans or "car advances'' to use the more popular expression. Below, we examine the legal position generally of loosif to employees. c , (iii). Loans to Employees The question to be considered here is whether or not an interest free loan or a loan at a rate below the market value made by an A • * * v j t employer to an individual is a taxable benefit within the law, and if so, the basis on which the charge on the employee is to be calculated. It has been suggested and this writer agrees, 6 that suc.h a » loan must be a * benefit" in the ordinary meaning of that word. But 56 5. ^96l7A,C. 352} 39 T. Car 124. 6. T7hitenan and YTheatcroft op.cit., p.523 para.14-41 2G7 that notwithstanding, it would seem that where an employer makes a loan available to an employee out of his available funds there may be ft -& no liability for the employer has not incurred an expenses in connection with the provision of the benefit. On the contrary, as will more generally be the case, where the employer has borrowed money at interest to make the loan, S.4A of Schedule I of the Income Tax (Amendment) Decree 1rs 276 In the prevailing circumstances, it would appear, although this is only a speculation, that a lot of Commonwealth countries especially the developing ones, have an insufficient understanding of their tax statutes or else an irinerent inability to apply their laws* Otherwise, how can the sharp contrast be explained between developed countries where tax cases seem to crop up, and the developing countries where there are no such cases? 77e are assuming, of course, that human conduct everywhere is basically the same. Prom the discussion below the futility and unreasonableness of some of the provisions in the laws of the new Commonwealth countries which have been modelled after the British become very obvious. B. Expenses "V-holly and Exclusively" Incurred: Duality of Purpose? The above expression which governs the deductibility of expenses as regards a trade, profession or vocation in the U.K., has been interpreted to the effect that where a taxpayer makes an expense, it must not be for more than one purpose. In other words, unless he applies monies exclusively to a purpose specified in the tax provisions, he loses the exemption or the deduction he might otherwise claim in respect of such application. The inflexibility of the q "wholly and exclusively" provisions is well established. 9. See L. Lazar (1967) ASCL at p.534. Note also that the usual exemption for charities precludes the application of any part of the relevant income to any purpose other than "charitable" : e.g. as was held in IRC v,Educational Grants Association /T967/ 2 All E.R. 893 (C.A.) where the application of monies for the benefit of employee's children was held not to be for the benefit of the public as a whole and hence not charitable. « 277 In 7'urgatroyd v, Evans Jackson.10 the obvious and for the taxpayer unhappy proposition that "partly" doe3 not mean "wholly and exclusively” , is very well demonstrated.1 The relevant facts were as follows* The taxpayer sustained an accident which resulted in his going into hospital. He declined a bed under the National Health Scheme and took a private room in a nursing home which enabled him to carry on his profession as a trademark agent during his sojurn there. His claim for 60 per cent of the hospital bill was h eld*. Plowman, J., to be fatal to a contention that the money was "wholly and exclusively" laid out for the purposes of tfepx •ofession, being a tacit admission that it was not. The Royal Commission was aware that the expression "wholly and exclusively Joes: «tft contemplate the possibility of an apportionment of an expenditure which is attributable partly to the objects of a trade, profession or vocation, and partly to other objects. Yet, in their Report they were reluctant to recommend a change in the status quo because according to them all available evidence show "that the rule is regularly interpreted as if it did allow such apportionment wherever it was possible to dissect a block of expenditure according to its objects*. s S T *123 10. /19627 1 All E.R. 881 (Ch.D. UK); /T96JJB.T.R. 151. 1. The Income Tax Act (1952) UK, S.137(a) disallows the deduction of "any disbursements or expenses not being money wholly and exclusively laid out, or expended, for the purposes of the trade, profession or vocation" . 2. The Crown conceded a sum of £15 for the use of the telephone. 3. Cmd. 9474 p.42, para. 123. In our opinion, the post-1955 experience has not justified the optimism of the Royal Commission. Clearly, the case of "ur-atroyd v. Evans Jackson was one in which an apportionment should have been allowed on some sort of a rough and ready basis. 9 The taxpayer's action in that case was by all accounts reasonable. By the use of his private room, he was able to keep his practice going and earn money, while at the same time preserving the capital asset of good will. Even though a somewhat similar terminology is employed in both the Nigerian and U.K. tax laws, and despite the suggestions of some wri. ters, 4 i.t is our submission that as regards the deductibility of expenses, the two laws differ in a number of material respects. For example, whereas apportionment was neve r contemplated in the U.K., it is specifically provided for under the Nigerian law. In the words of the statute, there shall be deducted* 5 "all outgoing and expenses or any part thereof, wholly and exclusively . , , incurred . . . in the production of income" . ® The fact that a duality of purpose i3 permitted is highly significant because this seems to be the exception rather than the 7 rule. The taxpayer's right here is not based on the discretion of the Revenue and is unquestionable. VThat may be questionable, however, is the precise formula for apportionment because a3 a practical 4567 4. S.0. Fashokun for example, gives the impression that the effect of the U.K. and Nigeria is the same. 5. Emphasis supplied. 6. S.17(l) ITMA as amended by S.5(2)(a) of the (1966) Income Tax (Amendment) Decree 1966. No.65 of 1966. 7. In the majority of Commonwealth countries the wording is nearer the U.K. version, e.g. see S.8 Income Tax Decree 1966. Ghana - NLCD 78. .natter it may not be easy to dissect an item of expenditure into different parts and to attach a value to each Fart. Furthermore, there is the problem of inquiring into taxpayers’ motives, an exercise which is manifestly difficult. In spite of the potential problems, the basic Nigerian position must be understood, and no attempt should be made to follow the unfortunate example of the United Kingdom in this regard. So far, so good. Recalling what has been said previously, 8 that the same rule8 govern the deductibility of expenses under the Nigerian law, that is, as regards all kinds of income whether relating to a profession, vocation, employment, office or trade, no objective appraisal of these rules can be made without looking at the significance of the "necessarily" incurred test. , C. Expanses "Necessarily’ In the U.K. this condition effectively means that it must be impossible to hold the taxpayer's office or employment without incurring the expenditure claimed to be deductible. And the long line of authorities establish that in incurring the expenditure there must be nothing optional on the part of the taxpayer. 899 8. Supra, at p. 9. See Lord Blanesbury in Ricketts v,Colcuhoun stressing the objective character of the rules when he said that "deductible expenses do not extend to those which the holder has to incur mainly . . . because of circumstances in relation to his office which are personalt^imself or as a result of his own volition" (1926) A.C. p.l at pp.7-3. The objective character of the rules were also stressed in Ea.~les v.Levy £1934/19 T.C.23 where it was held that the costs of an action brought by the taxpayer to recover his pay were not deductible on the grounds that the need for the action was personal to that particular taxpayer. 2S0 The severity of thi3 rule has been acknowledged in a number of cases,^ but that notwithstanding, the courts and the Revenue in the U.K. have been unreLenting in their ruthless application of the law. However, if the statement of Lord VTilberforce in Pook v, Owen^ is anything to go by, a new judicial approach to the "necessarily obliged" part of the expenditure test may be in the offing. His Lordship while acknowledging that the test is drafted in an objective fora, so as to distinguish between expenses which arise from the nature of the office and those which arise from the personal choice of the taxpayer, was of the view that this does not mean that no expenditure can ever be deductible unless those expenses are precisely those which must necessarily be and every holder of a particular office.2 T7ith that brief outline of the U.K. law, our task here is to determine the following matters. The appropriateness c? otherwise of the "necessarily obliged" part of the expenditure test under the Nigerian law; in the computation of the income of an office or employment on one hand, and the income from a profession, vocation or trade on the other. (i). Smployment or Office Income In deciding whether or not an expense has been, incurred necessarily, the Nigerian Revenue must not ignore social realities. 10. Cmd. 9474 p.44, paras. 129,130,151 and the cases cited therein. 1. /ltfcj 45 T.C. 571. 2. Ibid.. at pp.595-7. i 2S1 It ciu3t be remembered that there are numerous posts in the country, the incumbents of which according to tradition and custom are obliged to spend a part of their remuneration on hospitality. These include Cb.aŝ and Emirs** who have to spend lavishly on entertainment, travel and protocol as well as in maintaining their aura of authority and respectability. There is no need to be strictly legalistic here and to follow English precedents. To hold that the above kind expenditure are not allowable because the taxpayer could do without incurring them and yet discharge the duties of his office is unacceptable. Althoughtas we must admit there may be abuses as taxpayers submit grossly excessive claims, nevertheless, this does not detract from our basic submission since the objective character of the expenditure test relates to their nature and not their amount. Apart from the liberal application of the law as advocated above, there is probably a justification for tightening up things in several other directions. A number of instances may be highlighted. In Nigeria, the usual practice is for companies to sponsor their executives to become members of purely social and rather elitist clubs. The excuse given is that this has to be done in order to establish "business contacts" . Sometimes no excuse is given at all and it is stated quite blatantly that a "fringe benefit" is being conferred on the employee. 34 3. local Indigenous Rulers. Royal person (Southern Nigeria). 4. Local Indigenous Rulers. Royal person (Northern Nigeria). 23 Without bothering to inquire into motives the legal position may be restated as follows* Where an employee enjoys a perquisite or benefit by reason of his employment, it is taxable as an r additional remuneration and the measure of the benefit is taken to be the amount incurred by the employer in providing the benefit.^ In case of club membership , it would probably be the amount of the annual subscription, which in Lagos can be as much as £500. Our contention is that not only is the amount of the subscription taxable in the hands of the recipient, it is also not an allowable deduction from the payer's standpoint, because pet ^ an expenditure incurred "wholly and exclusively" nor "necessarily" in the production of income. Where the employee himself pays the club subscription out of his remuneration it is equally not an allowable deduction unless it is proved that this was an expense "necessarily" incurred for the discharge of the taxpayer's duties, and that it was a kind of expenditure which every holder of his office or employment was required to meet. That is assuming, of course, that the taxpayer satisfies the first arm of the rule having proved that the expenditure was "wholly and exclusively" incurred for the purpose specified. The U.K. cases support our argument. Thus, in Brown v» Bullock^ where a bank manager became a member of a West End club, something which was virtually a condition of his employment, the Court of Appeal held that no deduction was 5. S.4A ITLIA 1961 as amended by Decree No. 65 of 1966. 6. /I96l741 T.C. 1. Also Humbles v. Brooks /1962J 4O T.C.500 and Luoton v.Potts (1969 45 T.C. where it was held that a solicitor's articled clerk could perform his articles.without taking the Law Society Examinations. The fees for that examination were therefore not deductible. UNIVERSITY OF IBADAN LIBRARY 1-0 allowable in respect o f the expenses so incurred as the duties of the office could he performed without his becoming a member of the club. The decision in this case was not followed in Elwood v . V t i t z ! Tr. the latter case, the taxpayer who lived in Ireland was required by his company to make frequent visits to London in the performance of his duties. In order to obtain accommodation which was less expensive than staying at hotels, he became a member of two London clubs. The Court of Appeal of Northern Ireland held that the membership subscriptions of the two clubs which resulted overall in a net saving of expense were allowable as deductions, the fact that other club facilities were enjoyed by virtue of these subscriptions being largely irrelevant. The decision in the Utitz case can be explained quite simply if it is accepted that the club subscriptions were paid not to gain membership as an end itself but to obtain accommodation and facilities which the appellant had to get if he was to perform the duties of his office. This is quite different from the Nigerian situation where membership of prestigious clubs are ends in themselves. Still dwelling on the question of subscriptions by taxpayers, we must not be understood to suggest that no such payment should ever be allowable. Indeed, subscriptions to learned or professional bodies can produce a salutory effect both on the taxpayer and society in general. But such is the absurdity of the "necessarily obliged" test that although it is often desirable for an employee to incur certain expenses it is extremely rare for such expenditure to be considered necessary. 7. _/"l9657 42 T.C. 482, % L In Simpson v.Tate for example, a county medical officer of health Joined certain medical and scientific societies in order that he might be aware of all recent advance*in sanitary science and keep himself up to date on all medical questions affecting public health. It was held that the subscriptions paid by the tax­ payer to those societies were not deductible for tax purposes as they were not monies expended "necessarily” in the performance of the duties of an office. Rather, they were expended to enable the taxpayer to continue to be qualified which is an entirely different matter. This decision is now subject to a statutory provision97 in the U.K. which established that fees and subscriptions paid to professional and learned societies can,if certain conditions are satisfied, be deducted for tax purposes. o f It is our view that a similar provision should be made in the Nigerian law. Nothing should be done to discourage learning or self improvement. (ii). Income from a Profession, Vocation (or Trade) Unlike the Ghana1^ and U.K.1 position, for a professional to be able to claim any payment as a deductible expense in Nigeria, 8910 8. ^192^/2 K.B. 214; 9 T.C. 314. Note the case of Chelvanoyakan v. C.O.T. (S.C) /l932/ReP°rts of Ceylon Tax Cases, p.144 where the cost of a set of Law Reports purchased by an advocate was held not to be an allowable deduction. 9. S.192 ICTA 1970. U.K. Extra Statutory Concession No. 12 Cmnd.1258. 10. S.9(b); S.20(l) (1966) Income Tax Decree (Ghana, 1. Tfe refer here to the expense rules governing Cases I and II of Schedule D. 2 it must not only have been incurred "wholly and exclusively" for the profession, vocation or trade but "necessarily" . 3ut how is the "necessarily obliged" test to be applied? Does it mean that to be allowable the expenditure must be such that it would be impossible for the professional to exercise his profession without incurring it? Stated differently, must the expenditure be such that every professional placed in the position of the taxpayer has to incur it? Considering that the type of taxpayers s sub-head are self-employed persons, there is not theref employer to be looked to whose requirements or conditiorr are crima. facie evidence whether an expense is necessary. Is it not t—ru e then that the decision of the spender himself rust be given considerable weight? Or, alternatively, can the "necessarily obliged" test be construed to be an objective one with regard to employment income, and a subjective one in the case of professional or vocational income? .With regard tc a trade when is an expenditure "necessarily" incurred? Can the courts in Nigeria or the Revenue substitute its judgement for that of the trader himself? We thinkj: not. In short, the "necessarily obliged" test is a futile one as far as the above matters are concerned. Even assuming that it can be administered effectively, how reasonable is it to restrict the freedom of entrepreneurs? In our opinion, the "necessarily obliged" part of the expenditure test should be removed so that the only test is the objective one; viz, whether the expense was "wholly and exclusively" laid out for the purposes of a trade, profession or vocation. C O 256 However, the "necessarily obliged" test may be retained to govern the deductibility of expenses of employees and office holders provided it is applied with some degree of flexibility. Regrettably, instead of a move to lessen the restrictiveness of the rules that govern the deductibility of expenses, the Nigerian authorities have manifested an intention to add a further test.2 According to a press statement issued after the 1973 budget speech, ^ , the Income Tax Acts are to be amended to ensure that only expensest "wholly, exclusively, necessarily and reasonably" incurred V in the production of income is allowed ’Vith due respect, this writer is of the view that there is some muddled thinking high up in the Revenue hierarchy. For example, is it nossible for an expense to be incurred "'jn ecessarily" and yet at the same time not to be incurred "reasonably" ? Does the "necessarily obliged" test not imply that the expense must be "reasonably" incurred? Taken in isolation, what is a reasonable professionol. e^cn*s*- or a ’reasonable" trading expense? Is it plausible to apply an objective test here and to hold that a reasonable expense is such that any average person would consider reasonable? Tithout mincing words, our submission is that the proposed addition of the "reasonable man's test" to govern the deductibility of expenses is highly undesirable, especially when one remembers that the present testfhave gone too far already. 2 2. Daily Times (Nigeria) April 4th, 1973 at P.5. D. Expenses Must be Incurred "In the Production of Income" To rank as a deduction from income, the expenditure must have been incurred either (l) in the course of the performance of the duties of an employment or office, or, (2) in the exercise of a profession, vocation or trade. No authoritative pronouncement has yet heen made in Nigeria on the interpretation of the expression "in the production of income" , which undoubtedly is of the utmost significance. Ii the findings in C^O. T. v, BuV.enba Mines (East Africa) are to be believveedd,f then .the words probably bear a narrower meaning than the expression "for the purposes of the trade" . But this in fact does not tell us much. Eow much narrower, it may be asked, is the former expression in comparison with the latter? . O v It would seem that the two expressions in question are the legal draughtsman's way of saying that deductible expenses must bear a sufficiently -»lose relationship to the income producing activity; be it a trade, profession, vocation or employment. The great difficulty is that no clear-cut degree of proximity between expenditure and income generating activity can be prescribed. To illustrate the legal principles involved here we refer to the South African case of Port Elizabeth Tramway Co. v C. HR. ̂ where the meaning of the words "in the production of income" was duly considered. In that case, the taxpayer was a transport company. On one occasion the driver of one of its cars lost control of the vehicle 3 ■2a. 2 E-AT-C 333 3. Z1936/C.P.D. 241; 8 SATC 13. 283 ;.:ich ran into a building as a result of which the driver suffered .tries and eventually died, The company was compelled to pay r:a.ensution and the legal costs incurred in contesting the claim of the deceased's representatives. But the real point at issue was t--i3 t How closely must a company's expense be linked to its business operation? As the employment of drivers was necessary for carrying on the business cf tie company, and as the employment of drivers carried k '. . : u a necessary consequence a potential liability to pay • cb if such drivers were injured in the course of their . v.e Court considered that the compensation paid by the n_st be regarded as being so closely connected with the . -:: a= earning act from which the expenditure arose as to form part of the cost of performing it. The compensation was,therefore, an allowable deduction. . s y As regards the legal costs, the Court held that these can be deducted if they too are so closely connected with the earning of the income as to be regarded as part of the cost of earning it. In this case, they were expended in resisting a demand for compensation and as this was not an operation entered upon for the purpose of earning income, the company's legal costs were consequently disallowed. Another case which show that to be deductible, an expense incurred in the production of income must bear a sufficient closeness 4 to the income generating activity, is Bolam v. 3arlow. In that case., 4. T.C. 136. t e taxpayer an employee of a water board, was required to live within a reasonable distance cf his place of employment, and by so doing ~e spent more on accommodation than he would have done if he had been free to choose his place of residence. It was held that a claim to deduct this excess cost of living near his work was inadmissible.^ This case also illustrates the general principle that living expenses are never deductible for a taxpayer does not "eat or sleep in the course of performing his duties, but either before or after their performance" .6 But where the taxpayer must incur an extra expense in having to live away from home in the performance of his duties, that extra expenditure is usually deductible. In bolder v- TTaters 7for example, w.ere the taxpayer an aerospace pilot was granted a subsistence allowance of £1 per night when away from England, it was held that expenses incurred in excess of this allowance as well as the allowance itself were allowable. In this case, they were over and above that which would have been incurred while the taxpayer wa3 living at home. As ary ssttrict xrule is difficult to apply in practice,the U.K. Revenue now by concession allows the whole cost of living away from home so long as the taxpayer in question has a permanent residence. 8 The Nigerian Revenue apparently does the same, although a clear statement on this is not generally available. 5. See also Collis v.Hore /l 94,2731 T*c* P.173; Lomax v. Newton 34 T.C. 558. ' 6. Per Viscount Cave, L.C.,in Ricketts v. Colquhoun /T9267a .C.1 at P.6. 7. £ 9 3 0 7 15 T.C. 380. 8. nhiteman and Theatcroft op.cit., p.528, para. 14-49. 290 To sua up, it would seem that the measure of expense incurred vi production of income is a practical hard matter of fact to : : irained according to the particular circumstances of each case. 7 . p-.iinj principle, however, is the proximity or otherwise of an . - _m of expense to the taxpayer’s income generating activity. _. Incurred Darin- the Year of Assessment Unlike "losses" , which can be carried forward _m *:xpense" cannot be carried forward to a subsequent tax year :r carried back to a previous tax year even thou^i such expenditure , rcperly relates to the income of those particular tax year3. ^ Similarly, an apportionment of "expenses" over several years is not permitted.^ The Nigerian law which is clear on the above principles is quite acceptable. To allow apportionment of expenses over several tax years would be to complicate the task of the Revenue and the rule on expenses just discussed is probably most clearly shown in a' series of cases dealing with the travelling expenses of taxpayers. r. S.21(2), ITLIA 1961. 13. S.17(l), IT..1A 1961 as amended by S.5(2)(a) of the (1966) Income Tax (Amendment) Decree No. 65 of 1966. 1. See 1.0. T. v. Kotecha Estates Ltd. ^971^. A.L.R. 63. 2 3 1 * : : context, a distinction must be dravrn between an individual - incurs expense in travelling to his- place of work and an - irtiual who has two or more places of work and incurs expense - -.r-.vailing from one such place of work to another. .’. Expenditure Incurred in Travelling to a Place of ?ork The general rule that the expense incurred by a taxpayer in * -elling to and from his place of work is not deductible is well .llustrated by a number of cases. la Firstly, we consider the . -. âticn where the taxpayer is an ex•pplloo;yee, we refer to the case of Ricketts v. Colquhoun. 2 In that case, the taxpayer, a -arrister practising in London, also held the appointment of Recorder of Portsmouth. He claimed inter alia that his travelling expenses from London to Portsmouth on the occasion when he sat as Recorder were deductible under Schedule E. The House of Lords rejected this claim because the expenses were not incurred in the exercise of the taxpayer's duties. And as Viscount Cave, L.C., rightly stated! "(the expenses) are incurred not because the appellant holds the office of Recorder of Portsmouth but because living and practising away from Portsmouth, he must travel to that place before he can begin to perform his duties as Recorder and, having concluded those duties desires to return home . . .". *23 la. The general rule emerges from S.18(a) ITIIA 1961 which disallows expenses of a domestic or private nature. 2. £ 9267a.C. p.l. 3. Ibid., at p.4. 292 The case of C.I.R, v, Humphrey* ̂ (Hong Kong) already discussed is -Iso in point here. The essence of this decision we may recall, is at where the employer himself grants an allowance to the taxpayer ‘.o cover the cost of his journeys to his place of employment, then :uch an allowance is deemed to be an additional remuneration and hence taxable in the hand3 of the employee. The general philospphy behind the taxability of travelling expenses to and from a place of employment was considered by the .7. Royal Commission in their report. essentially -rith their conclusion which was to the effect that it was entirely up to the taxpayer to decide how far or how near he wishes to live from his place of employment. 5 That notwithstanding, in cities like Lagos where people are obliged to make journeys of up to to and from work, because they find it impossible to live nearer their places of employment, is there no case for allowing all or part of the amount spent as deductible from the employee’s income? We think there is. What we are saying is that whereas in the past the taxpayer did have a genuinely free choice as to where or how far from his place of employment he wishes to live, today, circumstances give him very little choice. It would perhaps have been unwise to press for any changes in the status quo considering the great administrative burden it may /T9707Hong Kong L.R. 447. * Cad. 9474. Travel Between Home and Work, paras. 236,237 at p.75. 293 ^.1, yet, in view of the widespread practice of granting generous expenses to the better paid employees, a fresh thinking •«?; is a must. * If only for reasons of equity and as a means of reducing the w - retween the rich and the poor, we are suggesting that any .icyee in Nigeria earning below £400 p.a. should be allowed to deduct 2. given sum of say £20 p.a. as his cost of travelling to and from his p i of employment. It is, indeed, sad to observe that the social order in Nigeria .3 such that those who are highly paid already, pl ecisely those -.o are granted additional remuneration like "travelling allowances" A (taxable but not taxed), to help them weather the increasingly high cost of living.^ 7/hile on the other hand the less fortunate citizens are forced to spend a substantial part of their meagre earnings on travelling. w * Our suggestion of a deduction across the board of £20 should not create any great problems especially since most employees are now taxed at source under the PAYE system. To allow the present disgraceful situation to remain unchanged under one pretext or another is to say the least, an oppression of the masses. - lluch of what has been said for the employee applies to the taxpayer exercising a profession or vocation. He cannot deduct from • « his income any "domestic or private" expense, which in this context 4 • includes the cost of travelling between his residence and his place of work. 677 6. As the Royal Commission observed, "the curious paradox is that the more highly paid employee could be presumed to be the kind of person to whom benefits in kind were specially likely to be offered" . Cmd. 9474» para. 216. 7. See S.18(a) ITMA. See Ra.iapakle ▼ ■C.O.H infra. The slightly different problem which may arise when the , m _ - ;payer has^more than one place of work is now considered. Travel Expense and the Itinerant Taxpayer To be allowablet the general rule i3 that;(l) an expense must ̂incurred in travelling from one place of work to another in ;:anection with the same employment; or (2) from one place of ctivity (to use a loose word) to another in the 0 e■;rcise of a profession or vocation. As the cases show, whether the taxpayer in doces have t.wwo places of work or two places of activity is a matter of fact. 9 In Pook v. Owen for example, the taxpayer carried on practice as a general medical practitioner at his r•eessiiddeence. He also held a part-time appointment at a hospital 15 miles away as an j Q y * oostetrician and anaesthetist. On occasions he sras on stand-by duty and during those periods he had to be accessible by telephone. His responsibility for a patient began as soon as he received a phone call. On receipt of a call he gave instructions to the hospital staff and usually he then set out immediately for the hospital but sometimes he advised treatment by phone and awaited further report. 8. Cmd. 9474 p.75, paras. 238-241. The general principles involved are discussed here under the heading''The Taxpayer with more than One Calling" . 9 9. /19627 45 T.C. 5?1* This case must contrasted with the House of Lords decision in Tavlor v. Provan /I9747 2 TC.L.R. p.394, where it was held that the travelling expenses between Canada and the U.K. of a Canadian resident director of a U.K. company constituted part of his emoluments within « HE, a nd3 w e r e n o. ti. n e_ cessaril1 : resulting room where the telephone was. ‘10 Usually, a taxpayer who seeks to deduct travelling expenses from his taxable emoluments may be faced with two problems. Firstly, as to the deductibility of the claim at all he will have to show * at he was "necessarily obliged" to incur (some) expenditure in travelling while at work. Secondly, as to the amount of the reduction claimed, that he was "necessarily obliged*to incur expenditure on travelling while at work to the full extent of the urount claimed, that is to say that he could not equally well have performed his travelling duties by cheaper transport. If he could rave done so, he may be allowed the amount that he would have incurred on travelling by means of that cheaper form of transport and net the amount claimed.^ *1 10. Ibid.. at p. 590. 1. See Karsden v-I.R.C. W.L.R. 734, Ch.D. U.K. where taxpayer used his private car for official duties instead of public transport which could have been cheaper. For the taxpayer exercising a profession or vocation, it is -.Lit a question of fact whether or not any expense is deductible for -- billing between several places of activity. In Nigeria, the ■ -' 3 are exactly the same as those governing the travelling expenses rf itinerant employees. To illustrate the principle here, we refer -: tr.e Ceylon^ case of Ra.jarakse v. C. 0. T. ̂ where the main question issue was whether cost3 incurred by an advocate in travelling *ran the premises in which he resides and has his chambers to the '-treae Court are allowable, considering the express provisions of * ; law that "no deduction shall be allowed in respect of domestic :r private expenses, including the cost of travelling between -esidence and place of employment". Drieberg, J., delivering the -igeaent of the Court stated that* "the chambers of an advocate and the courts are the place of business of an advocate, (and that) his movement from one place of business to another does not come within the scope of S.l(a) . . According to his Lordship, the question of whether or not a reduction would be allowed for travelling between these two places "Till depend on whether they are to be regarded as outgoings or expenses incurred by the taxpayer in the production of income" . Tfaile the Nigerian law is fairly clear on the*point that travelling expenses are to be allowed to a taxpayer where he proceeds from one place to another in respect of the same profession or rocation, what is not so clear is whether travelling expenses should 2. £19347(S.C.) Reports of Ceylon Tax cases p.27. 19 Ibid., at p.36. 4 2 "be allowed where he is carrying on two or more distinct professions or vocations. For example, nothing prevents an auctioneer in one part of the town being a freelance broadcaster in another district. In South Africa, where the taxpayer has two or more distinct businesses, expenses incurred in travelling from one to another are not allowable. 4 Vfe doubt very much whether Nigeria should follow } this example. if$ Since the majority of the people in the country pursue multiple vocations some of which are on a seasonable basis, it is our submission that any expense incurred in moving from one locality to another should be allowable. To regard this as a purely private f i or domestic expense would be unfair. (iii). Overseas Travel; Y/hen are Expenses Allowable? I! Nowadays people travel around the world a great deal more. I.Iany for the mere pleasure of seeing people and places but for some as a necessary concomitant of earning a living. Professionals I I we know, now have to travel abroad in order to keep abreast with l the latest developments in their respective fields, while artists and architects especially, may have to hop from one continent to another in search of new ideas and for the purpose of stimulating their creative thinking. The trouble usually is that it is not easy to distinguish a pleasure trip from a non-pleasure one. Furthermore, in situations where a travel expense is sufficiently analogous to a capital expenditure what should the legal position be? 4. A.S. Silke (1972) QP.cit.. p.207, para. 218. ; UNIVERSITY OF IBADAN LIBRARY With travel overseas, the tax position is as follows; (l) When is a travel expense "wholly and exclusively" incurred for the production of incone? That is, considering that there is usually a duality of purpose when people travel abroad, (2) When is an overseas travel, and hence the expense, "necessarily" incurred in the production of income? Whereas the first test may be easy to satisfy the latter is rarely ever satisfied because a travel overseas, though desirable, is rarely necessary. No case has yet arisen in Nigeria as regards the above matters. Turning our attention then to other Commonwealth countries, we find that the courts have sometimes taken a fairly liberal view of expenses incurred for overseas travel. We refer first to the case of Paramac Printing Company Ltd, v. Federal Commissioner of Taxation. ̂ The company in this case specialised in printing materials which contained pictures, drawings, captions etc. This involved a lot of creative work and thinking on the part of the managing director, his wife and daughter who were employees of the. company. The point at issue was whether expenses incurred by the afore­ mentioned persons to overseas art galleries and exhibitions were allowable. Although Owens, J., held that visits to galleries etc., were usual tourist activities, nevertheless, his Lordship was inclined to allow the cost of the overseas travel in full on the ground that such 5 5. £96S7A.L.R. 501. In reaching a decision, the court followed C.O.T. v, Finn /196I/IO6 CLR 60, where an architect obtained a similar allowance. Note also as a contrast Bowden v- Russell and Russell JJ.965J T.R. 89 (Ch.D. U.K.) where the court refused to allow a solicitor carrying on his own practice the expense of attending legal conferences abroad since the trips were partly for private purposes. The conference fees were/however«- . In our penultimate section below, we examine the liability to irerian tax of a number of taxpayers whose special status or condition cf employment raise interesting tax questions. The problems are discussed against the background of all that has been said already in t'-.is chapter. VI. SOME SPECIAL 1 A. Di. rectors: Liability to■ Nigerian Tax . The directors of some of the most important companies operating in Nigeria are foreigners who are non-resident-s . 10 Recalling what has been said in Chapter Three, whereas the Companies Decree 1968 made incorporation in Nigeria by all companies compulsory, there was no requirement that all directors on a certain number of them should be nationals or residents 1 10. This is not surprising because most of the big companies in Nigeria are subsidiaries of multinational companies. See 0. Teriba, E.C. Dozien and M.O. Kayode: "Some Aspects of Ownership and Control Structure of Business Enterprise in a Developing Economy - The Nigerian Case": Nigerian Journal of Economic and Social Studies: Vol.l^, No.l, March 1972, p.3» 1. Part X SS.368-371, Companies Decree 1968 No.51 of 1968. More important still, the law did not make it compulsory for the management and/or control of all companies to be exercised in Nigeria. With the status quo likely to remain unchanged^ for a long time, we raise the following issues. Who exactly is a director and what is the basis of liability to Nigerian tax of a non-resident director? The precise legal status of a director has been the subject of several judicial pronouncements ranging from his description as a "mere functionary" to his being the alter ego of the company. Without bothering to go through the whole lot of epithets, it is reasonably safe to say that as far as the tax law is concerned, a director, whether controlling or otherwise, is no more than an "office holder" or an "employee" of his company. Taking the matter one step further, if a director is an employee of a company what is the source of his income? And in the case of a non-resident person who is a director of a company incorporated in Nigeria what is the legal position? 2. The Nigerian Enterprises Promotion Decree 1972 only bars foreigners from participating in a number of businesses. Our statement should be viewed subject to the provisions of this Decree. 3. C.O.T. v Directors of A.Y. Ltd. 2 E.A.T. Cp.UlU Case No.57. Here it was categorically held that"a director whether controlling or otherwise of a company is sin employee of the company". See also Royal Commission Report Cmd.9^71*. page 70 para.216, where it was stated that the position of the director was different from that of an ordinary employee. For a general discussion of the kinds of problems envisaged, see R.D. Nicholson, "The Exemption of Incomes of Visiting United States Directors and Employees and Problems of International Tax Evasion" (1967~6tfJ **1 A.L.J. pp»9Q« 119. This article was written against the background of the U.S.A. - Australia tax treaty. V>1 1 t> X 'n* ‘— ou*’ opinion, the source of his income is the place where he " — 13 bis duties. In other words where the board of directors --^-7 exercise their function of "management and control" over ‘-a* affairs of the company which need not be Nigeria.** If( for the directors of a company decide to meet regularly outside country, then it can be argued that the salary of those of them resident in Nigeria, and not actively engaged in the day to day airs of the company does not "accrue in" and neither is it "derived Nigeria. If the remuneration happens also to paid overseas icthing illegal about this), then it would be clear too that the incoae would escape tax not being "received in" or brought into" Nigeria. On the authority of Unit; Construction Co. Ltd v. Bullock, our analysis would still appear to be correct even where the"management and control exercised outside the country in complete breach of the Articles and Memorandum of Association. One case which highlights some of the complexities involved in taxing non-resident directors is C.O.T. v P. & Co. and another.^ The material facts for our purposes were as follows: P. Co. Ltd. was a non-resident company registered in Guernsey and almost the whole of its income resulted from agricultural operations in Tanganyika, as it then was. The directors of the company apart from the managing director, were neither resident nor ordinarily resident in Tanganyika. k. We refer here to the principle established by the leading case of De Beers Consolidated Mines Ltd v. Howe /1906/ A.C.p.^55« 5. /19627a .C. 351; 0959) 3 AU.E.R. 831. 6. I.E.A.T.C. p.131• Case No.16. SI 3 .^*^r duties were performed in Guernsey or in England or in -and, and in Tanganyika* They were paid by funds drawn on *-■* company's Guernsey bank account, the English directors receiving r*?rling in England and the Swiss directors Swiss Francs in Switzerland* •11 payment were made with proper Foreign Exchange approval. As regards the Managing Director, he was found on the facts to nave been resident in Tanganyika during the years 19^7 and 19^8. His •crk as director was for the most part done in Switzerland, but he paid visits to Tanganyika of some months duration and there he also did some work. His service agreement was made in Switzerland and his remuneration was received there. Neither be nor the other directors at any time remitted any of the moneys received as remuneration to One of the major points at issue in this case was whether the income of any or all of the directors was income "accruing in, derived from, or received in" the territory of Tanganyika as was contended by the Commissioner of Inland Revenue of that country. Accordingly, .Hr. Newbold counsel for the Revenue asked the Court to agree with him that the words "derived from" in the circumstances of this case referred to the actual, even if distant, source of the revenue from which the payments became available, and for that reason it was necessary to consider that if there had been no sisal company operating in Tanganyika there would have been no income from which to pay the directors and shareholders. Therefore, he argued, the income must have been"derived from" Tanganyika. S1J The Court of Appeal was not impressed with the above argument, ~ e general consensus being well reflected in this passage from the judgement of Sir Herbert Cox, C.J., "From the authorities to which the court's attention was directed, it appears that the source of income of a company and the source of iacome of the employees of that company paid out of the assets of that company may be two entirely different sources, the residence and operations of the company being of exceptional importance so far as the company is concerned, but that it is the immediate source of revenue which we look at, _ certainly in so far as individual employees are concerned."' In short, the court held that the remuneration of the directors and the managing director were not derived from• TOanvganyika. With a view to removing the present anomalies in the Nigerian law the following changes are proposed. (1) That a certain proportion of the board of directors of all companies should be nationals or persons resident in Nigeria, and (2) That the income of all directors ofj companies incorporated in Nigeria should be deemed to have a "Nigerian source" wherever paid, wherever the duties of the employment are performed especially whether or not the board of directors hold their meetings in Nigeria or overseas. In this connection too, the place of the director's contract of employment should be completely irrelevant. There is, of course, a risk of double taxation inherent in this suggestion especially where non-resident directors are in a country where tax is levied on the basis of "residence" or "source". 7. Ibid., at page 165. 31 -- notwithstanding, our basic proposition remains unchanged. —1 ~ e -ere risk of double taxation such that Nigeria should for/go . - .-.git to levy taxes on the remuneration of thousands of foreign s-— - resident directors of companies incorporated and operating - -geria? Our answer is no. Surely, to allow directors to tax because of legal technicalities is unacceptable. There has been no Nigerian case so far in which the above matters - i :een considered. Leaving the theoretical principles aside for = moment, what is the position in practice? According to a Revenue official, the dliirreectors of all companies rccrporated in Nigeria, whether resident or otherwise, are paid in -geria and a proportion of their income is allowed to be repatriated : erseas under the foreign exchange scheme in force. But how accurate ’.us report is and whether or not there are directors paid overseas - £ a matter of speculation as nobody knows for certain. As regards directors generally, two minor problems warrant brief uments. What is the source of income of a director of an overseas rcctany redident in Nigeria? It would appear that his liability is =c income "brought into or received" in Nigeria subject to any arrangements for relief from double taxation.8 The main headache of the Revenue is to determine precisely when income is "brought into" or "received i. n" Ni. geri. a.9 See S.Ml) ITMA 1961. Supra Chapter Two. These expressions have been said to amount to a "Remittance Rule". The technicalities of this rule have been demonstrated by such cases as Timpsons Executors v, Yerbury Q.936] IK'B.6^5; 20 T.C. 155. Thomson v. Moyse /1961/A.C. 967 39 T.C. 291; Baker vrArcher-Shee /1927/A.C. 15 T.C.1. O I .• inally, on the question of directors* 1 travelling expenses: The r:-eral rule we may recall is to disallow expenses incurred in --ravelling to and from the employee's place of work. What should be traced is that this rule particularly affects directors of several rcrpanies who cannot claim the expense of travelling between one rrrpany's boardroom and another. What the Nigerian Revenue does in this situation is not clear. - ever, we submi. t that there is no reason whatever whyv -the Revenue mould allow expenses incurred by directors of associated companies as deductible. These kind of persons we know usually enjoy generous allowances in Nigeria which are taxable but not taxed. 1 3. Cultural Visitors, Professionals and the Like (i). Cultural Visitors The use of the expression "cultural visitor" in this context should be understood to include all assorted variety of entertainers as well as boxers, athletes, gymnasts, acrobats and the like. The one thing they have in common with a "professional" is that they are usually self employed persons "trading in their skills". Where the above categories of taxpayers confine their activities within a country's frontiers no major tax problem arises. But such is the need for cultural visits between countries that often in a year 10. S.18 ITMA disallows "private and domestic" expenses. 1. See our previous discussion supra, "The Indigenous Concept of an Allowance". a cultural visitor may find himself coming within the tax jurisdiction of several countries. For example, what is the tax liability (if any), of a visiting boxer or musician to Lagos who stays for a duration of only one week? And with potential earnings running into thousands of pounds, is it permissible for the cultural visitor to make a "quick kill" and then to leave the country without paying any tax? ' The words of the law on these matters are unambiguous. A cultural visitor to Nigeria is clearly liable on Nigerian "source" income in respect of: "gains or profits from any . . . profession or vocation, for whatever period of time such . . . profession or vocation may have been carried on or exercised".^ What is important to note is that there is no time duration before liability attaches. But then what is the machinery for collecting the tax due from a musician or,indeed any other cultural visitor? None whatsoever,.o Paradoxically, this awkward situation is the result of an express provision of the law whereby as far as individuals are concerned "income tax may be imposed only by the territory in which the individual is deemed to be resident for that year".^ And the test of residence for tax purposes,we know, is the availability or otherwise of a place in the country for the domestic vise of an individual on the 1st of April. S.Ml)(a) ITMA 1961 3 S.3(2) ITMA 1961. 213 Is short, unless a cultural visitor happens to be in Nigeria on jointed day and is caught by the "residence" test none of the tax authorities in the country has any power to extract tax * 1 Be rather than allow entertainers and the like to escape tax, we rrjrse the following procedural changes;(l) All cultural visitors toe country must obtain a*work permit* from the Federal Ministry of -itcor; (2) No such visitor should be allowed to leave without an‘exit rrit obtainable only when all appropriate taxes have been paid; (3) Zis "residence" test should be declared not applicable to cultural noitors, and (k) The Federal Board of Inland Revenue should be charged ..oh the responsibility of collecting any taxes due and amount rollected should be payable into the Dis table Fool Account of the Federation. Knowing what bureaucracy can be like in a developing country, 4 -t must be emphasised that the administrative processes for effecting our proposals must not be unnecessarily burdensome. Or else, it may act as a disincentive to cultural visitors. C ii). Visiting onals Much of what has been said above apply mutatis mutandis to visiting professionals. For example, surveyors or engineers who visit Nigeria on an ad hoc basis for consultancy work, or even visiting Funds in this Account are distributed periodically between the 12 states of the Federation. Its existence is specifically provided for by the 19&3 Constitution* £13 teachers who act as external examiners to Nigerian Universities for brief periods during the year. Fees earned by these persons, often quite substantial, are liable to the coubtry's tax. Looking at the other side of the coin, when are services rendered outside Nigeria of such a nature as to be regarded as having been done in the exercise of a profession within Nigeria? Suppose a company operating in Nigeria engages a non-resident accountant, can fees paid to him be deemed to have a Nigeria "source" and hence taxable in the country? And if so, what is the legal basis? That is, assuming course- that the accountant never visits Nigeria and carries out his duties entirely overseas. The answer is far from clear. Where the duties are performed entirely overseas, it is difficult to hold that any income "accrued in" or was "derived from" Nigeria, and if the payments were made outside the country then such income is neither "brought into" nor "received in" Nigeria. Furthermore, if the professional is neither resident nor domiciled in Nigeria there appears to be no basis whatever for liability. The only oasis for liability.perhaps,is to argue that the work done, even though physically executed overseas, was of such a nature that it related closely to a company's operation within Nigeria and h nee is a sufficient nexus to bring an overseas based accountant within the country's tax jurisdiction.^ 5 5. The case of C.O.T. v^Shein is relevant here. Supra at page 2.10 et seq. It may be recalled here that the Nigerian law permits apportionment where there are two possible sources of income. ITMA S.8(5). S20 -•ir submission is that in all situations analogous to that :u.*lined, there could be an apportionment of the fees between the two ::.:-.c.c_e sources, i.e. the place of residence of the accountant where a* :«rformed his duties and the place of residence of the client company •c.ch not only pays the fees but whose work is the actual thing -‘-rating the income. These suggestions are made subject to any :smile taxation arrangements in force. We must admit that the problems here are enormous and that the solution we offer is quite rudimentary. But what is to be borne in d is that Nigeria cannot afford to allow consultancy fees etc., for work done overseas in relation to Nigerian companies to remain -^taxable. Otherwise, the importing of skill either directly or .ncirectly could cause an intolerable burden on the country's balance ;f cayments position. 1. Fok oign Diplomats in Nigeria International comity does not permit the salary of the servants : f one state to be taxed by another state.^ Consequently, all servants ci overseas governments working in Nigeria are not amenable to local taxotu»»v taxed at all must be taxed by their home countries. 6. Cmd. 9474 para. 507 page 95. Cf. Art.34 Vienna Convention on Diplomatic Relations 1961; Art. 49 Vienna Convention on Consular Relations, 1963­ 7. We refer here to the Jamaican case of Neville Ashemheim v C.O.T. 3 W.L.R. 455 where it was held that an ambassador holds an "office" and that his salary is assessable to tax in his home country. S 2 1 ihis general statement of principle is, however, subject to a -^ter of exceptions. Where a consular officer receives "any income -’ respect of any trade, business, profession or vocation carried on =y him or in respect of any other emp]c. ent exercised by him within g •igeria" he is liable to the country's tax. The real effect of this is that income exempted are only those received in connection with consular activities. The second exception to the general rule is even more significant. The income of embassy employees on purely domestic duties are not • . < > . exempted from tax. In this category would fall caretakers, drivers, servants, ar.d the like. Whether or not this would include messengers and ordinary clerks is unclear. But the real problem area is the further provision that the income of a consular officer or employee •no ordinarily resides in Nigeria aYn"d not being a national of the foreign state which he serves is not exempt from the country's tax. 10 We may note here that the expression "ordinarily resides" is nowhere defined in the Code, and more important still, that the type of taxpayer contemplated need not be a Nigerian national. This means that the exception is much wider than would at first seem to be the case. It would cover for example, a Dahomeian national ordinarily resident in Lagos but working for the Senegalese embassy irrespective of his status in the hierarchy of things. 8910 8. S.16 ITMA read in conjunction with section (b) of the Third Schedule of ITMA. 9. This is quite reasonable otherwise diplomats would engage in trade for personal gains, and there is a possibility that they could serve as a front for businessmen wanting to evade tax. 10. The Proviso to S.(b) of the Third Schedule of ITMA 1961. .- «e Wish to recall an actual incident in order to show how provisions have worked in practice. This was a matter that 1=1 red a Nigerian national who worked for the Indian High Commission l^gos. The Revenue found him liable to Nigerian tax on the basis : t-e provisions outlined above, and somehow by a peculiarity of the lacian Code he was liable to Indian income tax. Apparently, this is i-̂ cause the Indian government taxes all income accruing directly =r indirectly from India and these include any payments to High . emission or Embassy staff overseas. The incident in question actuall-y raised the spectre of double taxation since a Nigerian national ordinarily resident in Lagos r-idenly found himself within the tax jurisdiction of two states. As mere is no tax treaty between Nigeria and India, the problem was resolved by the use of the Commonwealth Tax Credit Relief. 1 Looking at the same matter from ancother angle let us consider Tery briefly the tax position of Nigeria's own foreign personnel ----------------- T. Foreign and Arme'd Forees Personnel and Decree No. 51, 1972 With independence in i960, and then the Civil War some seven i V y » years later, Nigeria now has a fairly large diplomatic representation overseas and a vast territorial army at home. These two categories of taxpayers have been singled out for special mention here because i of the inapplicability of the normal tests for tax liability and of l residence. 1 •jf 1. This is a scheme between Commonwealth countries to grant relief for taxes paid in other Commonwealth countries. See e.Zk ITMA and Schedule Six of the same Act. 223 The Income Tax (Armed Forces and Other Persons)(Special Revisions) Decree 1972 is the government's response to cope with the situation. In short, the Decree provides for the imposition of tax on the income of Armed Forces personnel, public officers employed in the Nigerian Foreign Service and in respect of certain pensions and dividends payable overseas. The tax is to be collected by the Federal Board of Inland Revenue and not by the tax authorities of the states where the officers are resident or deemed to be resident. The proceeds of the tax after deduction of the ex been thought acceptable as it stands at present. In this brief section, therefore, we do a few of our most important observations. o Cl). As regards the definition of a "profession", "vocation" or a: "employment", it is urged that the authorities should maintain a flexible approach, bearing in mind for example, that the standard of skill and tra: of a professional must be relative to the community in which he operates and never in the abstract. Also, that in the particular case of Nigeria that the majority of the adult population are neither true professionals nor employees, but simply people pursuing • vocations, (2). A n observed elsewhere, the cornerstone of the Nigerian tax e principle of liability on "source income". i V / A philosophy interpreted by us in the case of employment or professional income to mean that there is liability to Nigerian tax once the "place of performance" of the duties of a profession or employment is in Nigeria. This approach was approved not only because it is a criterion difficult to manipulate for tax purposes, but as being very desirable in the interest of developing countries always on the receiving end of skilled labour ?oc; (3)» Considerable attention was focussed in this chapter so the problems involved in determining the precise scope of a taxpayer's emoluments, profits or gains as the case may be. In this connection, it was noted that his earnings as well as his expenditure were influenced by the custom and tradition of the local community. It was urged that the tax authorities while endeavouring to creserve the social order must take cognisance of payments and curported gifts to professionals and employees where appropriate in the computation of "total income" for tax purpos i>r (4) . As a corrollary to the above, the question of benefits in kind was gone into in great detail. So also was the unique Nigerian concept cf an "allowance" or "fringe benefit". It is our view that valuation must involve some compromise and wherever possible should be based on the market value^of the benefit provided. Where this is not practicable a sort of "thumb rule" should be employed. (5) . It was submitted with regard to the rules governing the deductibility of expenses that these are too strict and plainly unrealistic. The "necessarily obliged" part of the expenditure test it was urged ought to be dropped in favour of the "actually incurred" test. The special case of travelling expenses was examined in some detail and it was our opinion that all employees earning iAOO p.a. or less should be allowed to deduct their travelling expenses (from home to work). Tax law it is believed must yield to reason and not dogma • The essential modification of the law and its enforcement with regard to armed forces and foreign service personnel was accepted by us. But in addition to that, it was thought that a machinery for the collection of taxes from cultural visitors and non-resident directors must be set up. This we observed is virtually non-existent at present. Finally some value judgement, quite accurate to say that Nigerians people in the world".^ The rates of progression of these rates slight, and the machinery of assessment and collection lax. V.'e do not complain much because a country after all gets the kind of tax system it deserves and there is perhaps a valid policy reason for the Revenue not "flexing its muscles". However, be that as it may, we wish to observe as follows: That the Nigerian provisions are such as to encourage any intending expert or professional to the country. Not only is there a possibility of total exemption from tax but the schemes of generous allowances (taxable but not taxed) are very attractive. The risk of double taxation is also reduced or eliminated in the case of experts from some nine countries having tax treaties with Nigeria. As for qualified Nigerians abroad who hesitates to come home because salaries appear small, a well publicised campaign showing 3 3. Professor Adebayo Adedeji is of the same opinion too. In a book Review by him he stated that "Nigerians were in 1953/51* and still today are one of the most undertaxed people in the world". July/T962^ Nigerian Journal of Economic and Social Studies Vol. H No.2 page 201 at 202. %J(* ( the numerous "fringe benefits" and "allowances" which go with these salaries should encourage them to return. On the other hand, the tax position is such as to discourage the emigration of skilled Nigerians, whose unique status and general level of remuneration, direct and indirect.have been well chronicled. *J o o t> 6 0 CHAFTrH FIVE TAXATION OF INVSSTI-BNT OR PROPERTY INCOME PROBLEMS KICHLICHTgD A. Control Structure of Business. Capital Formation, Transfer of Technology. Conflicts of Interest and Jurisdiction. Re-I of Profits etc. The objective of this chapter is to examine the Nigerian tax provisions in relation to "dividend" and "interest" payments collectively referred to above as "investment income", and the tax treatment of "royalties", "rents" and other payments derived from the letting of property referred to above as "property income". In the appropriate context, the characteristics of these species of income are explained and thei se ambit defined. 1 This intro- ductory section, therefore, is no more than an attempt to sketch out the general background against which our discussion must be viewed. On the question of approach, whereas, S.O. Fashokun 2 has considered the taxation of "property income" (defined by him to include dividends, interest and royalties); his treatment of the subject has been rather legalistic and not sufficiently geared to the realities of life in Nigeria. Our approach differs significantly from his, in that while reviewing the same subject *4 1 • It is not our intention here to engage in a lengthy discourse on the classification of income. What may be noted, however, is that "dividends", "interest" and "royalties" can either be classified as "property income" or as "investment income". For example, see C.S.A. Wheatcroft, "What is Taxable Income? (1957) B.T.R. 310 at 317 where he stated that the main items of Investment Income are (l) Rents; (2) Interest; (3) Dividends; (4) Annuities and Other Annual Payments; (5 ) Income from Estates and Trusts; \6) Royalties, Commissions, etc. On the other hand, S.O. fashokun classifies them as "property income". 2. Personal Taxation in Nigeria - Ph.D (1971) University of London. Chapter 5. (unpublished). •'on J — z?i problems are examined from a much broader perspective. fcile the primary concern of this study is with legal problems, what =is* be stressed at the outset is that with the taxation of investment or — terty income an analysis of legal principles in the abstract is of little - 5. without some understanding of the underlying economic issues which they ~n designed to regulate. It is on this basis that we proceed, so that much .hat is said herein centres around Nigeria's programme for economic develop­ e d and the role of foreign investments in fulfilling that objective. Recalling our basic premise that the private sector of the Nigerian economy -s dominated by foreign interests,^ our enquiry inevitably raises difficult r.astions of conflicts of law and problems of international double taxation. 3ut above all, it brings into sharp focus the conflicts of interest and juris­ diction between the rich countries of investors where taxes are usually levied cn the basis of residence, domicile or nationaltiy, and the poor host countries reeding investments where tax liability is frequently on a "source" basis. Some of the relevant economic issues are now outlined. In countries like Nigeria, lacking an industrial base, capital formation *14 3. 0. Teriba, E.C. Edozien and M.O. Kayode, "Some Aspects of Ownership and Control Structure of Business Enterprises in a Developing Economy; The Nigeria Case." Nigerian Jnr. of Eco. and Soc. Studies March 1972 Vol. 14 No. 1 page 3. This study based on data from the Companies Registry showed that foreigners have a tight grip on the Nigerian economy. In another independent study, A.O. Philips confirmed the position stating that the bulk of m o d e m economic activity in Nigeria is carried on in organisations with substantial foreign interests. (1968) Nigerian Jnr. of Eco. and Soc. Studies Vol. 10, No. 3 page 321 at 330 article on "Nigerian Companies Tax". G.O. Nwankwo has also investigated how the expatriate banks dominate the Nigerian banking scene. See "Indigenisation of Nigerian Banking" - Paper delivered at the advanced seminar in African Law organised by S.O.A.S. 19th May, 1972. 3 3 0 i3 a difficult process, and not adequate^ for rapid development without considerable assistance from abroad. Even though it is widely accepted that the long run what is needed is a greater mobilisation of internal resources through taxation and increased savings, in the interim, the necessary finance 5 has to be secured from outside sources. At present, much capital for industrial development is obtained from the world capital markets or else from the intra-company transfer of resources.^ The detailed mechanics of such transfer are unimportant here. What is how­ ever, vital to note is that by whatever method loan capital is provided, substantial "interest" payments are involved - with its potentially adverse 4. An eminent economist has argued that the shortage of capital in Nigeria is greatly exaggerated. Distinguishing between apparent and effective demand for capital, the author argued that often, what was lacking was the absence of viable projects or adequate security as opposed to lack of capital. See Sayre P. Schatz (1962) Nigerian Jnr. of Eco. and Soc. Studies 7ol. 4, No. 1 page 66 article on: "Obstacles to Nigerian Private Invest­ ment". Many Nigerian economists disagree with the views expressed by that author, e.g. 0. Sonubi at page 73 of the same journal. 5. Like most other developing countfies, Nigeria was obliged to create an Industrial Development Bank; and more recently an Agricultural Credit Bank and a Bank for Commerce Industry with the objective inter-alia of granting medium and long term credit for development purposes. The ordinary commercial banks especially the expatriate ones which were hither­ to reluctant to grant credit facilities to businessmen are being coerced by the Federal Government to grant at least 4C^ of all loans and advances to indigenous borrowers. — Daily Times (Nigeria) 28th Kay (1973) page 3* 6 6. The net inflow of foreign investments in 1961 was £16 millions versus an outflow of £2.6m. giving a net flow of £13-8m. This rose gradually to a net inflow of £113.4m. in 1969 versus a net outflow of £54.00m giving a net flow of £59m. - Figures from: Economic and Financial Review - published by the Central Bank of Nigeria i.e. Vol. 6, No. 2 December 1968. Figures up­ dated to 1969 from other C.B.N. sources. For a discussion of some of the problems faced by developing countries as regards access to Capital Markets. See Foreign Investments in Developing Countries — U.N. E/4446. Sales No. S. 68.11. D.2; page 35 para. 176, 170; page 36 para. 181, 184, 185 effect on the borrower country's balance of payments 7 The need for a reasonable return on capital is accepted by the majority cf developing countries because they know that investment would only come if a good return was possible. What they have often complained about in the past is that investors expect too high a return on capital investment. But the truth is that as long as there is no universally acknowledged measure of a "reasonable profit" the mutual resentment is likely to persist.O In the absence of tax treaties, who ha3 the primary right to tax interest payments? The home country of the investor, or the host country where the capital is put to work? And then what should be the basis of taxation - taxation on interest "gross" or "nett"? What are the criteria for determining the source of interest payments under the Nigerian law? When precisely does liability arise? Time of "entitlemenat" or time of actual receipt? 78 7. An interesting example is Ghana where the public debt was so burdensome that the country was on the verge of bankruptcy. Creditors had to accept a reschedulement of payments. Highlighting the problem recently see Kelvyn Westlake: "Anxiety over Developing Countries' Debt Load."- The Times (U.K.) September 17th 1973. It may be noted also that there are balance of payments implications too for the countries of the lender where foreign loans granted are excessive. Hence, in America and Europe borrowing by foreign entities is strictly regulated. George R. Delaume, Legal Aspects of International Lending and Economic Development Financing, page 18. 8. Dirk D. Stikker defines it "as the minimum profits required to attract investors to a project in the particular circumstances present and future, applying or judged to apply to that project". See: The Role of Private Enterprise in Investment and Promotion of Exports in Developing Countries. O.N. Publication TD/35/Rev.1; Sales Ho. E.68.11.D.9 page 11, paras. 55, 56 and 57. See also Panel on Foreign Investments in Developing Countries (1969) U.N. Publication E/4654-ST/ECA/117; Sales No. E.69.11.D.12; pages 20-21; para. 68-74. n o f) C J . ' i These, among other things, are the issues examined in this chapter. Quite apart from the substantive provisions, the machinery for collecting the tax due is also examined. This is important especially since the bulk of those receiving interest payments from Nigeria are non-residents. Much of what has been said already about interest apply to "royalty, payments". Under current conditions, the development of important new technology in the form of patents, processes, and scientific or industrial know-how is largely a function of the research department of major corporations in advanced countries. 9 So that just as much capital for industrial development must flow from the in­ dustrialised countries to the poorer ones, so also must know-how and managerial skill. The necessary consequence of this, of course, is a "reverse flow" of interest and royalty payments from the poor nations to the rich. The conditions and procedures under which industrial technology is trans­ ferred to developing countries often raise a number of difficult legal and economic problems both to the suppliers and the recipients of such know-how. For example, the fact that an oversea company is able to conclude contracts 9 9. Nigerian education under the British was not technically oriented. How­ ever, today there is a big move to encourage, promote, and co-ordinate industrial research programmes of all kinds in Nigeria as indicated by the introduction of the Nigerian Council for Science and Technology Decree 1970. (Decree No. 6 of 1970j! Pursuant to this Decree, several Research Institutes have now been established. It may be noted in passing that it is perhaps better for a country to purchase patented inventions rather than engage in primary research which may amount to duplicating other peoples' work. A combination of both is probably the best solution. vith its foreign subsidiary for the provision of intangibles and services leaves much latitude in arranging the terms of the remuneration payable by the subsidiary being fixed in a way which brings about a shifting to the parent company of profits actually earned by the former.10 Also, there is the need for the host countries to provide adequate protection for industrial and in­ tellectual property* 1 which has to be balanced against the restraints of un­ justified patent monopolies. In discussing the taxation of royalty payments, attention is focussed in particular on the following matters.* (l) The deliniation of the scope of the term "royalty". (2) The applicable tests for the purposes of liability to Nigerian tax. (3) The expense component of this kind of payment. (4) The machinery for collecting the tax due etc. etc. 10. Nigeria is a case in point here. For the future, the Revenue is to be given more powers to disallow expenses for management, technical and other services which appear to it unreasonable. Experience show that these allowable expenses are used to reduce sizable profits to marginal profits or even losses with detriment to the Revenue: Daily Times (Nigeria) April 4th 1973, page 3 - Press statement on the 1973/4 Budget. 1 Without this protection, investors are reluctant to part with secrets. These kinds of property are now adequately protected in Nigeria with the introduction of the Patents and Designs Decree 1970. (No. 60 of 1970) and the Copyrights Decree 1970. The recent moves by the EEC to establish a European Patents system at once highlights the need for the protection of industrial and intellectual property and the problems inherent in achieving the desired objective. Some of these problems are discussed in the letters to the editor of the U.K. Business Times. September 19th, 1973s Towards Clarification and Simplification of a Patent system for Europe. o r> ] o o 4 With dividends, a few preliminary remarks may be made. Since the sub­ sidiary companies who dominate the Nigerian economy often send returns to over­ seas investors in the form of dividends and other company distributions rather than qua trading profits, the tax provisions relating to this category of income are of the highest significance. In that circumstance, is it logical not to discriminate as at present between distributed and undistributed profits in order to encourage the retention and re-investment of profits in Nigeria? On the same basis, what is the rationale behind the tax exemptions granted to certain dividend payments especially the "pioneer dividends" and dividends paid by petroleum companies? Before examining the detailed provisions on the taxation of investment or property income, it is perhaps apt to say a few words about the Nigerian Enterprises Promotion Decree 1972 — a. decree not understood by many, but which in the opinion of this writer is likely to alter the whole economic order in Nigeria, especially, as regards the ownership and control of businesses and the conditions for the inflow and outflow of capital and technology into the country. Undoubtedly, these are matters which have to be taken into considera­ tion in framing future tax provisions or in amending the existing ones. 2 2. The point to note here is that retained earnings can become a major source of investment finance compensating for the deficiency of other sources. A.O. Philips examines some of the economic implications in more detail: "Nigerian Companies Tax" — (196S) Nigerian Jnr. of Eco. and Soc. Studies Vol. 10., No. 3, page 321 especially where he examines the tax treatment of distributed and re-invested profits. B. The Nigerian Enterprises Promotion Decree 1972. and the future of Foreign Capital and Technology This decree establishes the Nigerian Enterprises Promotion Board which ha3 the power to advance the promotion of Nigerian Enterprises.^ The decree also establishes the Enterprises Promotion Committee in each state of the Federation with certain powers to assist and advise the Board on the implementa­ tion of the Decree and to ensure that its provisions are complied with by aliens resident in every state.^ Under s.4 of the decree, the establishment and operation of certain enter­ prises (listed in Schedule 1 of the Decree) are now exclusively reserved for Nigerian citizens, companies and associations; and certain other enterprises (listed in Schedule 2 of the Decree)^ cannot be operated or carried on by v y aliens in Nigeria unless they fulfill certain conditions specified in s.5 of * the decree. That is to say, that no alien can be owner or part owner of any enterprise listed in Schedule 2 where‘(i) the paid-up share capital of the enterprise does not exceed £200,000 or (ii) the turnover of the enterprise does not exceed £500,000 whichever the Enterprises Promotion Board considers to be appropriate and applicable in relation to such enterprise. And even where the above conditions (i) and (ii) are complied with, no alien can be owner or *45 3 s.l Decree No. 4 of 1972 4. Ibid., s.2 5. As shown in attached Appendix I. 6- As shown in attached Appendix II. t o C O n r> 0 0 O ♦ From the foregoing exposition the need to have adequate provisions re­ lating to the taxation of investment and property income must be self evident. ::~^RZ5T AND ANALOGOUS PAYMENTS A. Definition and Concept Tax is payable in Nigeria in respect of "...... interest&, diTscounts, charges or annuities". 10 Since these terms are nowhere defined in the In­ come Tax Acts, recourse must be had to the decided cases in order to discover their meaning.1 With "interest", which is our primary concern, it is also important to determine its precise ambit; because the more comprehensive this is, the wider the category of payments covered, and the greater the resultant revenue yield. NX A good working definition of "interest" may be found in the opinion of the Lord President of the Court of ession (Scotland) in the case of Schulze v. Bensted. 2 Quoting from Eell's Dictionary, His Lordship defined "interest of money", as^ "the creditor's share of the profit which the borrower or debtor is presumed to make from the use of the money". Or, *23 10. 8.17(c) CITA 1961; s.4(l)(d) ITMA 1961. Not much attention is paid to discounts, charges or annuities. Our chief concern is with "interest". 1• Mainly Commonwealth authorities are cited because Nigerian cases are lacking. 2. [1916 ]S.C. 188; 7 T.C. 30. 3. Ibid.. S.C. at p. 191; T.C. 33- Rowlatt, J. in Bennett v. Ogston called it "payment by time for the use of money". And in Re Foam Security 1944. a Canadian case, (1947) S.C.R. 394., it was stated that "interest is in general terms, the return or compensation for the use or retention by one person of money belonging in a colloquial sense, or owed to another". See also Halsburys Laws of England. 3rd ed., Vol. 27 page 7. that "otherwise stated, it is Just recompense to the creditor for being deprived of the use of hia money". Similarly, in Riches v. Vestalnister. Lord Wright stated that: ".... the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date". And that "it may be regarded as representing the profit he might have made if he had had the use of the money or conversely the loss he suffered because he had not had that use".4 What must be stressed here is that not only may loans produce to the lender that kind of profit or income called interest, but they may produce a further profit or income derived otherwise than by way of interest on these loans.5” There are a number of borderline cases where the taxpayer receives something for lending his money which is not described as interest. For in­ stance, he can lend £100 on terms that when it is repaid he gets back £105 (i.e. redemption at a premium), or, alternatively he can lend £95 on a security 45 4. jj947j A.C. 390 at 400; 28 T.C. 159 at page 189. 5. Hakim Bhai v. C.O.T. Ceylon Tax Cases Vol. 1., page 8 - especially Judge­ ment of MacDonald, C.J. at pp. 16, 19- 339 vhich will return him £100 (i.e. an issue at a discount).6 In the U.K., the general principle seems to be that when a commercial rate of interest is charged and the premium or discount is additional, then the profit of such premium or discount is treated a3 paid in respect of capital at risk and is 7 not income. But if nc interest is charged, or some extremely low rate, then the premium or discount is the reward for lending the money and is re- 8 garded as income. In this circumstance, a lot would depend on a proper analysis of the transaction in the light of all admissible extrinsic evidence.9 In the case of Nigeria, such exercise is unnecessary because "discounts", ," premiums", "charges" and "annuities" are expressly deemed to be taxableincome; 10 presumably, on the assumption that they are sufficiently analogous to interest payments. ’ ^ ' — ............■■ . g ;. 6. The word "discount" has no technical o? universal meaning. In what is perhaps its most common meaning, it is equivalent to the payment of in­ terest in advance e.g. when a banker advances the amount upon a bill of exchange which is not yet due^discounting the interest up to the day of payment. It is used in another sense for the abatement which is given on a debt because payment is made at an earlier date than it is customary for such debts to be paid. 7. Lomax v. Peter Dixon & Co. Ltd. [1943] K.B. 671 at 679; 25 T.C. 553 at 365. This case is important because of Lord Greene's analysis of the various methods adopted in regard to the granting of commercial loans. K.B. at 682; T.C. at 367. His Lordship's analysis has been quoted with approval by most experts. (See Simon*3 Taxes 3rd ed., Vol. C. at page 123 para. C.1. 201; Whiteman and Wheatcroft para. 3.34; page 80 et seq. 8. Davies v. Premium Investment Co. Ltd Cl945 ] 27 T.C. 27 9. Lomax v. Peter Dixon. Lord Greene, M.R., K.B. at p. 677; T.C. at p. 363. 10. The charging provisions of CITA provides that tax is payable upon the profits of any company in "respect of discounts, annuities, or other charges". There is no distinction drawn here between "capital profits" and "income profits". 1 1. LomflT v. Peter Dixon. Lord Greene, M.R. K.B. at 681 where his Lordship stated that the "discount is the reward" which a person discounting a bill of exchange or exchequer bill receives for his money. Si3 As regards the scope of interest payments generally, three situations nay now be considered. Firstly, where damages are given by the courts which include an addition for interest. The Nigerian practice here is not well documented, but it is the opinion of this writer that such interest should be taxable so long as the receipt in question is in substance interest and p not a capital sum for damages which has been estimated on an interest basis. Secondly, where arrears of interest are capitalized under the terms of the loan. The logical thing here,perhaps,is that where a sum is repaid in excess of the original capital of the loan that excess is to be regarded as taxable income.^ Thirdly, what i3 the legal position where interest is unpaid because it is unclaimed? The general principle in the O.K. is tihua t no income can be imputed as nothing ever arose.4 In that country, there is considerable case law on the subject of interest supporting the principle that "receivability" without receipt is nothing. For exa4m ple, in St. Lucia and Estates Co. Ltd, v >. » * i « 1# f r v, , • St. Lucia (Colonial Treasurer)7 unpaid interest on part of certain outstanding purchase price was held not to be assessable as it was not "income arising or accruing" in the relevant period. In Dewar v. I.R.C. undrawn interest 2. Riches v. Westminster Bank Ltd f 19471 A.C. 390 especially Lord Simonds at page 398. 3. I.R.C. v. Oswald (~1945 ] 360; 26 T.C. 448 4. C.S.A. Vheatcroft: "What is Taxable Income? (1957) B.T.R. 310 at 317. See also Ralph P. Ray, "Waiver of Remuneration. Dividends, Interests and Rents" - (1S72) B.T.R. 173 at 178. 5. [ 1924 ] A.C. 508 (P.C.) 6. [ 1935 ] 2 K.B. 351; 19 T.C. 561, C.A. a pecuniary legacy to which the taxpayer was legally entitled was again --t included in his taxable income and this decision was followed in Woodhouse t. I.R.C. Moreover, as these cases suggest, the mere voluntary non­ collection of the interest was sufficient, end it was not necessary to show any default by the debtor. An exceptional position arises in "transactions associated with loans or credit" as set out in section 496 of the Income and Corporation Taxes Act 1970. This is an anti-avoidance section applying where interest or other income is deliberately foregone in cases involving money lending or the giving of credit. The person foregoing the income is then assessed under Schedule D case VI on an "entitlement basis". Eut an effectively waived dividend or interest entitlement is not regarded as a distribution assessable under A s y Schedule F pursuant to s. 233 (2) (a) and (d) of ICTA 1970. Hitherto-, the Nigerian law has been quite similar to the U.K. position outlined. That is, liability to pay tax arose only if there was an actual payment of interest. However, from the press statement subsequent to the 1973/74 budget, it has been indicated that the law is to be amended "to ensure •*VA '. that taxes are payable tofRevenue as at the time such interest, management fees and royalties are shown in the company's account as due to overseas 0 beneficiaries". What this proposed amendment would amount to in practice is still to be 7- [1936] 20 T.C. 673: The taxpayer in this case sold property to a company in consideration of covenant to pay annuity. Part only of annuity was drawn, the question was whether the whole annuity due to the taxpayer was assessable to tax. % 8. Daily Times (Nigeria) April 4th 1973 page 3- This proposal has a lot of accounting implications too. That is, whether accounts are to be made up on a "cash" basis or an learnings basis". seen. But it is very doubtful whether the desired objective (i.e. to bring in governmental revenue more quickly) can be achieved. For example, if liability to tax is to arise at the point of time when an interest or royalty payment becomes due, who fixes the time of maturity? Surely, this is usually a matter of contract between the creditor and the debtor, or between the licensor and the licensee as the case may be. If then the time of payment is a matter of contract, can the agreed terms not be varied by the parties in order to defeat the objectives of the law? Since the precise wording of the proposed amendment is still unknown, any further comment on the issue is futile and purely speculative. To sum up, it is perhaps safe to conclude that the term "interest" as employed under the Nigerian Law would include any remuneration from bonds or debentures, government securities, cash desposits in banks, as well as any other profit arising from a money lending transaction of whatever q description. But whether or not the scope of the term "interest" can be extended to cover the interest on deferred payment on sales is uncertain. Like most other countries, the Nigerian tax provisions were,perhaps never intended to cover these specie of payments. The real point at issue here is this: Where instalmental payments of a capital nature are payable which exceed the antecedent liability is it right to regard the balance as interest and hence taxable, while at the same time ignoring the interest element where the antecedent liability has not 9 9. The term "interest" is usually defined exhaustively in tax treaties in order to remove doubts as to the precise scope of payments covered. For example, see OECD Draft Convention Article 11. 3i3 been quantified but a settlement is made in lump sum farm payable by instal­ ments?10 The question whether or not interest charged on deferred payments by the seller of goods or machinery should be treated under the same rules as any other kind of interest has been considered by the U.N. Ad Hoc Croup of Tax Experts.1 The crux of the matter is that developing countries who rurchase a lot of equipment from overseas often find it difficult to determine the interest element involved in the sales price of goods and machinery. Even though the interest may be substantial, they are often obliged to refrain from taxing this income because to be able to do so, there must be a provision in the law imputing an interest element on deferred credit sales where none is stated. c Bearing the above in mind, the following pertinent questions may be asked, •bat is the degree of revenue loss to Nigeria, potential or actual, by*not taxing interest on deferred credit sales? And if a tax must be imposed, what are the administrative obstacles? Presently, there are good grounds for suggesting that the revenue loss from the kinds of transactions in questi. on has not been very significant. *122 10. Hef. Campbell v. I.R.C. 45 T.C. 427; £j9707 A.C. 77 H.L.; Vesttj v. I.R.C. Periodical payments in connection with the sale of shares were held to contain an interest element. N.B. The numerous cases in this area of law are discussed fully in Whiteman and Wheatcroft paras. 3 — 25 to 3 - 33. 1. Tax Treaties Between Developed and Developing Countries — U.N, Publication First Report 1969 - Part One para. 88; Second Report 1970. Part Two, page 65 i.e. Chapter VIII. Interest on Deferred Export Credit Sales. / 2. No exhaustive study been carried out on this point yet. The Ad Hoc Group of Tax Experts came to no definite conclusion too. Tax Treaties Etc. Second Report (1970) at page 65. S44 This view is probably correct since most medium and long-term credits for purchases of equipment by developing countries are extended under official arrangements and in all cases, the credit agreements themselves provide that the interest payable should not be subject to tax.^ Even assuming that it is desirable to tax interest on deferred credit sales, the tax base will be very much eroded through administrative problems. A high degree of voluntary compliance from exporters is out of the question if it would involve significant book-keeping costs or if for some reason the tax would not offset a tax of the home country. Forw a developing country with rather modest administrative resources, it will certainly be a difficult task to effectively police each sale to determine if there should be some imputed interest. Consequently, the result of this administrative compromise would be to reduce the economic importance of taxing deferred credit interest. There is the spectre of double taxation too. In order to avoid double taxation on the interest element of a deferred credit sale, it may be necessary for the country of sale and the country of residence (i.e. of the exporter) to agree on an appropriate interest rate, something which may not always be easy to achieve.^ It is hereby submitted, therefore, that for the time being it is not necessary to extend the scope of the term "interest" under the Nigerian law to cover the interest element under credit sales arrangements. 34 3. Tax Treaties Etc. First Report (1969) para. 88, page 19. 4. One possible solution would be to use the rate on the Bankers Acceptances as an appropriate guide, since this rate is a genuine market rate for financing commercial sales. Cf. Tax Treaties Between Developed and Developing Countries. Second Report 1970 p. 66 I *» Attention is now focussed on "loan interest", considered to be the aost important category of interest, i.e. returns on loans made to companies or individuals for trading purposes. In the following discussion the double taxation implications are largely ignored as these are fully explored in subsequent chapters. B. Liability to Nigerian Tax; The "Source" of Interest 5 ^ Tax is payable for each year of assessment upon income accruing in, deprived from, brought into or received in Nigeria in respect of interest, discounts, charges or annuities".^ In other words, a taxpayer is liable on any interest payment received frca a Nigerian "source", or alternatively, where the interest is from a foreign "source", he is liable to pay tax on a "remittance" basis.^ While it is difficult to determine whether or not interest or any other income has been "remitted" into a country, 7 it is much more difficult to determine where the "source" of an interest payment is located for the purposes of taxation. It is with the latter problem that we are now concerned. 5. s.17(c) CITA 1961; s.4 (0(d) ITHA 1961. 6. The conclusion in Chapter Two was that the charging provisions limit the taxpayer’s liability in a geographical sense to profits derived from Nigeria (i.e. having a Nigerian "source"); and restricts liability in respect of transactions carried on outside Nigeria to profits actually brought into the country. 7. This is because the word "remit" is used in a technical sense. What must be noted is that there can be a remittance of moneys into a country without the physical transfer of funds, e.g. Timpson’s Executors v. Yerfrrry 20 T.C.155. See other cases discussed in Chapter Two. * 6-7 For the purposes of companies taxation, interest i3 deemed8019 to be derived from a Nigerian "source" if, (l) there is a right to payment of the interest in Nigeria or, (2) if the interest is by deed, will^otherwise charged upon or reserved out of real or personal estate situate in Nigeria, the property of the person paying the same, or as a personal debt or obligation by virtue of any contract which is entered into in Nigeria; or, (3) in the case of money q lent to a "Nigerian company"/ the loan is evidenced by mortgage, debenture, loan or other stock whether secured or unsecured issued by the company in recognition of its debt. (4) Fourthly, interest is deemed to be from a Nigerian "source" if the interest is payable on money lodged at interest in Nigeria. r Cn the other hand, for the purposes of personal taxation .the income from any interest on money lent by an individual, or an executor, or trustee outside Nigeria to a person in Nigeria (including a person resident or present in Nigeria at the time of the loan) is deemed to be d erived from the country if there is a right to payment there, if it is charged upon the payer’s real or personal estate in Nigeria as a personal debt by virtue of a contract entered into in Nigeria.^ 8. s.17 CITA deeming clauses after charging provisions. 9. The law is silent on the case of money lent to non-Nigerian Companies. A "Nigerian company", it may be recalled, is one whose "management and control" are exercised in Nigeria, s.2 CITA; s.2 ITMA - Interpretation sections. 10. 3.11 ITMA 1961. N.B. In spite of the slight differences in phraseology between the deeming provisions in the ITMA and CITA, it is assumed that the provisions are essentially the same, so that for the purposes of this study any reference to one includes a reference to the other except'.where otherwise stated. The purpose of the above deeming provisions, it would seem, is to serve as a guide in determining when precisely an interest payment is from a Nigerian » source. For example, by employing the formulae provided, once the security offered for the principal loan is situate in Nigeria, or the contract for the loan is entered into in Nigeria, it is quite easy to conclude that the "interest" has a Nigerian "source".1 But what is not so easy to decide, however, is the source of interest on capital nroductively employed in Nigeria, where the security for the loan is located overseas or where the "loan contract" is made abroad. Two reservations may be made thus far. Firstly, that the deeming pro­ visions cannot be used to determine the "source" of income in every given situation and perhaps were not so intended anyway. Secondly, that the efficacy of these provisions is greatly reduced by di .fficulties of interpretation and application. For instance, what is the exact meaning of the expression "interest payable on money lodged at interest in Nigeria"; No guidance is available anywhere. But in the opinion of this writer, it would appear that this deeming provision applies only to interest payments derived from sums deposited with banks, building societies, the Post Office and the like. That is, lodgements in Savings Accounts, Deposit Accounts, etc. This is as distinct from interest on loans granted to individuals or companies for commercial activities. Thus,where A lends 500 francs to B in Paris repayable there in French francs and then B with or without the knowledge or consent of A remits this sum to Nigeria for his trading purposes, can it be said therefore that A 12 1. i.e. following the second deeming provision in s. 17 ttTA- 2. No case has arisen in Nigeria on this point. has "lodged money at interest" in Nigeria? We think not The real heart of the matter is this: Under what condition are foreign investors liable to tax on interest from loans productively employed in Nigeria? This undoubtedly is a matter which is of the utmost importance for the investor and the host country alike. Money utilised in Nigeria from a loan can be divided into two categories, (a) Firstly, money which is lent by a foreign company in a foreign country but brought into Nigeria and used by the borrower, (b) Secondly, money brought into Nigeria by a foreign company and lent out there. In practice, the distinction between these two kinds of transactions may be blurred and very often may be a matter of form rather than subb;stance. But the tax implications of the two kinds of arrangement may differ a great deal. Whereas, there is a clear liabiliwty t*o pay tax in Nigeria under (b), i.e. having regard to the charging provisions as extended by the deeming clauses; the question of liability to Nigerian tax under (a) is more controversial. This is likely to remain so, as long as there is no universally accepted formula for determining the "originating cause" of interest payment for the purposes of taxation. The question of the "source" of interest payment has been the subject of major litigation recently in Nigeria and Kenya (East Africa). The two cases 3 3. Cf. Schioler v. Westminster Bank Ltd - discussed in Chapter Two suggests the contrary. In that case, a dividend warrant in Malaysian Dollars was sent to the U.K. for realisation by Guersey Bank without consulting customer. It was held that the "dividend" was received in the U.K. and hence taxable in that country. involved which had very similar facts related to the correct interpretation of the charging provisions under the Nigerian and Kenyan laws; laws, which were virtually identical except that in Nigeria the issue was the interpreta­ tion of the charging provisions as modified by the first deeming clause to the effect that interest is deemed to be derived from Nigeria if "there is a right to the payment of the interest in Nigeria". It is interesting to note that the outcome of the two »5rwere virtually the same thus indicating that the Nigerian deeming provision is of little or no effect. In fact, as is illustrated presently, it i1 sa cf* apable of producing a result completely opposite to what its. authors probably intended. Rather than extend the scope of Nigeria's tax juri tion over "interest", the deeming provision restricts it geographically. First, we refer to the Nigerian case of Aluminium Industries Aktien 4 Cesselshaft v. The Federal Board of Inland Revenue, the relevant facts of which were not in dispute. The appellant company in that case was a Swiss company which had advanced substantial loans to its subsidiary Nigerian company known as'Alumaco'J It was never in dispute that interest at the rate of 5 per cent was paid to the appellant company by Alumaco consequent upon an agreement concluded in Switzerland for a loan in Swiss francs to be repaid in that currency in Zurich The problem which arose in this case was whether the interest so earned by the foreign company was subject to tax under the Companies Income Tax Act 1961 as amended. The majority of the Appeal Commissioners decided that the 4 4. Suit No. SC/64/70 (unreported Supreme Court decision), decided on January 15th 1971 by Sir Ian Lewis, J.S.C. on behalf of the Supreme Court. interest so derived by the foreign company was not subject to tax, following which the Revenue appealed. In the High Court of Lagos, Sowemimo, J., gave judgement for the Revenue and allowed the appeal, holding that the interest in question was subject to tax in Nigeria. Although overruled on a further appeal to the Supreme Court, and it is thought rightly too, yet it is important to examine the reasoning behind h±3 lordship's decision. The following passage from the judgement is quite revealing: "What has to be decided is whether Alumaco. OasS t.he agent of the respondents 6 is liable to the payment of tax on the interest paid to the respondent. The interest is derived from the profits made by Alumaco in Nigeria. Such profits are taxable. 7 Alumaco is a subsidiary of the respondent company, the only difference being that Alumaco is a company registered in Nigeria, whereas the respondent is a foreign company. Since this foreign company had decided to invest money in a subsidiary company in Nigeria, it cannot escape payment of tax on the interest derived from the profits made on the investment in the subsidiary company merely because the "deeming" provisions of s.17 speaks of a right to a payment of interest in Nigeria. I am in complete agreement with the judgement of the minority that the Swiss 5678 5. Suit No. LD/7A/69, judgement given on the 21st November 1969. (unreported). 6. Emphasis supplied. 7. Emphasis supplied. 8. Emphasis supplied. Company could sue the Alumaco in Nigeria if they should de­ fault in paying the agreed interest. It In Immaterial whether the agreed interest should be paid in Swiss, francs or not, the Interest to be paid is out of profits made In Nigeria.̂ The money was invested in Nigeria therefore whatever profits are derived from such investment by way of interest must be subject to tax in Nigeria." From qfthe underlined parts of the above extracts the reasoning behind Ic.enimo, J's judgment is obvious. Here was an attempt by a judge of the High Court to interpret or perhaps to bend the law in order to reflect the economic reality of the situation. To conclude as his lordship did that interest paid rj Alumaco from profits made in Nigeria is from a Nigerian "source" is certainly an unreasonable approach. It is in Ofacyt in line with the submissions of tie developing countries at the meetings of the D.N. Ad Hoc. Group of Tax ixrerts.10 Considering the one vpy flow of capital (i.e. from the developed to the developing countries), and the resultant flow of interest payments in tie opposite direction, it would clearly be to the advantage of the poorer countries were it universally agreed that for tax purposes, the "source" of interest is the locality where the loan capital is utilised to generate wealth. 1 Regrettably, however, laws of developing countries supposedly designed regulate economic activities are all too often out of touch with reality. ?• Emphasis supplied. Tax Treaties Between Developed end Developing Countries.. First Report 11969) Part One, page 19, para. 89; Part Two, page 46, para. 53; Tax Treaties Etc. Second Report (1970) Part One, page 17 paras. 98 - 105. ■ The capital exporting countries on the other hand often argue that the "source" of income is the place of residence of the lender. The conten­ tions of both the rich and the poor appear to be valid. : number of observations may be made on the Judgement in the Lag03 High — . Firstly, it is interesting to note that the trial Judge ignored the that the Swiss company and Alumaco were two separate and distinct legal s titles. The relationship between the parties was clearly not one of principal agent but of lender and borrower - the fact that one was a wholly owned -iiiiary of the other notwithstanding. In this circumstance, it is doubtful whether the Judge could pierce the ■?il of incorporation. There was nothing unusual or illegal about the trans- -'ion between the parties 2 and no evidence was adduced before the Court to — • that the transaction was a sham and was entered into with a view to evade 3 On the contrary, the transaction appear* genuine and more or less at 'nt’s length". The 5 per cent rate of interest seems to be quite reasonable n : ioes not indicate an attempt to "siphon off" profits from the subsidiary riany in Nigeria to its parent company overseas - q result which is easily A :irieved by charging exorbitant interest rates. let the dilemna facing the judge was fairly typical. That is, whether ne form or substance of a transaction is to prevail. Even though the question firing the court was not a simple case of company "A" in Zurich investing money — company "B" in Nigeria, this was the net effect. In other words, Sowemimo, * - was correct at least from the practical point of view when he held that a *• -• It is common practice for parent companies to provide funds for subsidiaries, i-e. either from its own funds or from the world capital markets. '• ’•’here tax evasion is attempted, the Revenue may disregard such transaction especially when it is artificial or designed to reduce tax liability. s.U ITMA; s.25 CITA. ^ *• The point here is that interest is an allowable deduction from gross profits. a* 17 (l)(a) ITMA; s. 27 (0(a) CITA 1961. m c o ireign company had invested money in a subsidiary in Nigeria. In spite of the above, however, it i3 the opinion of this writer that .-a*, the Court had to look at in this particular case was the fact that money .-a paid by "B" to "A" in Zurich pursuant to an agreement and more important £till that the agreement between the parties concluded in Zurich was for a loan _s Swiss francs to be repaid in Zurich in Swiss currency. Although the understanding between the parties was for the loan capital to :■= used for Alumaco's purposes in Nigeria, (and thus in a loose sense "invested" .a .Vigeria) it is important to note that having received the money in Zurich, -t was possible for Alumaco to keep the money in Zurich for other purposes with- :ut remitting the same to Nigeria. Directing our minds specifically to the t consequences of the transaction, -• is our view and we are supported by several authorities,5 that as regards •interest", the law is not concerned with how or where the borrower obtains the funds with which he pays interest. In other words, the source of the lender's income (e.g. interest) has nothing to do with the "source" of the tettor's income from which he discharges his obligation to pay interest.** luff us, P., in the Bast African case subsequently reviewed, illustrated the joint well when he stated inter-alia that t 5* E.g. Tariff Reinsurances Ltd, v. C.O.T. [ 1938 ]59 C.L.R. 194 at 205, where Sir John Lathan, C.J., stated that "It is not relevant to consider what another person who is not an agent in any sense of the taxpayer does in order to obtain the moneys which he uses for purpose of making payments to the taxpayer." N.B. An analogy may be drawn here with the deter­ mination of the "source" of a director's remuneration viz., place where the company obtains its own profits? — See P. Co. Ltd, v. C.O.T. 1 E.A.T.C. 131. 6* North, J. .in I.R.C. v. Philips Gloeilampenfabrieken C1955 ] N.Z.L.R. 868 at p. 891. "a bank which lends a trader money in the U.K. to be repaid with interest there could hardly be asked to pay Kenya income tax if the trader happens to bring that money, or a portion of that money into Kenya and trades with that money there and then pays his interest from the profit he earns in Kenya. Surely, here the position must be that the trader pays income tax on the profits he earns, but the bank in the O.K. could not be asked to pay income tax on the interest sent from Kenya when so far as the bank was concerned it has invested its money by a loan in the O.K. and had had nothing to do with the trader's venture in Kenya". 7 One criticism of Sowemimo, J's judgement, therefore, is his failure to draw a distinction, albeit a fictional one, between the "source" of the lender's income (i.e. interest) and the "source" of the borrower's taxable profits out of which the interest was paid. To hold as he did that the interest received by the Swiss company is "derived from the profits made by Alumaco in Nigeria" is to confuse mat Another and the judgement is this: By holding that "it i3 immaterial whether the agreed interest should be paid in Swiss francs or not", the trial judge completely ignored the express terms of the agreement between the parties. If this fact is immaterial, then what is ^terial? With due respect, it is submitted that the stipulation in the loan E€reement that the principal and interest are to be paid in Zurich in Swiss currency are terms fundamental to the contract. This point is discussed in further detail below. 7. 1971 E.A.L.R. 127 at pages 143, 144. Finally, and as a corollary to the above, it is considered untenable to hold as the trial judge did, that the Swiss company had "a right to sue” For repayment of the interest in Nigeria in accordance with the first "deeming" provision of s.17 CITA as amended. The reasons for our submissions here would emerge presently. A As stated previously, Sowemimo, J., was overruled on appeal to the Supreme Court where some of the fallacy of his reasoning was exposed. In line with our second and third criticism above, Chief F.R.A. Williams counsel of the appellant company, recalled that while the ordinary rule in respect of a debtor is that the debt is situate where the debtor resides because there the debt can be enforced against him by process of law,® this rule did not apply if there was a contract (as was the position here) to pay in a specific currency.^ Expatiating a little on the point made by counsel, the question is this; how far is it logical to regard the place of residence of the debtor as the situs of a debt and hence the location of the "source" of interest for tax purposes as has been contended in a number of cases? The kind of anomaly which may arise is well illustrated by the Ceylonese case of National Bank of India v. C.O.t !^ In that case, the main issue was *&10 8. Counsel relied on the statement of Lord Atkin, J., (as he then was) in New >ork Life Insurance Company v. Public Trustees Q924} 2 Ch. 101 at 120. This writer considers the principle as stated to be correct. See R.H. Graveson: The Conflict of Laws - 6th ed. Sweet & Maxwell 1969, at pp. 52 ~ 53; Dicey and Morris - on The Conflict of Laws - 8th ed. 1967. Stevens & Scn3 at pp. 509 and 510. 5. Counsel relied on the statement of Eve, J., in Re Russian Bank for Foreign Trade £934] Ch. 720 at 738. N.B. For the purposes of the Capital Gains Tax Decree, a debt, secured or unsecured is situated in Nigeria, if and only if the creditor is resident in Nigeria, s. 25(c) CGTD 1967. 10* Ceylon Tax Cases Volume One page 121. This case is in line with the well known South African case of C.I.R. v. Lever Bros, op. cit. where it was held that interest on money lent abroad was derived from a non-Onion source even though the debtor was resident in South Africa. whether interest payments on loans obtained overseas can acquire a Ceylonese source once the debtor hitherto non-resident becomes resident in Ceylon. Foyser, S.P.J., in the District Court had no difficulty in rejecting the Revenue’s argument holding that it is a fallacy to treat an overdraft incurred in England ty a person at the time resident in England as something in the nature of an investment in Ceylon when the debtor becomes resident in that country. In this circumstance, therefore, the judge concluded that the interest payable on the overdraft could not be said to be income "arising in, or derived from Ceylon". Cn a purely theoretical level, it has been suggested that a debt being a specie of intangible personal property should be taxabl. in the state in which the owner resides and nowhere else. And that debts due from the residents of one state to the residents of another state should not be taxed in the state in vhich the debtor resides, merely on account of such residence. 1 Sound as these propositions are, they are not trouble free. For tax purposes, the proposal to locate the source of interest payment at the place of residence of the creditor rather than that of the debtor suggests that this "source" is not a fixed one. But the truth of the matter is that the "place of residence" test (i.e. either of the debtor or creditor) being something that can be changed quite easily cannot be a practical criterion for resolving the question of liability to tax on interest payments. Putting the whole problem in perspective and to return to our main dis­ cussion, Ian Lewis, J.S.C., on behalf of the Nigerian Supreme Court stated that vhat they had to determine in the case before them was not whether the appellant company could recover if it chose to sue Alumaco either in Nigeria or in Karl Drechsler, "Business Situs as a Basis of Property Taxation of__Intangibles" “ (1943) Wisconsin Law Review, page 352 at page 367. 35 Switzerland. But on the contrary, their sole duty according to his Lordship was to decide whether it had a right to the payment of the interest in Nigeria Xii u is accordance with the first deeming provision of s.17 CITA especially^the case as pleaded fell within that narrow compass. Following a number of English authorities, 2 his Lordship did not hesitate in holding<(l) that it had no such right and that its sole right under the contract was for payment in Switzerland in francs; (2) that it could not sue in Nigeria for payment of interest in Swiss currency, for it was only in Swiss Courts that judgement could be obtained in Swiss currency; (3) that if the appellant company tried to sue Alumaco in Nigeria it could only be for damages for failure to pay its debt or fulfill its obligations and that a Nigerian court would then award damages in Nigerian currency. In reaching a conclusion on the matter, before him, the appeal judge directed his mind to two factors. Firstly, the "originating cause" of interest payment and secondly its place of location. In his own words:^ "the source of this obligation was the agreement made in Zurich between the appellant company and the Aluminium Manufacturing 2* 2. Especially the statement of Lord Radcliffe in In re United Railways of Havana and Regia Warehouses Ltd £l96lj A.C. 1007 at p. 1059 stating inter- alia. that "any contract to settle a debt in the currency of the country in which the settlement is to be made is a contract for the payment of money in the eyes of our law ....." And also Lord Denning at page 1067 of the same report viz that "in the absence of any express clause deter­ mining the proper law, the transaction should be governed by the law of the country of the lender". Concluding, his Lordship noted that any claims brought before the English courts must be made in "sterling and judgement given in sterling" as the English courts "do not give judgement in dollars any more than the U.S. courts give judgement in sterling". 3. At page 11 of the certified true copy of the judgement. Company of Nigeria Limited, and the obligation itself under that agreement was for the Aluminium Manufacturing Company of Nigeria (Alumaco) to pay the principal and the interest on the loan to the Appellant Company in Zurich in Swiss currency. Hence, neither the source of the obligation nor the obligation itself arose in Nigeria but in Switzerland? That being so, it was decided that the claim for tax could not be brought vithin the first deeming provisions as pleaded by the Revenue and that the Swiss company was not liable to Nigerian tax on interest by Alumaco. In cur opinion, the criteria applied by the Supreme Court are quite logical, even though as is pointed out shortly these are completely out of touch with economic reality.' r It is fascinating to note that in& the case of Ssso Standard Eastern Inc, v. Income Tax.*4 6 the East African Co !urt of Appeal had reached exactly the same con- - 4. Emphasis supplied. Note that in reaching a decision on the "source" of obligation and its place of location his Lordship relied on the case of jJational Bank of Greece S.A. v. Westminster Bank Executor and Trustee Co. (Channel Islands) Ltd. H.T7 jj971j 2 V.L.R.105. The crux of the matter here vas whether or not the source of payments (as guarantors in default of payment of interest by the principal debtors) was situated within the United Kingdom. Lord Hailsham, L.C. at p. 109 - "I have come to the con­ clusion that the source of the obligation in question was outside the U.K. This obligation was undertaken by a principal debtor which was a foreign corporation. That obligation was guaranteed by another foreign coroporation which as was conceded before us had at no time any place of business within the O.K. It was secured by lands and public revenues in Greece. Payments by the principal debtor of principal and interest to residents outside Greece was to be made in sterling either at the offices of Hambros Bank or Erlanger Ltd.or (at the option of the holders) at the National Bank of Greece in Athens Greece by cheque drawn on London. Whichever method was selected ..... discharge of the principal debtors’ obligation would have involved .... either a remittance from Gteece to the paying agents specified in the bond, or, at the option of the holder, a cheque issued within Greece though drawn on London presumeably payable there out of funds remitted by the debtors from abroad". ’• I.e. the one way flow of foreign investments and the possibility of tax avoidance by the manipulation of the place of contract. This writer would like the law to be changed so that the substance of a transaction prevails rather than its farm. 6. [1971] E.A.L.R. 127 fusion as was arrived at in the Alumaco Case. These two cases decided about n ii=s time were based on remarkably similar facts. In the Esso Case, the :c=issioner of income tax confirmed an assessment on the Appellant, an American ~:.?any, of income tax on interest received by it in respect of a loan made available to a Kenya company for the construction of a refinery in Mombassa and for working capital. The loan agreement made in New York was for dollars and all repayments were to be made in New York in dollars. The question at issue was whether the interest on the loan accrued in, or was derived from Kenya. , , v v The Court of Appeal held as follows: (l) That the expressions "accrued in" sad "deprived from" are synonymous 8 and interpreted them to mean "source",Q .2) that the source of income is the place from which it is derived and that this is a question of fact. Applying these principles to the problem before it •* the Court decided that the source of the interest in this case was the contract made in New York, that the location of that source was New York and that the interest neither accrued in nor was derived from Kenya. Following the decisions in the Alum^cn Case and the Esso Case it is now settled law both in Nigeria and East Africa that the "source" of interest payment is the agreement for the loan and that the location of that "source" is the place of the agreement. Our first objection to these tests for resolving the problem of liability on interest payments is the ease with which they can be manipulated to avoid tax. *8 7' The Esso Case was decided on the 5th of June 1970, whereas the Alumaco Case was decided on the 15th of January, 1971. It is surprising that no reference &t all was made to the Esso -Case at the Supreme Court. 8* I-e. following Lord Davey in C.I.R. v. Kirk 1900 A.C. 588 at p. 592 9* The Court followed Lord Davey's statement in Liquidator Rhodesia Metals Ltd v. C.O.T. Q940] A.C. 774 at 789. Approved by Briggs, J.A., in C.O.T. v. ^ Oo- Ltd. 1 E.A.T.C. 131 at 162. •or instance, loan agreements may be concluded in "tax havens" thus localizing the "source" of interest in territories where little or no tax is payable. ?xrthermore, loan capital already in a country may become subject to an agreement overseas thus localizing the source of the interest abroad. Secondly, even where no tax avoidance motives are involved, is it not true that under present conditions most loan agreements are concluded overseas? Tee fundamental point here is whether or not a developing country can afford not to levy tax on interest payment on the principle that the "source" of such payment is localised where the loan agreement is concluded. The opinion of this writer is that principle or no principle the place where capital is productively employed should have either an exclusive or at least a concurrent right to levy taxes on interest payments. The U.N. Group of Tax experts came to this conclusion too. At this juncture, we wish to refer to the rather intriguing concept of the "source" of interest payments in the Republic of South Africa, as established by the case of C.I.R. v. Lever Bros, and Unilever Ltd. 1 In that case, it was .'.eld that the originating cause of interest in the case of a loan of money was not the debt but the services which the lender performs for the taxpayer viz. A m tne supply of credit in return for which the borrower pays him interest. Vatermeyer, C.J.,puts it this way:2 0̂* The objections of the developing countries to the OECD Draft Double Taxation Convention on Income and Capital may be noted here. Article || gives the primary right to tax interest to the home country of the investor with a limited withholding tax allowed in the home country of the borrower. The trend today, however, is towards revenue-sharing. That is, following the work of the D.N. Ad Hoc Group of Tax Experts. (1970) Second Report Part PP. 17, 18, paras. 98 - 105. 1* []946j A.D. 441; 14 S.A.T.C. 1. 2- Ibid., A.D. at p. 451 C O u 61 "In the case of a loan of money the lender gives the money to the borrower, who in return incurs an obligation to repay the same amount of money at some future time and if the loan is one which bears interest, he also incurs an obligation to pay that interest. As a rule, the lender either gives credit to the borrower or transfers to him certain rights of obtaining credit which had previously belonged to the lender, and this supply of credit is the service which the lender performs for the borrower, in return for which the borrower pays him in­ terest. Consequently, this provision of c:redit is the origina- ting cause or 3C-~ of the interest received M . the lender."^ According to A.S. Silke,^ since the true source of interest on a loan in terms of the Lever Bros. Case is the provision of credit, once this takes place in the Republic of South Africa the source of the interest is in the Republic. Thus, if the loan creditor has made the money available to the debtor in South Africa, the source of the interest is in the Republic irrespective of where the debtor resides, the debtor productively employs the capital, the interest is payable or the loam contract is concluded. That i3, if A in South Africa figrees to lend money to B for use in his business in Botswana and. A makes the money available to B in South Africa then the source is in the Republic even though B may have transferred the capital to Botswana for use in his business there. The position would, however, be different if A remitted the loan through bis bankers to B in Botswana. In such a case, the credit would have been provided in Botswana and not in the Republic. 3 3. Emphasis supplied. 4" Op- cit.. at page 134 The South African approach has been adopted in New Zealand following the hiding case of C.I.R. v. Philips Gloeilampenfabrieken.̂ This was a case in- rrlving the determination of the source of interest payment on a loan made iTailable in the Netherlands to a company in New Zealand. Essentially, the facts were similar to those in the Esso and Alumaco Cases, As far as Nigeria is concerned, it is questionable whether the South African concept of the source of interest (i.e. the place of supply of credit) is appropriate. Invariably, the place of supply would be the home country of the lender or alternatively any other locality nominated by him. Like the "situs of obligation" test therefore, the "credit supply" test is capable of easy mani­ pulation to avoid tax. It is, therefore, rejected for precisely the same reasons that the approach adopted in the Alumaco and Esso Cases was rejected Vhat then is the solution? One thing is clear looking at the decided cases in most Commonwealth countries; viz, that the interpretation and application of the "source" principle is a matter of the utmost difficulty. The real point at issue here is this: >.hat would (or should) a practical man in a developing country regard as the real source of interest? And in this connection, is there any difference between the "real source", the "intermediate source" and the "ultimate source"? furthermore, is interest payment capable of having more than one "source"? In the words of Schreiner, J.A. "in the case of an investment by way of loan, the creditor is leasing his money to make an income from it: he is generally 1958 N.Z.L.R. 868 Op. cit. at page 460 et. seq. Lever Bros Case. speaking not anxious to have it back so long as his debtor is sound and his security ample. His object, in the first in­ stance, in lending the money was to get what annual payments the borrower was prepared to pay for its use. Essentially. therefore, the interest is the fruit of the money and comes from where the money is, irrespective of where the contract was cade or the interest is payable".^ This writer is inclined to agree with the above statement. To hold that ihat'the "originating cause" of interest is the agreement for the loan as was dene in the Alunaco and Esso cases is an approach unlikely to be adopted by any practical nan in a developing country.^ Relating the above specifically to Nigeria, a developing country obliged to borrow overseas, can anything be movrev pyractical than to regard the "source" of interest payments as located within the count^- and hence liable to taxation — ihat is, once loan capital has been productively employed within the country? Vith this in nind^can it not be argued that Sowemimo. J's judgement in the Alumaco Case was a more practical and realistic one than that adopted by the Supreme Court? In view of the special economic circumstances of the country as outlined in the introductory parts of this chapter, and the arguments already advanced, Emphasis supplied. The dissenting opinion of Schreiner, J.A.,is of some significance because of the very interesting propositions of law in it. These proposition have, in fact, been relied on (although not successfully) in a number of cases, e.g. in the New Zealand case of C.I.R. v. Gloelampenfabrieken [ 1958 Jn .Z.L.R. 068 at pp. 889 - 891. Also in Esso Standard v. C.O.T. [1971 ] E.A.L.R. 127 at p. 139. It may be recalled that the generally accepted rule is that the source of income is not a legal concept but something which a practical man would regard as the real source of income, the ascertainment of which is a practical hard matter of fact. - Nathan v. Fed. Com, of Tax [1918 ] 25 C.L.R. 183. Isaacs, J. at p. 189 - 190. the following recommendations may be made: (l) That interest payments on capital productively employed in Nigeria should he deemed at all times to have a Nigerian "source" and hence liable to the country's taxation. 10 It is, of course, appreciated that this unilateral measure may render the recipients of such income liable to double taxation especially when resident overseas where tax is levied on the basis of residence or domicile. Double taxation could arise too where the home country of the investor holds that the source of interest payment received by its residents is the contract or agreement or the "supply of credit" which would invariably take rlace overseas. As we shall discuss in subsequent chapters this can either be eliminated sr mitigated by the selective use of unilateral reliefs or bilateral reliefs as may be agreed upon in tax treaties. What must be emphasized here is that ■’•igeria cannot afford to abdicate her right to levy taxes on interest payments on the grounds of legal technicalities. >2) Secondly, that the deeming provisions of s.17 CITA restricting the ambit of the charging provisions over interest payments which are considered to be of little value should be scrapped. In future, irrespective of whether or not interest is from a "source" in the Republic of Nigeria, once it is payable by debtors (companies or individuals) ordinarily resident or carrying on business in the country to non-residents, it should be subject to a withholding tax of sey 25 per cent to be deducted by the payer and paid over to the Revenue. With this approach, the whole question of "source" of interest would be of greatly •iininished significance. 10- Compare our proposal with the provisions under the Capital Gains Tax Decree where a debt is deemed to be situate at the place of residence of the creditor, s. 25(c) CCTD. 1967. (3) Finally, it is submitted that wherever possible the law should be inter­ preted to reflect economic reality and not in accordance with abstract concepts of justice. Afterall, the tax law is not an end in itself but a means to an end. Attention is now focussed on some other aspects of the tax treatment of interest payments under the Nigerian law. C. Commutation of Profits: Interest as an Allowable In order to ascertain the profit or loss of any company, interest payable on coney borrowed and employed as capital in the production of profits is an allowable deduction. 10a Interest as a specie of business expenditure is, therefore, subject to the usual tests for deductibility viz, "wholly, exclusively and necessarily incurred". In other words, "interest" is an allowable deduct­ ion from gross profits only if incurred on capital which was borrowed and used wholly, exclusively and necessarily for the production of income. ' As was pointed out in the previous chapter, these tests are extremely difficult to apply.* For example, whereas interest on money borrowed to finance the day to day transactions of a company would be allowable, it is very doubtful whether interest on moneys borrowed to build a new factory would be an allowable expenditure. 2 There are * of course «a lot of borderline situations and so no r-srd and fast rule can be laid down. ICa. s.17(l)(a) ITMA; s. 27(a) CITA 1961. ̂• See Chapter Four, supra, and the cases discussed therein. In this circumstance the sum would be a capital expenditure. Vhat should be rroted is that the * factory may qualify for a capital allowance under the Capital Allowances Schedule. • 366 The Rhodesian Case of "T" v. C.O.T. 3 is quite helpful here. The point £t issue in that case was whether interest paid by the appellant on money ton-owed by him to enable him to buy a house in which to live so as to permit of his letting at a profit a second house owned by him was deductible or was simply a domestic expense. The court rejected the contention of the appellant and held that the borrowing of money to buy a house for the taxpayer to live in so that he could let at a profit the house he already owned could not be regarded es the obtaining of a loan for use "in the production of income" (e.g. trading) as required by law. The court was of the opinion that while the appellant's course of conduct allowed him to retain his income producing asset, it also allowed him to acquire a private residence for himself, and that it was to the latter result that the loan to the appellant was directly related. One matter of practical difficulty is now referred to. That is, the pre­ vention of tax fraud (e.g. the charging of exorbitant interest rates etc.), where there is a transfer of funds between related companies.^ Although the Revenue has a general power to disregard "artificial or fictitious" transactions there is very little evidence that this power is being used effectively at present. 5 in any case, what is an artificial or fictitious transaction? The fact that Company A is willing to borrow from B at exorbitant interest rates does not ’_195Sf| Rhodesia and Nyasaland Law Report, p. 349- 4. Except for the purpose of financing the import and export of goods the permission of the Federal Ministry of Finance is required by an individual, firm or company resident in Nigeria in order to borrow money from outside the country. Application for such permission must be accompanied with the following information, (i) The amount, duration and purpose of the loan (ii) the rate of interest payable (iii) the arrangements proposed for repayment - "Doing Business with Nigeria" page 23, published by the Standard Bank, February 1970. This procedure helps to eliminate some of the problems in this area. 5. s.25 CITA; s. 14 1TKA. 367 necessarily make the transaction artificial or fictitious. There may be legitimate business reasons why this should be so e.g., the inadequacy of the collateral, the extended time for repayment etc. , For the future, it is submitted that interest may not be deductible from gross profits where money is borrowed from an affiliate unless the tax authorities are satisfied that the interest arises from a normal market investment and that the companies concerned have been dealing at arm's length. The presumption should be that affiliated companies are not dealing at arm's length unless the contrary is proved. This approach which is already applicable to Petroleum Companies can be extended to cover all kinds of companies.^ That notwithstanding, a lot still de the Revenue to determine whether or not a purported interest payment is a genuine business expense in­ curred wholly, exclusively and necessarily in the production of income. Any failure in this regard would result in sizeable profits being reduced to marginal ones by the deduction of bogus expenses. In the past no difficulty normally arose with regard to the allowance of management fees, interest, royalty or service charges or to the apportionment of any expenditure or income between a foreign parent company and its Nigerian subsidiary, provided that the basis adopted was realistic and was not altered from year to year.^a In general, this continues to be the case but recently the taxation authorities have adopted a firmer attitude and will very rarely 6. Petroleum Profits Ordinance (1959) s. ^ H • ga. The approval of the Federal Ministry of Finance is required for the re­ patriation of corporate profits, dividends, management fees, royalties, and the like. Application to the Ministry is usually made by the company's bankers. The kind of remittances, in qestion fall under Category C. 3G3 concede that a payment of interest is not taxable in the hands of the lender. Similarly, they now seek to tax any profit element included in management and service charges unless they are satisfied that these are strictly reimbursements of actual expenditure oi* the true cost of service rendered. D. The "Expense" Component of Interest; Taxation Gross or Ne S s a ? - Deduction at Source. Any company in Nigeria making a payment of interest, management fee or royalty to another company has to deduct tax at the standard company rate of tax from such payment and account promptly to the Federal Board of Tnl«nri •j Revenue for the tax so deducted. But curiously enough, there is no provision in the law as to how and when the tax is to be paid. In practice, therefore, Q the Revenue collects such tax by means of a special notice of assessment. The Board at its discretion may authorise a company in writing to deduct tax from a particular payment of interest, management fee or royalty at a particular rate of tax or to deduct no tax at all. But the experience so far appears to be that pej mission to pay without deducting tax will be granted only in very exceptional circumstances. The above method of tax collection on interest payments (i.e. deduction at source by the payer) is admirable, and in line with what obtains in several other countries. Having said that, two issues connected therewith are worth *9 7' s.9 Income Tax (Amendment) Decree 1966* No. 65 of 1966 providing for a new s.6U CITA. 8* Provision is made in s.61 CITA as to the time which payment is to be made i.e. as regards other categories of income. 9. 8.61(a )(2) CITA. Note that where the tax deducted exceeds the company's liability the Board on application by the company must refund the excess. (A)(3) CITA. 363 discussing. Firstly, the rather high rate of withholding tax on interest (40 per cent); and the fact that the tax is levied on gross interest payments with­ out any regard for the costs incurred by the lender. Surveys show that these costs are particularly high in the case of institutional lenders (banks etc.) leaving only a relatively small profit margin.^ Theoretically, taxation on a net basis is the logical thing to do and was so agreed by the Ad Hoc Croup of Tax Experts who reviewed the problem recently. 1 But the truth is that taxation on a explicit and accurate r.et basis does not offer a practical solution from the administrative point of view. In the cir­ cumstances, the best solution, perhaps is for the tax in the payer's country to be computed on the gross interest at a rate roughly comparable to the average effective rate cn a net basis. This is only possible assuming, of course, that the expense component in the various types of interest is determinable.2 But to determine the expense component of an interest receipt and whether or not such expense is justifiable is a matter of the utmost difficulty. What, then, must Nigeria do? Ignore the exp>ense component of interest completely or reduJce xthe ?present rate of tax on this specie of income? Looking elsewhere, the following solutions have been adopted by some developing countries. In Argentina, for example,^ there is an automatic fixed 10. Tax Treaties Between Developed and Developing Countries. 1969. First Report Part One, page 20 para. 90; (1970) Second Report Part Two, pp. 57,58. • 1. Ibid.. (1970) Second Report, Part Two, pages 57, 58. 2. No universally acceptable method has yet been devised to determine the expense component of interest payment as lawyers, accountants and economists differ so touch on methodology. 6 3- Tax Treaties ate. (1970) Second Report, Part Two, p. 58. % > 370 50 per cent deduction allowed from gross interest income thus reducing the 41 per cent withholding tax by half. The Israeli solution is also interesting.4 5 In that country, gross interest is taxed to non-residents at the rate of 25 per cent and to banks at a rate of 15 per cent. If, however, the foreign bank wishes to prove additional expenses, it may do so and will then be taxed at 49.5 per cent on the net. It is the view of the present writer that Nigeria can successfully ignore the expense component of interest payments and retain the present high rate of tax (i.e. 40 per cent) on gross interest payments without adverse effect on the inflow of capital into the country. We hold this view for two reasons. Firstly, the fact that any hardship may be mitigat of the provision in the law whereby a total or partial exemption from tax can be granted on a selective vb asis; secondly the fact that foreigOn iVnvestments have continued to pour into the country unabated.' The next sub-section looks critically at the exemption granted to a number - of interest payments. At this juncture, a word or two must be said about the tax treatment of imported interest payments; that is, interest payments received by residents of Nigeria from overseas. What is important to note here is that at present the persons receiving this kind of income are insignificant in number because of the restrictions on foreigners raising funds from or within Nigeria and the scarcity of loan capital anyway. 4. Ibid., at page 58 5. Supra. Introductory section showing some Central Bank figures. The rate of inflow of new foreign investments has constantly been on the increase. 37 Where interest is imported, it is computed as part of the income of the recipient,1 and credit is given for any tax paid at source in accordance with ice appropriate formula for relief under the Nigerian law depending on whether tie income is from a Commonwealth country, a treaty country or from a country which is neither. The double taxation implications are pursued further in the appropriate chapters. i. "Interest" Exempted from Tax o f Certain interest payments are exempted from Nigeria tax in the hands of the recipients. These fall under two broad categories. In some cases the exemption granted is of general application, while in other instances thi3 exemption is on a more selective basis. In order to encourage the inflow of capital, there is an obvious bias in favour of non-residents in the tax treat- cent of i• nterest payments accruinfg tfo them from Nigeria. For example, interest accruing to any person who is not resident in ’■igeriâ is completely exempted from tax in the following circumstances.* i) Where the interest is on a loan charged on the public revenue of the Federation and raised in the U.K.; (ii) if the interest is on any bond issued by the Government of the Federation to secure repayment of the loan raised from *23 1* See s.2l(l) ITMA; s. 31 CITA dealing with the computation of "total income" and "total profits" from all sources in respect of an individual or company as the case may be. 2. See Chapters VI, VII and VIII, infra. 3. For the purposes of this exemption a person shall only be deemed to be resident in Nigeria if present in the country for a period or periods amounting to 183 days or more in that year of assessment. Third Schedule ITMA para. (e). Enacted as a supplement to s.16 ITMA. * the International Bank for Reconstruction and Development under the authority of the Railway Loan (international Bank) Ordinance 1958; (iii) if it is interest of any monies borrowed by the Government of the Federation or of a state upon upon terns which include the exemption of such interest from tax in the hands of the non-resident person.4 Furthermore, where the Federal Commissioner of Finance so consents, in­ terest may be exempted from tax on any monies borrowed outside Nigeria by a corporation established by law in Nigeria upon terms which include the exempt- ion of such interest from tax in the hands of a non-resi nt person. To this effect, the Commissioner has exempted a number of interest payments on loans borrowed by some public companies from the provisions of the tax code. 5 The merits or demerits of these exemptions are matters on which no intelligent criticism can be made because all the facts are unknown. Apart from the above, there is a gseneyral exemption granted on in_tere_st payments made by the Nigerian Post Office.* This is only reasonable considering the need to cultivate the saving habit among the local people and to generate internal resources. R< , however, up till the present time it would seem that not enough effort has been made to mobilise internal capital; capital, 7 which according to S.P. Schatz, should be enough for economic development. 456 4. Third Schedule ITMA para, (e), sub-paras (i) - (iv). 5. E.g. Loans granted to the Nigerian Ports Authority. See Income Tax ^n~ terest on Loan Granted to the Nigerian Ports Authority (Exemption) CNo.2) Order 196~3: Loans granted to the Nigerian Sugar Company. See Income Tax Interest on Loans granted to the Nigerian Sugar Co. Ltd (Exemption No. 2) Order 1Q6?. 6. Third Schedule ITMA para. (0); 8. 26(l)(f) CITA. 7* "Obstacles to Nigerian Private Investment", on. cit. That there is still a great need for foreign capital is evidenced by the pro­ visions of the Companies Income Tax (Amendment)(No. 3) Decree 1971. According to this law, where on, or after 1st January 1971, a company in­ corporated outside Nigeria grants a loan of at least £75,000 either abroad in foreign currency or out of monies brought into Nigeria from abroad, to any person carrying on a trade, business, profession or vocation in Nigeria for use in such trade, etc., the interest derived on such loan is with effect from the 1570/71 year of assessment «(i) exempted from Nigerian income tax in the hands # of the foreign company ifthe loan is not repayable by the borrower until after the expiration of at least a period of ten years; (ii) liable to Nigerian income tax at half the current company rate if the loan is not repayable until a~ft er the expiration of a period of between five and ten years.9 . nP Any exemption or relief granted under this law can be withdrawn by the Inland Revenue if the loan is repaid before the expiration of the relevant qualifying period.1̂ Also, the Federal Executive Council may order that exempt­ ion or relief should not be granted in respect of the interest on any particular loan or that any exemption or relief previously granted be withdrawn. ̂ Any additional assessment necessitated by the exercise of the above powers may be made at any time.^ Equally of interest in the context of our present discussion is the fact that the Federal Ministry of Finance will consider from non-residents wishing 8. S.17A (l)(a) CITA as amended. 9. s. 17A (1)(b) CITA as amended. 10. ILld., s. 17A(2)(3)• t 1. Itod., S. 17(A)(4). 2. IWd., S. 17A(5) 4 to invest capital directly in Nigeria applications for the grant of "Approved Status" for such investment. This is just another incentive to encourage the inflow of fresh capital and simply means that sympathetic consideration will be given to the repatriation of capital directly invested in Nigeria to the extent of any distribution of a capital nature arising from a realisation thereof. Although an unconditional guarantee is not given, approval for re­ patriation would be withheld only in exceptional circumstances.^ in. ?,CYALTI£3. R2ST5 AND SIMILAR PAYI-fcKTS A. Definition and Concept In Nigeria, tax is payable for each year of assessment upon the profits of any company or individual in respect of: "rent or any premium arising from a right granted to any other person for the use or occupation of any property".* 4 The precise scope of this provision is unclear as no pronouncement on it has been made by the courts and no official guide explaining its meaning can be found. However, if the word "property" is construed in its broadcast sense to include all species of property (i.e. moveable or immoveable, tangible or intangible), then the provision is wide enough to cover royalties and other ^uelagous payments which on a cursory reading of the tax code appear not to be charged to tax at all. For our purposes, therefore, the use of the term "royalty" should be understood to include payments of any THnd received as consideration for the use of, or the right to use any literary, artistic or scientific work (i.e. 3* Doing Business in Nigeria - A Standard Bank Business Aid - February 1970 Page 22. 4* a. 17(b) CITA; s.4(l)(c) ITMA emphasis supplied - "any property!! 373 copyrights); payments received as consideration for the use or the right to use any patent, trade mark, design or model, plan, secret formula or process; or for the use of or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. Our working definition should also be construed to cover "manage­ ment fees", headquarters expenses, consultancy fees and the like.^ Whether or not this definition should be extended to cover compensation or damages paid for fraudulently copying or infringing intelqlejcTtual or in­ dustrial property rights is debateable. It has been strongly suggested especially where there is a double taxation agreement in existence that these kinds of damages should be included in the term'royalty. This writer agrees, but would go on to add that the term "royalty" need not be restricted to damages paid for the infringement of industrial property rights etc. where there is a double taxation agreement but to all instances of such infringement. Thus, where such damages are awarded by Nigerian Courts, it is clearly in Nigeria's interests to regard them as sufficiently akin to royalty, payments and,hence taxable as In principle, royalties in respect of a licence to use patents and similar industrial or intellectual property are income to the recipient from a letting. Although classified here as an "inventment income",^ royalties all too often 56 5. Our working definition is based on the OECD Model as approved and amended by the U.N. Ad Hoc Group of Tax Experts. Where a tax treaty is in force between two countries the precise ambit of a royalty payment is clearly defined. It should be noted that the term royalty does not include payments for Oil Concessions etc. That is, the term royalty as used in this context. 6. Commentary on Article 11 OECD Draft, page 118 Report of the OECD Fiscal Committee 1963. 7* This classification is also adopted by the U.N. Ad Hoc Group of Tax Experts. First Report 1969, Part One, Chapter VI. See too G.S.A. Wheatcroft’s classification (1957) B.T.R. 310 at p. 317: "What is Taxable Income?" 376 appear to be the profits of a trade. Whereas, royalties paid by instalments are considered revenue receipts in the hands of the recipient and so taxable, difficulties often arise in the case of an outright sale of a patent, copyright or know-how for a lump sum particularly where such payment is neither clearly of a capital nor revenue nature. What must be pointed out here is that a payment which is clearly of a capital nature will not become a revenue receipt merely because it i3 one of a series of payments of the same kind, just as a revenue receipt will still be medical supplies by a number of secret processes sold its products in Burma. Faced with the possibility of the Burmese government setting up its own factory and laboratories,the company undertook to disclose secret processes to that government and to provide other information in consideration of the payment of a "capital sum of £100,000". The company also undertook to provide certain services and to manage the proposed factory in return for an annual fee, which was admitted to be subject to tax. No similar agreement had been entered into 8. KacNaughten, J.,in Glasson v. Rougier 26 T.C. 86 at 90 "a sum of money paid in commutation of annual sums which are ’income' for the purposes of the Income Tax Acts is chargeable to income tax, just as in the computations of the profits of a business a sum paid in commutation of an annual 'expense' is allowed as an expense". 9- [1957] 37 T.C. 540 377 by the company with any other foreign government or any other party. The House of Lords by a majority held that the £100,000 was not taxable as it was a receipt on capital account. Viscount Simond>stated the position vividly observing thati^ "the company parted with something for which the government was prepared to pay no less than £100,000 i.e. an asset which was the source or one of the sources of its profits .... The company has parted with its property for a purchase price .. .... and when I say 'its property' I mean......a capital asset". The same principle was applied in Volf Electric Tcools Ltd, v. Vilson. where the appellant company which had presvviously traded in electric power tools in India agreed to provide an Indian company with all present and future drawings, designs and technical knowledge as well as data necessary for the establishment of a factory for the production of certain ranges of portable electric tools. It also assigned all its Indian patents to that company. It was held that shares issued by the Indian company to the appellant company as consideration for the drawings etc. were received by the appellant company as part of a comprelihensive agreement whereby, as to the selected tools, the company gave up its business in India. Accordingly, the shares were considered a capital asset of the appellant company and not taxable. The Evans Medical Supplies Case was distinguished by the House of Lords 1C. Ibid.. at page 579 1- (1968) 45 T.C. 326. 373 2 in Soils Sqy.ce Ltd v. Jeffrey where engineering "know-how" was sold on a number of occasions to different countries. In this case,the appellant company embarked on a deliberate policy of licensing companies in other countries to manufacture its engines on terms which involved the payment of capital sums (so-called) and royalties. The House of Lords held that the lump sums were trading receipts on revenue account. The engineering "know-how" sold in this case was regarded as a regular product of the trade and was treated as more transient and less permanent than the "know-how" relating to medical supplies in the former case which could be applied in manufacturing for a long time. The test to be applied to the type of cases under discussion was spelt out by Eankes, L.J., in British Dyestuffs Corporation (Blackley) Ltd v. I.R.C.̂ in these words: "Looking at the matter, is the transaction in substance a parting by the company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as p>art of the profits and gains of that trade?" Somewhat similar problems have arisen to those considered under this head in connection with patent rights and copyright psayments. 23 2• (1962) 40 T.C. 443. I?.B. The principles established in the last three cases have been followed in the Rhodesian case of Vacu-Lug (Pvt) Ltd, v. C.O.T. [ 1963]r and H.L.R. 194. Agreement by Co. A to provide Co. B with "know-how" and rights to use a patented process and a trade mark. Whether consideration was a receipt of a capital nature or a gain in carrying out a scheme of profit making, and thus taxable? Held that the test to be applied was whether the whole agreement was analogous to a final cession of rights or a continuing sub-lease of those rights. The Rolls-Royce case has also been followed in Kusker v. English Electric Co. Ltd. 41 T.C. 556. 3* (1924) 12 T.C. 586 at p. 596. 3 7 9 Relating the above to Nigeria, it would appear that the present income tax law is inadequate especially as regards the tax treatment of lump sum pay­ ments obtained from the sale of patent, copyright or know-how.* Clearly, these payments cannot be regarded as "rent or premium arising from a right granted to any other person for the use or occupation of any property". And neither are such receipts strictly a category of "trading income" since most vendors of these rights do not trade in these items. Furthermore, it is doubtful whether they are caught by the sweeping up provisions of the tax code.*a The uncertainty of the tax treatment of dealings in know-how etc. is not peculiar to Nigeria. It was not until 1968 for example, that an attempt was made in the U.K. in the Finance Act 1968 (now s. 586 ICTA 1970) to codif̂ r the subject against the background of the existing case law discussed above. But the Nigerian situation, although not appreciated by many, remains rather un­ satisfactory. To put the whole problem in its proper perspective the first thing to be recalled is the one way flow of know-how (i.e. from the developed to the develop­ ing countries), and the corresponding flow of royalty payments in the opposite direction. What is important here is this: Can Nigeria afford to allow lump sun payments on the sale of know-how to escape tax on the grounds of legal technicalities? Where a parent company overseas sells "know-how" etc, to its subsidiary in Nigeria and a lump sum payment is made, of what significance is 4* The effect of the Capital Cains Tax Decree 1967 is ignored here but referred to presently. The point we are making here is of crucial importance especially in those developing countries where a Capital Gains Tax has not been introduced, e.g. Ghana.