Commonwealth Tax Relief
Sunday,18th November, 2018. 6:34:12pm

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COMMONWEALTH TAX RELIEF

     
     

Chief. Yahaya. O. Olajide (fca,fcti)
Managing Partner

(Charters Accountants, Tax Practitioner)

 

RELIEF IN RESPECT OF COMMONWEALTH INCOME TAX

Tax is defined as a compulsory levy imposed or charged on taxable citizens, companies and firms to enable government obtain the required revenue to finance its activities. A major principle of taxation is that it should be equitable or must be as just as possible. A good tax system must also be seen to be neutral, i.e. it must not change the behaviour of the tax payer after it has been levied as to investment or consumption.

As a result Governments, has always try not to tax one single item of income in the hand of a recipient tax payer more than once unless there is a special reason to do so or where control as to the appropriateness of records of tax paid could not be guaranteed. The commonwealth tax relief is a relief granted to an individual or company on certain classes of income or tax credit given as deduction from tax payable in Nigeria on an income or profit which has been subjected to tax in a foreign country (referred to as commonwealth country) which is now been subject to tax in Nigeria either in part or wholly.

Commonwealth tax relief is commonly referred to as “ Double Taxation Relief”

The relief is granted to any taxpayer who operates in a country with whom Nigeria has double taxation agreement.

The Companies Income Tax Act 1960 Section (33), subsection (1) provides that :-

“If any company, being a Nigerian company, which has paid, by deduction or otherwise, or is liable to pay, tax under this act for any year of assessment on any part of its profits proves to the satisfaction of the Board that it has paid, by deduction or otherwise, or is liable to pay, commonwealth income tax for that year in respect of the same part of its profits, it shall be entitled to relief from tax paid or payable by it under this act on that part of its profit.” While subsection (2) of the same section provides that “If any company, other than a Nigerian company which has paid, by deduction or otherwise, or is liable to pay, tax under this act for any year of assessment on any part of its profit proves to the satisfaction of the Board that it has paid, by deduction or otherwise, or is liable to pay, commonwealth income tax for that year of assessment in respect of the same part of its profits, it shall be entitled to relief from tax paid or payable by its under this act on that part of its profit”

 

The Act recognizes TWO Classes of companies or individuals,

a)  A Company incorporated in Nigeria or in the case of an individual, one who is resident in Nigeria ( A Resident      Taxpayer) , and

b) A company not incorporated in Nigeria or an individual not resident in Nigeria referred to as Non – resident Taxpayer.

In a situation where there is no agreement with a country outside the commonwealth and the republic of Ireland , a foreign income or profit will be assessed to tax along with Nigeria income of the tax payer which means there would be double taxation. For further understanding of double taxation, internally generated incomes or profits are normally subjected to local taxes in the countries where they are earned. Taxing them in Nigeria without reference to previous tax paid will result to double taxation of the same income or profit. Double taxation relief is therefore necessary to reduce such burden on the taxpayer. Different computations apply to each category of tax payers.

For a tax payer to claim for commonwealth tax relief, the taxpayer must first find out if his country belong to the group referred to by the Act as commonwealth members or whether his country is among those whom Nigeria has signed tax treaties.

The most recent list available to me at the time of writing this article is reproduced below:-

S/N

NAME OF COUNTRY

EFFECTIVE DATE

1

The united kingdom of Great Britain and the republic of Northern Ireland effective 1989

1989

2

Islamic republic of Pakistan

1990

3

The kingdom of Belgium

JAN. 1991

4

The French republic

JAN. 1991

5

The government of Canada

JAN 1993

6

The kingdom of the Netherlands

JAN. 1993

Table A. Countries in which Tax Treaties Exists with Nigeria

The agreement or treaties as to double taxation is provided for in Section (34) Subsection (1) to (5). The agreement is referred to as “Double Taxation Arrangements”

DOUBLE TAXATION ARRANGEMENTS
The tax Act provides for the specific pronouncement of the existence of double taxation arrangements with foreign countries. In Section (34) subsection (1) the Act provides that “If the Minster by order declares, that arrangements specified in the order have been made with the Government of any country outside Nigeria with a view to affording relief from double taxation in relation to tax imposed on profits charged by this Act and any tax of similar character imposed by laws of that country, and that it is expedient that those arrangements should have effect, the arrangement shall have effect notwithstanding anything in this act”.

In the case of non-resident taxpayers, the Act sort to remove responsibility for payment of tax or rendering of return by a foreign Manger of officer of a company or individual not resident in Nigeria as required by Section (37) of the Act.

Subsection (2) of section 34 provides that :-

“on the making of an order under this section with respect to arrangement made with the government of any commonwealth country or the Republic of Ireland, section 37 of this act shall cease to have effect as from the beginning of the first year of assessment for which the arrangement are expressed to apply except in so far as the arrangement otherwise provide”

However to be sure that claims for double taxation is genuine and accurate, the tax law provide for disclosure of relevant records in subsection (3) by stating that:-

“Where any arrangement have effect by virtue of this section, any obligation as to secrecy in this act shall not prevent the disclosure to any authorized officer of the government with which the arrangement are made of such information as is required to be disclosed under the arrangements”

To allow for review of the provisions of the treaties and arrangement, the Act empowers The minister in subsection (4) to “make rules for carrying out the provisions of any arrangement having effect under this section” While the Act gives the wide power to expand the list of profits for which relief could be allowed, the order further give comfort to taxpayers who may be entitled to relief before the arrangement is made, the Act empowered the Minister in subsection (5) of section 34 to the effect that:-

“An order made under the provision of subsection (1) of section 34 may include provision for relief from tax for periods commencing or terminating before the making of the order and provision as to profits which are not themselves liable to double taxation”

METHEOD OF CALCULATING RELEIF TO BE ALLOWED FOR DOUBLE TAXATION

RESIDENT TAXPAYER

Section 33 subsection (a) provides that:-

“If the commonwealth rate does not exceed one-half of the rate of tax under this Act, the rate at which relief is to be given shall be the commonwealth rate of tax”

i.e CRT < ½ NRT : RELIEF = CRT

(where CRT = Commonwealth Rate of Tax, and NRT = Nigerian Rate of Tax)

 

Other literatures also refer to the commonwealth rate of tax as “ Foreign Tax

While subsection (b) of the same section states that if the commonwealth rate of tax exceeds the Nigerian rate of tax, the relief will be half the Nigerian rate of tax.

i.e IF CRT > ½ NRT, RELIEF = ½ NRT

The Nigeria rate of tax for the individual is the tax imposed (before the deduction of relief for other taxes) divided by the total income. The commonwealth rate of tax is arrived at in a similar manner.

In other words;

i. Nigeria Rate Of Tax (NRT%) = NIGERIA TAX( N ) x 100

TOTAL INCOME( N )

•  The Commonwealth Rate Of Tax (CRT %)

= COMMONWEALTH TAX OR FERIGN TAX X 100

TOTAL PROFIT OR TAXABLE PROFIT

NON RESIDENT TAXPAYER : If a company other than a Nigerian company (or non resident in the case of personal income tax) has paid or is liable to pay on a profit on which commonwealth income tax has either been paid or liable to be paid, such a company or individual will be entitled to relief as follows:

•  If the commonwealth rate of tax (CRT) does not exceed the Nigeria rate of tax (NRT), relief shall be given at one half of the commonwealth rate of tax.

If CRT< NRT, relief = ½ CRT.

•  If the commonwealth rate of tax (CRT) exceed the Nigerian rate of tax (NRT), relief shall be given at an amount equals to that by which the Nigeria rate of tax exceeds one half of the commonwealth rate of tax.

If CRT > NRT, relief = NRT - ½CRT

GENERAL PROCEDURES FOR THE COMPUTATION OF TAX PAYABLE BY A TAXPAYER WITH FOREIGN INCOME

•  Determine the global income of the taxpayer by including the income derived from abroad.

•  Determine the taxable profit of such taxpayers. If it is a business, add or deduct balancing adjustment and allow capital allowances. If an individual, allow for relief and allowances.

•  Determine tax payable by applying the applicable rate of tax to the taxable profit determined in 2 above. This represents the Nigerian tax.

•  Calculate the Nigerian rate of tax by dividing the tax computed by the total taxable income i.e. dividing by item 2.

•  Calculate the commonwealth rate of tax by dividing the tax paid on the foreign income by gross amount of the foreign income.

•  Compare the commonwealth rate of tax with either one-half of the Nigerian rate of tax or with the Nigerian rate of tax depending on the tax position of the tax payer. Apply the rule to determine the rate of relief.

•  Compute the amount of double taxation relief by multiplying the rate of relief obtained in 6 above by the amount of gross foreign income.

The amount of relif obtained is deducted from the tax liability computed in 3 above to determine the net tax payable.

(b) in any other case, the rate at which relief is to be given shall be half the rate of tax under this act.

(2) at a rate thereon to be determined as follows:-

(a) If the commonwealth rate of tax does not exceed the rate of tax under this act, the rate at which relief is to be given shall be equal to the amount by which the rate of tax under this act exceeds one-half of the commonwealth rate of tax.

(3) For the purposes of this section –

“commonwealth income tax” means any tax on income or profits of companies charged under a law in force in any country within the commonwealth or in the republic of Ireland which provides for relif from tax charged both in that country and Nigeria in a manner corresponding to the relif granted by this section;

“The rate of tax” under this act of a company for any year of assessment means the rate determined by dividing the amount of tax imposed for that year (before the deduction of any double taxation relief granted by this part) by the amount of the total profits of the company for that year, and the commonwealth rate of tax shall be determined in a similar manner.

(4) Any claim for relief from tax for any year of assessment under this section shall be made not later than six years after the end of that year, and if the claim is admitted, the amount of the tax to be relived shall be repaid out of the tax paid for that year of assessment or set-off against the tax which the company is liable to pay for that year of assessment.

Provided that if the company fails to satisfy the Board as to the amount of the tax to be relived, the Board shall give notice of refusal to admit the claim and the provisions of Part X shall apply accordingly with any necessary modifications as though such notice were an assessment.

PART X COMPANY INCOME TAX ACT 1960

Section 55 subsection (9) provide that subject to an appeal, the Appeal commissioners may confirm, reduce, increase or annul the assessment or notice or make such order thereon as they may see fit.

Subsection (10)also provide that every decision of the Appeal commissioners shall be recorded in writing by their Chairman and a certified copy of such decision shall be supplied to the appellant or the Board by the Secretary, upon a request made within three months of such decision.

Double taxation relief is an exempted tax granted for certain class of income or tax credit given in one or other countries which are parties to a double taxation agreement to reduce the burden of double taxation.

This implies that a relief is granted to any taxpayer who operates in a country with whom Nigeria has a double taxation agreement. For instance, if any Nigeria company or individual which has paid or is liable to pay commonwealth income tax in a year of assessment is again due to pay, or has paid or is liable to pay tax under the company income tax act or an individual under the personal income tax act from that of its profit or his income, a relief shall be allowed from the tax payable.

In a situation where there is no agreement with a country outside the commonwealth and the republic of Ireland , a foreign income or profit will be assessed to tax along with Nigeria income of the tax payer which means there would be double taxation.

For further understanding of double taxation, internally generated incomes or profits are normally subjected to local taxes in the countries where they are earned. Taxing them in Nigeria without reference to previous tax paid will result to double taxation of the same income or profit. Double taxation relief is therefore necessary to reduce such burden on the taxpayer.

Membership

OLAJIDE AND ASSOCIATES is a member of BNI and a registered member of The Institute of Chartered Accountants of Nigeria and Chartered Institute Of Taxation Of Nigeria

 

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