TAX EXEMPTION AND YOUR NON-PROFIT
Non profit outfits are exempted from paying certain taxes in Nigeria, in some African countries and this has sort of become a global policy too. The essence of this is to reduce the burdens on nonprofits and help them optimise their resources for more impact and maximum output.
Under Nigerian law (which is the focal point), a research by the Banwo-Ighodalo team reveals that pursuant to changes introduced to the tax regime under the Finance Act 2020, the Federal Inland Revenue Service (FIRS) recently issued two Information Circulars, both dated March 31, 2021, detailing the rules that will, henceforth, guide its tax treatment of non-governmental organisations in Nigeria.
Before the coming into force of the Finance Act, there were laws which made provisions for the tax exemption of non profits from gains which were not gotten from commercial activities. However, there was no clarity about activities which were of a. ‘public character’ within the meaning and intendment of the Companies Income Tax (CITA). This lacuna was closed by the Finance Act 2020 which defined the phrase ‘of public character’ thus: an organization or institution is of public character, if it is registered in accordance with relevant law in Nigeria; and does not distribute or share its profits in any manner to its members or promoters.
It can be gleaned from the above that nonprofits enjoy statutory tax exemption on their incomes and gains, the tax exemption enjoyed is neither unconditional nor absolute. Nonprofits enjoy tax exemption from activities which are not commercial in nature only. So, for instance, if an environmental based advocacy non-profit organisation invents a sellable innovation and actually sells it, gains made from that sale would be taxable. While income derived by non-profit entities from members’ subscription fees, donations, grants, zakat, offerings, tithes, funds realized from launchings, etc. are considered as tax-exempt.
Additionally, companies’ donations to non-profits are tax-exempt provided that:
(a) the donation is made out of the company’s profits for the relevant year of assessment;
(b) the total donation made does not exceed 10% of the total profits of that company for the relevant year of assessment; and
(c) such donation is not of capital nature, except where the donations are made to universities or other tertiary or research institutions or for any developmental purpose (which donation should not exceed 15% of the total profits of the company for the relevant year of assessment or 25% of the tax payable in line with the provisions of section 25A of the Companies Income Tax Act).
It is important to note however, that this tax exemption status of non-profits does not extend to Value Added Tax (VAT) on goods and services purchased by the organisation. This is with the exception of such goods and services that are purchased for humanitarian services. What this is means is for example, if Organisation A wants to purchase sanitary towels to distribute to girls in low-income areas, it’ll not be taxed. But if Organisation A also purchases the same as part of employee welfare or to resell, then it will be taxed. Under section 15 of the VAT Act, Non profits are required to file their VAT returns with the FIRS, not later than the 21st day of the month following which the purchase or supply was made.
Pertinent to state that Non profits also have some tax obligations and not just tax rights. They include:
i) registration with FIRS for tax purposes;
(ii) filing of annual tax returns under section 55(1) of the CITA and other relevant statutory provisions;
(iii) liability to pay tax on all incomes and gains derived from commercial activities, or on incomes and gains not exclusively applied to the NGO’s charitable object(s)
(iv) registration with FIRS for listing under the Fifth Schedule to the CITA, for the purpose of eligibility to receive tax-deductible donations under section 25 of the CITA;
(v) deduction at source, and remittance to the relevant tax authority, of applicable taxes, payable on the emoluments of its employees, directors, and officers (under the Pay-As-You-Earn regime).
The above-listed obligations are very important and Impacty advises all nonprofits to comply with the law on this matter, and reduce risk of paying huge correctional fees when mistakes can be avoided by getting proper legal counsel.