The term ‘Non-Profit Organisation’ could be misleading because it suggests that entities in this category do not make a profit, which is not the case. Non-profit organisations are essentially organisations that are prohibited from distributing profits to their members or officers. They could be incorporated; in which case the governing corporate law provides for the non-distribution of profit constraint; or unincorporated. Although these entities make profits, they are prohibited by law from distributing profits to members. Rather, surplus revenue is ploughed back towards achieving the goals of the entity. They are usually without transferable ownership interests and are mostly funded by contributions or donations from members of the public, governments and organisations that identify with their mission and objectives rather than by commercial transactions.
Some distinctive features of non-profit organisations are:
- They are usually set up to work for the public good (not the benefit of shareholders)
- Their aims reflect community objectives (not long term growth & bottom-line profit)
- Their performance is measured by achievement of multiple goals and not usually financial profit
- Governance is provided by a governing body which can be known variously as a council, board of trustees, etc.
- Membership of the governing body is usually voluntary and unpaid, subject to refund of reasonable expenses incurred by them in the performance of their duties.
Tax obligations of Non-Profit Organisations in Nigeria
The Companies Income Tax Act, 2007 (CITA) exempts from income taxation, the profit of any corporate entity engaged in ecclesiastical, charitable, or educational activities of a public character provided such profits are not derived from a trade or business venture. From the wordings of the statute, it is clear that where any exempted corporate entity derives profit from a business or trade, such profit will not fall within the exemption provided by the law. Thus, where a non-profit organisation derives profit from any business venture or trade, such profit would be subject to tax deductions at the appropriate rate. Also, where a non-profit organisation invests its assets in any institution, the income derived from such investment shall be subjected to tax. With regards to Capital Gains Tax (CGT), section 26 of the CGT Act exempts non-profit organisations from CGT provided that the gain is not derived from any disposal of assets acquired in connection with any trade or business carried on by the organisation and the gain is applied purely for the purpose of the organisation.
A fundamental question that would arise from the proviso of sections 23 CITA and 26 CGT Act which provide tax exemption for non-profit organisations would be “what does ‘business venture’ or ‘trade’ mean for the purposes of interpretation of the statute?” Although the word ‘trade’ is not defined in the statute, the Nigerian Supreme Court in the case of Arbico Ltd v. FBIR (1996) 2 All NLR 303 laid down two key guidelines in the interpretation of the word: first, that the word ‘trade’ should be interpreted in its widest sense in accordance with its common everyday meaning and secondly, that an isolated one-off transaction could constitute trade. In that case, the appellant objected to the tax assessment by the respondent on the proceeds of sale of property on the ground that it was a single transaction and therefore did not constitute trade. According to the Black’s Law Dictionary 8th Ed, 2004, ‘trade’ means the business of buying and selling or barter in goods or services. This definition has been adopted by the Federal Inland Revenue Service (FIRS) in the determination of tax liabilities of organisations.
Arguably, the best justification for the exemption of non-profit organisations from corporate income tax is the fact that it would help to compensate for the capital formation constraints faced by such organisations owing to their peculiar corporate structure. This is based on the premise that most of the funds of non-profit organisations are made up of voluntary gifts and donations by persons or groups that identify with their goals and objectives. Therefore, the exemption would serve a useful purpose in encouraging the operation of non-profit entities, particularly where they would serve consumers better than profit seeking entities; for instance, in the area of humanitarian intervention and provision of relief and healthcare to victims of crisis, natural disasters, war or similar occurrence.
Traditionally, non-profit organisations were few and mostly engaged in activities of a charitable nature. This is not the case today as many non-profit organisations now exist in a number of important and expanding service industries in Nigeria such as education, research, health care, media and arts. Indeed many non-profit organisations now seem to be driven by profit and operate in some sort of competition with their profit-driven counterparts, and they have begun to take on the semblance of profit-making ventures by their operation and organisation.
It is the role of tax authorities to ensure that tax incentives are not abused by target organisations, which in this case are non-profit organisations. Thus, there is need for adequate monitoring and enforcement by tax authorities to ensure that non-profit organisations file the returns required in order for the authorities to ascertain the true position of these non-profit organisations.
The current trend has been that many non-profit organisations, including faith-based organisations, operate business ventures as subsidiaries or divisions for profit making purposes and still claim to be exempted from taxation. This is usually based on the argument that all the activities of the organisation should be classified as non-profit making charitable ventures geared towards the attainment of the entity’s objects. However, this does not reflect the reality, especially for tax purposes, going by the provision on taxation exemption as the definition of charitable and ecclesiastical purpose would have been expanded beyond the intended scope of the law.
The classical case on the issue of taxation of non-profit organisations in Nigeria is the case of Shodipo & 2 Ors v. FBIR (1977) 3 SC 53, where it was held that where a church organised and incorporated a company that carries on the business of dealing in real estates, the company is liable to pay tax on rent received from the lease of the property. The court further held that even though the income was wholly applied towards charity, it was still assessable to tax. In order to comply with financial reporting and accounting standards as well as tax obligations, non-profit organisations would be required to separate their activities by identifying which activities are charitable and qualify for exemption; and which activities are commercial or profit-oriented.
Related regulatory requirements for Non-Profit Organisations
All non-profit organisations are expected to register with the Integrated Tax Office (ITO) of FIRS and obtain a Tax Clearance Certificate. Also, in line with the provisions of the CITA 2004, non-profit organisations are expected to file without notice or demand, a return every year with the FIRS. The return is to contain:
(i)The audited accounts, tax and capital allowances computations and a true and correct statement in writing containing the amounts of its profits from each and every source computed in accordance with the provisions of CITA;
(ii) Such particulars as may be required for the purpose of the Act and any rules made with respect to such profits, allowances, reliefs, deductions or otherwise as may be material by virtue of the CITA; and
(iii) A declaration signed by a director or secretary of the organization that the information contained in the return is true and correct.
The Financial Reporting Council Act of 2011, mandates every financial report or statement to comply with the accounting and financial standards developed by the Council. Non-profit organisations are also obligated to deduct and remit Pay-as-You-Earn (PAYE) tax to the appropriate tax authority in accordance with the Personal Income Tax Act (PITA) 2011 (as amended); pay value-added tax (VAT) on all goods and services not exempted from VAT in accordance with the VAT Act 2004 and also remit withholding tax where applicable to the tax authority; pay taxes due on all other activities not covered by any statutory relief, exemption or incentive. Furthermore, non-profit organisations are required to file returns annually with the FIRS and the Corporate Affairs Commission (CAC).
Tax evasion is a global malaise that jurisdictions across the globe have to deal with. Tax authorities, on one hand must endeavour to ensure that tax liabilities of organisations are clearly defined in order to avoid ambiguity. They must also ensure that tax incentives are properly applied and not abused by beneficiary organisations. On the other hand, non-profit organisations should be operated in a responsible manner, in line with legal and regulatory requirements. Non-profit organisations should not be used as a cloak for tax evasion. The fact that non-profit organisations are exempted from taxation in certain aspects of their activities does not mean that they are absolutely tax free. There are several other aspects of tax that apply to such organisations and they should be aware of these obligations and ensure compliance in order to avoid penalties.
- Henry Hansmann, The rationale for exempting non-profit organisations from corporate income taxation, 91 Yale L.J No. 1, (1981) pp 54-100 at page 56.
- Bittker & Rahdert, The exemption of non-profit organisations from federal income taxation, 85 Yale L.J 299, 301 (1976)