COMMONWEALTH INCOME TAX RELIEF APPLICABLE TO COMPANIES OPERATING WITHIN THE COMMONWEALTH COUNTRIES : bY OLUFEMI MICHAEL OLARINDE

Commonwealth Tax Relief

What is Commonwealth?

The Commonwealth is a political association of 47 member states, almost all of which are former territories of the British Empire. The association is formed for the development of free and democratic societies and the promotion of peace and prosperity to improve the lives of all the people of the member nations.

What is a Tax Relief?

Tax relief is any government program or policy initiative designed to reduce the amount of taxes paid by individuals or businesses. It may be a general tax cut or a targeted program that benefits a specific group of taxpayers or promote a particular policy of the government.

What is Commonwealth Income Tax Relief?

Commonwealth Income Tax Relief (CWTR) is a double taxation relief available to commonwealth nations for the avoidance of double taxation among the member states. This provides that tax paid on income earned in a commonwealth country may be relieved by another commonwealth country or grants reduced rate of tax on income that is taxable in another commonwealth country.

Legislative Provision in Nigeria

Section 44(1) of the Companies Income Tax Act (CITA) Cap C21 LFN 2004 (as amended) provides relief for a Nigerian company that its income has been taxed or is taxable in another commonwealth country. The section provides that:

“(1) If any 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 Service 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 profits at a rate thereon to be determined as follows:

(a) if the Commonwealth rate does not exceed one-half of the rate of tax under the Act, the rate at which relief is to be given shall be the Commonwealth rate tax;

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

In a similar manner, Section 44(2) of CITA provides relief for a company other than Nigerian company (non-resident companies) as follows:

“(2) 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 profits, proves to the satisfaction of the Service 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 it under this Act on that part of its profits 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 one half of the Commonwealth rate of tax;

(b) if the Commonwealth rate of tax exceeds 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.”

In defining the tax that qualifies for the relief, Section 44(3) of CITA provides as follows:

“(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 relief from tax charged both in that country and Nigeria in a manner corresponding to the relief granted by this section

Section 44(1) & (2) of CITA as cited above, provides a Commonwealth Tax Relief for both resident and non-resident companies whose profits have been subjected to a tax in commonwealth member nation or in the Republic of Ireland. Such companies will be entitled to relief from tax paid or payable in Nigeria on the same profit, either in whole or in part, as a means of mitigating double taxation in Nigeria.

Conditions to the Application of Commonwealth Relief

1. For Nigerian companies, the applicable rate of tax for relief is the rate of tax paid in the other commonwealth country, subject to a maximum relief of ½ Nigerian tax rate, (i.e., maximum of 10% for medium size companies or 15% for large size companies).
2. For a non-resident company from a commonwealth country, where the rate of tax charged in its home commonwealth country does not exceed ½ Nigerian tax rate (i.e., 10% or 15% as the case may be), then the full rate of tax charged or chargeable in the other commonwealth country shall be allowed as a relief against the full Nigerian rate of tax.
3. However, for a non-resident company, where the rate of tax charged in its home commonwealth country exceeds the Nigerian tax rate (i.e. more than 20% or 30% as the case may be), the applicable rate of relief will be limited to the amount at which the Nigerian rate of tax exceeds  ½ of the rate of tax charged in its home commonwealth country (i.e. relief shall be 20% or 30%, as the case may be, minus ½ of the tax rate in its home country).
4. There must be a corresponding relief of the same kind in the other jurisdiction in such a way that provide reciprocity between the two countries, i.e., for a Nigerian company to benefit from the relief in respect of income derived from a commonwealth country, the income must have been subject to commonwealth tax relief in the source commonwealth country. Similarly, for a non-resident company from a commonwealth country to enjoy the relief in Nigeria, similar relief must be available to Nigerian companies that derived income from such commonwealth country.
5. The Company that seeks to benefit from the relief in Nigeria must furnish proof of a corresponding tax deduction or payment in the other jurisdiction.
6. Claims for relief of commonwealth tax for any year of assessment can be made not later than six years after the end of the year the tax was incurred or paid.
7. The tax to be relieved shall be available for set-off against the tax which the company is liable to pay in Nigeria for that year of assessment.
8. It should also be noted that the provisions will not be applicable in respect of any commonwealth country with which Nigeria has a Double Taxation Agreement (DTA), as Sections 45 and 46 of CITA, which provides for the application of DTA, has overriding effect on other relevant provisions of the Act.

Challenges of the Relief

As good as this relief is for cross-border trade and investment, not many businesses have the knowledge or understanding of this provision of CITA. Also, not all commonwealth countries have similar provisions in their tax legislations. Therefore, most businesses that operate overseas cannot enjoy this relief, because of lack of reciprocity from the other tax jurisdiction. This is because reciprocity is the pillar on which the relief is activated, and it is the most important pre-condition for granting the relief in Nigeria.

Conclusion

Cross-border trade and investment will be better enhanced if the commonwealth countries that are yet to have the Commonwealth tax relief emulates Nigeria to develop similar provision in their tax legislation.