Legal Perspectives on Taxing Churches, Mosques, NGOs
One of the cardinal principles of every tax system is equity. By this it means the taxpayers, who are subject to the authorities of the state contribute to its upkeep in proportion to their income and ability. By extension, the principle of equity posits that taxpayers, depending on their level of income, are treated equally by the law without any preferential treatment granted to any category of people.
The rationale for this is not far-fetched. When government uses tax proceeds to fund developmental projects, the amenities thereby provided will be at the disposal of all members of society for their collective use and enjoyment.
There are, however, exceptional situations where the government, on the basis of underlying social or economic objectives, grant tax exemptions to certain category of persons. Examples are when the government grants tax holidays to business enterprise to stimulate their growth and development, or when religious organisations and non-governmental organisations are granted exemption from the operations of the tax laws.
Many countries, including Nigeria, recognise the significant role played by these organisations in advancing the cause of humanity, and in complementing the efforts of government in its duty to bring good governance to its citizens. Religious organisations, for example, provide the key role of meeting the spiritual needs of the citizens which the government itself is often ill-equipped to provide.
The extent of tax exemption for non-governmental organisations and religious organisations is often the subject of controversy as its scope is not easily definable. For example, there is the widely held belief in Nigeria that churches and NGOs do not pay and are not liable to the payment of the various taxes which businesses and persons are generally subject to. To many, one of the ways to earn money and escape the perennial visit from the tax authorities is to set up a religious organisation or an NGO involved in one charity work or the other. These beliefs are sometimes fuelled by the tax authorities themselves who often approach the topic of taxation of religious organisations as a taboo to be discussed with measured circumspection.
NGOs also popularly are such organisations, institutions and companies which are established by private persons, communities or association of persons to carry out certain social, religious, benevolent or educational objectives of a public character. It is always an essential characteristic of such bodies that their operations are geared towards solving societal problems as opposed to profit making. This essential attribute is the distinguishing factor between NGOs and business entities. Due to the various beneficial effects of activities of NGOs in the society, in addition to their not-for-profit attribute, they enjoy a lot of tax privileges and exemptions under the various tax statutes operating in Nigeria.
For instance, the principal income tax statutes in Nigeria, the Personal Income Tax Act and the Companies Income Tax Act, exempt the income of ecclesiastical, charitable or educational institution from tax. These exemptions are often expressed in general terms which have led to the widely held – albeit in my opinion erroneous – belief that NGOs are exempted from payment of all forms of taxes. A critical look at the tax statutes and regulations made pursuant to the tax laws, however, reveal a contrary position.
For example, the general exemption contained in the Section 23 of CITA only apply to the extent that the income of the exempted organisation is not generated from any trade or business carried on by such organisation. This provision was tested before the court in the case of Sodipo & Macaulay v FBIR NTCLR, p.273 where it was held that the 3rd plaintiff, which was owned exclusively by the Methodist Church Mission in Nigeria, is liable to be taxed on the income derived from the use of the building, Wesley House in Lagos. The rationale was that the said building was used for commercial purposes and outside the scope of the exemption granted by the tax statutes.
Apart from liability to tax, where NGOs carry out trade or engage in business, there are other categories of tax liability imposed on NGOs by the various tax statutes. Principally, among these are the various withholding tax laws and regulation. Section 78(3) of CITA and Section 69(5) of PITA respectively impose the obligation to deduct withholding tax on all institutions, government agencies and organisations, regardless of whether or not such institution or organisation is liable to tax on its own income.
Withholding tax is not a specie of tax, but rather a system of tax administration by which a person is made a statutory agent of government who withholds the tax due from money payable to a third party. Withholding tax system is a pre-emptive measure to prevent tax evasion. The person or entity which pays for a service is imposed with the obligation to deduct a certain percentage of the money payable as tax and remit same to the government.
For clarity sake, where A enters into business transactions with B which is covered by withholding tax, and under which A makes payment to B, the law imposes an obligation on A to withhold the tax payable by B from his fees and remit same to the tax authority. In essence the religious or charitable organisation is not, and will not be paying the tax from its pocket, but is only assisting the government as a collection agent. There are series of transactions carried out by religious organisations and charities which make them qualify for payment of withholding tax. For example, religious organisations and NGOs have facilities and institutions which are run by persons engaged as employees, and who are paid remunerations on a regular basis. The law imposes an obligation on employers under the PAYE Regulations to withhold tax from the remunerations payable to such employees and remit same to the tax authorities on a monthly basis.
These tax exempted organisations often rent or lease properties for their own use. PITA and CITA, the two principal income tax statutes, impose the obligation on these bodies as tenants to deduct tax from the rent payable to the landlords for the use of the premises leased. Another example is where such exempted organisations such as churches, mosques or charities engage contractors for supply of goods or for any project. There is an obligation to withhold tax from the sum payable to the contractor. Thus, where church A, for example, engages XYZ Construction Company limited to construct its world-record 500,000-capacity church pavilion, it must deduct, at source out of the contract sum, withholding tax at the rate specified by law and remit same to the tax authority.
Similarly, where the Muslim Society of Nigeria engages the services of a publisher to make its religious publications which are distributed on a monthly basis to their members, it is obligatory for tax to be deducted from the payment made to the publisher for onward transmission to the tax authorities.
The same thing goes for a charity that goes on a road-show to create awareness for the effect of climate change or domestic abuse. Tax must be deducted from the amount paid to the company which handled publicity for it. Remunerations paid to members of the governing body of charitable institutions are likewise subject to withholding tax. After the deductions, the amount deducted as withholding tax must be remitted to the tax authorities within 30 days.
Inbuilt into the withholding tax system is an anti-double taxation mechanism. The organisations or persons from whose fees or remunerations tax is deducted are allowed to claim credit for the amount already deducted at the point of paying tax to the authorities. This way they are protected from the jeopardy of incidence of double taxation on the same head of income.
It is generally understood by the tax authorities, and indeed it forms part of the tax policy thrust of the Federal Government that one of the ways of improving tax yield is not by increasing the tax rate or imposing new taxes, but by widening the tax net and bringing more tax payers (including agents of tax payers) within the reach of the tax laws.
Expanding the scope of operations of the withholding tax system is one of the ways the government can achieve this. Withholding tax has the added advantage of being easily verifiable as the amount involved is usually fixed, and as such the tax authorities are saved the trouble of the process of assessment and ascertainment of the income. It is thus imperative for the government to widen its operations to bring more organisations within its scope.
It is readily foreseeable that any such effort by the government to tax religious bodies will be met with some form of resistance considering the culture of non-compliance and evasion which pervades the religious bodies, and the deference with which religious organisations are treated in Nigeria. However, this should not deter the government in collecting the tax due to it from these organisations. Tax education and awareness have a significant role to play in this regard. The government and the tax authorities need to educate the NGOs and religious bodies on their role as partners in progress. Also the fear of these bodies should be allayed to make them understand that whatever tax they will pay to the government is not from their income but would be borne by third parties who are the actual payers. Also government can take this a step further by incentivising religious organisations who display voluntary compliance by allowing them to keep certain percentage of the taxes deducted to cover for administrative expenses.
However the government cannot afford to shy away from its obligations by neglecting to collect what is due to it from recalcitrant religious organisations and NGOs. These organisations enjoy the protection of the state. They benefit from the amenities provided by the government. Many of them even exert some level of influence on government policies and programmes to their benefits. It is naturally equitable that they contribute their quota in the developmental strides of the government by collecting the taxes they are obligated to deduct and remitting same to the government.
The obligation to pay tax is a civic duty, a constitutional obligation and the price that every citizens and bodies subject to the laws of the Federal Republic of Nigeria pay as patriotic members of the Nigerian society. Going by the quoted Bible passage at the beginning of this article, one would be safe to conclude that religious organisations and NGOs have the moral and religious obligation, as the scriptures preach adherence to the authority of constituted and lawful governments, and payment of just dues to ensure its survival. On a final note, the obligation to deduct and pay tax attract penalty for non-compliance. These organisations would not be setting good examples for their members and the society they cater for if they are engaged in a scuffle with the tax authorities for failing to comply with the law.