By Elvis E. Asia
Religion occupies a special place in the hearts of men. It is a tool for social, economic and political mobilization and provides succor to man. The charitable and humanitarian role of religion cannot be overemphasized. The special place of religion is recognized by law. One such recognition is the tax exemption granted religious institutions. The extent and ramification of this exemption has been a subject of debate. The recent pronouncement by the Oyo State Government that churches and mosques will be subjected to tax in the state has reignited the debate.
This article examines the tax exemption debate and contends that the general belief that religious institutions are absolutely exempted from tax has no basis in law. The exemption granted to religious institutions as well as charitable and educational institutions are limited. These organizations are under obligation to account for tax to the relevant tax authorities in many respects.
Tax Exemption for Religious Organizations
The principal legislations on taxation in Nigeria have provisions exempting ecclesiastical, charitable and educational institutions from income and capital gains tax.
Personal Income Tax
Section 19 (1) and 3 (a):
“(1)There shall be exempt from the tax all that income specified in the Third Schedule to this Act.
(3) Nothing in this section or the Third Schedule to this Act shall be construed so as to-
(a) exempt in the hands of the recipients any interest, bonuses, salaries or wages paid wholly or in part out of income exempted thereby;”
Section 75 (1):
” The provisions of sections 69, 70, 71 and 72 of this Act shall apply respectively to dividend, interest, rent and royalty forming part of the income or profit exempted from tax under any section of this Act and the Third Schedule thereto: Provided however, that dividend, interest, rent or royalty derived from outside Nigeria and brought into Nigeria through Government approved channels shall remain exempted”
Paragraph 13 of the Third Schedule:
“The income of any ecclesiastical, charitable or educational institution of a public character in so far as such income is not derived from a trade or business carried on by such institution”.
Companies Income Tax
Section 23 (1) (c) and (n) of The Companies Income Tax Act (CITA) provides that:
“(1) There shall be exempt from the tax‐ …
(c) the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company; …
(n) nothing in this section shall be construed to exempt from deduction at source, the tax which a company making payments is to deduct under sections 78, 79 or 80 of this Act, such that the provisions of sections 78, 79 and 80 of this Act, shall apply to a dividend, interest, rent or royalty which is a part of the profits or income referred to in subsections (1) (a) to (f) and (h) to (1) of this section…”
Capital gains tax
Section 27 (1) ( a) of the Capital Gains Tax Act (CGT) exempts religious organizations from capital gains tax. The section provides:
(1)Subject to subsection 2 of this section, a gain shall not be chargeable if it accrues to- (a) an ecclesiastical, charitable or educational institution of a public character; …in so far as the gains is not derived from any disposal of any assets acquired in connection with any trade or business carried on by the institution or society and the gain is applied purely for the institution or society as the case may be.
The word ‘ecclesiastical’ is not defined by the tax laws. The usual meaning of ecclesiastical is ‘belonging to or connected with Christian religion’. It is opined that the term when used in conjunction with ‘charitable institution’, was intended to refer to all religious institutions. The word ‘charitable’ institution in the context of taxation is wide enough to embrace not-for-profit organizations including religious organizations, whether Christian, Islamic and Traditional.
Limit of Tax Exemption for Religious Institutions
The following deductions can be made from the above provisions of PITA, CITA and CGT and other tax legislations:
- The exemption is limited to income and capital gain taxes.
- The income tax exemption for religious institutions is limited to the incomes generated from the contributions of members and other persons and organizations in furtherance of the objectives and goals of the institutions. For churches, for example, this means offerings, tithes and special donations and contributions to the church. For mosques, this means proceeds from zakat, sadakat fil sebillah (offerings), voluntary contributions and donations from Islamic organizations.
- In order to be entitled to the exemption, the institution and its funds must be deployed for ‘Public interest’ or the institution must be of ‘public character’. Once the income of the religious institution is appropriated or misappropriated for purposes other than public interest, the income becomes taxable. A religious organization is not a protective umbrage for tax evasion.
- There is no exemption for incomes generated from trade and businesses carried on by the institution. This means that if a religious institution engages in trade or business of whatever description and earns profit, it must pay tax on the profit earned and account to the relevant tax authority. Where a religious institution invests its funds in fixed deposits, shares or other investments, the profit earned may be taxable. It does not matter that the profit earned is used for the objectives of the institution. What matters is that the institution engages in trade or business, whether or not it was a one-off transaction. In Arbico Ltd. v. FBIR, the Supreme Court held that the word “trade” should be interpreted in its widest sense and that an isolated one-off transaction can still constitute a trade.
- Religious institutions are under obligation to deduct tax from the salaries and other emoluments of staff including Pastors and Imams. This means that the institutions are not exempted from the PAYE system and incidental accounting for the tax.
- The exemption is for the institution not the Pastors, Imams and other religious leaders. Pastors and Imams are under obligation to pay tax, not only on the salaries, stipends or honorarium derived from the institutions, but also on other incomes like profits from sale of books, investments, gifts from members and other benefits- in-kind. Benefits-in-kind are the perks enjoyed by religious leaders in the form of vehicles, accommodation, furniture, club subscription, free interest loan, and other asset-based benefits from the institutions other than salaries payable in cash.
- Religious institutions are not exempted from the withholding tax system. The institutions are agents of tax collection within the withholding tax mechanism. Like every other corporate body, they are liable to withhold tax on payments made to their contractors and suppliers. Section 75 of PITA and section 79 of CITA specifically mandates them to withhold tax on rent and account to the tax authority. Their unearned income (dividend, interest, rent) are also subject to withholding tax.
- There is no special exemption for religious organizations under the Value Added Tax Act. Goods and services procured by religious institutions are not exempted from 5% VAT. However, goods purchased for use in humanitarian donor funded projects are zero rated.
- The mere fact that religious, charitable and educational institutions are generally incorporated under Part C of the Companies and Allied Matters Act and are not expected to distribute their profits to their members does not confer on them absolute exemption. The same is true where the company is registered under section 26 of CAMA as a company limited by guarantee.
Religious Organizations’ Obligation to file Tax Returns
The tax exemption provided religious institutions do not insulate them against the duty to file tax returns. The fact that an entity is exempted from payment of income tax does not obviate the need for the entity to file returns. This is more so when, as argued above, the exemption is to a limited extent. The exempted institutions have obligations to register for Tax Identification Number (TIN) and file tax returns with the relevant tax authority for many reasons:
- There is no way Federal Inland Revenue Service and State Internal Revenue Service can determine whether the income of a religious institution is exempted without the institution filing returns with comprehensive audited statements of account. It is from the statement of account that the tax authority can determine which ‘profit’ is exempted.
- As discussed above, the salaries and other payments by the institutions are not exempted from tax. The law requires religious institutions to withhold tax on salaries and other benefits of employees. Religious institutions must file returns and account for the tax.
- Religious institutions are under obligation to account for withholding tax under the relevant provisions discussed above. They must file returns to account for the tax.
- There is no presumption of ‘public character’ in the relevant provisions exempting religious, charitable and educational institutions. Public character must be shown and established from the returns filed by the institutions for them to enjoy the exemption.
- Religious institutions are not exempted from VAT. They are under obligation to register for VAT and file tax returns when they engage in business.
- For Tertiary Education Tax under the Tertiary Education Trust Fund (Establishment Act, 2011 (TETA), though there is no express exemption, the determination and computation of the tax under the Act suggests that they may not be liable to pay the tax. However, where a religious, charitable or educational institution engages in trade or business, the assessable profit from such trade or business may be subject to education tax.
Section 55 of CITA confirms the above. The section provides that:
(1) Every company, including a company granted exemption from incorporation shall, whether or not a company is liable to pay tax under this Act for a year of assessment, with or without notice from the Service, file a self‐assessment return with the Service in the prescribed form at least once a year and such return shall contain‐
(a) the audited accounts, tax and capital allowances computation for the year of assessment and a true and correct statement in writing containing the amount of profit from each and every source computed;
(b) A duly completed self‐assessment form as may be prescribed by the Service …”
Section 81 of PITA as amended by section 20 of PITA Amendment Act also provides that every employer (which includes religious institutions), must file tax returns to the relevant tax authority not later than 31st of January, every year of all emoluments paid to employees. Sections 69-75 of PITA as amended and section 78 of CITA mandates the filing of withholding tax returns. VAT returns are also to be filed on or before the 21st day of the following month whether a transaction took place or not.
There is no presumption about a tax. Tax is purely a matter of law. According to Lord Cairs in Partington v. Attorney-General ‘if the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear…’ The debate on the extent of tax exemption for religious institutions is largely emotive and presumptive. Tax exemptions for religious and other institutions like charitable and educational institutions, are not absolute. The institutions are subject to and liable to account for tax in many respects. Religious organizations are under legal duty to account for withholding tax, PAYE, and income tax and VAT when they engage in trade or business.
The effect of the above is that religious institutions are liable to file tax returns in line with various tax legislations, income and capital gains tax exemptions notwithstanding. The current practice where the finances of religious organizations are shrouded in mystery and beyond question is not backed by law. There is no law which legitimizes the inscrutability of the funding of religious organizations. With the way our tax legislations are worded, no religious organization should be entitled to income tax exemption without filing returns disclosing comprehensively the sources of its income.
What appears to be an immutable protection for religious, charitable and educational institutions in tax administration in Nigeria will not go on forever. Given the drive for alternate sources of funds by the government, tax authorities will increasingly beam their searchlight on these organizations. Religious and other not-for-profit organizations therefore need to review their tax strategies sooner rather than later.
Elvis Asia is a Senior Counsel in Nigeria and can be contacted on: 09017163850, firstname.lastname@example.org.
 Religion has been defined as a system of beliefs or attitudes about an imaginary being or object held to be supernatural, sacred or divine, and the moral norms, practices, values, institutions, and rituals associated with such belief or system of thought.
 Religion is a very sensitive subject matter. This is because the tenets and practices of religion are not subject to empirical rationalization. The discussions and arguments on the subject are mostly emotional and sentimental. Some adherents even say religion takes preeminence over all human conducts including the law. This fundamental underpinning of religion makes it difficult to accurately apply tax legislations to their operations.
 Cap P8 LFN 2004.
 PITA was amended by the Personal Income Tax (Amendment) Act, 2011 (PITA Amendment Act).
 With the amendment of the Third Schedule by section 33 of the PITA Amendment Act, paragraph 13 will now be paragraph 11. This is because paragraphs 2 and 3 which hitherto exempted the income were deleted by the amendment
 By virtue of section 25 (5) (c) donations to ecclesiastical, charitable and educational institutions specified in the Fifth Schedule as amended in December 12, 2011 are also tax deductible.
 According to Wikipedia, a charitable organization or charity is a non-profit organization whose primary objectives are advancement of charitable, educational, religious, or other purposes serving the public interest or common good.
See https://en.wikipedia.org/wiki/Charitable_organization, accessed on 11/10/19
 This means obligatory alms-giving in Islam. It is calculated on the total savings of a Muslim in a year, typically at the rate of 2.5% (or 1/40) of the savings above a minimum amount known as nisab. See https://www.globalsadaqah.com/blog/islamic-zakat-importance/and https://en.wikipedia.org/wiki/Zakat accessed on 4/10/19
 ‘Public character’ or ‘public interest’ is not defined by PITA, CITA and CGTA. Paragraph 9 of the Requirements for Funds, Bodies or Institutions Regulations, 2011, made pursuant to the Federal Inland Revenue ( Establishment) Act, 2007 defines public interest or public character institution as “a body or institution whose activities are meant to benefit Nigerians in general and particularly the public and its profits are not available for distribution to its promoters”. In BEST CHILDREN INTERNATIONAL SCHOOLS LIMITED v. FEDERAL INLAND REVENUE SERVICES (2018) LPELR-46727(CA), the Court of Appeal held that an educational institution registered as a company limited by shares and whose proprietor introduced herself as a member of the National Association of Proprietors of Private Schools did prove that its educational activities was of a ‘public character’.
 There is no sufficient guide in the law on the definition of trade or business. The interpretation Section of the Fifth Schedule of PITA defines “trade or business” to mean “trade or business or that part of a trade or business the profits of which are assessable under this Act”. The terms are generally defined as the business of buying and selling or barter in goods or services.
 In the United States, such a profit is termed unrelated business taxable income (UBTI). This is an income generated by a tax-exempt entity by means of taxable activities. See https://www.investopedia.com/terms/u/ubti.asp, accessed on 7/10/2019.
 Many people are of the view that tax exemption applies provided the profit earned is used in furtherance of the objectives of the institution. This argument is not correct. Religious institutions are organized under Part C of the Companies and Allied Matters Act which expressly forbids them from engaging in business.
 (1996) 2 All NLR 303
 See also the English cases of Marlin Vs Lowry (1955)3 All ER 48; 11 TC 297); Murray Vs I.R. Comrs (1951, 32 TC 238)
 Pay- As- You- Earn.
 In Uniben v. ESBIR (2019) 43 TLRN, Edo State High Court held that members of cooperative society were not exempted from tax. Cooperative societies enjoy the same tax exemption as religious institutions.
 It must be noted that section 603 of the Companies and Allied Matters forbids payment of salaries and other remunerations to a member of council of management or governing council of religious organizations except Ex-officio members. They are only entitled to reasonable out-of-pocket expenses. This prohibition however relates to their duties as members, not to services rendered outside the duty simpliciter. For example, the fact that a pastor or Imam is a member of governing council will not preclude remuneration for the services rendered outside the ordinary duty of being a member of the council. They will be entitled to fees for services rendered.
 Section 3(1)(b) of the PITA Amendment Act, defines chargeable income as “any salary, wage, fee, allowance, or other gain or profit from employment including compensations, bonuses, premiums, benefits, or other perquisites allowed , given or granted by any person to any temporary or permanent employee…”.
 Withholding tax is not a special kind of tax but a mechanism for tax collection. It is an advance payment of income tax by a taxpayer collected by a third party in accordance with law. The purpose is to reduce the incidence of tax evasion. See Uniben v. ESBIR Ibid note 9. Withholding Tax Returns are to be filed on or before the 21st day of the month following the month in which the deductions were made.
 Withholding tax applies to consultancy, technical, service fees, Management fees, Construction/building (excluding survey, design, and deliveries) and Contracts at the rate of between 5-10% depending on the type of transaction and the relevant tax authority.
 In Western Nigeria v. FBIR (2017) 29 TLRN 59, it was held that interest received by a company limited by guarantee for charitable, educational and other related purposes was taxable.
 In American International School (AIS) v FIRS Decided in 2015, AIS, a school incorporated as a company limited by guarantee under CAMA was assessed by the FIRS to Companies Income Tax (CIT) and Education Tax for the years 2008 to 2013. One of the issues in the case was whether an educational institution was liable to tertiary education tax. The Tribunal held that since ecclesiastic, charitable and educational institutions are exempted from income tax, they are also not liable to education tax.
 Section 15 of VAT Act
 (1869) L.R. 4 H.L. 100 at P. 122. See also NIGERIAN BREWERIES PLC. V. OYO STATE BOARD OF INTERNAL REVENUE (2012) LPELR-8672(CA); Ahmadu & Anor. v. The Governor of Kogi State & Ors. (2002) 3 NWLR (Pt.755) 502 at 522 and FEDERAL BOARD OF INLAND REVENUE V. INTEGRATED DATA SERVICES LIMITED (2009) LPELR-8191(CA)