The bank holding companies feared double taxation on dividends received.
The Federal Ministry of Finance and the Federal Inland Revenue Service have resolved the tax challenges faced by Bank Holding Companies.
The tax challenges of the Bank Holding Companies emerged while the banks were implementing the Central Bank of Nigeria’s Regulation on the Scope of Banking Activities & Ancillary Matters, No. 3, 2010, which required the separation of commercial banking business from other financial services.
These bank holding companies include the FBN Holdings Plc, Stanbic IBTC, UBA, and FCMB.
One of the challenges, the fear of double taxation on dividends received by holding companies, Holdco, is a result of the potential conflict between section 80 (3) of Companies Income Tax Account, CITA, and section 19 of the same document.
While the former treats dividend received after deduction of Withholding Tax, WHT, as franked investment income of the recipient company which shall not be charged to further tax as part of the profits of that company, the latter declares that where dividend paid to shareholders by a Nigerian Company exceeds its total profits then the company shall be charged to tax at the rate prescribed in section 40 (1) of CITA as if the dividend is the total profits of the company for the year of assessment.
Accordingly, where the dividend distributed to shareholders exceeds total profits of a Holdco, the implication is that despite having suffered WHT, the Holdco shall be liable to pay tax on dividend distributed to shareholders.
However, the FIRS clarifies that dividend received by Holdcos from its subsidiaries shall not suffer double taxation and the applicable tax rule is section 80 (3).
The CEO of FBN Holdings Plc, Bello Maccido, commended the resolution of the tax issues.
“We salute the professionalism and insight of the Finance Minister, Ngozi Okonjo-Iweala, and the FIRS team for the progress so far recorded,” he said, adding that the development has engendered an equitable taxation regime for Bank Holding Companies in the nation.
According to him, the holding companies at inception faced a major concern over possible interpretation of existing tax statutes that would lead to the double taxation of dividends. He highlighted that there was also a concern about the magnitude of transaction costs that would be incurred by the banks in responding to the change in regulations.
“It was therefore necessary for Bank holding companies to seek mitigation of some of these costs through waivers and concessions from the regulatory authorities. It was very clear that without government’s intervention, the companies would have faced possible challenges in this regard,” he said.
Mr. Maccido said the Coordinating Minister for the Economy, Ngozi Okonjo-Iweala, along with the Federal Inland Revenue Service team was very instrumental to ensuring that the tax issues were heard and resolved in good time to meet the CBN deadline.
He noted that the Securities & Exchange Commission, Nigerian Stock Exchange, NSE, and Central Securities Clearing System, CSCS, were equally very receptive to discussions on reduction of transaction costs for Bank Holding companies.
Mr. Maccido said the leadership of the Federal Ministry of Finance and the FIRS had, through the resolution of the tax issues, demonstrated their commitment to ensuring greater good of the economy and stimulation of economic activity.
The Financial Services Regulation Coordinating Committee, FSRCC, is reported to have created the platform for the Bank Holding Companies to table their tax and transaction costs issues to regulators and supported the idea of creating an industry working group.
Industry experts say the tax statutes as at 2010 did not contain any specific provision for taxation of pure non-operating holding companies as envisaged by Central Bank. The tax issues that came up for discussion included: Avoidance of Double Taxation on Dividends Received by the companies, Minimum Tax, and Administration of Withholding Tax amongst others.
Holding companies, if well structured, are expected to enhance their group’s competitiveness, streamline and coordinate various operations across non-bank financial services, and further exploit opportunities for synergies between subsidiaries.