WHAT CONSTITUTES ‘TRADE’ FOR TAX PURPOSES: GUIDELINES\u00a0FOR THE GENERAL PUBLIC<\/p>\n
This circular is issued pursuant to Section 8(1)(t) of the Federal Inland Revenue Service\u00a0(Establishment) Act 2007 which empowers the Service to carry out all necessary actions\u00a0expedient for the discharge of its functions under the Act, Section 9(l)(a) of the\u00a0Companies Income Tax Act (CITA) Cap C21 LFN 2004 as amended and Section 3(1 ) (a)
\nof the Personal Income Tax Act (PITA) Cap P8 LFN 2004 as amended.<\/p>\n
The purpose of this circular is to clarify FIRS position on what constitutes ‘trade’ or\u00a0business for tax purposes. In accordance with the Companies Income Tax Act (CITA),and\u00a0the Personal Income Tax Act (PITA) any trade is subject to tax under CITA and PITA,\u00a0even if that trade is carried out by friendly societies, co-operative societies, charitable and\u00a0ecclesiastical organizations, or trade unions.<\/p>\n
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1.0 Introduction<\/strong> A definition of the word ‘trade’ cannot be found in Nigerian tax legislation although an\u00a0attempt was made in PITA. The interpretation Section of the Fifth Schedule of PITA\u00a0defines “trade or business” to mean “trade or business or that part of a trade or business\u00a0the profits of which are assessable under this Act”.<\/p>\n However, the issue has been addressed in several legal cases<\/a>, the rulings of which\u00a0provide some legal certainty regarding how the courts interpret the word (see Subheading\u00a02.0). In line with these rulings, ‘trade’ can be regarded as “the business of buying and\u00a0selling or bartering goods or services”. Furthermore, the one-off nature of an activity in no\u00a0way\u00a0invalidates that activity as constituting trade. This interpretation matches the approach in\u00a0other jurisdictions, namely the UK and USA (see subheading 3.0).<\/p>\n 2.0 Case Law in Nigeria<\/a><\/strong> \u2022 Firstly, that the word ‘trade’ should be interpreted in its widest sense, in\u00a0accordance with its common everyday meaning; In line with the ruling of the Supreme Court, the following definition seems to capture the\u00a0common meaning of the word ‘trade’. Trade is “the business of buying and selling or\u00a0barter in goods or services”(taken from Black’s Law Dictionary, Eighth Ed. (2004)).<\/p>\n 3.0 Treatment in Other Tax Jurisdictions<\/strong> <\/p>\n \u00a0<\/strong><\/p>\n <\/p>\n In the UK, as in Nigeria, there is no statutory definition of the word ‘trade’. Her Majesty’s\u00a0Revenue and Customs (HMRC) relies on case law to formulate a working definition. In the USA, the Internal Revenue Service (IRS) employs a similar approach to HMRC. 4.0 Badges of Trade<\/strong> 1. Profit seeking motive. An intention to make a profit supports trading, but by\u00a0itself is not conclusive. <\/p>\n <\/p>\n <\/p>\n These ‘badges’ will not be present in every case and of those that are, some may point\u00a0one way and some the other. The presence or absence of a particular badge is unlikely,\u00a0by itself, to provide a conclusive answer to the question of whether or not there is a trade.\u00a0The weight to be attached to each badge will depend on the precise circumstances.<\/p>\n 5.0 FIRS Position<\/strong> i. In the case of Marlin Vs Lowry (1955)3 All ER 48; 11 TC 297),\u00a0a person without previous knowledge of linen trade bought a\u00a0surplus stock of aeroplane linen from government which he sold\u00a0to the public in small lots. He engaged employees for the\u00a0re-packaging and embarked on sales” promotion through\u00a0extensive adverts and campaigns. It was held that he was\u00a0trading. iii. In Burge Vs Pyne (1969, All ER 467), a club proprietor providing facilities for\u00a0bar, dancing, cabaret, fruit machines and gambling, appealed against the\u00a0inclusion of his winnings in his assessment. The appeal was dismissed on the\u00a0ground that the winnings formed part of his regular income from the trade of\u00a0running the club.<\/p>\n From the foregoing and in accordance with the provisions of CITA, any friendly society,\u00a0cooperative societies, charitable and ecclesiastical organizations or trade unions that\u00a0carry out trade as defined and described above would be liable to tax on income derived\u00a0from such trade.<\/p>\n <\/p>\n <\/p>\n 6.0 Enquiries<\/strong> Executive Chairman, Or<\/p>\n Director, Tax Policy and Legislation Department Or<\/p>\n Visit our website: www.firs.gov.ng WHAT CONSTITUTES ‘TRADE’ FOR TAX PURPOSES: GUIDELINES\u00a0FOR THE GENERAL PUBLIC This circular is issued pursuant to Section 8(1)(t) of the Federal Inland Revenue Service\u00a0(Establishment) Act 2007 which empowers the Service to carry out all necessary actions\u00a0expedient for the discharge of its functions under the Act, Section 9(l)(a) of the\u00a0Companies Income Tax Act (CITA) Cap C21 […]<\/p>\n","protected":false},"author":1,"featured_media":4401,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[2],"tags":[1606,1694],"class_list":["post-4421","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","tag-tax-in-nigeria","tag-what-constitutes-trade-for-tax-purposes"],"acf":[],"yoast_head":"\n
\nCITA states that “any trade or business for whatever period of time such trade or\u00a0business may have been carried on” shall be subject to Companies Income Tax\u00a0(Sec.9(1)(a) of CITA). The profits of certain institutions are exempt from tax under CITA,\u00a0but only in so far as such profits are not derived from ‘trade or business’ (Sec.23). This\u00a0means that the profits of any organization that are derived from ‘trade’ shall be subject to\u00a0Companies Income Tax. This raises the question, what exactly constitutes ‘trade’?<\/p>\n
\nAlthough no explicit definition of ‘trade’ exists in the law, the issue has been addressed in\u00a0several legal cases, the rulings of which provide some legal certainty regarding how the\u00a0courts interpret the word. The most important case is that of Arbico Ltd v. FBIR, {1996} 2\u00a0All NLR 303. The plaintiff in the dispute, Arbico, had acquired a plot of land, erected a\u00a0building, and sold the property at a profit. The company was subsequently assessed for\u00a0tax on the proceeds of the sale of property The Company objected to the assessment on\u00a0the basis that the transaction was a one-off and therefore did not constitute ‘trade’. The\u00a0case was ultimately settled in the Supreme Court. In the ruling the Court laid down two\u00a0important axioms:<\/p>\n
\n\u2022 Secondly, that an isolated one-off transaction can still constitute a “trade”.<\/p>\n
\nIn considering what constitutes ‘trade’ for tax purposes it is useful to consider how the
\nissue is addressed in other jurisdictions.<\/p>\nNeed a Legal Firm or Lawyer in Nigeria<\/a><\/span><\/h2>\n
\nHMRC states that “Usually, trading involves the provision of goods or services to\u00a0customers on a commercial basis”. As in Nigerian case law, “Simply because a venture is\u00a0a one-off or occasional does not mean that it will not be treated as trading for tax\u00a0purposes”. It is interesting to note that although the HMRC definition employs the notion
\nof ‘commercial basis’, HMRC explicitly states that whether or not the profits of an activity\u00a0are ultimately used for charitable purposes is not relevant for the determination of whether\u00a0or not that activity constitutes a trade.<\/p>\n
\nIRS regards ‘trade’ as including “any activity carried on for the production of income from\u00a0selling goods or performing services”. It is interesting to note how IRS treats the trading\u00a0activities of an organisation that also carries out tax exempt activities. IRS states that “an\u00a0activity does not lose its identity as a trade or business merely because it is carried on\u00a0within a larger group of similar activities that may, or may not, be related to the exempt\u00a0purposes of the organizations. In other words, a single organisation can undertake both\u00a0exempt activities and trading activities. This implies that an organisation cannot argue that\u00a0none of its activities constitute ‘trade’ just because it undertakes some exempt activities.<\/p>\n
\nIn 1955 in England, the Royal Commission on the Taxation of Profits and Income in\u00a0reaction to whether a statutory definition of trade was necessary, said that “each case\u00a0must be decided on its own circumstance (1955 Cmnd.9474 para.116) and suggested\u00a0badges of trade” which they considered to be the major relevant considerations that will
\nfacilitate in determining whether any profit is a taxable trading profit or not. Badges of\u00a0trade refer to certain indicators that may be used in determining the factual question as\u00a0whether an activity is trade or not. Case law has expanded it to 9. The badges of trade\u00a0are:<\/p>\n
\n2. The number of transaction. Systematic and repeated transactions will support\u00a0‘trade’. An isolated transaction may also constitute a trade.
\n3. The nature of the asset. Is the asset of such a type or amount that\u00a0it can only be turned to advantage by a sale? Or Did it yield an\u00a0income or give ‘pride of possession’, for example, a picture for\u00a0personal enjoyment?
\n4. Existence of similar trading transactions or interests. Transactions\u00a0that are similar to those of an existing trade may themselves be trading.
\n5. Changes to the asset. Was the asset repaired, modified or improved to make\u00a0it more easily saleable or saleable at a greater profit?
\n6. The way the sale was carried out. Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise\u00a0cash for an emergency?
\n7. The source of finance. Was money borrowed to buy the asset? Could the\u00a0funds only be repaid by selling the asset?
\n8. Interval of time between purchase and sale. Assets that are the subject of trade will\u00a0normally, but not always, be sold quickly. Therefore, an intention to resell an asset\u00a0shortly after purchase will support trading. However, an asset, which is to be held\u00a0indefinitely, is much less likely to be a subject of trade.
\n9. Method of acquisition. An asset that is acquired by inheritance, or as gift, is less\u00a0likely to be the subject of trade.<\/p>\nRead: Company Registration Service<\/span><\/a><\/h2>\n
\nA definition of the word ‘trade’ cannot be found in Nigerian tax law. However, the issue\u00a0has been addressed in several legal cases, the rulings of which provide some legal<\/a>\u00a0certainty regarding how the courts interpret the word. In line with these rulings, ‘trade’ can\u00a0be regarded as “the business of buying and selling or bartering goods or services”. Where\u00a0one or more of the criteria on the badges of trade apply, FIRS will treat such transaction\u00a0as trade. Furthermore, the one-off nature of an activity in no way invalidates that activity\u00a0as constituting a trade. This interpretation matches the approach in other jurisdictions,\u00a0namely the UK and USA. The following decided cases are relevant in this regard:<\/p>\n
\nii. In Murray Vs I.R. Comrs (1951, 32 TC 238), where a timber merchant who\u00a0bought standing timbers in two plantations and could not cut them due to\u00a0labour cost, sold the rights to cut the timbers to meet his indebtedness. He
\nwas assessed to tax on the profit from the transaction. He contended that the\u00a0sale was a capital transaction since it was not in the normal course of his\u00a0business but it was held that the transaction was part of his normal trading as
\na timber merchant.<\/p>\nGet a Debt Recovery\/ Collection Agent in Nigeria?<\/a><\/h2>\n
\nAll enquiries on any aspect of this circular should be directed to the office of:<\/p>\n
\nFederal Inland Revenue Service,
\nRevenue House,
\nNo 15 Sokode Crescent,
\nWuse Zone 5, Abuja.<\/p>\n
\nFederal Inland Revenue Service
\nRevenue House,
\nNo 15 Sokode Crescent,
\nWuse Zone 5, Abuja.<\/p>\n
\nEmail: enquiries@firs.gov.ng
\nTelephones: 08159490002, 08159490001, 08159490000<\/p>\n","protected":false},"excerpt":{"rendered":"