One of the foundational theories of law that I was introduced to in my hey-day at the University of Lagos is that of Jeremy Bentham. Jeremy opined that an action is morally right if it produces the greatest happiness for the greatest number of people. This theory embodies the driving force or motivation behind philanthropy and non-profit activities anywhere in the world.

Introduction

Three things are inevitable in life – change, death, and taxes. Whether the latter certainty – taxes – applies to philanthropists and organizations that execute corporate social responsibility (CSR) activities or not, is the crux of this article. Firstly, it is essential to understand what taxation is about, and its end goal. Taxation is a critical tool for revenue generation, economic development, and wealth redistribution in any country. Simply put, taxation is the tool employed by the government of a country to help fund public work and build infrastructure that will make the economy and lives of those living in it better. Taxes sometimes may be considered a necessary burden, yet their application – just like philanthropists – can be altruistic in nature.  

How then do private philanthropists or Non-Profit Organizations (NPOs) fit into this picture? Governments worldwide employ tax incentives to encourage CSR and philanthropy, ensuring that businesses and high-net-worth individuals contribute to societal growth. 

In Nigeria, the tax regime provides for deductions and incentives aimed at fostering development through philanthropic activities. The Road Infrastructure Tax Credit is a great example of this approach, allowing companies to invest in public infrastructure and national development in exchange for tax relief. However, challenges still exist regarding implementation, compliance, and effectiveness. Examples of entities that benefit from tax incentives in Nigeria include: Dangote Cement, Omega Power Ministries (OPM) Foundation, David Oyedepo Foundation, BUA group, and Nigerian Liquefied Natural Gas companies to mention a few.

Taxation and the Legal Framework for CSR and Private Philanthropy in Nigeria

Generally speaking, private philanthropy i.e., donations made by individuals or private organizations to charity are untaxed or may qualify for tax rebates but this largely depends on the cause that the endeavor seeks to support, and how the entity is structured. For instance, private philanthropy outfits like Non-profit Organizations that register with the Corporate Affairs Commission may be considered for tax rebates by the Federal Inland Revenue Service if they qualify as public benefit organizations.

The Nigerian tax system, primarily governed by the Companies Income Tax Act (CITA), the Personal Income Tax Act (PITA), and the Value Added Tax Act, makes provisions for charitable donations. Similarly, the Federal Inland Revenue Service (FIRS) has issued guidelines on deductible donations, particularly in education, healthcare, and disaster relief efforts.

The tax treatment of philanthropists that carry out CSR programs is determined by:

1. Nature of their activities
2. Sources of their income

Nature of Activities

Within this pillar, one will typically find that VAT, withholding tax and stamp duties come to play.

Business operations: For every meal you purchase over the counter at restaurants, a value added tax is typically included in the bill. This also extends to other services that are provided to you as an end user. The current rate of this specific tax is 7.5%. While the author concedes that generally, NPOs are exempt from the application of value added tax, he submits that within the hitherto context, if the non-profit organization owns a business that markets goods or provides a service (that are not VAT exempt), it will be required to remit value added tax to the government at interval

Income and expenditure: If the non-profit expends money by paying for the services of outsourced labor e.g., contractors, the NPO will remit withholding tax. The same tax will also be applied to NPOs or philanthropists where they own assets that yield passive income e.g., properties that yield rent, shares that provide dividends, etc.

In the same vein, personal income tax will also be applied where the same NPO employs people and places them on a payroll. In this case, the NPO will need to deduct Pay-As-You-Earn tax on the said salaries and remit to the government via its tax parastatals. Good examples of NPOs that may be subjected to such tax are churches or orphanages that employ staff and accordingly, pay them.

Public documentation: Where a private philanthropist engages its legal representative and a third-party for the purpose of executing a lease document, it will be required to pay stamp duty on such document. If there are other public documents it needs to execute that require duty paid, the NPO will be required to pay for each of them distinctly. This action will be deemed as compliance with section 8 of the Stamp Duties Act.

2.​ Sources of their income:

Generally, donations and grants received by private philanthropy entities like NPOs are tax exempt, but inflow trickling in from provision of goods and services provided by the NPO in exchange for a fee will be subject to value added tax.

Tax Filing

By virtue of section 55 of CITA, philanthropic outfits like NPOs (whether they are fully tax exempt or not) are mandated to file annual tax returns with the FIRS. The returns shall include: evidence that the income the NPO received has been totally expended on charitable efforts, as well as audited copies of its financial statement. Failure to comply with the foregoing will attract sanction in the form of penalties.

Taxation as a Tool for Engineering Development in Nigeria

Nigeria deploys several tax mechanisms to nudge and encourage private sector participation in national development. Some notable methods include:

1.​ Mandatory Tax Contribution to Development: Recognizing that education is the bedrock of development in any society, the Nigerian government levies an education tax on registered companies operating within Nigerian shores. This tax, properly known as Tertiary Education Trust Fund (TETFund) Tax, is pegged at a rate of 2% of the company’s annual assessable profits.

2.​ Tax Rebates for Charitable Contributions: Corporations and individuals who contribute to qualifying non-governmental organizations (NGOs) and community development projects can deduct part of their donations from their taxable income, reducing their overall tax burden. Reverting to the legal lens, section 25 of the Companies Income Tax Act (CITA) provides that donations made by corporations to funds, bodies and institutions of a public character listed in Schedule 5 of the Act, are tax deductible.

3.​ Public-Private Partnerships (PPPs): The government partners with private entities to fund infrastructure, healthcare, and education projects. Through tax reliefs, these corporations gain incentives to invest in areas that would otherwise be solely dependent on public funding.

4.​ Pioneer Status Incentive (PSI): Companies investing in critical sectors, including technology, power, education, healthcare, and research, can benefit from the PSI, granting them tax holidays of up to five years, or seven years in respect of industries located in economically disadvantaged local government areas of the Federation. This policy encourages long-term investment in critical sectors, driving development in the long run.

5.​ Digital Services Tax (DST) on Tech Giants: With the rise of digital commerce, Nigeria has introduced digital service taxation, targeting multinational tech corporations operating within the country. This move aligns with this author’s prior and consistent call for taxing digital activities at source, and is no doubt, enhancing efficiency of Nigeria’s tax administration. Revenues generated from DST could potentially be redirected toward social investments and development projects.

6.​ Research and Development (R&D) Tax Relief: While Nigeria’s R&D tax incentives are not as developed as in some advanced economies, there are ongoing efforts to provide tax relief to companies engaged in innovation and technological advancement, provided that such R&D activities are carried out in Nigeria and are connected with the business from which income or profits is derived.

7.​ Double Tax Treaties (DTT): In the past few years, Nigeria has signed a couple of double tax treaties with other nations. The effect of this move is that foreign investors who are initially taxed by their home governments for investment they make in Nigeria will not need to be taxed in Nigeria and vice versa. To digress, and in relation to private philanthropy, if a Nigerian NPO is involved in cross-border activities, for example, receiving funding, donations, or income from foreign sources, a double tax treaty could potentially impact its tax liabilities. For instance, DTT allows donors who are resident in other countries to take advantage of tax credits or deductions for donations made to a Nigerian NPO, depending on the treaty’s terms.

Reality Check: Compliance, Effectiveness, and Challenges

Despite these incentives, there are significant challenges surrounding compliance and the effectiveness of the tax regime in promoting philanthropy.

1.​ Low Awareness and Bureaucratic Challenges: Many CSR-performing businesses and philanthropists are unaware of available tax incentives or find the process cumbersome due to the bureaucracy in the Nigerian system.

2.​ Loopholes and Tax Evasion: Some NPOs and corporate entities exploit tax exemptions and deductions for fraudulent activities, engaging in tax avoidance rather than genuine philanthropy.

3.​ Weak Enforcement and Monitoring: Regulatory bodies often lack the capacity to track and ensure compliance with tax-exempt charitable donations.

Global Trends: Learning from Saner Climes

Several advanced economies have implemented innovative tax incentives to drive social investments. For example:

●​ Social Investment Tax Relief (SITR) in the United Kingdom encourages investors to fund social enterprises, allowing them to claim up to 30% tax relief on investments made into businesses addressing social or environmental challenges. The main goal of SITR is to stimulate social investment by making it financially attractive for investors. Many social enterprises are not profitable in the traditional sense and rely on alternative forms of funding. SITR can help fill that gap by making investment in social impact businesses more appealing to the private sector, which may otherwise focus only on financial returns.

●​ Impact Investing Tax Benefits seen in Canada and Australia allow businesses investing in low-income communities to claim substantial tax breaks.

Future Outlook: Strengthening Tax Incentives for Philanthropy in Nigeria

To enhance the effectiveness of Nigeria’s tax incentives for philanthropy, the government must:

●​ Improve Awareness and Simplify Processes: Specific public campaigns and simplified procedures will encourage more participation in tax-deductible philanthropic efforts.

●​ Strengthen Monitoring and Enforcement: Regulatory agencies should deploy technology-driven compliance systems to track charitable donations and prevent abuse.

●​ Introduce New Incentives: Nigeria can explore tax reliefs like SITR to promote impact investing and social entrepreneurship.

●​ Foster Transparency and Public Trust: Establishing a public registry for tax-deductible philanthropic contributions will ensure accountability and strengthen trust.

Conclusion

Tax incentives for philanthropy in Nigeria hold great potential for national development but face significant implementation challenges. By learning from global best practices, enforcing compliance, and creating a more transparent framework, Nigeria can harness private sector contributions for sustainable growth. The future of tax-driven philanthropy in Nigeria depends on continuous reform, stronger institutions, and a commitment to ethical governance.