Introduction
On 24 June 2019, the Nigeria Police Trust Fund (Establishment) Act (NPTF Act or "the Act") was enacted into law, with the overarching goal of improving the capabilities and wellbeing of the Nigerian Police Force (NPF).
The Act established a Trust Fund ("the Fund") for the training and financing of the NPF and provided the framework for the management and control of the Fund. The Fund is to be funded from many sources including 0.5% of the total revenue accruing to the Federation Account, 0.005% of the net profit of companies operating business in Nigeria, special intervention fund approved by any arm of Government, budgetary allocations and aids and grants, amongst others. The Fund is to be utilised for the construction of police stations, provision of living facilities for the Nigerian Police Force, procurement of books, instructional materials, and training equipment for use at police colleges and similar training institutions among other things.
The Act is to operate for six (6) years, after which it will cease to exist, unless an extension is granted by an Act of the National Assembly. Therefore, if not extended, the Act will cease to operate by June 2025.
In this article, we examined the appropriateness and legal implications of obligating taxpayers to finance the NPF as well as the validity of the Fund in light of recent legal developments. We also addressed the potential issue of multiple taxation that the introduction of the levy may result in and its tax-deductible status, along with the ambiguity in the definition of net profit. To navigate these challenges, we proposed certain steps and actions that the Federal Government could take regarding the Act.
Evaluation of the legal framework for contributions to the Fund
Section 4(1)(a) and (b) of the NPTF Act addresses two significant but contentious sources of contribution to the Fund - 0.5% of the total revenue accruing to the Federation Account and 0.005% of the net profit of companies operating business in Nigeria. However, this raises the question: Can top line deductions be made from the Federation Account by the Federal Government of Nigeria (FGN)?
The Federation Account serves as a central repository for all revenues collected by the Federation of Nigeria. Specifically, Section 162(1) of the 1999 Constitution provides, amongst others, that:
"...all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja".
are to be deposited into the Federation Account.
Furthermore, Section 162(3) specifies that:
"Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the local government councils in each State on such terms and in such manner as may be prescribed by the National Assembly."
Interpretation of the above Section 162 of the Constitution vary, giving rise to two main perspectives:
- Restrictive interpretation:
Proponents of this view argue that it is unconstitutional for the FGN to withhold revenue due to the Federation Account by directing companies to remit the NPTF Levy into the Fund rather than the Federation Account. They cite Section 162(1) of the Constitution referenced above, which requires that all revenues collected by the FGN, with certain exemptions, are to be deposited into the Federation Account.
They further contend that all revenues allocated to the Federation Account can only be distributed directly to the three beneficiaries expressly mentioned in Section 162(3) of the Constitution - the Federal and State Governments, and the Local Government Councils. Therefore, the NPF is not directly entitled to a share of these revenues as it is not expressly listed among the beneficiaries in the Constitution.
Lastly, they assert that Section 4(1)(a) and (b) of the NPTF Act represent an attempt by the FGN to shift the burden of funding and maintenance of the NPF to others than itself. Specifically, they argue that it is the constitutional duty and responsibility of the FGN, and not that of any State or Local Government, to establish, fund, and maintain the NPF.
- Expansive interpretation:
Proponents of this viewpoint argue that the use of the term "credit" in Section 162(3) implies that the designated beneficiaries are entitled only to the amount "remaining" in the account after necessary deductions or "debits" have occurred, not the total revenue accruing to the Federation Account.
The differing interpretations outlined above have raised a fundamental question as to who should be responsible for funding a government agency?
Over the years, the NPF has grappled with severe underfunding, despite its pivotal role in maintaining law and order. In the 2024 National Budget, only NGN969 billion1 (3.3% of the total expenditure of NGN28.77 trillion – before any supplementary budget) was allocated to the Ministry of Police Affairs. While this marked an improvement from the NGN871.3 billion2 and NGN518.53 billion allocated in 2023 and 2022, respectively, such funding may be viewed as grossly inadequate in a country with a population exceeding 200 million. The funding shortfall and its adverse effect on law enforcement prompts the question "should taxpayers bear the burden of financing an agency of government?"
The authors of this article contend that community investment in policing in Nigeria may offer a viable solution, given the inadequacy of federal allocations. They elaborate on this perspective in the Recommendations section.
Practises in Other Jurisdiction
Although, the notion of shared funding may be novel in Nigeria, it is a practice already established in some other countries. For example, in England and Wales, police forces receive funding from both the Government and taxpayers. According to the website of the Government of the United Kingdom, "In addition to central Government funding, Police and Crime Commissioners (PCCs) set a local police precept which is part of Council Tax. Police precept accounts for around 34% of the funding PCCs directly receive via the settlement and is paid directly by local taxpayers"4 [emphasis ours].
Similarly, in the USA, the police is funded through federal, state, and local contributions. The bulk of it comes from the local offerings. The amount depends on factors such as the population, staff strength, city size, GDP and location.5 Also, in some provinces in Canada, municipalities levy specific charges or fees for enhanced police services. For example, in Alberta, municipalities can impose special levies to fund additional policing services beyond the standard provision.6
Consequently, using tax-payers money (or part thereof) to fund NPF should not be strange to international practices. However, the authors concede that such utilization would have to be rooted in the express provision of the Constitution.
Judicial Ruling on the Implementation and Constitutionality of the NPTF Levy
The aforementioned issues came to light in the case involving the Attorney General for Rivers State (AGRS/ "the Plaintiff") and the Attorney General of the Federation (the "1st Defendant"), the Accountant General of the Federation (the "2nd Defendant"), the Revenue Mobilization, Allocation and Fiscal Commission (the "3rd Defendant"), and the Honourable Minister of Finance for the Federal Republic of Nigeria (the "4th Defendant") (collectively known as the Defendants), in 2022.
After considering the arguments of both parties, the Federal High Court (FHC) made several significant determinations, including that the FGN lacks the authority, as per Section 162(1) and (3) of the 1999 Constitution, to directly deduct any amounts from the Federation Account for the purpose of training or sustaining the Nigeria Police Force (NPF).
Essentially, the FHC held that by virtue of the explicit and unambiguous provisions of Section 162(1) of the 1999 Constitution, the FGN is mandated to deposit all revenue it collects into the Federation Account, with specific exemptions for the proceeds of personal income tax from certain entities. Consequently, Section 4(1)(b) of the NPTF Act, which directs companies to remit NPTF levy directly into the Fund rather than the Federation Account, is deemed inconsistent with Section 162(1) of the 1999 Constitution and, therefore, null and void by virtue of Section 1(3) of the 1999 Constitution.
Furthermore, the FHC determined that Section 162(3) of the 1999 Constitution outlines the distribution of funds in the Federation Account exclusively among the Federal, State, and Local Government Councils within each State of the Federation to the exclusion of any other entity. Consequently, the provision in Section 4(1)(a) of the NPTF Act, which permits the Government of the Federation to deduct 0.5% of the Federation Account's credit balance for deposit into the NPTF, is deemed inconsistent with Section 162(3) of the 1999 Constitution and, therefore, deemed null and void.
The court found that based on a combined reading of the Exclusive Legislative List, Section 214 of the 1999 Constitution, and Section 5 of the Nigeria Police Trust Fund (Establishment) Act (NPTF Act), it is solely the responsibility of the FGN to establish and maintain the NPF as one of its agencies without resorting to the Federation Account for funding.
As a consequence of the above, the Court issued an injunction order restraining the Defendants from enforcing the provisions of Section 4(1)(a) and (b) of the NPTF Act. The practical implication of this order is the prevention of deducting 0.5% of the total revenue or any sum accruing to the Federation Account, and stoppage of collecting direct levy from companies for the purpose of funding the NPTF. Interestingly, the judgement would appear not to have considered the provisions of Section 80(1) and 80(3) of the 1999 Constitution, which acknowledge the establishment of a public fund for specific purposes, and the disbursement of funds from such public funds in accordance with related Acts of the National Assembly.
As it stands, the judgment cannot be deemed final, as the Federal Government of Nigeria (FGN) retains the right of appeal against the entirety or any specific part of the judgment that it finds unsatisfactory. Such appeal, if pursued, may result in a different ruling. Hitherto, there have been no recent development in this regard, nor changes in the operation of the Act since the verdict of the FHC was issued.
Unresolved Issues
Beyond the legality or otherwise of the NPTF levy, the operation of the Act also has significant inherent gaps. Some of the gaps are discussed below:
- Multiple taxation and tax-deductible status of the levy
There is no doubt that companies conducting business operation in Nigeria are assessed to a plethora of taxes and levies including but not limited to companies' income tax, tertiary education tax, National Information Technology Development (NITD) levy and Nigerian Content Development (NCD) levy (for those operating in the oil and gas sector) amongst others. The introduction of the NPTF levy further compound the situation and negatively impacts the ease of doing business in the country.
Simplifying tax administration and harmonizing the number of taxes payable are widely acknowledged to enhance compliance. A tax system becomes burdensome when taxpayers must navigate numerous taxes. In Nigeria, the sheer volume of over 200 taxes and levies7 exacerbates this complexity. To address this, the Presidential Fiscal Policy and Tax Reforms Committee has proposed reducing the number of existing taxes to less than 10, with the overarching aim of improving the business environment in the country.
Furthermore, the NPTF Act does not specify whether the NPTF levy is tax-deductible when calculating companies' income tax – a matter that is currently being challenged by the tax authorities. In the authors' view, the NPTF Act should be revised to clearly indicate the allowance for such deduction.
- Ambiguity in thedefinition of net profit
The NPTF levy is applied on the net profit of companies operating in Nigeria. However, the Act does not provide a clear and precise definition of the term "net profit", leaving room for different interpretations and potential disputes. For instance, "net profit" could mean earnings before interest, taxes, depreciation and amortization (EBITDA), or profit before tax (PBT). It could also mean profit after tax (PAT). Depending on which interpretation that a taxpayer adopts, the amount calculated as the levy would defer. This lack of clarity introduces uncertainty regarding the amount payable.
In practice, many taxpayers typically adopt profit before interest and tax. Nevertheless, clarity and specificity on the definition of the term "net profit" for the computation of NPTF is essential to ensure fair and consistent application across board, and to minimize potential conflicts between taxpayers and the tax authorities.
- Should the descriptor "companies operating in Nigeria" extend to non-resident companies (NRCs)?
Section 4(1)(b) mandates companies operating in Nigeria to contribute 0.005% of their net profit to the Fund. However, there is a debate regarding whether this requirement should extend to NRCs. Two opposing viewpoints have emerged:
- One perspective argues that one primary objective of the Nigerian Government is to attract foreign investment. Therefore, imposing the NPTF levy on NRCs could be counterproductive, potentially deterring foreign investment.
- The other viewpoint is that the activities of the NPF in maintaining law and order impact the entire country, not just Nigerian companies. Therefore, all companies operating in the country, regardless of their incorporation status, are direct beneficiaries of the services being provided by the NPF.
We expect that the Government will review both perspectives and come up with a mechanism that will not discourage foreign direct investment, while ensuring that its revenue generating capacity is not impaired.
- Exemption for small companies
Micro, Small and Medium Enterprises (MSME) have been integral to the growth of the Nigerian economy, contributing significantly to the GDP. According to the Nigerian Bureau of Statistics (NBS), this sector contributes about 48%8 to the GDPThis underscores the importance of supporting MSMEs through conscious government policies.
To alleviate the burden of MSMEs from multiple taxes that some already pay, the NPTF levy should only apply once a particular revenue threshold is met. For example, the NITD and NASENI levies are triggered only for companies with an annual gross turnover of a hundred million naira (N100,000,000) and above.
The absence of such revenue threshold in the NPTF Act adds an additional strain on this category of entrepreneurs, which together with other levies and taxes, may potentially jeopardise the survival rate of MSMEs in the country.
While the Act does not explicitly exempt small companies from the levy, the amendment made by the Finance Act 2021 stipulates that the CITA governs the administration, assessment, collection, accounting, returns and enforcement of the NPTF levy. Notably, Section 23(1) of the CITA exempts the profit of small companies from income tax. The question arises whether the exemption extends to the NPTF levy. It should, in the authors' view. We expect that further clarification will be made in this regard.
- Continuation of the Act
Section 2(2) of the Act states that "The Trust Fund is to operate for six years from the commencement of this Act and shall, at the expiration of that period, cease to exist unless it is extended for any further period by an Act of the National Assembly."
The Act has been deemed counterproductive in encouraging businesses in Nigeria, and thus, has continued to receive heavy criticism. Given the impending plan for state policing, it may be important that state and local sources are harnessed in police funding as practiced in other jurisdictions. Also, it is doubtful whether based on a cost-benefit analysis, the NPTF is worth implementing. For example, the operation of the Act has not really contributed significantly to FGN's revenue as the FIRS recorded a miniature NPTF collection of about NGN70 million in 20239. It therefore, raises the relevance question of the Act.
Our recommendations
The issue of underfunding and efficiency of the NPF has proven to be a subsisting dilemma for the FGN, spurring suggestions that are anticipated to resolve these challenges. One of them is the decentralization of the NPF such that each state of the federation has a level of autonomy in controlling its police. The aims of this, amongst others, is to improve the welfare of the NPF, ensure its optimal performance and enhance security of lives and properties. Beyond the above suggestion that is receiving some attention, we have highlighted other recommendations that may enhance police financing in Nigeria.
- Pending when a determination is made as to the extension or otherwise of the operation of the NPTF Act and following the example of the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme ("the Scheme")10, contributions to the NPTF could be made voluntary, but tax-deductible. This would allow individuals or businesses to choose to contribute and then fully recover their contribution for income tax purposes. Thus, any Nigerian company wishing to support the NPF could do so, with the full understanding that it will get a tax deduction for such contribution.
- Establish a revenue threshold for MSMEs, to protect them and promote their growth and enhance their survival rate. For example, the FGN may simply adopt the threshold of N100,000,000 already set for the NITDA levy, for the NPTF levy as well.
- Define the term "net profit" in an amendment act to the NPTF Act, to avoid ambiguity and ensure consistent application of the levy.
- Include the NPF as one of the bodies to which tax-deductible donations may be made under Section 25 of CITA.
In conclusion, the current NPTF levy places an unjust burden on Nigerian companies, exacerbating the challenge of multiple taxation. We will suggest that the FGN revisit the operation of the levy in its entirety, particularly, in the light of the work being done by the Fiscal Policy and Tax Reform Committee, for harmonization.
Footnotes
1 2024 budget breakdown: see ministries with increased allocations - Order Paper
2 Minister laments inadequate N871.3bn budget for police operations in 2023 | The Guardian Nigeria News - Nigeria and World News — Nigeria — The Guardian Nigeria News – Nigeria and World News
3 Key Numbers in Nigeria's Revised 2022 Budget | Dataphyte
4 Police funding for England and Wales 2015 to 2022 - GOV.UK (www.gov.uk)
5 Investing in Public Safety: How Police are Funded – Courage California Institute
6 Funding | Alberta Municipalities (abmunis.ca)
7 Multiple taxation: Tinubu panel asks govt to drop 190 taxes, OPS blames states (punchng.com)
8. Unsung heroes: SMEs as backbone of the Nigerian economy - Businessday NG
9. FIRS - Simplifying Tax, Maximizing Revenue
10. The Scheme fosters collaboration between the Government and Nigerian companies for critical road infrastructure projects.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.