Corporate Governance Issues In Not-For-Profit Organizations (NFPOs) In Nigeria
Not-for-Profit Organizations (NFPOs) are voluntary organizations that are not state controlled.
NFPOs play an important role in bridging the gap between the government institutions, donors, agencies and the communities; organizing poor people, facilitating collective action, representing the poor in advocating for their rights and in some cases supplying basic amenities to sustain livelihood. NFPO’s are an important part of a democratic fabric, driving accountability and responsibility in political leadership.
Similarities and Differences between NFPOs and for profit Businesses in Nigeria There are a number of similarities between the structure and the operations of NFPOs and regular businesses in Nigeria. They are both governed by the Companies and Allied Matters Act (CAMA) and regulated by the Corporate Affairs Commission (CAC).
Businesses and NFPOs have governing boards and management — Board of Directors for companies, while the NFPOs do have Board of Trustees. In addition, both do require resources to be made available through either capital or contributions that must be channeled towards achieving set goals. There are, however, some differences between the structure, operations and objectives of a business and that of NFPOs. One of the major differences is the motive of set up. While a business’ main objective is to make profit, that of NFPOs is that of societal impact and value. In addition, the funding for NFPOs is mostly from donations, grants and philanthropy in addition to the accumulated surpluses from previous periods, whereas the funding for businesses is obtained from shareholders as equity contributions. Also, the board of trustees and a governing Council is saddled with the responsibility of overseeing the activities of NFPOs whereas a Proprietor/Partners (Sole Proprietor/Partnership) or Board of Directors (company) see to the effective management of the objects and operations of for-profit businesses. Lastly, the profits (other than those derived from trade or business carried out by them)of the NFPOs are exempted from Company income Tax whereas for-profit businesses are obligated to pay the Company Income Tax (company) or Personal Income Tax (Sole Proprietor or partnership).
Key Issues for NFPOs in Nigeria The Companies and Allied Matters Act (CAMA) defines the composition, the duties and the operations of the Board of Directors (companies) and the Board of Trustees (NFPOs).
Unlike Directors of Companies, the trustees of an NFPO cannot be paid any remuneration for carrying out their functions as trustees. They can only be paid out of pocket expenses, reasonable rent for property leased or sold, and fees for services rendered by the trustees. See Section 603 (2 a) & (2b) of CAMA. The concept of voluntary work done to further the objectives of an NFPO does not only apply to the operations of NFPOs but extends to its management which is expected to have no basis for conflicts of interests in carrying out their duties. Income and property of NFPOs must be applied solely towards the promotion of the objects and no portion shall be paid or transferred directly or indirectly, by way of dividend, bonus, or otherwise by way of profit to any of the members of the association, including trustees. Section 603
It is important to consider the relationships that may exist between potential trustees and the NFPO when appointing members of the board of trustees. Where a trustee is already involved with the NFPO as fundraisers or donors, it may not prevent him from serving efficiently. However, they may create the potential for undue influence and this may compromise the board’s ability to exercise independent and fair judgment. This perception of partiality may damage or taint the organization’s reputation or good standing in the eyes of stakeholders, even where no actual undue influence exists. NFPOs should therefore ensure that a sufficient number of independent persons are appointed to form the Board of Trustees. CAMA does not provide specifically for the number of times the board of Trustees should meet as this is provided for by the Constitution. In line with best practices in corporate governance, it is usually suggested that the board of trustees meets at least 2 times a year.
Tax and Regulatory Compliance Requirements for NFPOs> NFPOs are expected to register and obtain a Tax Identification Number (TIN) at the Federal Inland Revenue Service (FIRS) — the federal tax agency. In recognition of the nonprofit structure of NFPOs and the significant role being played by these organizations in building a strong society, the Government grants tax exemption of their profits (other than those derived from trade or business carried out by them) from income tax. Therefore, the Nigerian tax laws do not necessarily exempt NFPOs from paying taxes; rather, they are only exempted from paying income tax based on section 23 of the Company Income Tax Act (CITA).
Where the NFPO invests its assets in any institution, the income derived from such investment shall be subjected to tax. NFPOs will also pay Capital Gains Tax (CGT) where it makes a gain on disposal of assets. Goods purchased for use in humanitarian donor funded projects are zero rated under the Value Added Tax Act Cap V1 LFN 2004 as amended. It is important to note that only goods purchased by the NFPO are zero rated, and services procured shall be charged at 5% VAT. NFPOs are expected to deduct Pay-As-You-Earn (PAYE) from employees’ salary and remit same to the appropriate tax authority. They are also expected to deduct
withholding tax (WHT) on payments made to its suppliers and remit same to the appropriate tax authority. In line with section 55 of CITA, it is mandatory for every NFPOs to file its tax return every year and such return shall include the audited accounts, tax and capital allowances computations and a written statement containing the amounts of its profits from each and every source computed in accordance with the provisions of CITA. In addition, it is also required that a director or secretary of the organization must sign a declaration that the information contained in the return is true and correct.
NFPOs must file its annual returns with the CAC not earlier than 30 June or later than 31 December each year, other than the year in which it is incorporated — Section 607 CAMA. The returns must consist of the name of the organization, the names, addresses and occupations of the trustees, and members of the council or governing body, particulars of any land held by the organization during the year, and of any changes which have taken place in the constitution of the Association during the preceding year. NFPOs are also expected to join the process of preventing Money Laundering in Nigeria, hence they are encouraged to register with the Special Control Unit Against Money Laundering (SCUML) as a Designated Non- Financial Institution (DNFI). Tax Benefit for Donors In order to encourage donations to some certain NFPOs, Section 25 of CITA allows any company making donations to NFPOs that are specifically listed under the 5th schedule to CITA to enjoy tax reliefs on such donations, where the donation does not exceed 10% of the total profits of that company for that year (as ascertained before any deduction of such donations is made). It must be noted that the NFPOs listed on the abovementioned schedule are very limited in number.
Conclusion Based on my recent interactions with leaders of NFPOs, it would appear that there is allow level of compliance with the relevant laws. This is primarily due to the low level of awareness of the relevant laws by the leaders of the NFPOs. In addition, the absence of a single regulator for this sector also seems to encourage the non-compliance behaviours.
Unlike in developed economies such as the UK where there is a “Charities Commission”, there is no sole regulatory body which oversees the activities of the NFPOs in Nigeria. The Regulation of NFPOs should promote and enhance the viability of the structure and operations of NFPOs, acknowledging them as an important sector of the economy. It is hoped that the NFPO Regulatory Commission of Nigeria (Establishment) Bill (currently at the national assembly) will not stifle their operations of the NFPOs while attempting to push regulatory compliance.
Author: Wole Oluyemi is a chartered accountant and business advisor, with special interests in SME businesses, strategy, finance and tax. He is also a doctoral researcher at Cranfield University (UK) with research focus on corporate political strategy. He can be reached at @WoleOluyemiCo on Instagram, Twitter and Facebook