Today, we will be reviewing a recent decision by the Federal High Court in a case involving taxation of a non-resident company. Tax is a creation of statutes. Without an enabling law, tax cannot be imposed. But laws are creations of men. As it is with every other human endeavours, laws themselves suffers imperfections that its creators are exposed to. Tax laws are no different.
One of the ways by which clarity is brought to ambiguous provisions is through court decisions. For a long time, court cases on tax matters are scarce commodities in Nigeria. No thanks to court-shy taxpayers who would rather choose pragmatic solutions than challenge unfair position by tax authorities. The length of time it takes to push a case through is enough disincentive for seeking judicial redress on tax matters. In the last few years, this narratives is changing. Taxpayers are becoming more litigious and self-assured.
We are beginning to have taxpayers and tax authorities who would rather move to have their position tested in court. A number of decisions are coming through from Tax Appeal Tribunal (TAT) and Nigeria High Courts. This is a welcome development. Multinationals appear to be having increasing confidence in Nigeria judicial system as some of the recent court cases involve foreign companies.
One recent case is the decision of the Federal High Court (FHC) on determination of “fixed base” for non-resident company (NRC) in Nigeria. This ruling was handed down on 18 September 2015 by a FHC in Lagos. Let’s quickly look at the facts of the case. A Nigeria multinational oil company (let’s refer to it as “NMOC”) awarded two contracts – one offshore contract and the other onshore contract. The offshore contracts covering engineering and procurement was awarded to a NRC, a Japanese company (Let’s call it “JCo”). The onshore contract (covering construction, commissioning and inland transportation) was awarded to 2 Nigerian companies. One of the Nigerian companies that executed the local contract is a subsidiary of JCo. Let’s call the Nigeria subsidiary “NCo”.
JCo performed all the obligations under the offshore contract outside Nigeria. None of its employee visited Nigeria in connection with the project. NCo, its Nigeria subsidiary, executed the local (onshore) contract together with its counterpart to whom the contract was awarded. NCo filed its own tax returns and paid taxes for its own account, for the local contract executed. FIRS viewed the arrangement in a different way as it sees the project as one single contract. In FIRS’ view, both JCo and NCo executed a Nigerian project and derived profit therefrom.
According to FIRS, JCo is liable to tax in Nigeria because the contract in question is a Nigeria project. It would seem that FIRS relied on the notion that the profit was “derived from” Nigeria and therefore liable to tax. More fundamentally, FIRS ignored the split contract arrangement and took the whole project as one single contract. To FIRS, there is only one project and therefore one contract with offshore and local components.
The Nigeria Companies Income Tax Act (CITA) makes provision for taxation of NRC that are carrying on business in Nigeria. CITA clearly provides that “the profits of a foreign company is taxable in Nigeria only to the extent that it is deemed derived and not attributable to any part of the operations of the company carried on outside Nigeria”. It then goes further to provide the circumstances that may lead to profits of a NRC being deemed to have been derived from Nigeria. According to CITA, there are 4 circumstances that may lead to the profit of a NRC to be deemed to have been derived from Nigeria. One of such conditions is where the NRC has a “fixed base” of business in Nigeria and the profit is attributable to the fixed base.
Fixed base is not specifically defined in CITA but few examples were given of arrangements that may not constitute a fixed base. There is a conceptual similarity between the terms “fixed base of business” and “permanent establishment” that is used in tax treaties. In principle, there must be a geographical location with some degree of permanence from which the business is carried on. JCo has a subsidiary in Nigeria. In the opinion of FIRS, JCo has a fixed base in Nigeria. Prior court decisions on determination of fixed base were cited in defense. FIRS consequently assessed JCo to tax and following a refusal to amend, JCo approached Tax Appeal Tribunal (TAT).
TAT delivered its judgment on 17 April 2014 and upheld the decision of FIRS. That is, held that JCo is liable to tax in Nigeria. Dissatisfied with the decision, JCo approached the FHC in Lagos and filed an appeal on 16 May 2014 which is within 30 days as prescribed. After a careful examination of the facts of the case and the evidences provided, the FHC reversed the ruling of the TAT. The FHC was able to establish that none of the 4 scenarios that could bring a NRC to tax in Nigeria was present in the case.
The existence of a fixed base upon which the decision of FIRS was based was invalidated.
A number of critical and far-reaching principles were established in the case. The 126-page judgment is a must-read for lovers of taxation. The FHC established that there were indeed two separate contracts and rebutted TAT’s position of a single contract jointly performed by JCo & NCo. In the offshore contract, it was clearly laid out that the contract is to be fully performed outside Nigeria with no link to the local contract. The onshore contract also clearly spelt out the contractors with no link or reference the JCo or the offshore contract.
JCo was not a party to the local contract and didn’t perform any of its obligations under the offshore contract in Nigeria. It follows from the above that since TAT ignored the onshore contract, it couldn’t have objectively bring JCo to tax in Nigeria.
The FHC’s decision has reaffirmed the position that establishing the existence of a fixed base for a NRC must be based on facts. The question must be answered by reference to the actual activities performed by that NRC in Nigeria. It is pertinent to state that it is not in all cases that a NRC have a Nigeria-sourced income that such is liable to Nigeria tax. It is not in all case that a contract to perform a project to be cited in Nigeria automatically creates a fixed base for tax purposes. If as in this case, the projects were executed outside Nigeria, the NRC cannot be said to have a fixed base in Nigeria. Once a fixed base cannot be established, (and the other 3 conditions are non-existent), the NRC will not be liable to tax in Nigeria.
It is true that Section 9 of CITA imposes tax upon the profits “accruing in, derived from, brought into or received in Nigeria”. However, Section 13(2) stipulates the limited circumstances under which the profits of a foreign company shall be deemed to be derived from Nigeria. It is only to the extent that the circumstance is established that tax may be imposed, and only on the profit that it attributable to the fixed base. For Nigeria companies, they are liable to tax on their global income based on Section 13(1) of CITA. A NRC must have a Nigeria source income that meets one of the 4 circumstances in Section 13(2) to be liable to tax in Nigeria.
FIRS’s position was premised on the existence of a fixed base which the FHC refuted and ruled that JCo is not liable to Nigeria tax. The Judge reiterated the age long principle articulated by Lord Clydes. The famous dictum in the English case between Ayshire Pullman and IRS. It remains a fundamental principle of tax law that a party is at liberty to structure its affairs in such a manner as to minimize tax incidence. Other Judges have also echoed same that anyone may arrange his affairs so that his taxes shall be as low as possible, within the laws. Taxpayers are not bound to choose an arrangement or structure which best pays the tax authority.
The FHC stated unequivocally that there’s nothing wrong in structuring ones tax affairs even if the effect was to limit tax exposure. It is now firmly established that a party may embark on tax planning so as to limit its tax incidence. With judgments like these, Nigeria tax system will continue to evolve and mature. When gray issues are tested and brought for adjudication, the decision of the court provide parties with precedence to be referenced.
It’s a wrap for today. Please send in your feedback and be sure to read up previous sessions.
Note:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday, 2 December 2015. Every Wednesday at 17:00 WAT (CUT+1), I run a one-hour “tweetax” session with hashtag #TaxWiseNG where topical tax issues are discussed. The tweets are subsequently posted as an article and posted on my website www.yomiolugbenro.com, facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
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