• The decision of the FHC in Accugas v. FIRS against the retrospective application of the provisions of the Finance Act 2019
  • The decision of the Court of Appeal in FIRS v. AG Lagos and The Registered Trustees of Hotel Owners and Managers Association of Lagos, affirming the power of the FIRS to collect Value Added Tax (“VAT”) on goods and services consumed in hotels, restaurants and event centres
  • The decision of the TAT in New Skies Satellites v. FIRS on permanent establishment rules and the exemption of Stamp Duties on contracts with government agencies
  • The decision of the TAT in Investment Holdings Limited v. FIRS on deposit of disputed tax prior to the commencement of an appeal

Notable Judgments

The decision of the FHC in Accugas v. FIRS against the retrospective application of the provisions of the Finance Act 2019:

 

Background:

In the above case, Accugas (the “Appellant”) sought, among other reliefs, a declaration that the provision of the Finance Act, 2019 (the “Act”) cannot retroactively apply to periods, transactions, activities and income earned in periods before the enactment of the Act.

Court’s Decision:

The Abuja Division of the Federal High Court (“FHC”) delivered a landmark decision on the applicability of tax amendments to transactions that arose before such modifications. The FHC held that the Finance Act 2019, which became law on 13 January 2020, should not apply to any trade activity conducted by Accugas between January and December 2019, even if the returns reporting the trading activity were filed after 13 January 2020.

The decision of the FHC has established that amendments to tax laws cannot be applied retroactively, except where the law expressly states so. It also confirmed that any right, privilege or obligation accruing to taxpayers under an enactment is preserved despite the repeal of such enactment.

 

The decision of the Court of Appeal in FIRS AG Lagos and The Registered Trustees of Hotel Owners and Managers Association of Lagos, affirming the power of the FIRS to collect Value Added Tax (“VAT”) on goods and services consumed in hotels, restaurants and event centres:

 

Background:

The VAT Act was introduced before the 1999 Constitution of the Federal Republic of Nigeria, and the question of the constitutionality of the VAT Act has resulted in several landmark judicial decisions. The CFRN does not provide for consumption taxes under the Exclusive and Concurrent Legislative Lists. Hence, consumption taxes ought to be a residual matter for taxation by the States.

In the case of  A.G. Ogun v. Aberuagba,[1]  the Supreme Court held that States are only empowered to impose sales tax on intra-state transactions as opposed to inter-state or international transactions, which are matters exclusively reserved for the Federal Government on the Exclusive Legislative List. The Supreme Court decided that the Sales Tax Law of Ogun State was invalid to the extent that it imposed sales tax on international and inter-state transactions.

On the other hand, in the case of A.G. Lagos v. Eko Hotels,[2] Eko Hotels argued that it was difficult to comply with the VAT Act and the Sales Tax Law of Lagos State, as it would amount to double taxation. The Supreme Court noted that both statutes provide for the collection of consumption tax on certain consumable items and that the tax rates under both laws were similar. The Supreme Court held that the VAT Act had fully covered the field of consumption tax in Nigeria, hence, the Lagos State Sales Tax Law was void.

The FHC, in the case of  A.G. Rivers v. FIRS, recently ruled that the Federal Government is only entitled to impose and collect taxes outlined in items 58 and 59 of the Executive Legislative List. Hence, the powers to legislate and enforce the VAT Act and other taxes not listed in items 58 and 59 lies residually with the State Government, as the Constitution does not empower the National Assembly to enact any law to impose any form of sales tax, including VAT and any other class of tax outside those specifically mentioned in item 7 (a) & (b) of Part II, Second Schedule.

Till the case of A.G. Rivers v. FIRS gets to the Supreme Court, there continues to be controversy and ambiguity regarding the final position of the constitutionality of the VAT Act.

Court’s Decision:

The Court of Appeal in Lagos set aside the 2019 judgment of the FHC and upheld the powers of the FIRS to impose VAT on goods and services consumed in hotels, restaurants, and event centres in Nigeria. The court also held, among other things, that the VAT Act being an existing federal law, had covered the field of consumption tax. Hence, its provisions should prevail over similar States’ laws, including the Hotel Occupancy and Restaurant Consumption Law of Lagos State, 2009 and Lagos State Hotel Occupancy and Restaurant Consumption (Fiscalisation) Regulations, 2017.

Until the matter is brought before the Supreme Court, the decision of the Court of Appeal has established that hotels, restaurants, and event centres in Nigeria are not to pay consumption tax.

The decision of the TAT in New Skies Satellites FIRS on permanent establishment rules and the exemption of Stamp Duties on contracts with government agencies:

Background:

In the above case, New Skies Satellites (the “Appellant”), a company incorporated and resident in the Netherlands for tax purposes, engages in the business of distributing satellite capacity across the globe via its network of communication satellites.

The Appellant had entered into an agreement with the Nigerian Broadcasting Corporation (“NBC”) through SES Nigeria Limited (“SNL”), a related party in Nigeria in line with a Federal Government Executive Order mandating government Ministries, Departments, and Agencies (MDAs) to include Nigerian companies as parties to contracts with foreign service providers. New Skies also contracted an unrelated local company Computer Warehouse Group (“CWG”) to provide uplinks and transmission services to NBC.

The Appellant, on the request of NBC, applied to the FIRS to confirm its eligibility to enjoy tax concessions under the Agreement Between the Kingdom of the Netherlands and the Federal Republic of Nigeria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Cains (the “Nigeria-Netherlands DTA”). The FIRS ruled that the Appellant was ineligible to enjoy tax concessions as SNL and CWG had created a permanent establishment for the Appellant in Nigeria. The FIRS also assessed Stamp Duties at 1% on the contract between NBC and the Appellant.

The Appellant sought the following reliefs from the Lagos Zone of the Tax Appeal Tribunal (“TAT”), among other things:

  1. a) a declaration that the Appellant has no permanent establishment in Nigeria based on the provisions of Articles 5(1), (3) and (7) of Nigeria-Netherlands DTA. Establishing they do not have a permanent establishment in Nigeria affirms that they will not be taxable in Nigeria for business profits under Article 7 of the Nigeria-Netherlands DTA.
  2. b) a declaration that the contract is exempted from Stamp Duties by the express provisions of the Stamp Duties Act (“SDA”) and that the Appellant has no responsibility to defray or bear any Stamp Duty which may arise.

Court’s Decision:

The TAT delivered a decision to the effect that a non-resident company can trigger being said to have a permanent establishment in Nigeria if the services provided to it by an unrelated party in Nigeria are integral to delivering its contract in Nigeria. Also, the inclusion of a related company as a party to a transaction with a government agency bolsters the argument for a permanent establishment in Nigeria. The TAT held the Appellant has a permanent establishment in Nigeria on the following grounds:

  1. the Appellant had an office provided by CWG at its disposal for the provision of uplinks and transmission services to the Appellant; and
  2. SNL was an integral party to the contract representing the Appellant’s interest interest in Nigeria, hence, it acquired permanent establishment as contemplated under Article 5 of the Nigeria-Netherlands DTA and is liable to tax in accordance with Article 7 of the Nigeria-Netherlands DTA.

The TAT also ruled that Stamp Duties do not apply to contracts with government agencies in line with the Stamp Duties Act, which exempts from Stamp Duties contracts where the customer is the government or an agency, department or parastatal of government.

The decision of the TAT in Investment Holdings Limited v. FIRS on deposit of disputed tax prior to the commencement of an appeal:

Background:

In the above case, the FIRS raised an objection to the competence of the appeal on the ground that the appellant failed to deposit 50% of the disputed tax into a designated account before commencing the appeal, contrary to Order III Rule 6 of the Tax Appeal Tribunal (Procedure) Rules 2021 (“TAT Rules”) which provides that an aggrieved person shall pay 50% of disputed amount into designated account by the Tribunal before hearing as security for prosecuting the appeal.

Court’s Decision:

The TAT ruled that Order III Rule 6 of the TAT Rules which mandates payment of 50% of the disputed tax as a condition to appealing a tax assessment was contrary to paragraph 15(7) of the 5th Schedule to the Federal Inland Revenue Service (Establishment) Act, 2007 which provides for payment of deposits as security for prosecuting an appeal only in limited circumstances. Order III rule 6 was therefore voided on the ground of this inconsistency.

 

Legislation

Introduction of tax incentives for startups and investors by the Nigeria Startup Act 2022:

The Nigeria Startup Act, 2022, assented to by the president on 19 October 2022, introduced tax incentives for investors and labelled startups. However, while some are generally applicable,[3] some are peculiar to startups, as listed below:

  1. labelled startups are exempted from contributions to the Industrial Training Fund in respect of in-house training provided to its employees for the duration of the startup label;
  2. investors are entitled to an investment tax credit equivalent to 30% of their investment in labelled startups;
  • a labelled startup shall enjoy a full deduction of any expenses on research and development which are wholly incurred in Nigeria;
  1. gains arising from the disposal of the shares of a labelled startup are exempt from Capital Gains Tax (“CGT”) provided that the shares have been held for a minimum of 24 months; and
  2. non-resident companies that provide technical, consulting, professional or management services to a labelled startup shall be subjected to a reduced Withholding Tax (“WHT”) rate of 5% on income derived from such services.

For a company to be eligible for the Startup Label certification and enjoy the above incentives, it must fulfil the requirements below:

  1. it is registered as a limited liability company under the Companies and Allied Matters Act 2020 and has been in existence for not more than ten years from the date of incorporation;
  2. its objects are innovation, development, production, improvement, and commercialisation of a digital technology innovative product or process;
  3. it is a holder or repository of a product or process of digital technology or the owner or author of a registered software; and
  4. it has at least one Nigerian as a founder or Co-founder of the startup, provided that the Nigerian founder or co-founder will share from profit or revenue from the sale of shares.

Sole proprietorships and partnerships may also be certified as labelled startups and must fulfil the above requirements except (a) above.

 

Introduction of the Federal High Court (Tax Appeal) Rules 2022:

The Federal High Court (Tax Appeal) Rules 2022 (the “Rules”), came into force on 10 January 2022 and repealed the Federal High Court (Tax Appeal) Rules 1992. The Rules prescribe the procedure for initiating and conducting appeals at the Federal High Court against decisions of the TAT.

One notable provision of the Rules is Order V Rule 1 which provides that where a debtor is appealing against a decision of the TAT, such a debtor shall deposit the entire judgment sum in an interest yielding account maintained by the Chief Registrar of the Court. The deposit of the judgment sum is a condition precedent to the hearing of an appeal and failure to comply with this requirement renders an appeal liable to be struck out or dismissed. This provision imposes a condition on the right of access to the Federal High Court that is not contemplated by the Constitution and the Federal High Court Act. It is therefore arguable that the provision is inconsistent with the Constitution and the Act and liable to be voided like Order III Rule 6 of the TAT Rules. However, until it is voided, taxpayers appealing against decisions of the TAT are required to meet this burdensome condition to exercise their rights of appeal.

Non-Interest Finance (Taxation) Regulation 2022:

The FIRS, pursuant to its powers to make regulations,[4] issued the Non-Interest Finance (Taxation) Regulations 2022 (the “Regulations”) which took effect from April 2022. The Regulations was introduced to regulate the taxation of institutions offering non-interest financial services in Nigeria, and are applicable to non-interest financial instruments and institutions operating under the principles of Islamic Commercial Jurisprudence.[5]

Pursuant to the Regulations, income earned under the non-interest finance arrangements are subject to the provisions of the Companies Income Tax Act (“CITA”), Tertiary Education Trust Fund (Establishment, Etc) Act 2011, as amended (the “TET Fund Act”), National Information Technology Development Agency Act and Personal Income Tax Act (“PITA”).[6] Also, fees charged on any transaction conducted pursuant to the Regulations are subject to Companies Income Tax (Rate, Etc., of  Tax Deducted at Source (Withholding Tax)) Regulations (the “WHT Regulations”), and the VAT Act while transaction documents are subject to the SDA, where applicable.[7]

In the event that a financial institution pays, distributes, or shares money to participants or customers in the form of a share of profit or return on investment, such payment or distribution shall be subject to the provisions of the WHT Regulations.[8] Also, where a financial institution grants a customer rebate, discount, waiver, or reduction of an amount, it shall be deemed an income to the financial institution and taxed appropriately.[9] However, where there is an agreement between the financial institution and the customer for such rebate, there shall be no tax liability.[10]

 

Circulars and Notices

Public notice on TaxPromax one-off waiver:

The Federal Inland Revenue Service (“FIRS”) issued a public notice approving the waiver of all outstanding interest and penalties imposed by the Service via its TaxPromax until 31 December 2022. The one-off waiver arose due to complaints from taxpayers about additional interests and penalties imposed on them while generating payment reference numbers on liabilities. The waiver applies to liabilities not from self-assessment but from monitoring, desk review, tax audit and tax investigation exercises until the deadline.

Circular on NASENI levy:

The National Agency For Science And Engineering Infrastructure Act, 2004 introduced the National Agency For Science And Engineering Infrastructure (“NASENI”). It made provision for the funding of the Agency, which among other things, includes a levy on income or turnover of commercial companies and firms with a turnover of N4 million and above, which shall be:

  1. at the rate of a quarter per cent in the first instance;
  2. collected by the Federal Board of Inland Revenue or by any other suitable means as may be specified by the Agency; and
  3. credited to the account of the Agency;

The circular issued by the FIRS now clarifies the administration of the NASENI levy. The levy shall now apply to commercial companies and firms in specific sectors with a turnover of ₦100,000,000 at the rate of 0.25% to be collected by the FIRS. The sectors covered are banking, mobile telecommunications, ICT, aviation, maritime, oil and gas sectors, particularly companies engaged in business activities that the primary regulators of the sectors regulate.

Circular on taxation of non-residents in Nigeria:

FIRS issued an updated circular on the taxation of non-residents in Nigeria. The circular provides a general description of the application of the Nigerian tax laws to non-resident individuals and companies, the extent of their liability to Nigerian taxes, and the payment procedure. The circular withdraws and replaces the 2011 circular on the subject matter.

Every company, resident or non-resident, is liable to Companies Income Tax (“CIT”) in Nigeria where the profits accrue in or are derived from, brought into or received in Nigeria. A non-resident individual becomes liable to tax from the day he commences a trade, business, vocation, employment or profession in Nigeria. However, where the employment is not exercised in Nigeria, the non-resident individual will be liable to tax on the employment income only if:

  1. the individual has spent 183 days in Nigeria; or
  2. the employer is in Nigeria or has a fixed base in Nigeria which bears the expense;or
  3. the employer is one of the Governments in Nigeria; or
  4. the individual is in employment as a seafarer or is performing standby duty on board a ship in Nigeria.

Nigeria has the first right to tax incomes arising in or derived from Nigeria. For incomes brought into Nigeria, relief will be granted for tax payable in the country where the income originated, where such country has a double tax agreement with Nigeria.

FIRS circulars on the implementation of the Petroleum Industry Act, 2021 (“PIA”):

In relation to the fiscal provisions of the PIA and to provide clarity on conversion, transition, compliance, apportionment and consolidation of cost and revenue and other issues which needed to c for the smooth administration of the Act, the FIRS issued the following circulars on the:

  1. Clarification on the Fiscal Provisions of the PIA in Respect of Conversion, Transition andCompliance Matters(the “Circular on Conversion and Transition”);
  2. Clarification on Sundry Fiscal Provisions and other Related Matters under the PIA (the “Circular on Sundry Fiscal Provisions”);
  3. Apportionment and Consolidation of Costs & Revenue under the PIA (the “Circular on Consolidation of Costs and Revenue”); and
  4. Clarification on Taxation of Production Sharing Contract (“PSCs”) and Incorporated Joint Venture Companies (“IJVCs”)Operations under the PIA (the “Circular on Taxation of PSCs and IJVCs”).

The Circular on Conversion and Transition requires all companies in the petroleum industry to transit to the full provisions of the PIA. However, companies in upstream petroleum operations which do not transit to the PIA regime will continue to be subject to the provisions of the Petroleum Profits Tax Act, Deep Offshore and Inland Basin Production Sharing Contract Act and other applicable laws till the expiration of their licences or leases. The circular detailed the application of Hydrocarbon Tax (“HT”) and CIT to companies in the upstream, midstream and downstream sectors. HT applies to all companies in upstream petroleum operations except companies in frontier acreage other than those reclassified by the Minister of Petroleum Resources and deep offshore operations, while CIT applies to all companies in the petroleum industry in the upstream, midstream and downstream sectors.

The Circular on Sundry Fiscal Provisions requires transited companies and companies with new licences or leases granted under the PIA, in ascertaining their chargeable profit for an accounting period, to subject their allowable costs to the Cost Price Ratio limit of 65% of the Gross Revenues for any accounting period.

The Circular on Consolidation of Costs and Revenue requires any company engaged in upstream petroleum operations, granted Petroleum Prospecting Licences (“PPLs”) and Petroleum Mining Leases (“PMLs”) to consolidate revenue and costs based on the two categories of chargeable tax. Hence, revenue earned and costs incurred from its PPLs, on which the profits are chargeable to tax at 15%, will be consolidated separately from its PMLs which are chargeable to tax at 30%. Transited companies that hold some Oil Prospecting Licences (“OPLs”) and Oil Mining Leases (“OMLs”) subject to tax under PPTA are also required to separately consolidate their operations on the OML that is taxable under PPTA to determine Petroleum Profits Tax payable, including a separate computation of CIT liability for its gas operations.

The Circular on Taxation of PSCs and IJVCs requires PSCs with an interest in the Model PSC under the PIA and PSC under the Petroleum Profits Tax Act and Deep Offshore and Inland Basin Production Sharing Contract Act to compute their tax separately for both regimes. IJVCs are also required to register for tax purposes with the FIRS, compute their tax liability, file returns and pay appropriate taxes applicable to their relevant operations as a company.

  • Public notice appointing telcos and deposit money banks as VAT agents:

The VAT Act empowers the FIRS to appoint any person as an agent for VAT collection.[11] Flowing from this authority, the FIRS issued a public notice appointing deposit money banks and some telcos as VAT withholding agents for taxable supplies made to them with effect from 1 January 2023. This appointment follows the initial appointment of Government ministries, statutory bodies and agencies as agents, as well as the appointment of companies operating in the oil and gas sector in 2007 as agents for collection of VAT on all taxable supplies made to them. Consequently, telcos and banks will withhold the 7.5% VAT on behalf of the FIRS, failure of which makes them liable to a penalty at the rate of 150% and 5% interest above the minimum rediscount rate of the Central Bank of Nigeria.

  • Circular on Tertiary Education Tax:

FIRS issued a circular to provide clarification on the administration of the Tertiary Education Tax (“TET”) under the TET Fund Act. The amended Act provides a TET rate of 2.5% on the assessable profit of a company registered in Nigeria other than small companies as defined in the CITA.

Circular on the taxation of companies engaged in shipping, air transport and cable undertakings:

FIRS issued a circular explaining the taxation of the income of foreign companies providing shipping or air transport in international traffic and cable undertakings. The circular issued pursuant to sections 14 and 15 of CITA and published on 11 May 2022 withdraws and replaces the earlier circular published on 3 June 2021.

Profits of a non-resident company from the operation of a business of transport by ships or aircraft strictly within the borders of Nigeria would have the same treatment as a Nigerian Company engaged in shipping or air transport business.

Two exemptions apply for the tax treatment of companies engaged in shipping or air transport in countries with Nigerian DTAs. These are DTAs that grant unconditional tax exemption to shipping or airlines of tax treaty partners and those that provide only conditional or reciprocity-based exemption. Regarding tax treaties granting unconditional tax exemption, the companies engaged in shipping or air transport are exempt from Nigerian income tax if they are residents of the treaty partner.

Public notice on the application of WHT on dividends, interest and royalties paid by treaty partners under the various DTAs:

By this notice, and following the approval of the Minister of Finance, Budget and National Planning, the unilateral application of a uniform WHT rate of 7.5% on dividends, interest and royalties paid by residents of Nigeria and beneficially owned by residents of Nigeria’s treaty partners under the Double Tax Agreements (“DTAs”) between Nigeria and other countries was discontinued. Accordingly, with effect from 1 July 2022, the applicable rate is 10%, except where it exceeds the maximum rate specified in the tax treaty. In that instance, the maximum rate specified in the tax treaty shall apply.

The Implementation of the Finance Act 2021

The Finance Act 2021 (“FA 2021”) took effect on 1 January 2022. It introduced significant tax regulatory changes, particularly the Capital Gains Tax Act, CITA, PITA, Customs & Excise Tariff (Consolidation) Act, Value Added Tax Act, Federal Inland Revenue Service (Establishment) Act, TET Fund Act and Nigeria Police Trust (Establishment) Act. This section highlights some key amendments and their effect on the tax space in 2022.

  1. CGT is chargeable on the disposal of shares at the rate of 10%, except:
  • the proceeds are reinvested in the acquisition of shares of the same company or any other Nigerian company within the same year of assessment shares of any Nigerian company;
  • where the total proceeds from the disposal of shares are less than N100 million in any consecutive 12-month period.
  • where the shares are transferred between an approved borrower and lender in a regulated securities lending transaction.
  1. The profits of any company engaged in educational activities are now subject to CIT. Previously, the profits of companies engaged in educational activities of a public character were not subject to [12] However, this is no longer the case with the extension of CIT to profits of such companies by the FA 2021 .[13]
  2. The FA 2021 provides that the FIRS is to assess, collect and enforce the payment of the Nigerian Police Trust Fund levy.[14] The levy was introduced by the Nigeria Police Trust Fund (Establishment) Act 2019 at 0.005% on the net profit of companies operating in Nigeria.[15] However, the FHC, Abuja Division, recently considered the constitutionality of the provisions of the Act, in the case of AG Rivers State v AGF & 3 Ors,[16] and declared the provisions of the Act to be unconstitutional, null and void. Hence, this levy is no longer applicable.
  3. The FIRS has the power to appoint any person to withhold or collect the applicable VAT, and such person shall remit the tax withheld or collected to the FIRS on or before the 21st of the following month.[17] Pursuant to this introduction, the FIRS recently appointed deposit money banks and some telcos as VAT agents.

[1] (1985) 1 NWLR (Pt. 3) 395.

[2] (2017) LPELR-43713(SC).

[3] As other companies, labelled startups operating in eligible industries under the Pioneer Status Incentives Scheme may apply to the Nigerian Investment Promotion Commission for grant of tax reliefs and incentives under the PSI. If granted, the startup will be entitled to a tax holiday for an initial period of three years, which may be extended for an additional two years.

[4] Section 61 of the Federal Inland Revenue Service (Establishment) Act, 2007.

[5] Regulation 1 & 2 of the Regulations.

[6] Regulation 15(1) of the Regulations.

[7] Regulation 15(2) of the Regulations.

[8] Regulation 16 of the Regulations.

[9] Regulation 17(1) of the Regulations.

[10] Regulation 17(2) of the Regulations.

[11] Section 14(3) of the VAT Act (as amended).

[12] See the case of American International School of Lagos (AIS) v FIRS, Unreported judgment, delivered on 29 July, 2015, in Appeal No: Unreported TAT/LZ/CIT/059/2014.

[13] Section 7 of FA 2021.

[14] Section 36 of FA 2021.

[15] Section 4(1)(b) of the Nigeria Police Trust Fund (Establishment) Act 2019.

[16] Unreported judgment, delivered on 26 January, 2022, in Suit No: FHC/ABJ/CS/511/2020.

[17] Section 31 of FA 2021.