Using the Tax Appeal Tribunal as an Instrument of Promoting a National Tax Policy



Saturday, February 14, 2015 12.50 PM /  By Olumide K. Obayemi

Revisiting NAOC vs FIRS and Shell vs FIRS.

Section 10(1)(g) of the Petroleum Profits Tax Act, Cap P13, Laws of the Federation of Nigeria (2004) (“PPTA”) allows deduction of interests on intercompany loans. The conditions for deductibility include: (a) the loans were secured at arm’s length; and (b) the interests have been paid.

In this regard, Section 10(1)(g) of PPTA provides thus:


(1) In computing the adjusted profit of any company for any accounting period from its petroleum operations, there shall be deducted all outgoings and expenses wholly, exclusively and necessarily incurred, whether within or without Nigeria, during that period by such company for the purpose of those operations, including but without otherwise expanding or limiting the generality of the foregoing-



(g) all sums incurred by way of interest on any inter-company loans obtained under terms prevailing in the open market, that is the London Inter-Bank Offer Rate, by companies that engage in crude oil production operations in the Nigerian Oil Industry…

Further, Section 13(2) of the PPTA also provides: 


13. Deductions not allowed

(2) Notwithstanding the provisions of subsection (1 ) (d) of section 10 of this Act, in computing the adjusted profit of any company of any accounting period no deduction shall be allowed in respect of sums incurred by way of interest during that period upon any borrowed money where such money was borrowed from a second company if during that period-


(a) either company has an interest in the other company; or


(b) both have interests in another company either directly or through other companies; or


(c) both are subsidiaries of another company.


(3) For the purposes of subsection (2 ) of this section -


(a) a company shall be deemed to be a subsidiary of another company if and so long as an interest in it is held by that other company either directly or through any other company or companies;


(b) an interest means a beneficial interest in issued share capital (by whatever name called); and

(c) the Board shall disregard any such last-mentioned interest which in their opinion is insignificant or remote, or where in their opinion that interest arises from a normal market investment and the companies concerned have no other dealings or connection between each other.

When faced two similar cases, would a Nigerian court issue conflicting decisions as occurred in TSKJ Construction International Sociadade Unipessonal Lda v Federal Inland Revenue Service (2014) 13 TLRN 1 and NNPC v Tax Appeal Tribunal (TAT) & Ors (2014) 13 TLRN 39, or would the court apply the rule of stare decisis and create uniformity and certainty in application of legal rules and statutes?

On two separate occasions, i.e., on September 18, 2014 and on January 22nd, 2015, the Lagos Zone of the Nigerian Tax Appeal Tribunal (“TAT”) Nigerian Agip Oil Company Limited vs Federal Inland Revenue Service,(2014) 16 TLRN 25 and The Shell Petroleum Development Company of Nigeria Limited vs Federal Inland Revenue Service, Consolidated Appeal Nos: TAT/LZ/003/2014 & TAT/LZ/006/2014, respectively.

Both decisions, in principle, furthered the underlying principles of the Nigerian National Tax Policy, whose goals, including that of the present Nigerian appeal system are aimed at meeting the expectation of all tax stakeholders, i.e., that the 2007 establishment of the TAT would reduce the incidence of tax evasion, ensure fairness and transparency of the tax system, minimize the delays and bottlenecks in adjudication of tax matters traditional court system, improve the tax payers’ confidence in the Nigerian tax system, provide opportunity for expertise in tax dispute resolution, provide avenue for effective involvement of parties, focus on facts rather than legal technicalities and promote early and speedy determination of matters without compromising the principle of fairness and equity.

In the first case, i.e., Nigerian Agip Oil Company Limited vs FIRS, the court conducted a historical review of the PPTA starting from 1959 until 1999, and also examined the concept of “expense deductibility test” under Section 24 of CITA.

In Nigeria, the “expense deductibility test” states that any expense that is “wholly, exclusively, necessarily and reasonably incurred” by a company is deductible by the company in filing its returns. Under the PPTA, the applicable tax is 85% in Nigeria. Agip had taken a loan from its sister corporation (Eni) in 2001 (at the first glance, the loan satisfied the “expense deductibility test”), and Agip had repaid the instalments between 2001 and 2011, along with interests. The terms of the loan were open-market and also satisfied the London Inter-Bank Offer rate (LIBOR).

FIRS sought to disallow the deductibility of the interests by Agip, by relying on Section 13(2) of PPTA that was originally enacted in 1959, which expressly disallowed the deduction of interests paid on a loan between related entities. However, Agip relied on the 1999 amendment to the PPTA as contained in Section 10(1)(g), which similarly expressly allowed deductibility of interests paid on loans between related corporations, in so far as the terms of the loan were open-market and also satisfied the LIBOR.

The court had to determine which of the clearly conflicting legislation would apply. In resolving the quagmire, the court expressly adopted the dictum of Tobi JCA (as he then was) in Onagoruwa v. The State, (1993) 7 NWLR (Pt 303) page 49 at page 102 that one can examine the legislative history of an Act of Parliament to determine, construe and interpret the law. In sum, the court upheld and allowed the deductions by Agip Oil, by holding that the legislative intent was to allow Section 10(1)(g) as an exception to bars imposed under Section 13(2) of PPTA. The TAT held thus:

Section 13(2) disallows any tax deductions on sums incurred by a company through any inter-company loan transaction. This appears to contradict the provisions of Section 10(1)(g) that allows tax deductions on interests on loans between related companies when they deal at arm’s length.

But we must construe the legislative intention behind the introduction of Section 10(1)(g) to the Act. Section 10(1)(g) was introduced as a later amendment. The provisions of Section 13(2) have always been part of the Act as Section 11(2). The legislature intends that for tax purposes related companies should, from the enactment of Section 10(1)(g) begin to enjoy the tax deduction always allowed non-related companies when they transact as though unrelated.


These provisions are not necessarily inconsistent with each other. It is the ‘seemingly conflicting parts are to be harmonised if possible so that effect can be given to all parts of the constitution’ Pa Ogundare, JSC of blessed memory in Ishola v Ajiboye (1994) 6 NWLR (Pt 352) 506 at 558-9. This pronouncement applies with equal statutory provisions. A community reading of these two provisions state that interest on inert-company loans are not deductible in computing adjusted profit, except as per Section 10(1)(g) where such loans are obtained under terms prevailing in the open market. Thus whether deductions are deductible or not, on interest on inert-company loans, depends on that specific arms-length litmus test.

The arms-length litmus test was also applied in Shell vs FIRS. There, under the Shell’s joint venture with the Nigerian National Petroleum Corporation (NNPC), NNPC had some financial obligations, and the joint venture provides that should NNPC fail to meet these obligations, Shell must take measures to fill the funding gaps. Further down the road, NNPC failed to meet its financial obligations, and Shell got loans from two sister companies: Shell Petroleum N.V and Shell Oman Trading Limited.

In computing its tax returns for those years, Shell deducted interest that it had paid on the loans. However, rejecting these deductions, FIRS assessed Shell to additional PPT and subsequently Educational Tax (EDT) liability, for US$94,707,348 and US$2,228,408 respectively.

Shell contended that it was not liable to pay additional PPT and EDT because the deductions that FIRS disallowed were valid as such were allowed under section 10(1)(g) of PPTA. Responding to FIRS’ invocation of section 13(2) of PPTA, Shell traced the legislative history of sections 10(1)(g) and 13(2) of PPTA, and submitted that section 13(2) existed prior to section 10(1)(g) being introduced into PPTA in 1999. Shell then argued that the sections conflict and thus section 13(2), being the earlier clause, ought to have been repealed. Shell urged TAT to invoke the doctrine of implied repeal to exclude the application of section 13(2) of PPTA.

Further, Shell argued that even if section 13(2) of PPTA were in force, at best it modifies section 10(1)(f) of PPTA not section 10(1)(g), by relying on NAOC v FIRS (above), where the TAT similarly upheld the deductions of interests paid on intercompany loans obtained at arm’s length.

The FIRS, in opposition, contended that while section 10(1)(g) of PPTA provides for loans between companies generally, section 13(2) provides for loans between sister companies specifically. FIRS maintained that section 13(2) of PPTA operated as a proviso to limit the generality of section 10(1)(g) of PPTA, and that section 10(1)(g) did not apply here because the borrower and lender were related companies, i.e., the provision that governs loans between related entities is section 13(2), not 10(1)(g), and under section 13(2), interests are not tax deductible.

In ruling in favour of Shell, just as it had previously found in NAOC vs FIRS, by applying the arms-length litmus test. According to the TAT in Shell v FIRS:

The Appellant borrowed the funds from two sister companies. Section 10(1)(g) allows deduction of interest on intercompany loans whenever those loans are obtained at arm’s length. It says nothing about the relationship between lender and borrower. The Appellant’s loans from its sister companies were at arm’s length and therefore qualify for interest deductions under section 10(1)(g). This conclusion is consistent with our earlier decision in Nigerian Agip Oil Company Ltd v FIRS (TAT/LZ/015/2014 & TAT/LZ/016/2014, Unreported, decided 19 September 2014). We set aside the 2007-2011 PPT Notice of Additional Assessment no. PPTBA 95 and EDT Notice of Additional Assessment no. PPTBA/ED 87.

We conclude by commending the TAT by issuing consistent and uniform decisions in both cases. Certainty and uniformity are great hallmarks of an efficient tax system.

A good tax system must be certain and not arbitrary. In addition, where the courts issue conflicting judgments, such would cause resentment and often a decline in tax payer morality.

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