Legal validity of advanced tax rulings in Nigeria - Saipem v FIRS


Monday, September 22, 2014 3.58PM / By Olumide K. Obayemi




Double Taxation Agreement is not meant to give the tax which is due to one country to another but to ensure [that] the same income is not taxed by two different countries. - Honourable Justice Saliu Saidu in Saipem vs FIRS.

Since the return to democratic government in Nigeria, on 30th May 1999, Nigeria has embarked on the introduction of open market legislation, removal of limitations on foreign ownership, granting of financial incentives to Nigerian investors, importation tariff elimination, pioneer status and tax incentives, the elimination of restrictions placed on foreign capital importation, the reduction of import duties, and an overhauling of Tax legislation.


Herein, we examine the legal effect of Advance Tax Rulings in Nigeria in the context of rules of natural justice that frown against Ex Post Facto laws. We adopt the working definition provided by the United States Internal Revenue Service (IRS) that Advance Tax Rulings (ATR) is 


a written statement issued to a taxpayer or his authorized representative by the National Office which interprets and applies the tax laws to a specific set of facts.” See, 26 C.F.R. § 601.201(a)(2).


On Friday, March 27, 2014, Honourable Justice Saliu Saidu of the Federal High Court, Lagos, in Saipem Contracting Nigeria Ltd & Ors vs Federal Inland Revenue Service & Ors, Suit No.: FHC/L/CS/1081/09 issued a decision stating that a single Consortium Contract containing offshore and onshore elements to be performed by two (2) separate local and foreign subsidiary of a global conglomerate may have its onshore part taxable under Sections 9, 11, 13 26 and 30 of the Nigeria Companies Income Tax Act, Cap C21, Laws of the Federation of Nigeria (2004) (CITA).


More troubling is the weight to be given to Advanced Tax Rulings (ATR) sought and received by the taxpayer from the Federal Inland Revenue Service (FIRS), prior to embarking on a transaction with significant tax implications as was evident in the Saipem decision. Justice Saidu, relying on the matrimonial case of Menakaya vs Menakaya (2001) 16 NWLR (Pt. 738) 203 held that FIRS may resile from and/or revoke the ATR, after the taxpayer may have planned and relied on the ATR as stating the FIRS’ position in Nigeria. According to Justice Saidu:


“Notwithstanding whatever representation [that] the 1st Defendant [FIRS] might have made to the Plaintiffs [Saipem] as to their tax regime or status, it is the law that guide payment of tat that [must] prevail...Therefore, it is not the issue of resiling of earlier statement that is important now. What is important are the various provisions of law guiding payment of tax in this country. I hereby hold that nothing stopped the [FIRS] from resiling their earlier statement to the Plaintiffs, where such statement does not conform with the law. Issue of payment of Tax is completely that of law.


As we shall see below, the Menakaya decision is completely factually and legally distinguishable. Further, in the United States, Advance Tax Rulings (ATR) have a de facto precedential effect, since they are all published and easily accessible, and the IRS has a duty of consistency toward similarly situated taxpayers.


The facts of Saipem case were that the Plaintiffs, Saipem Nigeria, Saipem Portugal and Saipem Parent Company (France) entered into Consortium Turnkey contract for construction, installation and fabrication that were to be performed in Portugal and Nigeria. The importer of the finished products was Shell. Section 11, Article 36.8 of the contract stated that both offshore and onshore elements of the contract were taxable in Nigeria and that Saipem was liable as the taxpayer. Further, Section 11, Article 22.2(b) also stated that where Saipem was able to provide a tax exemption certificate, Shell, will not withhold tax due to FIRS under Section 82 of CITA. In 2009, Saipem engaged astute Tax Scholar, Professor Taofeeq Abdulrazaq of Saffron who then obtained a tax opinion (Advanced Tax Ruling) from FIRS stating that profits from services performed in Portugal will not be taxable in Nigeria.


Nevertheless, in 2011, the FIRS resiled and withdrew their statement, and, claiming that the earlier tax exemption letter issued to Saipem was issued in error. FIRS thereafter imposed VAT tax, Withholding Tax and tax under CITA.


Represented by Layi Babatunde, SAN, Saipem filed an originating summons before the Federal High Court (FHC). First, relying on AG Rivers vs AG Akwa Ibom (2011) 3 SC 33, Adekeye vs Adeshina, (2011) 12 SC (Pt 11) 1, OAU vs Onabanjo, (1991) 5 NWLR (Pt 193) 549 at 567; Ayuya vs Yonrin, (2011) 4 SC (Pt II) 1 at 56, and the Canadian decision in Minister of Health & Social Services vs mount Sinai, (2001) 5 SCR 281, claimed that the tax opinion earlier obtained from the FIRS exempting the services performed in Portugal was binding and that the FIRS was stopped from withdrawing that position since Saipem had already acted on the opinion and thereafter changed its economic position to its detriment.


Second, Saipem claimed that under Section 13(2)(c)(c) and 9(1) of CITA income of a non-resident corporation was not subject to tax in Nigeria, since Saipem Portugal and Saipem Parent Company neither had a fixed base nor a permanent establishment in Nigeria.


Finally, Saipem argued that under Section 7 of the Double Tax Treaty between Nigeria and France (DTT), income of Saipem Parent Company was exempted. Therefore, if the DTT does not apply, a non-resident company (NRC) will only be taxable if the income is derived from Nigerian business activities. 


The FIRS, relying on Sections 9(1)(a), 11(2), 13(2)(c), 26(b) and 30(b)(iii) of CITA and Offshore International vs FBIR (2011) 4 TLRN 59, at 78-82, countered arguing that the entire contract was a single contract, and so Shell had a legal obligation to withhold tax on payments to Saipem. Further, FIRS argued that since it was not the global income of Saipem that was being taxed but profits from Nigerian contract, the exemption under the DTT does not apply.


Representing the Federal Attorney General, Bello Salihu of Ajumogobia & Okeke argued that an examination of the Turnkey Agreement between Saipem and Shell shows that Section iv sets the scope of the contract while Clause 5.5 therein stipulates the obligations and extent of the construction and installation. A wholistical examination shows that it is a single contract under Section 13(2)(c) of CITA and does not fall under any of the exemption under Section 23(1) of CITA, and, thus, under Section 82 of CITA the profits flowing from the single contact are subject to withholding in Nigeria.


Shell, represented by Gbolahan Elias, SAN, Shell is only liable for VAT tax at the tax point, i.e., at the importation point when the finished products from Portugal arrive in Nigeria after the services rendered offshore are incorporated into tangibles.


Justice Saidu in summary held that (a) the FIRS was entitled to withdraw their earlier tax opinion since payment of tax were stated under the CITA, such could not be privately altered between Saipem and FIRS; (b)  Saipem are not consumers and so are not subject to VAT tax; and (c) since all the necessaries leading to the single consortium/turnkey contract including execution and payment were taking place in Nigeria, the Saipem companies were deriving profit in Nigeria, and that, that part of the income attributable to Nigeria is subject to CITA tax.


The matter is presently on appeal before the Court of Appeal.


Within the context of the Nigerian government to attract foreign investment, certainty and consistency are needed to assure the investors. If the FIRS is allowed to change their position whimsically, the aim and intent of the government would be defeated.


In Nigeria, a non-resident company (NRC) is a company or corporation that is not registered or incorporated in Nigeria but which derives income or profits from Nigeria. Exemption from incorporation does not confer exemption from payment of tax on any company. Every company, resident and non-resident, is liable to tax in Nigeria if its income is liable to tax under the provisions of the CITA. Thus, Nigerian tax laws do not exempt the income of a branch from tax. Further, an individual or corporation may have dual or multiple residence status. The NRC generally has two sources of income (a) Global Income: income from its global operation subject to tax only in its country of incorporation and (b) Nigerian income: income attributable or derived from operations in Nigeria, subject to tax in Nigeria.


Further, in the US, an Advance Tax Ruling is an official pronouncement of the IRS’s National Office that applies the Internal Revenue Code (IRC) and Regulations to a particular set of facts. The Ruling is usually written in response to a taxpayer request. Taxpayers may rely on them or appeal their position to the Tax Court or other Federal court.


We therefore state the case for bindingness of ATR. Empirical studies show that it is now globally recognized as an indispensable part of tax jurisprudence. First, according Yehonatan Givati, considering the problem of legal uncertainty and its consequences given the magnitude of tax disputes, most tax scholars see the advance tax ruling procedure as an indispensable tool in the modern world of tax administration and compliance. Second, advance tax rulings have received considerable attention from tax scholars and practitioners in recent years. Third, the importance of the advance ruling procedure has been widely accepted by tax administrations around the world, and, so, in recent years more and more countries have established an advance tax ruling system. For instance, as of 2005, Austria, Belgium, France, Ireland, Japan, Switzerland, Turkey, Argentina, Brazil, Chile, China, Cyprus, Estonia, India, Latvia, Lithuania, Malta, Singapore, and South Africa, amongst others, now provide an advance tax ruling procedure to their taxpayers.


We submit that Nigeria must not be left out in the race towards the 23rd Century. Judicial policy must favour certainty and consistency of tax laws


We further submit that the fact that FIRS sought to change its position after stating an earlier written advisory that the SAIPEM income were not taxable. It amounts to an ex post facto rule and enforcement by FIRS. An ex post facto law (Latin for "from after the action" or "after the facts") is a law that retroactively changes the legal consequences (or status) of actions that were committed, or relationships that existed, before the enactment of the law. In criminal law, it may criminalize actions that were legal when committed; it may aggravate a crime by bringing it into a more severe category than it was in when it was committed; it may change the punishment prescribed for a crime, as by adding new penalties or extending sentences; or it may alter the rules of evidence in order to make conviction for a crime likelier than it would have been when the deed was committed.


A tax legislation that seems to target certain taxpayers might raise concerns under the equal protection guarantees of the Nigerian Constitution. It seems possible that retroactive tax legislation could, depending on its specifics, meet the criteria to be a bill of attainder. The two main criteria that courts have used to determine whether legislation is an unconstitutional bill of attainder are (1) whether specific individuals are affected by the statute (“specificity” prong), and (2) whether the legislation inflicts a punishment on those individuals (“punishment” prong).


For instance, in the United States, retroactive tax legislation potentially implicates the Due Process Clause of the Fifth Amendment, which states that no person shall “be deprived of life, liberty, or property, without due process of law.”


Along the same line, Section 44 of the 1999 Nigerian Federal Constitution states as follows: 


44. (1) No moveable property or any interest in an immovable property shall be taken possession of compulsorily and no right over or interest in any such property shall be acquired compulsorily in any part of Nigeria except in the manner and for the purposes prescribed by a law that, among other things -


(a) requires the prompt payment of compensation therefore and


(b) gives to any person claiming such compensation a right of access for the determination of his interest in the property and the amount of compensation to a court of law or tribunal or body having jurisdiction in that part of Nigeria.


A good example is Nichols v. Coolidge, 274 U.S. 531 (1927), where the taxpayer transferred property to a trust in 1907, with the income going to the taxpayer during life and the corpus to the taxpayer’s heirs at death. The 1919 estate tax provision included transfers taking effect upon death in a descendant’s taxable estate. The taxpayer died two years later. In holding that the 1919 provision did not apply to the 1907 transfer, the Court wrote that the law violated due process because it was “arbitrary, capricious and amounts to confiscation” in that it included the pre-1919 transferred property in the taxable estate “merely because the conveyance was intended to take effect in possession or enjoyment at or after his death” and out of concern that “[d]iffferent estates must bear disproportionate burdens determined by what the deceased did one or twenty years before he died.”

The Saipem case is presently on appeal. Hopefully, tax consideration and goals will serve as guideposts for the Appellate Court.


*Olumide K. Obayemi, Faculty of Law, Lagos State University, Lagos, Nigeria


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