Background
In 2002, the FIRS raised additional assessments against Halliburton West Africa Limited (“HWAL”) in respect of recharges to its Nigerian affiliate for services performed under various tripartite agreements. Dissatisfied with the decision of the FIRS, HWAL filed an appeal to the then Body of Appeal Commissioners (“BAC”) which ruled in favour of the FIRS. HWAL subsequently challenged the ruling of the BAC at the Federal High Court (“FHC”) which ruled in its favour.
The additional assessments arose from the contractual arrangement between HWAL, a non-resident company and its Nigerian affiliate, HESNL. HWAL and HESNL had entered into a tripartite agreement to provide services to third parties in Nigeria. The parties agreed that HWAL would pay HESNL 100% of its expenses in addition to management fees of 4%. It was the non-inclusion of the amount paid to HESNL by HWAL in the turnover of HWAL that led to the dispute.
In filing its self-assessment returns, HWAL had deducted the recharges to HESNL in arriving at the net turnover on which it computed its deemed profit under section 26 of the CITA.
Section 26 of CITA provides that:
“Where… it appears to the FIRS that in any year of assessment, the trade or business produces either no assessable profit or assessable profits which in the opinion of the FIRS are less than might be expected to arise from that trade or business or… the true amount of the assessable profits of the company cannot be readily ascertained, the FIRS may… assess and charge that company for that year of assessment on such a fair and reasonable percentage of that part of the turnover attributable to the fixed base…”
In practice, in assessing non-resident companies to tax, the FIRS relies on this provision to deem a profit ratio of 20% of turnover derived from Nigeria (implying a cost ratio of 80%). This is then taxed at the corporate tax rate of 30% resulting in an effective tax of 6% of turnover.
HWAL had applied this rule but based on its net turnover (after deduction of recharges to HESNL) and not the gross turnover. The additional assessment raised by the FIRS was therefore 6% of the amount recharged to HWAL by HESNL.
The BAC ruled that deduction of the recharges were illegal on the basis that the payments in earning turnover either as overhead or otherwise were irrelevant to the implementation of the provision of section 26.
The FHC however disagreed with the BAC and ruled that the additional tax amounted to double taxation as HESNL would have already paid tax on the amount it received. The court held that HWAL was entitled to deduct recharges under a tripartite arrangement in arriving at its turnover for deemed profit purposes under section 26.
Overview of the CA judgment
Position of the FIRS
The FIRS disagreed with the ruling of the FHC and filed an appeal before the Court of Appeal (“CA”). The FIRS raised the following issues for determination:
· Whether the FHC misdirected itself in setting aside a finding of facts made by the BAC and whether HWAL could take advantage of an illegal contract. The BAC had on its own without been asked by the parties opined that the tripartite contracts were illegal on the basis that the offshore companies were not incorporated in Nigeria under section 54 of CAMA.
· Whether the FHC erred in invalidating the additional assessment to tax and,
· Whether there was any legal basis for the FHC to hold that there was double taxation.
The FIRS argued that taxing the entire sum received by HWAL did not amount to double taxation and that there was no description of turnover split between the parties in the main contracts.
Position of HWAL
HWAL contended that it was entitled to deduct the recharges on the basis that both HWAL and HESNL were contractors under the tripartite agreements and there was no evidence that the said income would go entirely to HWAL. In addition HWAL argued that by the effective construction of section 26, HWAL a foreign company not registered in Nigeria, could legally do business in Nigeria through HESNL.
HWAL also sought a ruling on whether a legitimate expectation had been created based on the circular issued by the FIRS as well as well as confirmation from some of its senior officers regarding the treatment. The FIRS had issued a circular in 1993 and made other representations to Halliburton on which the company had placed reliance in its contractual arrangement.
The Judgment
The CA delivered its judgment in favour of the FIRS and held that the FHC was wrong to rule that there was double taxation. According to the judge taxing the full income would only amount to double taxation if the same income is taxed more than once in the hands of a single taxpayer.
Since the main thrust of the decision of the FHC was that the additional assessment amounted to illegal double taxation, the decision of the FHC was therefore set aside.
The CA also ruled that the legality of the tripartite agreement under section 54 of CAMA did not affect the taxability of the said amounts and was irrelevant to the main dispute.
On the question of legitimate expectation the court took the view that for a party to avail itself of the benefits of the legitimate expectation, the representation on which it seeks to place reliance must not be inconsistent with statutory provisions.
Furthermore, the party seeking to place reliance on the doctrine of legitimate expectation must have disclosed all the material facts to the tax authority making the representation.
The takeaway
The ruling has far reaching implications especially for non-resident companies who had relied on the earlier judgment of the FHC in planning their tax affairs and entering into tripartite arrangements.
Since the main issue that was addressed by the CA in this decision is whether the deduction of recharges amount to double taxation, the main tax dispute in similar cases still remain unresolved.
The question that should have formed the basis on which the additional assessment will be upheld or discharged is whether based on the arrangement between the parties, the recharge was part of the turnover attributable to HWAL or not.
Put differently, was the recharge an expense to HWAL such that it should form part of the 80% deemed cost and HWAL should therefore not take further deductions in which case the additional assessment should be upheld; or was the recharge an allocation of revenue between the parties such that the recharge was never part of the revenue of HWAL and the additional assessment was excessive and should have been discharged?
The FIRS will seek to apply this decision to all cases in which there are “recharges” whether the facts are similar or not. Companies would need to reassess their tax exposures in line with the current ruling and review their uncertain tax positions where necessary.
Affected companies would need to be prepared to initiate legal proceedings to challenge an assessment where the facts are distinguishable from the particular facts of this case. However, they must ensure that the issues in dispute are properly articulated in order to aid proper resolution.
Taxpayers must also be cautious when relying on a clarification, ruling or circular issued by the FIRS. A taxpayer should only rely on a representation from a tax authority if the representation is consistent with statutory provisions.
Moshood Olajide & Chukwuemeka Onuoha
