Generally, taxation is treated as having a significant cost on transactions and return of investment. As such it is common practice in many jurisdictions for companies intending to undertake a transaction to seek upfront, a quantification of the taxes that would apply to the transaction if completed, from the tax authority in charge of the relevant jurisdiction. This process if followed through usually gives rise to an Advance Tax Ruling (“ATR”). Simply put, ATR is a written memo issued by a tax authority expressing an opinion about how the tax laws apply to specific transaction(s). Put differently, it is the tax authority’s interpretation of a tax statute[s] and its [their] application to a specific transaction based on peculiar facts presented by the tax payer seeking the opinion. The OECD’s Glossary of Tax Terms defines advance ruling as “a letter ruling, which is a written statement, issued to a taxpayer by tax authorities, that interprets and applies the tax law to a specific set of facts” (See http://www.oecd.org/ctp/glossaryoftaxterms.htm).
ATR is generally considered to have strong merits – the most crucial of which is that it makes for clarity and consistency in tax administration, since the tax payer would have known upfront the quantum of tax triggered by its proposed activities. ATRs are widely recognized as creating legitimate expectations for taxpayers under general principles of administrative law; however, the binding force of an ATR over the tax authority (or legitimate expectation created) is limited to the very transaction or set of facts in respect of which an ATR was issued.
Interestingly, the general principles and understanding of ATRs as summarised above does not appear to apply clearly in Nigeria. In FBIR v. Halliburton (WA) Ltd (2014) LPELR – 24330 (CA), the respondent (Halliburton) sought to rely on representations contained in a circular issued by the appellant (FBIR) as creating a legitimate expectation in its favor. The Court of Appeal however held the position that the doctrine of legitimate expectation did not avail the respondent, and that the determining factor of tax liability is the tax statute itself. On the strength of the Court’s decision, the appellant was allowed to resile from its representations to the respondent.
It will be disclosed in this write-up that the Court of Appeal may have intended to depart from Halliburton in Saipem Contracting Nigeria Limited & 2 ors. v. Federal Inland Revenue Service & 2 ors. (Appeal No. CA/L/436/2014 – unreported judgment of the Court of Appeal delivered on 10 July 2018), and set a new precedent for ATRs in Nigeria. However, the Court failed to take a determinable, clear and definite position on the question: whether or not an ATR is binding on a tax authority in Nigeria, and by so doing failed to set a definite precedent in this area.
In the above referenced case, Saipem Contracting Nigeria Limited (“Saipem Nigeria”), Saipem (Portugal) Comercio Maritimo, SU, LDA (“Saipem Portugal), and Saipem S.A (altogether “Saipem”) entered into a contract with Shell Nigeria Exploration and Production Company Limited (“Shell”). Prior to the execution of the contract, Saipem Nigeria sought an ATR from the Federal Inland Revenue Service (“FIRS”) on the various taxes applicable to the contract with Shell. The FIRS provided its opinion on the taxes applicable to the transaction, and in particular, represented that (i) Saipem Portugal and Saipem S.A. were not liable to pay companies income tax, value added tax and withholding tax for the offshore component of the transaction in Nigeria, and (ii) Saipem Nigeria would not be liable to pay withholding tax for metal fabrication activities in Nigeria.
Based on the representation of the FIRS, Saipem proceeded to execute the contract with Shell. After the contract had been performed by the Saipem entities, the FIRS issued an assessment notice on Saipem Portugal and Saipem S.A. for companies income tax, value added tax and withholding tax for the offshore component of the work done under the contract, and same on Saipem Nigeria for withholding tax on the manufacturing fabrication carried out in Nigeria. The Saipem entities thereafter commenced an action at the Federal High Court Lagos by originating summons inviting the Court to determine (amongst other questions), whether the FIRS can contrary to its ATR issue the aforementioned assessment notices on the Saipem entities. In resolving the issue raised in favour of the FIRS, the Federal High Court held that the FIRS is not bound by its ruling if the ruling is incorrect and contrary to law. In the Court’s opinion, “it is not the issue of resiling of earlier statement [sic] that is important now. What is important are the various provisions of law guiding payment of tax in Nigeria“. On this basis, the Court held that FIRS could resile from its representation to Saipem.
Saipem appealed against the decision of the Federal High Court at the Court of Appeal on several grounds including the ground that the Federal High Court erred when it held that FIRS can resile from its earlier representation. In particular, the appellants (Saipem) raised for the determination of the Court of Appeal, the issue whether the FIRS can resile from the earlier representation made to it on its tax liability. On 10 July 2018, the Court of Appeal dismissed the appeal but however failed to specifically affirm or overturn the Federal High Court’s decision that the FIRS can indeed resile from its representation, if the representation fails to conform with the law relying on any legal basis. The Court of Appeal rather proceeded to determine the issue on factual grounds. The Court found as a fact that: (i) Saipem did not rely on FIRS’ representation as the entities had already contracted with shell before seeking and obtaining the ATR from FIRS, and (ii) FIRS did not derogate from its representation and that its demand for the taxes was consistent with its ATR. On this basis, the Court of Appeal concluded that the FIRS is not estopped by law to “determine the tax liability arising from” Saipem’s contract with Shell.
The decision of the Court of Appeal has done more harm than good in terms of providing a definite position on the binding force of ATRs under Nigerian’s tax jurisprudence. It is clear from the summary above that the Court of Appeal failed to provide any legal analysis or conclusion on whether or not ATRs issued by Nigerian tax authorities are binding, and in what circumstances such ATRs can be revoked. The Court of Appeal merely made a general statement on the conditions for the applicability of estoppel and proceeded to evaluate the evidence before it (an issue of fact), and drew a conclusion that the FIRS cannot be estopped by law from determining Saipem’s tax liability.
It is noteworthy that the Court of Appeal’s decision is so fluid that it is capable of more than one interpretation. One interpretation can be that the Court of Appeal upheld the decision of the Federal High Court to the effect that ATRs are not binding and what is relevant is the Court’s interpretation of the tax statute. This argument may find support from the conclusion of the Court of Appeal to the effect that: “the 1st Respondent (i.e. the FIRS) is not estopped from applying the provisions of the law to determine the tax liability of the Appellants (i.e. Saipem)…”. It could be argued that the conclusion of the Court of Appeal reiterates the decision of the Federal High Court.
Another interpretation, which appears to be more potent is that by delving into the question: whether or not Saipem relied on the ATR issued by the FIRS and whether or not the FIRS resiled from the ATR, the Court of Appeal has impliedly overruled the Federal High Court and endorsed the position that the FIRS cannot resile from its representation to Saipem (whether or not it was inconsistent with any subsequent interpretation of statute), such that if Saipem had proved that it relied on the representation, and that the FIRS resiled from the representation, then the FIRS would have been bound. The essence of this argument is that if it was the intention of the Court of Appeal that ATRs are not binding on the FIRS (whether generally or in limited circumstances), the Court of Appeal would not have proceeded to delve into the facts of the Saipem case and the evidence before it as such determination will only be academic. The law as it is in Nigeria is that the Courts are not allowed to engage in hypothetical or academic evaluations or determinations.
The second view above is further strengthened by the Court’s position that Saipem was entitled in law to rely on estoppel “as a sword” in demanding that the FIRS conforms with its representation. The Court proceeded on this basis to hold that “In order for estoppel to apply, the representation made has to be one which the 1st Respondent (i.e. FIRS) has resiled from and which the Appellants (i.e. Saipem) acted upon to their detriment”. This goes to show that the Court of Appeal had invariably intended to set down a new principle, which essentially is that the FIRS are bound by estoppel from resiling from ATRs issued to taxpayers. However,whilst it appears that the Court of Appeal intended to lay down a new precedent that supports the bindingness of ATRs in Nigeria on the basis of estoppel, being a determination founded substantially on the facts of the Saipem case, the Court of Appeal’s decision in Saipem can hardly apply as judicial precedent in this area.
In Tejumade Clement & anor. v. Bridget Iwuanyanwu & anor. (1989) 3 NWLR (PT. 107) 39 AT 54, the Supreme Court while explaining the meaning of judicial precedent (also known as stare decisis) stated as follows: “Stare decisis means to abide by the former precedent where the same points come again in litigation and it presupposes that, the law has been solemnly declared and determined in the former case and thus precludes the Judges of the subordinate Courts from changing what has been determined”. To the extent that the decision of the Court of Appeal in Saipem did not “solemnly” or absolutely define the binding force of ATRs in Nigeria, the last word on this issue arguably is the decision of the Court of Appeal in Halliburton.
It cannot be denied that there is a conflict between Halliburton and Saipem –Halliburton expressly excluded the applicability of estoppel in ATRs, while Saipem seems to have endorsed it. However, given that the decision of the Court of Appeal in Saipem did not set down determined principles (as it is based substantially on the facts of Saipem’s case), and the confusing interpretations that can be given to that decision, it is very likely that lower Courts as well as the Court of Appeal will follow the jurisprudence in Halliburton.
In view of the foregoing, the advice to tax payers who intend to obtain tax advice on transactions is to rely less on representations made by the FIRS or any other tax authority, and much more on the advice of competent and reputable tax adviser which is premised on a dispassionate interpretation of the letters of the law. It is very crucial to adopt this approach because, indeed, the tax man can eat his cake and have it.
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