Background

In a public notice dated 17 December 2021 (the “Notice”), the Federal Inland Revenue Service (“FIRS”) directed all international shipping companies (“ISCs”) operating in Nigerian territorial waters to regularise their tax compliance status. This notice applies to ISCs operating in Nigeria’s territorial waters whether as containerised, bulk cargo, fishing trawlers, crude oil or natural gas lifting vessels, dredging, survey, floating production storage and offloading (FPSO) or other gainful activities. Notably, the FIRS notified operators of international shipping lines (owned, hired or chartered vessels) and their agents to ensure full tax compliance immediately and conclude the regularisation of their tax compliance status no later than 28 February 2022.

In furtherance of the Notice, the FIRS issued demand letters to ISCs informing them of the commencement of a tax investigation for businesses conducted in Nigeria from 2010-2019 and back taxes that have accrued from 2010- 2019 years of assessment. The claims vary depending on the value of the cargo and the number of visits by the vessel but are in the range of US$400,000 to US$1,100,000 per vessel.

ISCs are understandably worried and have expressed concerns about the legal basis for FIRS’s actions. This newsletter x-rays the taxation regime for ISCs in light of the applicable legislations and examines the considerations that arise in the enforcement of FIRS demand letters to the ISCs.

Taxation of ISCs and General Compliance Obligations

Pursuant to section 14 of the Companies Income Tax Act 2004 as amended (“CITA”) profits of foreign/non-Nigeria companies derived from business operations of transport by ships or aircrafts in Nigeria are taxable in Nigeria and are expected to file tax returns pursuant to section 55(1A) of the CITA. Such profits are classified into freight income or non-freight income. The position of the law was clear as regards the tax base of non-resident ISCs until the collection of tax by the FIRS on demurrage and other ancillary income from inward carriage was challenged in CMA CGM Del Masa v. FIRS.¹

In this regard, by the amendment of the Finance Act 2020, the law is now clear that non-freight income are excluded from the provisions of section 14 of CITA and taxable under section 9 of CITA. However, it should be noted, especially in light of the ongoing investigations of ISCs, that there is still ambiguity regarding the approach to be adopted for business conducted prior to the Finance Act 2020 as the FIRS may persist in taxing such income in light of the decision in CMA CGM Del Masa v. FIRS.

In furtherance of Section 55(1A) of CITA (as amended), the contents of a tax return to be filed by a non-resident ISC are as follows:

1. The ISC’s full audited financial statements and the financial statement of the Nigerian operations, attested to, by an independent qualified or certified accountant in Nigeria;
2. Tax computation schedules based on the profits attributable to the ISC’s Nigerian operations;
3. A true and correct statement, in writing, containing the amount of profits from each and every source in Nigeria; and
4. A duly completed Companies Income Tax Self-Assessment Forms.

Also, the Finance Act 2023 introduces an amendment to the CITA² which makes it mandatory for non-resident companies (“NRCs”) engaged in shipping and air transport operations in Nigeria to present evidence of income tax filings for the preceding year, and tax clearance certificates (“TCCs”) showing income taxes paid for the three preceding tax years, in order to continue carrying on business in Nigeria or obtain any relevant approvals or permits.

Implication of Double Taxation Treaties (“DTT”) on the taxation of ISCs

Nigeria has executed DTTs with sixteen (16) Countries³ - Italy, United Kingdom, Belgium, Pakistan, Czech, Slovakia, France, Netherlands, Romania, Canada, South Africa, China, Philippines, Sweden, Spain, and Singapore. The provisions of the DTTs entitle ISCs incorporated within such jurisdictions to either a partial or full tax exemption on income derived from their operations in Nigeria. Therefore, any tax investigation and assessments by the FIRS will be required to take the provisions of the DTTs into consideration. As an example, Article 8 of the DTA between Nigeria and the UK, grants UK resident companies’ unconditional exemption from the payment of income tax in respect of profits derived from the operation of ships or aircraft in international traffic. On the other hand, certain DTTs specify a pre-condition for reciprocity, such that the relevant foreign company will only be exempted from tax payments or benefit from a reduced tax percentage, where there are Nigerian owned vessels that operate in international waters and operate in the relevant foreign country. As such, the assessments cannot be made on a blanket basis but should take into consideration the peculiarities of each ISC.

Impact of the Statutory Limitation Period for Tax Assessments on the Back Taxes

Section 35 of the Federal Inland Revenue Service Establishment Act 2007 (as amended) (“FIRS Act”) grants the FIRS powers to investigate or cause an investigation to be conducted to ascertain any violation of any tax law in Nigeria. Pursuant to section 66 (1) of CITA, the limitation period for tax investigations and assessments under Nigerian law is 6 years.⁴ The implication therefore is that the FIRS cannot raise assessments that exceeds 6 years except in circumstances of fraud, negligence or wilful default by the taxpayers. This is the position of the law as elucidated in Citibank Nigeria Limited v. Rivers State Board of Internal Revenue⁵ ; as well as Eco Bank v. Delta State Board of Internal Revenue⁶ ; where the Tax Appeal Tribunal stated emphatically that unless particulars of fraud, wilful default and negligence are specially proved by the tax authorities, tax assessments cannot exceed the limitation period of 6 years. Accordingly, if an assessment notice issued to an ISC exceeds 6 years, it is important to note that the burden of proving the particulars of fraud, wilful default and negligence is on the FIRS.

Jurisdiction Over Activities Outside the Exclusive Economic Zone

Section 1 of the Exclusive Economic Zone Act provides that “there is hereby denominated a zone to be known as the Exclusive Economic Zone of Nigeria which shall be an area extending from the external limits of the territorial waters of Nigeria up to a distance of 200 nautical miles from the baseline from which the breadth of the territorial waters of Nigeria is measured”. There is sparse guidance by the tax laws and judicial precedents on the taxation within the EEZ. As such, it remains a question whether business operations within the EEZ will be subject to tax as they may not be considered as loading from the Nigerian territory.

Attitude of the Present Administration of the Federal Government of Nigeria

In light of the legitimate fear and concern that foreign oil vessel owners may flee Nigeria and withdraw their services over what they see as excessive tax back charges, the national dailies reported on 20th June 2023⁷ that the Federal Government has set up a technical committee to resolve issues arising from the demand notice given to the ISC and vessel owners. The technical committee comprises the Nigerian Upstream Petroleum Regulatory Commission, Nigerian Midstream and Downstream Petroleum Authority, Nigerian National Petroleum Corporation, Federal Inland Revenue Service and the Presidency, in the Office of Chief of Staff, Special Adviser to the President on Energy and Special Adviser to the President on Revenue and the Secretariat will be the Federal Inland Revenue

The FG also gave ISCs a 3-month period to reconcile their accounts and a further grace period of 6 months to clear their ten-year outstanding tax bill, balance their accounts and avoid any tax penalty or liability for failure to comply in the outstanding years.

Conclusion

The recent directives and tax investigations initiated by the FIRS targeting ISCs have raised significant legal and compliance challenges. Affected ISCs should expeditiously engage with their legal and tax advisers who will help them understand the specific tax regulations and exemptions applicable to their operations in Nigeria. The FIRS should also ensure that enforcement mechanisms and guidelines are certain and clear to be able to achieve a fair and equitable resolution of the challenges posed by the tax compliance demands on ISCs.

1. (2021) 55 TLRN 28
2. Section 14 (6) CITA as amended.
3. FIRS Tax Treaties
4. Section 66 (1) CITA and generally, section 35
5. APPEAL NO: TAT/SSZ/017/2018
6. APPEAL NO: TAT/SSZ/005/2020
7. FG Takes Urgent Step to Avert Oil Vessel Withdrawal over Tax Charges