ARE RELIGIOUS BODIES AND THEIR EMPLOYEES TAXABLE IN NIGERIA?

ARE RELIGIOUS BODIES AND THEIR EMPLOYEES TAXABLE IN NIGERIA?



By
*M. T. Abdulrazaq

Two years ago and in an animated but friendly discussion with a state tax official I had mischievously challenged him to seal the Temple of any of the tax defaulting African traditional religions in exercise of the powers of the tax authorities to distrain the premises of tax defaulters. I also encouraged him to collect sales tax on the provision of traditional amulets, fetish waist bands, local gourds, cowry necklaces and black soap made with vulture heads or that he should test the waters and cart away the divination objects and shrine of any of the gods of African traditional worship. The tax official, luckily, ignored the challenge and I was happy for him.

The recently reported disputations and alleged physical aggressions between a religious body institution and a State Internal Revenue must attract due attention. Tax collection is serious business and could be a dangerous venture as lessons from other lands show, for example, in Russia in 1996, 26 tax collectors were killed and 74 injured in the course of their work, six were kidnapped and 41 had their homes burned down. Nigerian history also tells us about the Aba tax riots of 1929.

However, there is absolutely no justification to physically attack tax officials and such attacks are unacceptable in a civilised society and must be heavily punished.

We all know that paying tax is not a favourite past time of anyone and tax officials are not our beloved persons but the law must be obeyed. We need to put sentiments aside and respond to the question whether religious bodies and their employees are taxable in Nigeria?

There are five issues to consider in this matter. What are those five issues?

The first issue is the need to determine the legal status of the religious body and the state legislative provisions. In other words, what is the nature of the religious body? Is it registered by the Corporate Affairs Commission? Is it registered under the various individual constituent states legal provisions? Is there a Charity Commission or a body in the nature of a Charity Commission, as we have in the United Kingdom, to which all religious bodies must file their annual accounts and financial statements? What governmental organ regulates religious bodies? Is there no obligation for religious bodies to file their statement of affairs to a state authority? Are the religious bodies free to roam the Nigerian field with no control on the rendering of their tax affairs? Indeed, what is the nature of religion in Nigeria and what are the answers to these posers?

The second issue is whether the religious body, however legally constituted, is carrying on a trading activity? Who is taxable assuming that the religious body is not legally constituted? Would they be regarded as belonging to the informal sector and therefore asked to pay a flat sum as tax without any proper assessment? How do we know if a religious body is trading and what is a trade for tax purposes? Whether or not an activity is a trade is a mixed question of law and fact. A person does not trade if he simply procures others to trade, he must be involved in the buying and selling or rendering of services. If there is regular buying and selling, or rendering of services, this is clearly trading and the profits or gains are taxable. An isolated or casual transaction which is in the nature of trade and of a commercial nature are taxable. These assertions are supported by the cases of Arbico Ltd v. Federal Board of Inland Revenue 1 NTC 146, Reverend M. F. Shodipo v. Federal Board of Inland Revenue 1 NTC 273 and Offshore International S. A. v. Federal Board of Inland Revenue.



Where it is established that the religious body is carrying on trade it is taxable under section 9(1)(a) of the companies Income Tax Act, LFN, Cap C21 of 2004 or under section 3(1)(a) of the Personal Income Tax Act, LFN, Cap P8 of 2004 on gains or profits of the trade.

The third more interesting issue is the taxation of the employees of religious bodies. Who is their employer and to whom do they do they render their services? Are they able to provide physical evidence of a contract for service or a contract of service? Are they in employment or carrying on a profession or a vocation?

The term employment indicates the existence of an "office" and signifies something in the nature of a "post".

In the English case of Inland Revenue Commissioners v. Maxse (1919) 1 KB 647, Scrutton L. J. said a profession "involves the idea of an occupation requiring either purely intellectual skill, or manual skill controlled by the intellectual skill of the operator" and a vocation is stated in the case of Partridge v. Mallandaine (1886) 18 QBD 276 at p. 278 to mean "the way a person passes his life".

Under section 3(1)(b) of PITA 2004 "any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, benefits or other perquisites allowed, given or granted by any person to an employee are taxable" and in section 3(2)(a) of the same Act it is stated that "employment" "includes any service rendered by any person in return for any gains or profits".



An employee of a religious body is taxable if it is shown that the salary or any other pay is derived from the employment with the religious body and the religious body is under obligation to withhold the tax and remit it to the relevant tax authority under sections 81 and 82 of PITA and the it may be penalized for non-deduction of tax under section 82 of PITA.

The fourth issue is that the religious body may be exempted from tax on profits if it "engages in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on" under section 23(1)(c) of CITA or in a Presidential exemption under section 23(2) and (3) of CITA 2004. The donations to ecclesiastical or religious bodies are also not taxable under section 25 of CITA but the bodies must be listed as approved by the tax law and some evidence of the donation must be provided. Does this mean that receipts should be collected for tithes, offerings and zakat?



The fifth issue is, what should the tax authorities do where a religious body has not delivered a return and it is of the reasonable opinion that it is taxable? The tax authority may use its power to enter the premises of the religious body and require information under section 103 of PITA or use the best of judgment to determine the taxable sum under section 54(3) of PITA.

The factor to consider in making the best of judgment assessment against a tax payer who failed to supply information was provided in the case of Federal Board of Inland Revenue v. Omotesho 1 NTC 257 citing the decision in Income Tax Commissioners v. Badridas Ramrai Shop, Akola (1937) L. R. 64; Indian Appeal 102, A. I. R. 1937 P. C. 133 that the tax officer "must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regards to the assessee’s circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper value".



Where all attempts fail to collect the tax from the religious body, the relevant tax authority may proceed under section 105 of PITA which provides that an offence is committed if a tax collector is willfully obstructed in the performance of his duties as in where there is a physical assault.

The relevant tax authority also has the power to distrain for non-payment of tax under section 104 of PITA. The wisdom required to distrain the goods or premises of a religious body is a matter for discussion on another day.

Finally, our tax officials must adhere to the admonition in the Board of Customs and Excise v. Bolarinwa (1968) 1 N. T. L. R. 350 at 354 and not give an inhuman interpretation of the fiscal laws which would cause hardship to fellow citizens of our country.

The tax officials must understand that religion is not taxable but the commercial activities of religious bodies and the income of their employees.

Tax officials must always exercise diligence and caution and not be over zealous or seek what Ilorin indigenes call "fitina" in this matter of the taxation of religious bodies in Nigeria. May we all be blessed.




*M. T. Abdulrazaq is a Professor of Taxation, Faculty of Law, Lagos State University and former Registrar/Chief Executive, Chartered Institute of Taxation of Nigeria.

ASPECTS OF TAX CRIMINALITY IN NIGERIA

                                       ASPECTS OF TAX CRIMINALITY IN NIGERIA

                            M.T.Abdulrazaq  LLB(ABU) LL.M(LSE) PhD (ABU) BL ACIArb FCIB FCTI.

                            Professor of Taxation, Faculty of Law, Lagos State University .

Introduction

This article is concerned with the tax practitioner's  own position when his client or employer has become, or seems  likely to become, involved with the criminal law. The tax practitioner in those circumstance needs to be alive to the possibility of himself infringing the provisions of the criminal law. This is an aspect which has so far received little attention.

It must be clear, however, that this article makes no claim  to being an exhaustive guide but one that simply draws attention  to some areas of the criminal law of which the tax  practitioner may be unaware or has forgotten. Expert legal  advice should be sought whenever a tax practitioner is in doubt about his own position.

1. Cheating

a.Section.321 of The Penal Code Law, 1959 (Northern Region  No. 18 of 1959)

(See generally Notes on the Penal Code Law (1959) S. S. Richardson, Government Printer, Kaduna).

The above section provides that whoever by deceiving any person

a.fraudulently or dishonestly induces the person so deceived to deliver any property to any person or to consent that any person shall retain any property; or

b.intentionally induces the person so deceived to do or omit to do anything which he would not do or omit to do if he were not so deceived and which act or commission causes or is likely to cause damage or harm  to that person in body, mind, reputation or property, is said to cheat.

 Explanation

A dishonest concealment of facts is a deception within the meaning of this section and is akin to the U.K offence of cheating the public revenue. See also Hudson (1956) 2QB
252. This also inevitably leads to the offence of tax evasion.

Comment

(i)The definition of the offence of cheating embraces some cases in which no transfer of property is caused
as a result of the deception and some in which a transfer does occur; for these cases generally, provision is made in section 324. For the cases in which property is transferred, a more specific provision is made in section 326.

(ii)The original authors of the Penal Code said:
‘’ propose to make it cheating to obtain property by deception in all cases where property is fraudulently obtained".

In the definition of cheating in section 320 there are set forth two separate classes of acts which the person deceive may be induced to do. In the first place he may be induced to deliver any property to any person or to consent that any person shall retain any property. In order to constitute the offence of cheating, the person who induces another to do this class of act must do so fraudulently or dishonestly.
The second class of acts set forth in the section is the doing or omitting to do anything which the person deceived would not do or omit to do if he were not so deceived. In order to constitute the offence of cheating with regard to this class of acts, the person who induces another to do them must intentionally induce him to do them. In the first class of acts, the inducement must be fraudulent or dishonest. In the second class of acts, the inducement must be intentional.

(iii). The distinction between breach of contract and cheating depends upon the intention of the accused at the time of the alleged inducement which may be judged by his subsequent act but of which the subsequent act is not the sole criterion. Mere breach
of contract does not normally give rise to a criminal prosecution, but see section 381 for an exceptional case.

(iv). The offence of cheating must be committed by the wrongful obtaining of a consent. The difference between this offence and that of extortion is that in extortion the consent is obtained by intimidation and in cheating the consent is obtained by deception.

(v) Cheating is a complete offence by itself and is not a form of criminal breach of trust. A person who tricks another into delivering property to him bears no resemblance to a trustee in the ordinary accepted meaning of that term.

 

 (vi) Note the difference between "fraudulently" and "dishonestly" see section 16 and 17.

2.       Incitement to Commit a Criminal Offence

It has been said that an inciter is one:

‘Who reaches and seeks to influence the mind of another to the commission of a crime... The approach to the others mind may take various
forms) such as suggestion) proposal) request) exhortation) gesture) argument) persuasion) inducement) goading or the arousal of cupidity’

(Homes J. A. in Nkosiyana, 1966 (4) SA 655 at 658 AD). Smith and Hogan's Criminal Law (7th edition at page 268)
says as to the mental element:

‘ it must be proved that (the accused) knew of (or deliberately closed his eyes to) all ',the circumstances of the act incited which are elements of the crime in question)).

Where incitement is tried on indictment, 'it is punishable with fine and/ or imprisonment at the discretion of the court. if however:

"It is tried summarily, the offender is not liable to any greater penalty than he would

be liable to on summary conviction of the completed offence))

(Smith and Hogan 7th ed. at pg. 267).

3.       Conspiracy

(a) Section. 96 of The Penal Code Law (Northern Region No.  18 of 1959) provides that:

1.     when two or more persons agree to do or cause to be done

(a) an illegal act; or

(b) an act which is not illegal by illegal means, such an agreement is called a criminal conspiracy.

 

2.Notwithstanding the provisions of subsection (1), no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless
 some act besides the agreement is done by one or more parties to such agreement in pursuance thereof.

Explanation

it is immaterial whether the illegal act is the ultimate object of such agreement, or is merely incidental to that object.
This section shall not apply to an agreement of two or more persons to do or cause to be done any act in contemplation or furtherance of a trade dispute if such act committed by one person would not be punishable as an offence. Nothing in this section shall exempt from punishment any person guilty of a conspiracy for which a punishment is provided by any Ordinance or other Law.

1. Comment

1.Conspiracy is distinguished from other offences in that the crime consist simply in the agreement or confederacy to do some act, no matter whether it is done or not. In other offences, the intention to do a criminal act is not a crime of itself until something is done amounting to the doing or attempting to do some act to carry out the  intention. Section 96 codifies English Law in this matter.

2.Where, a conspiracy amounts to an abetment within the definition in section 83, there is no need to proceed under section 96 as conspiracy of that type is specifically provided for in section 83.

3.A mere agreement between 'two or more persons to  commit an illegal act or .lawful act by unlawful means is sufficient to constitute the offence.

4.      Explanation above is designed to save the activities of trade unions and associations. Within the background of a trade, it is lawful for two or more persons to do an
act in contemplation or furtherance of the dispute provided that such an act is lawful if committed by one person.

(b) Section 516 of Criminal Code Act Cap. 77 of Laws
of Federation of Nigeria

Provides that any person who conspires with another to commit any felony, or to do any act in any part of the world which if done in Nigeria would be a felony, and which is an offence under the laws in force in the place where it is proposed to be done-is guilty of a felony, and is liable, if no other punishment is provided, to imprisonment for seven years, or, if the greatest punishment to which a person convicted of the felony in question is liable is less than imprisonment for seven years, then to such lesser punishment.

(c) Section 516A of same act further state that any person who while in a State conspires with another to do any act not in the State which if done in the state would be a felony against the law of the State and which is an offence against the law of the place where it is proposed to be done, is guilty of a felony and is liable, if no other punishment is provided, to imprisonment for seven years, or if the greatest
punishment to which a person convicted of the felony in question is liable is less than imprisonment for seven years, then to such lesser punishment.

In this section and section 517A, "law of a state" has the meaning assigned to it in section 10A of this code.

(d) Section 517 of the same act also provides that any person who 'conspires with another to commit any offence which is not a felony, or to do any act in any part of the world, which if done in Nigeria would be an offence but not a felony, and which is an offence
under the laws in force in the place where it is proposed to be done, is guilty of a misdemeanor  and is liable to imprisonment for two years. The offender cannot be arrested without warrant.

(e) Section 517 A also provides that any person who while in a State conspires with another to do any act not in the State which if done in the State would be an offence against the law of the State (other than felony) and, which is an offence against the law of
the place where it is proposed to be done is guilty of misdeamenour and is liable to imprisonment for two years. The offender cannot be arrested without warrant.

(f) Section 518 of the same Criminal Code Act Cap 77 of the Law of Federation of Nigeria provides that any person who conspires with another to effect any of the following purposes:

i.      prevent or defeat the execution of enforcement  of any Act, Law, Statute, or Order; or .

  II. to cause any injury to the person or reputation of any person, or to depreciate the value of any property of any person; or

iii. to prevent or obstruct the free and lawful disposition of any property by the owner thereof
for its fair value; or

IV. to injure any person in his trade or profession; or

v.       to prevent or obstruct, by means of any act or acts which if done by an individual person would constitute an offence on his part, the free and lawful exercise by any person of his trade, profession, or occupation; or .

VI. to effect any unlawful purpose; or

 vii. to effect any lawful purpose by any unlawful  means; is guilty of a misdemeanours, and is liable to imprisonment for two years. An offender cannot be arrested without warrant.

(g) Section 518A also provides that the provisions of section 516 to 518 shall not apply to an agreement or combination of two or more persons to do  procure to be done any act in contemplation or
furtherance of a trade dispute if such act committed by one person would not be punishable as an offence: provided that nothing in this section shall exempt from punishment any persons guilty of a conspiracy for which a punishment is provided by any other enactment:

And provided further that nothing in this section shall affect the law relating to riot, unlawful assembly, breach of the peace, or sedition, or any offence
against the state.

For the purposes of this section however- "offence" does not include an offence punishable only by fine; and "trade dispute" has the same meaning as in the
Trade Unions Act.

4. Section 171 Penal Code Law, 1959

This section provides that whoever intentionally offers any resistance or illegal obstruction to the lawful arrest of any other person or rescues or attempts to rescue any other
person from any confinement or custody in which that person is lawfully detained, shall be punished

(a) with imprisonment for a term which may extend to 7 years or with fine or with both;and

(b) if such other person is under sentence of death, shall be punished with imprisonment which may extend to imprisonment for life and shall also be liable to fine.

Comment:

The intention of the accused is an important ingredient of the offence. If the arrest is itself not lawful, then resistance to the arrest will not be an offence under this section.
Similarly, the person from whose custody a rescue is effected must have authority to detain lawfully the person rescued or no offence will have been committed in the rescue.

5.. Section 513 of Criminal Code Act
This section provides that:

1.       Any person who attempts to procure another to do an act or make an omission of such a nature if he himself were to do the act or make the omission he would be guilty of an offence, is himself to be deemed guilty of attempting to commit such offence
and to be punishable accordingly.

2.Any person who while in Nigeria attempts to procure another to do an act or make an omission at a place not in Nigeria of such a nature-

a.that if he were himself to do the act or make the omission in Nigeria he would be guilty of an offence; and

b.that if he were himself to do the act or make the omission at the place where the act "or omission is proposed to be done or made he would himself be guilty of an offence under the laws in force at that place, is guilty of an offence of the same kind
and is liable to the same punishment as if he were himself to attempt to do the same act or make the same omission in Nigeria.  See 1 RC V. Rossminster Ltd (1980) All ER 80.

 

6.            Personal Income Tax Act 2004

1)            Section 105 of this Decree provides as follows:

Any person who-

a.          having been required to give information under the provisions of the preceding section wilfully obstructs a Tax Collector in the performance of his duties by neglecting or refusing to give such information; or

b.        otherwise obstructs or wilfully misleads or attempts to mislead a Tax Collector in the performance of his duties under this part of this Act is guilty of an offence under this Act.

2)            Section 97 of the same Act also provides that:

A person who –

(a)          being a person appointed for the due administration of this Act or employed in connection with the assessment or collection of the tax –

(i)            demands from a person an amount in excess of the authorized assessment of the tax;or

(ii) withholds for his own use or otherwise,a portion of the amount of tax collected;or

(iii) renders a false return,whether orally or in writing,of the amount of tax collected or received by him;or

(iv) defrauds a person,embezzles any money,or otherwise uses his position to deal wrongly with the relevant tax authority;or

(b)          not being authorised under this Act to do so,collects or attempts to collect the tax under this Act,

 is guilty of an offence and liable on conviction to a fine of N1000 or to imprisonment for three years or both such fine and  imprisonment.  
See  C.O.P v. Amadu of Awe 1 NTC 30: Hellel v. A.C.l.T 1 NTC 33; Nakade v. Jos Native Authority 1 NTC 118.

  

Conclusion

It will be clear from the foregoing that there are possible perils for the tax practitioner when a client is involved, or potentially involved with the criminal law. It seems that the
first precaution a practitioner needs to take is to avoid  becoming too closely identified with his client and his client's position. It means perhaps keeping a segment of his mind
detached. Most practitioners will probably do this automatically in order to maintain an objective view of the situation in the client's own interest. A little more than that is, however, required: an awareness that the practitioner could be at risk personally unless appropriate further precautions are taken, we hope this will be of  some help in indicating the form those precautions should take.

 Finally, we would stress again the need for expert legal advice if the practitioner is in any doubt of the legal effect of a course of action he is contemplating on behalf of his client or employer.  

 

TAX IMPLICATIONS OF LOCAL CONTENT ACT

Taxspectives by Afolabi Elebiju

THISDAY LAWYER, November 1, 2011, p.vii

TAX IMPLICATIONS OF LOCAL CONTENT ACT






Introduction   
The above legislation, hereinafter "the Local Content Act (LCA)", came into force on 22 April 2010 following assent by President Jonathan. Efforts to enact LC legislation has been on since the early 2000s; ‘Nigerianisation’ provisions in the Petroleum Act, JOAs and PSCs, as well as previous LC initiatives which assumed greater fillip with the return to civil rule in 1999, have obviously not achieved the desired effect. Understandably, the enactment of the LCA was popularly regarded as a welcome development in the nation’s quest to optimize value from its oil and gas industry and a (singular) high watermark of the 2011 class of the National Assembly. LC status checks on the energy sector of countries like Brazil, Indonesia, Malaysia, Norway shows that Nigeria is lagging behind in this value optimization objective. However, it is better late than never.

Section 2 LCA mandates all industry stakeholders to "consider Nigerian content as an important element of their overall project development and management philosophy for project execution." It establishes, and vests regulatory oversight of LCA in the Nigerian Content Monitoring Board (NCMB). Whilst the Act has been subject of much discourse, this piece focuses on salient tax and business issues arising from its provisions.





Supremacy/Universal Application
LCA declares from the outset (section 1): "notwithstanding anything to the contrary contained in the Petroleum Act or in any other enactment or law, the provisions of this Act shall apply to all matters pertaining to Nigerian content in respect of all operations or transactionscarried out in or connected with the Nigerian oil and gas industry." Does the fiscal provisions catch companies like Nigerian LNG, given the recent trial and appellate decisions in NDDC v NLNG (2009) 1 TLRN 25; (2011) 4 TLRN 1? Answer would be yes: ‘notwithstanding’ used in LCA means NLNG’s "veil of protection" vide NLNG (Fiscal Incentives & Assurances) Act would be lifted to subject NLNG to the LCA. The Supreme Court has held in Nigerian Deposit Insurance Corporation v. Okem [2004] 10 NWLR (Pt.880), 107 at 182, that "when the term ‘notwithstanding’ is used in a section of a statute, it is meant to exclude an impinging or impeding effect of any other provision of the statue or section so that the said section may fulfill itself."

NDDC v. NLNG correctly exemplified the approach that effect must be given to incentive legislation, unless there are express provisions to the contrary. However, such contrary intention is clearly evinced by "notwithstanding anything to the contrary contained …in any other law" in section 1 LCA, to avoid the result whereby the Courts held inter alia that by virtue of the NLNG Act, NLNG was exempted from complying

with section 14(2)(b) NNDC Act which provided for payment of ‘NDDC Levy’ of 3% of total annual budget of upstream and gas processing companies operating in the Niger Delta. The other argument that NLNG Act being a private Act could not be repealed by implication vide a subsequent inconsistent provision, would also not avail as a shield from the LCA. Accordingly, NLNG would be liable to make the 1% contribution to the Nigerian Content Development Fund required by the LCA.





LCA and Fiscal Incentives
Section 48 is an interesting provision: "the Minister shall consult with the relevant arms of Government on appropriate fiscal framework and tax incentives for foreign and indigenous companies which establish facilities, factories, production units or other operations in Nigeria for purposes of carrying out production, manufacturing or for providing services and goods otherwise imported into Nigeria." This writer wonders whether this provision is necessary, given that there is already sufficient framework under which qualifying companies could benefit.

These include: (a) Industrial Development Tax (Income Relief) Act, under which pioneer status is granted and which is administered by the NIPC; (b) applicable incentives in CITA and PPTA; (c) Oil and Gas Export Free Trade Zones Act and Nigerian Export Processing Zones Act which, subject to exceptions, exempt approved enterprises within the Zones from Nigerian tax and fiscal obligations; and (d)NIPC Act which established the NIPC as Government’s investment facilitation agency to "coordinate and monitor all investment promotion activities", "maintain liaison between investors and [MDAs,] institutional lenders and other authorities concerned with investments", and "for the purpose of promoting identified and strategic or major investment …in consultation with appropriate Government agencies, negotiate specific incentive packages for the promotion of investment…"

Not the least is the Nigerian Tax Policy (approved by the Federal Executive Council), which leans against ‘discriminatory’ nature of tax incentives in the long term, whilst advocating sparing use of incentives cum level playing field for all businesses (paras 2.6.4 and 4.4(b)).





Deductibility of LCA Compliance Costs
Further to section 7 mandating operators to submit ‘Nigerian Content Plan’ for all projects to demonstrate compliance with Nigerian content requirements of the Act, section 25 requires such entity submitting a plan to establish a project office in the catchment area/location of the project "where management and procurement decision making are to take place." This could be compared with the Rivers State Employment of Junior Workers (Enforcement) Law 2000.

By section 64, "for the purposes of assessment and verification, all operators and contractors shall provide the Board …with access their facilities and all documentation and information required for substantiating the Nigerian content reported." Pursuant to sections 60 and 61, operators are to "submit to the Board their annual Nigerian Content Performance Report covering all projects and activities for the year under review" and "which shall specify by category expenditure the Nigerian content on both current and cumulative cost basis..." Section 70(a) and (k) document key functions of NCMB to "implement the provisions of this Act" and "make auditing procedures and conduct regular audits for the purposes of monitoring and implementing compliances with the provisions of this Act."

The most important point is that all LCA compliance costs would be tax deductible, being "expenses wholly, exclusively, necessarily and reasonably incurred in the production of" the company’s profits (section 24 CITA; cf. section 10(1) PPTA). Gulf Oil Co. Nigeria Ltd v. FBIR [1997] 7 NWLR (Pt.514), 698, where the Court of Appeal followed the locus classicus, Shell v. FBIR [1996] 8 NWLR (Pt. 468), 256 as well as earlier cases like Western Soudan Exporters Ltd v. FBIR (2010) 3 TLRN 139 has settled the issue.

A side issue is whether FIRS may disallow LCA compliance costs, based on quantum? In my view, once a company’s Nigerian content compliance status satisfies the NCDMB, the FIRS is obliged to allow allthe related costs: they should prima facie be allowable deductions by FIRS. Quantum/reasonableness would be a question of fact in the circumstances. Parallels can be drawn from established regulatory practice whereby Nigerian regulators rely on (sister) sectoral regulators that have specialised knowledge of the relevant sector. Thus FIRS and CBN relies on NOTAP’s approval of ‘technology quotient’ service agreements between Nigerian companies and non-residents to allow fees thereunder as both tax deductible and eligible transaction for the purposes of accessing the official market to procure foreign exchange and offshore repatriation of same.





1% Contract Value Contributions to the LC Fund
Section 104(1) establishes the Nigerian Content Development Fund for implementing Nigerian content development in the oil and gas industry. Specifically, section 104(2) provides that "the sum of one percent of every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity or transaction in the upstream sector of the Nigerian oil and gas industry shall be deducted at source and paid into the Fund." Although no remittance timeline is stipulated, "reasonable time" can be implied, which in most cases could be paralleled with the respective windows within which WHT deductions and VAT must be remitted. It also stands to reason that the 1% deduction would be in the currency of payment of

the contract sum. Failure to deduct or remit the 1% is an offence (like other non-compliance with LCA, section 68), and liable upon conviction to fine of 5% of the project sum or cancellation of the project.

Although section 104 should apply to all contracts in the industry, businesses could seek to avoid this provision through gross-up arrangements, albeit they may find their bids becoming uncompetitive as a result. It may thus be a matter of business judgment whether to gross-up the 1% contribution to the Fund vis a vis potential risk of regulatory perception as an attempt to frustrate intendment of LCA. Or, regarded as conduct breaching the LCA, and therefore an offence, pursuant to section 68.


The issue may actually be moot because of likely low visibility of any gross-up arrangement to the regulator. Furthermore, since impact of the 1% deduction as additional cost of doing business would be mitigated by the ability of contractors to tax deduct same, the gross-up option may not be compelling.
Competitiveness Issues
The prospect of "exclusive consideration to Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute such work to bid on land and swamp operating areas…for contracts and services" (section 3(2)) could incentivize investment, which would more often than not, be tax deductible. Section 16 stipulates: "the award of contract shall not be solely based on the principle of the lowest bidder where a Nigerian indigenous company has capacity to execute such job and the company shall not be disqualified exclusively on the basis that it is not the lowest financial bidder, provided the value does not exceed the lowest bid price by 10%." Section 14 also provides in part: "…the bid containing the highest level of Nigerian content shall be selected provided the Nigerian content…is at least higher than its closest competitor."


These provisions could mean increased tax revenue: the higher Nigerian bid/contract sum will implicate more VAT and WHT than would have been otherwise applicable with the lowest (successful) bid. Furthermore, the differential (between lowest and higher successful bids), represents additional cost of business for the client, which is however mitigated by the deductibility of such costs. The circumstances of the client and contractor respectively would determine where the differential would have enjoyed more optimal tax treatment: the amount of deductions available to the contractor typically affects how much of the differential would comprise part of contractor’s assessable profits.
Conclusion
The LCA is a good example of law being used as an instrument of social engineering to further national strategic objective. As the Minister makes regulations for the
purpose of giving effect to the LCA (section 101), and the Board enforces the LCA, players in the Nigerian oil and gas space will do well to be mindful of the tax impact as a component of their business strategy.

SOURCE:THISDAY LAWYER, November 1, 2011, p.vii