Nigeria s Federal High Court reverses TAT ruling on determination of fixed base for nonresident company

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1 16 November 2015 Global Tax Alert Nigeria s Federal High Court reverses TAT ruling on determination of fixed base for nonresident company EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 18 September 2015, Nigeria s Federal High Court (FHC) in Lagos reversed an earlier ruling of the Nigerian Tax Appeal Tribunal (TAT) in a tax case between JGC Corporation (JGC) and the Federal Inland Revenue Service (FIRS) with respect to the assessment of JGC for Companies Income Tax (CIT) on a contract executed with Mobil Producing Nigeria Unlimited (MPNU). MPNU entered into two separate contracts for the realization of its EPC3 Bonny Terminal Project in Nigeria. JGC executed the offshore contract while its local subsidiary in Nigeria, JGC Nigeria Limited (JNL) alongside Daewoo Nigeria Limited (Daewoo) executed the onshore contract. The FIRS assessed JGC for income tax in Nigeria on the execution of the offshore contract on the basis that JGC had a fixed base. JGC objected to the assessment and appealed to the TAT. The TAT upheld the FIRS income tax assessment. Accordingly, JGC filed an appeal of the case with the FHC. The FHC reversed the TAT ruling stating that the judgment of the TAT failed to consider key evidence brought before it which was the onshore contract with Daewoo; and that the execution of the offshore contract with MPNU did not create a fixed base for JGC.

2 2 Global Tax Alert Detailed discussion Facts MPNU, a company incorporated in Nigeria, entered into two separate contracts for the realization of its EPC3 Bonny Terminal Project. The first contract was executed between MPNU and JGC Corporation and the terms within the contract stated that certain aspects of the project to be performed wholly outside Nigeria would be undertaken by JGC. This contract was referred to as the offshore contract (engineering and procurement). The second contract was executed between MPNU and JNL and Daewoo as contractor and the project to be performed within Nigeria would be undertaken by JNL and Daewoo. This Contract was referred to as the onshore contract (construction, commissioning and inland transportation). JGC stated that it did not perform any of its obligations under the offshore contract in Nigeria and none of its employees was in Nigeria for the purpose of executing the contract. It further said that JNL, its local subsidiary in Nigeria, had paid CIT on its earnings from the onshore contract. The FIRS responded stating that JGC was assessed tax as a nonresident company (NRC) in line with section 13(2) of the Companies Income Tax Act (CITA) because it jointly executed the Mobil project under a single contract with a common project site thereby creating a fixed base for the company. Based on the facts of the case presented, the TAT in April 2014 ruled in favor of the FIRS stating that the execution of the contract constituted a fixed base for JGC in Nigeria and therefore the company should be liable to tax in accordance with the provisions of section 30 of CITA. JGC then instituted an appeal at the FHC in Lagos seeking a determination of the following issues: Whether the judgment of the Tribunal should be set aside because it failed to consider key evidence Whether the Tribunal was right to conclude that JGC has a fixed base in Nigeria based on the evidence relied upon Whether the Tribunal was right to accept FIRS tax assessment of JGC on the basis of the company s overall turnover from the offshore contract without first determining the proportion attributable to its fixed base in Nigeria FHC judgment The FHC ruled in favor of JGC stating that JGC was not liable to tax in Nigeria as the execution of the offshore contract did not create a fixed base for it in Nigeria. In delivering its judgment, the FHC addressed the following issues: The Tribunal failed to consider and evaluate pieces of evidence placed before it as these were material in determining the case. One such critical piece of evidence was the onshore contract which the JGC was not a party to and therefore had no obligation or benefit under the terms of the contract. The condition for the taxation of a foreign company in Nigeria was not present in the case nullifying the Tribunal s earlier judgment that JGC had a fixed base for which it carried out its operations in Nigeria. This was not the case of the execution of a single contract creating a PE for the NRC as defined in section 13(2) of CITA as two separate contracts were executed with MPNU and JGC was not a party in the onshore contract. There was also no clear evidence in the facts of the case that any of the works contemplated under the terms of the offshore contract was executed in Nigeria. The mere fact that a foreign company was contracted to perform a project to be cited in Nigeria does not translate to the foreign company having a fixed base in Nigeria. Notwithstanding the fact that JGC does not have a fixed base in Nigeria, the FIRS was wrong to assess the entire revenue from the offshore contract to income tax without first determining the portion attributable to its operations in Nigeria. This was at variance to the provisions of section 30 of CITA where the FIRS is expected to subject to tax a proportion of the NRC s turnover attributable to its operations in Nigeria. Implications The ruling provides further clarity on what constitutes a fixed base for a nonresident company in Nigeria where the execution of a split contract (with a separate offshore and onshore contract) does not constitute a fixed base for the nonresident company executing the offshore contract. The judgment further emphasizes the important principle that the existence of a contract between a Nigerian company and a nonresident company does not prima facie translate

3 Global Tax Alert 3 to carrying on business in Nigeria. This is significant in several respects and parties contracting for services must sufficiently designate activities carried out entirely offshore to avoid being regarded as carrying on business in Nigeria. This principle was also established in the earlier case between Gazprom Oil & Gas Nigeria v FIRS where the TAT held that a contract to perform services for a Nigerian company was not sufficient to create an obligation to register and charge VAT. 1 In addition, this also provides clarity on the issue of a nonresident company with a PE being subject to income tax only on a portion of its turnover attributable to its operations in Nigeria. However, it will be interesting to see how the requirement to file on an actual basis changes the context of such claim. 2 Endnotes 1. See EY Global Tax Alert, Nigerian Tax Appeal Tribunal rules that nonresident companies carrying on business outside Nigeria are not liable for VAT, dated 13 July See EY Global Tax Alert, Nigeria requires nonresident companies with a PE or fixed base in country to file income tax return on actual profits basis applicable for tax years commencing as of 1 January 2015, dated 13 February 2015.

4 4 Global Tax Alert For additional information with respect to this alert, please contact the following: Ernst & Young Nigeria, Lagos Abass Adeniji Edem Andah Chinyere Ike Ogochukwu Isiadinso Oluwatumininu Familusi Ernst & Young Advisory Services (Pty) Ltd., Johannesburg Justin Liebenberg

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