OALP Journal TAX DISPUTES IN THE OIL & GAS SECTOR: ARE THEY SUBJECT TO ARBITRATION? Introduction. Legal Framework for Arbitration in Nigeria

Transcription

1 OALP Journal 3 nd November 2017 TAX DISPUTES IN THE OIL & GAS SECTOR: ARE THEY SUBJECT TO ARBITRATION? Introduction The relevance of arbitration in an increasingly globalized economic structure cannot be overemphasized. However, the question of arbitrability of tax disputes has long been the subject of sustained debates in legal circles. In particular, in the oil and gas sector which, despite dwindling commodity prices and a growing trend towards renewable energy sources, remains pivotal to resource-rich emerging economies such as Nigeria this issue is of critical importance to governments, industry players and the investing community. Given that commercial tax disputes are generally arbitrable, it is tax disputes arising from dealings between foreign investors and host states in the oil and gas industry, which accounts for most tax disputes in Nigeria that has provoked the most legal debate. The key arguments in this debate are hinged on the sovereignty of tax, its statutory and policy underpinnings and mainly posit that tax exists outside the realm of private ordering and arbitration. This is further underscored by the fact that the Federal Inland Revenue Service (the FIRS) (the tax operator), usually not a party to contracts between oil companies and government, may institute proceedings to restrain arbitration on the basis that the dispute is not arbitral. Here, we examine the arbitrability of tax disputes in the oil and gas industry in Nigeria by analysing the underlying concepts against the backdrop of the mandatory statutory arbitration regime of the Petroleum Act Cap P10, LFN, (2004) (the Act),as well as relevant case law and trends in other jurisdictions. Legal Framework for Arbitration in Nigeria The primary statute governing arbitration in Nigeria is the Arbitration and Conciliation Act (the ACA). The ACA provides little guidance as to what matters are not subject to arbitration. As such, the question of the arbitrability of a dispute is largely left to the discretion of the courts, who generally apply five tests: (x) whether the dispute is justiciable; (y) whether the dispute can be compromised lawfully by accord; (z) whether the contract is illegal; (xx) whether the dispute leads to a change of status as done in matrimonial proceedings and; (yy) whether the dispute is within the contemplation of the parties as reflected in the agreement. The ACA also requires that the arbitration agreement must be in respect of a dispute capable of settlement by arbitration under Nigerian law and must be valid under the applicable law or under the laws of Nigeria. In other words, the agreement must be operative, capable of being performed, and enforceable against the parties. In United World Ltd. Inc. v. M.T.S. Ltd, the Court of Appeal held that a matter shall be referred to arbitration when it is to be interpreted or a 1. W Park Arbitrability And Tax in L. Mistelis & S Brekoulajis (eds), Arbitrability: International & Comparative Perspectives (Kluwer Law International) 2009, pg Section 11 and Section 42 of the first schedule of the Act. 3. Cap A18 LFN In Arab Republic v. Ogunwale (2002) 9 NWLR (Pt. 771) at Pg. Para, the Court of Appeal held that the test of determining whether a dispute is referable to arbitration is that the dispute or difference must necessarily arise from the clause contained in the agreement. 5. (1998) 10 NWLR (Pt.568) 1

2 difference or dispute exists. The difference or dispute must necessarily arise from the clauses contained in the agreement. Therefore, a holistic analysis of the provisions of the ACA and case law illustrate that not all disputes are arbitral in nature in Nigeria. Only disputes arising from a commercial transaction can be referred to arbitration. The Agreement to Arbitrate, Party Autonomy and the Effect of Public Policy The notion of party autonomy is the bedrock of arbitration as the authority of arbitral tribunals emanate from the agreement between the parties. It depicts the independence of parties in the prescription of the arbitration including the freedom to choose the law to govern the arbitration, seat of arbitration, number of arbitrators, etc. The courts as well as the ACA also reiterate the entrenchment of the principle of party autonomy in the Nigerian arbitration jurisprudence. Clearly, the principle of party autonomy is entrenched in Nigeria subject to governing law, the lex arbitri and the dictates of public policy. Lex arbitri in arbitration is the body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. Public policy is a much more nebulous concept but has been described as a principle of law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against public good. In Nigeria, the concept of breach of public policy generally connotes breach of Nigerian law or state policies. Therefore where the seat of arbitration is Nigeria, Nigerian law would prevail over any agreement of parties that is contrary to public policy or relevant law. For instance, a choice of foreign law as the law governing the contract perceived to evade tax laws or breach constitutional provisions may not be upheld. Arbitrability of Tax Disputes in the Nigerian Oil and Gas Industry With the exception of the New York Convention, which limits arbitrability to disputes that are capable of settlement by arbitration, no binding international instrument has provided a theoretical grounding, or even a list of excluded activities. Furthermore, it is difficult to discern a general rule due to a lack of determinative authority on the subject under Nigerian law. However, there are a number of principles which Nigerian courts have applied when considering the arbitrability of tax disputes, and these are considered below. General Framework In Nigeria, the general rule is that disputes based on issues of tax and the interpretation of the Petroleum Profit Tax Act (the PPTA), are not arbitrable. As stated above, arbitration of tax disputes in Nigeria usually occurs in the context of relationships between foreign investors and host states which has resulted in a plethora of lawsuits such as the case of Nigeria Agip Exploration Limited v NNPC, amongst others. In the case of FIRS v. NNPC and Others, 6. Halsbury's Laws of England, 24th Edition, at para 503, states as follows: The dispute or difference, which the parties to an arbitration agreement agree to refer, must consist of a justiciable issue triable civilly. 7. Disputes not falling within the category of commercial disputes (e.g. matrimonial disputes) would not be arbitrable under the Act, though they may be referred to customary arbitration. 8. Gary B. Born, International Commercial Arbitration: Commentary And Materials (2d Ed. 2001) See Stabilini Visinoni Ltd v. Mallinson & Partners Limited (2014) 12 NWLR (Part 1420) Section 1(b) of the ACA 11. Smith Ltd V. H&S International [1991] 2 Lloyd s Rep 127 At 130) 12. Lord Truro in Egetron v. Lord Brownlow (1853), 4 H.L. Cas. 1, Llias Bantekas The Foundations of Arbitrability in International Commercial Arbitration. Accessed on 17 April, 2016 Available on Chapter P13, Laws of the Federation of Nigeria, Shell (Nig.) Exploration and Production Ltd & 3 others v. Federal Inland Revenue Service Unreported Appeal No. CA/A/208/2012; delivered by the Court of Appeal, Abuja on 31st August, 2016, Esso Petroleum and Production Nigeria Ltd v. NNPC Unreported Appeal No. CA/A/507/2012; handed down by the Court of Appeal, Abuja on 22nd July, (2014) 6 CLRN FHC/ABJ/CS/774/2011 2

3 the FIRS had contended that the matters submitted to arbitration raised questions about taxation and were therefore inarbitrable. The Federal High Court concurred holding that section 34 of the ACA would not preclude a court from restraining arbitration where the contention is that the matter submitted to the arbitrators is inarbitrable. Subsequently, in the case of Statoil (Nigeria) Limited & Anor v. FIRS & Anor the Court of Appeal held that the FIRS had standing to interfere with arbitration proceedings when it constituted an infringement of the Constitution or other Nigerian laws or impede FIRS statutory functions or powers. The Court s reasoning seemed to be based on the fact that a party to an arbitration agreement may challenge the jurisdiction of the tribunal or claim that the arbitration agreement was void, and the tax authority should be similarly entitled to challenge an arbitration where it falls within its statutory remit. Arguably, the direction of the Court in Statoil is questionable at best. For one, the ACA does not permit the intervention of a non-party to an arbitration agreement as this runs contrary to the principle of party autonomy. Also, it seems unclear how an agreement inter partes to submit to arbitration impedes the functions or powers of FIRS. However, the decision remains binding but it is hoped that if this decision goes on appeal, the Supreme Court would quash it and uphold the arbitration. The decision in Shell (Nig.) Exploration and Production Ltd & 3 others v. FIRS is also interesting to note. The principal issues in this case were: (x) whether as a non-party to the production sharing contract, the FIRS had standing in the subject matter of the arbitration and (y) whether an arbitration tribunal has jurisdiction over tax matters. With regard to the first issue, the court affirmed the FIRS statutory power to administer all federal tax legislations, including the PPTA and held that FIRS has standing in any dispute relating to the assessment, computing, and payment of taxes in accordance with the PPTA. On the question of arbitrability, the court in Shell referred to Section 251(1)(b) of the Constitution which provides for the exclusive jurisdiction of the Federal High Court in matters relating to federal government revenue and the taxation of companies in Nigeria. Relying on this, the court stated that on matters pertaining to taxation in Nigeria, only the Federal High Court has jurisdiction to adjudicate, to the exclusion of arbitral tribunals. The rationale of the court s decision in Shell i.e. that the Federal High Court has exclusive jurisdiction to resolve tax disputes in Nigeria seems rather suspect, especially given the courts acceptance of the Tax Appeal Tribunal as sharing in the Federal High Court s exclusive jurisdiction to hear and determine tax disputes. A better view seems to be that the exclusivity of the Federal High Court under Section 251 only relates to other courts and does not extend to arbitration tribunals which run on a separate track from that of the courts under the Nigerian legal jurisprudence. In comparison, the UK seems to adopt a public policy approach similar in effect to Nigeria s. The UK Arbitration Act does not expressly specify whether or not certain disputes are arbitrable, instead, the courts determine arbitrability on a case-by-case basis. In general, commercial disputes (both contractual and noncontractual) are capable of arbitration inclusive of disputes relating to fraud, unless the fraud relates specifically to the arbitration agreement. However, where the dispute engages third party rights or represents an attempt to delegate to the arbitrators what is a matter of public interest which cannot be determined within the limitations of a private contractual process, it may not be arbitrable. Tax disputes are generally regarded as falling within the latter category and thus cannot be referred to arbitration. 18. Which generally p-rovides for non-intervention by courts in arbitral matters governed by the Act. 19. (2014) LPELR (CA) 3

4 In the United States on the other hand, the question of statutory non-arbitrability of tax disputes in the oil and gas industry has become largely academic since the federal courts have deemed virtually every statutory cause of action to be arbitrable. In Mitsubishi Motors v. Soler Chrysler Plymouth the court held that unless Congress demonstrates a clear intention to preclude a waiver of judicial remedies, arbitration agreements should continue to be enforceable. The Petroleum Act Regime Having analysed the foregoing, it is useful to also consider the specialised arbitration regime under the Petroleum Act the principal legislation regulating the oil and gas sector in Nigeria. There are two broad arbitration regimes under Nigerian law consensual arbitration and compulsory or statutory arbitration. While the former is founded on parties agreement or consent, the latter relates to legislations that make arbitration mandatory irrespective of the consent of the parties and from which parties cannot derogate. question or dispute shall be settled by arbitration unless it relates to a matter expressly excluded from arbitration or expressed to be at the discretion of the Minister. The implication of the foregoing is that a dispute relating to payment of royalties involving oil and gas companies and the government, which payment of royalties is in the nature of tax, is capable of being resolved by arbitration. It is however arguable in light of the decision in Shell, and given that it touches on the revenue of the Federal Government that the statutory arbitration regime provided for under the Petroleum Act conflicts with the exclusive jurisdiction of the Federal High Court. It will be interesting to see how the courts might address this conflicting position in future. Consensual arbitration arises on the basis of an agreement. For instance, most oil and gas contracts usually stipulate arbitration as the initial dispute resolution mechanism for example, clause 24(2) of Nigerian PSC Model Agreement executed between NNPC and International Oil Companies (IOCs) provides for settlement of disputes by arbitration. The discussion above generally relates to consensual arbitration such as contemplated under the PSCs. On the other hand, the Petroleum Act creates a statutory arbitration regime. Paragraph 41 of the First Schedule to the Act also provides that: If any question or dispute arises in connection with any license or lease to which this Schedule applies between the Minister and licensee or lessee (including a question or dispute as to the payment of any fee, rent or royalty) the U.S. 614 (1985) 4

5 Conclusion and Recommendations The arbitrability of tax disputes presents itself with attempts to balance the competing interest of party autonomy and freedom of contract on the one hand, and the state s power to manage its revenue, on the other hand. A liberal trend towards arbitration should be encouraged, particularly for key players in the oil and gas sector and there can be little justification to deny parties all direct recourse to arbitration notwithstanding that the dispute is dressed in fiscal garb. Parties should enjoy the freedom to agree the terms of arbitration, and arbitration of tax matters should not be considered a breach of law or public policy. While tax authorities in Nigeria still maintain that arbitration is not a suitable mechanism for resolution of tax disputes, creating a regime for resolution of tax disputes by way of arbitration will project the country s image as a business friendly destination keeping in mind the real long term benefits to the country, as investors are always keen to know that disputes can be resolved expeditiously, and without protracted litigation. In the meantime, perhaps it might be useful to make the FIRS a party to the arbitration agreement or obtain approval in principle from the FIRS, such that the FIRS would be estopped from reneging on its contractual submission to arbitration. For further information, please contact: Edem Andah Partner Ext 2633 eandah@olaniwunajayi.net Abayomi Okubote Ext 2405 aokubote@olaniwunajayi.net Eden David Ext 2628 edavid@olaniwunajayi.net Ekene Enuebuka Ext 2705 eenuebuka@olaniwunajayi.net Olaniwun Ajayi LP Olaniwun Ajayi With nearly 60 years' experience in helping organizations and individuals achieve their goals, Olaniwun Ajayi LP has a track record of involve ment in some of the largest and most complex transactions in dynamic sectors of the Nigerian economy. Our unparalleled capacity to handle intricate legal issues is the bedrock of our practice, and our clients depend on us to help translate their opportunity into reality 5