September 12, 2023
Nigeria Tax Appeal Tribunal judgment partially voids Income Tax Country-by-Country Reporting Regulations 2018
On 17 August 2023, the Lagos zone of the Tax Appeal Tribunal of Nigeria (TAT) ruled in favor of a taxpayer (the Appellant or the Company), in a tax dispute centered on the legality of the CbCR Regulations 2018 and the subsequent notices of administrative penalties issued by the Federal Inland Revenue Service (FIRS, Tax Authority or Respondent) based on the provisions of the Regulations.
The TAT established that the provisions of section 61 of the FIRS Establishment Act (FIRSE Act) give the Board of the FIRS the power to make subsidiary legislations. However, this delegated power can only be exercised by a legally and properly constituted Board as stipulated by the FIRSE Act, and where this is not so, any step, process or action done in the name of the Board will be null and void.
The TAT further ruled that penalty imposed on any defaulting entity must be in line with the provisions of the principal legislation.
The Appellant received notices of administrative penalties from the FIRS for late filing of the 2019 and 2020 Country-by-Country notifications under the CbCR Regulations 2018. The Company asserted that the notices were illegal, ultra-vires, null and void as the Respondent imposed a penalty beyond the stipulations of the FIRSE Act.
The Company further contended that the Organsation for Economic Co-operation and Development's Country-by-Country Multilateral Competent Authority Agreement (CbC MCAA) pursuant to which the CbCR Regulations 2018 were drafted, was an international instrument not yet domesticated by the National Assembly as required by section 12 of the 1999 Constitution of the Federal Republic of Nigeria (FRN) and, hence, was unenforceable in Nigeria. The Company made the same argument with regard to the CbCR Regulations 2018.
Section 61 of the FIRSE Act delegates power to the Board of the FIRS to promulgate subsidiary legislation by way of rules or regulations. This power is specific to the Board of the FIRS and cannot be delegated. As a result, any regulations or rules established in the name of the Board but without the presence of a legally constituted Board is deemed to be null and void to the extent of its inconsistencies.
Section 12 of the Constitution of the Federal Republic of Nigeria states that no international instrument shall have the force of law in Nigeria unless the instrument has been enacted into law by the National Assembly. Although the Tax Authority maintained that the CbCR Regulations 2018 did not constitute an international instrument, it did not disprove that the CbCR Regulations 2018 were published in the name of the Board of the FIRS during a period when the Board of the FIRS was dissolved and, hence, improperly constituted.
Issues for determination
The issues under contention were:
The Company's position
The Company argued that the National assembly delegated power to the Board of the FIRS to draft rules or regulations and that this transfer of power by any person/body other than the National Assembly in this instance should constitute an invalid delegation of authority.
Further, the Company stated that the Board of the FIRS had been dissolved and was no longer in existence when the CbCR Regulations 2018 were published. As such, the administrative penalty notices that the FIRS issued were not based on a CbCR regulation enacted by a properly constituted Board of the FIRS as required by the FIRSE Act.
The Company further maintained that the CbCR Regulations 2018 is a replica of the CbC MCAA, an international agreement, which is yet to be ratified by the National Assembly in accordance with section 12 of the 1999 Constitution.
Last, the Company argued that the applicable penalty for failure to file a CbC notification should be as stipulated in Section 26 of the FIRSE Act1 because the contravention is unrelated to tax liabilities.
The FIRS submitted that the CbCR Regulations 2018 were drafted pursuant to Section 61 of the FIRSE Act 2007 and all other powers enabling the Board of the FIRS, with the approval of the Honorable Minister of Finance. Further, it argued that Regulation 13 of the CbCR Regulations 2018 empowers it to levy penalties for late and non-filing of CbCR notification.
Furthermore, the FIRS stated that based on its records, the company submitted its CbCR notification form for the financial years 2020 and 2021 on 7 January 2022, when it was due no later than 31 December of the respective years; the late filing penalties were imposed accordingly.
The FIRS further maintained that, contrary to the Company's claim, the CbCR Regulations 2018 are not a treaty but rather a regulation enforceable and promulgated pursuant to the FIRSE Act and that the CbC MCAA is not included in the list of treaties signed between Nigeria and any other country. The FIRS submitted that the CbC MCAA and CbCR Regulations 2018 are similar in nature but are two different legal documents, serving different purposes.
In conclusion, the FIRS stated that Section 92 of the Companies Income Tax Act (CITA) stipulates that there can be other rules or regulations made pursuant to the Act and specifies a penalty for cases where no penalty has been provided in either the Act or another rule or regulation. But, where another rule or regulation has specified a penalty, that penalty is extant and remains in force to the subjugation of the general penalties provided in Section 92 of CITA.
The TAT's judgment
The TAT ruled that the CbCR Regulations 2018 were not drafted by a Board of the FIRS that was legally constituted and properly composed, as it had been dissolved and had not been reconstituted at the time the regulation was promulgated. Also, in accordance with the provisions of Section 12 of the 1999 Constitution of the Federal Republic of Nigeria, every international instrument must first be domesticated after ratification before it can take on legal significance.
Furthermore, the TAT ruled that the notices of the administrative penalties served on the Appellant by the enforcement of the CbCR Regulations 2018 are unconstitutional and void.
The TAT's decision not to uphold the legality of the CbCR Regulations 2018 may bring about some resistance to the enforcement of the CbC administrative penalty. This development could significantly impede the FIRS's enforcement of the penalty provision of the Income Tax CbCR Regulations 2018 unless the Respondent files an appeal asking a higher authority to overturn the decision.
Nonetheless, companies should closely monitor developments on this topic to ensure they stay updated regarding their CbCR obligations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Nigeria, Lagos
Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 Section 26 of the FIRS Act provides that relevant persons are required to grant FIRS access to all computers, electronic devices or cloud computing facilities wherein records, data or information are stored or otherwise residing. Section 26 (3) of the FIRS Act provides the sanction for a defaulter, which is a fine equivalent to 100% of the amount of the tax liability.