Nigeria: Deductibility Of Punitive Payments In Corporate Tax Assessment

Last Updated: 4 September 2019
Article by Temiloluwa Oladele


Arguably, the most basic principles in business are minimising cost and maximising profit. Thus, it is not unnatural that businesses would seek to reduce their expenses to the barest minimum. Conversely, the tax authorities have the responsibility of ensuring that businesses pay their taxes in accordance with the tax laws.

Businesses sometimes incur punitive payments for default or violation of laws in the conduct of their businesses – commonly in the form of fines and penalties, and these punitive payments are sometimes substantial. It is likely that a business which has incurred substantial punitive payments would expect to treat such payments as deductible expenses in ascertaining its taxable profit. However, a pertinent issue is whether such punitive payments are tax-deductible.

Are Punitive Payments Tax-deductible?

The taxman recognises the need to allow room for businesses to thrive. As such, provisions are often made to allow the businesses pay taxes on only actual profits and not all incomes of the businesses. Thus, certain business expenses are deductible before the net income is taxed. These deductions are often referred to as "allowable deductions," while the part of the income to be taxed thereafter is referred to as the "taxable profit" or "chargeable profit."

The expenses that are tax-deductible are spelt out in section 24 of the Companies' Income Tax Act[1] ("CITA"), which is the primary statute on the taxation of companies doing business in Nigeria. The section lists tax-deductible expenses of a business to include expenses incurred during the applicable period wholly, exclusively, necessarily, and reasonably for the purposes of such business.[2] It would therefore appear that the tax authorities do not recognise such punitive payments as tax-deductible expenses and this is notwithstanding a general reluctance of businesses to pay tax on punitive payments like fines and penalties. The rationale for this may be that such expenses are avoidable in the realisation of the company's profits for the relevant year of assessment. Furthermore, punitive payments are by nature incurred only because the company defaulted or violated some law and as such, can hardly be said to have been incurred "necessarily" for the realisation of the profits of the company.

The deductibility of punitive payments in determining taxable profit, came up for determination in Federal Inland Revenue Service (FIRS) V. The Shell Petroleum Development Company of Nigeria Ltd (SPDC).[3] In that case, the Respondent (SPDC) had made tax deductions on amounts incurred for gas flaring in its tax returns. The Appellant (FIRS) contended that the deductions were penalties for gas flaring and therefore were not allowable deductions. Although the Court held that the payments were punitive payments, it decided that that such fees for gas flaring are not expenses wholly, exclusively and necessarily incurred for petroleum operations as envisaged under section 10 of the Petroleum Profits Tax Act.[4] Consequently, SPDC was not entitled to make tax deductions of the sums incurred.

A more recent case is that between MTN Nigeria Plc (MTN) and the FIRS, arising out of a N330 billion fine paid by MTN Nigeria Plc for failing to deactivate more than 5 million unregistered SIM cards as required by the Nigerian Communications Commission. In filing its returns, MTN treated the N330 billion fine as an allowable deduction and therefore did not account for it as part of its taxable profit. However, the FIRS disagreed with MTN on the deductibility of the fines in arriving at the taxable profit, and imposed tax on the fine. Dissatisfied with the FIRS' assessment, MTN has approached the Tax Appeal Tribunal (the "TAT") to determine the treatment of the fine as a tax-deductible expense. The matter is still pending before the TAT as at the time of this article.


It would be interesting to see how the TAT decides the MTN Nigeria appeal before it. At the moment, the decision of the Federal High Court ("the FHC") in Federal Inland Revenue Service v. The Shell Petroleum Development Company of Nigeria Ltd[5] which disallowed the tax-deductibility of punitive payments, may be considered binding on the TAT being an inferior court to the FHC, unless the TAT is able to distinguish the two cases.

Whichever direction the TAT takes in deciding the MTN Nigeria appeal, it would be important for the jurisprudence on deductibility of punitive payments as allowable expenses. Also, given the value of the sum in dispute – N330 billion, there is a good chance that any aggrieved party will appeal the decision until it gets to the Supreme Court.

[1] Chapter C21, Laws of the Federation of Nigeria 2004.

[2] Section 24(1) of CITA.

[3] (2018) 39 TRLN13.

[4] Chapter P13, Laws of the Federation of Nigeria 2004 which is similar to the test under section 24 of the CITA.

[5] Supra, note 3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions