With effect from Thursday, July 11, 2019, Rule 4 of the Financial Reporting Council of Nigeria ("FRCN") Rules became no longer applicable. This is by virtue of a Public Notice issued by the FRCN, captioned: "Revocation of Rule 4". In this brief, we examine the implications of Rule 4, the controversies that surrounded it, and the new vista occasioned by its revocation.
Rule 4, NOTAP and Controversies on Corporate Expenditure:
Summarily, Rule 4 which was captioned: "Transactions Requiring Registration from Statutory Bodies such as the National Office for Technology Acquisition and Promotion" had stipulated that where statutorily-required registrations or approvals from statutory bodies were not obtained for registrable and approvable contracts, the expenditures in respect of those contracts should not be recognised as such by the reporting accountant and or auditors in the financial statements of the company.
Some tax authorities, external auditors, reporting and tax accountants, took the position that the effect of Rule 4 was to disallow expenses that required, but did not receive statutory approval; the more prominent case in point being contracts that require the approval of and registration by the National Office for Technology Acquisition and Promotion ("NOTAP"). The position being bandied was that in the absence of NOTAP approval and registration of a relevant contract, all relevant transactions arising from such contract could not be reported in a company's financial statements and accordingly would not be allowed for corporate income tax purposes. This was despite the legal opinions of some commercial law firms, such as ours, that consistently advised that the absence of NOTAP registration and or approval could not be the basis of disallowing an expense that was wholly, reasonably, exclusively and necessarily incurred in the generation of the relevant corporate profits. This advice is in line with express statutory tax laws, unlike that of a regulator's pronouncement such as Rule 4.
Rule 4 was made by the FRCN following the December 14, 2015 decision of the Federal High Court of Nigeria (the "FHC") in Suit No. FHC/L/CS/1596/2015: Stanbic IBTC Holdings Plc. v. FRCN and NOTAP ("Stanbic v. FRCN"). The FHC had held that failure to obtain approval on a registrable contract from NOTAP renders the registrable contract illegal and estops the company from making any payments or remittances in respect of the unapproved contracts. The FHC's decision was a sore one, particularly in the circumstance that the Court did not consider and hold itself bound by the 1985 decision of the Court of Appeal ("CoA") in Beecham Group Limited v. Esdee Food Products Nigeria Limited  3 NWLR (Pt. 11) 112 at 116 (the "Beecham Case") The CoA had decided in the Beecham Case that the penalty for non-registration under the NOTAP Decree No. 70 of 1979 (which is same as the NOTAP Act) was that foreign exchange will officially not be released for a transaction, the underlying contract of which was not approved by NOTAP. According to the CoA, non-registration does not make the transaction or the underlying contract invalid or unenforceable.
The CoA has however corrected the FHC decision in the recently decided Suit No. CA/L/208/2018: Stanbic IBTC Holdings Plc. v. FRCN and NOTAP where the CoA relied on Section 7 of the NOTAP Act to hold that the failure to register a registrable contract with NOTAP could not render such contract invalid, illegal, null or void. The CoA affirmed the position of the NOTAP Act to the effect that non-registration of a registrable contract only prevented the company from making payments under the unregistered contract through the Ministry of Finance, Central Bank of Nigeria or a licensed bank in Nigeria. Put simply, the company cannot access foreign exchange at the official rate or market for remittances outside of Nigeria under the unregistered contract.
The revocation of Rule 4 appears to be based on the CoA's reversal of the FHC's decision in Stanbic v. FRCN. The FHC decision and the subsequent creation of Rule 4 had generated a turbulent ripple through the Nigerian corporate space, especially in the recognition of legitimate expenses, which for practical commercial considerations were not subjected to non-mandatory regulatory approval. Commerce will often consider only that which is expressly prohibited as illegal and whatever is statutorily permissible, often because it is not prohibited, will mostly be adjudged on the altar of practicality; time and money most especially. The macabre dance occasioned by the FHC's decision in Stanbic v. FRCN and the creation of Rule 4 was a time-consuming distraction in the progress of commerce. Legislations must be read and interpreted for what they are. Unnecessary regulatory incursions, particularly when unsupported by clear and unambiguous statutory provisions must be jettisoned. The demands of a growing market economy could not be more. Clearly the decision of the FRCN to revoke Rule 4 removes the basis of sentiments that the CoA decision in Stanbic v. FRCN could still be revisited at the Supreme Court. The revocation of Rule 4 is indeed a welcome step in the right direction of correctly recognising legitimate corporate expenses.
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.