Nigeria: Retroactive Application Of Finance Act 2019 – Analysis Of FHC's Decision In Accugas vs FIRS

The Federal High Court ("FHC" or "the Court") sitting in Abuja, on 27 June 2022, delivered a judgement on the applicability of tax amendments to transactions that arose prior to such amendments. The decision arose from an appeal by Accugas Limited (Accugas or the Company) against the Federal Inland Revenue Service (FIRS) and the Attorney General of the Federation.

The lone issue for determination in the case was whether (in light of the provisions of sections 6(1)(b) and (c) of the Interpretation Act) the provisions of the Finance Act, 2019 (FA 2019) can retroactively apply to periods, transactions, activities, and income earned prior to 13 January 2020 when the Finance Act was assented to. In this article, we have analyzed the decision of the FHC and the potential implications on businesses.

Background

In determining income tax payable in a particular tax year, companies are assessed to tax on a preceding year basis, in line with Section 29 (1) of Companies Income Tax Act (CITA). Thus, the tax assessment for a current year, 20X2 is based on the financial statements of the previous year, 20X1. In filing income tax returns, companies are required by Section 55 of CITA to submit amongst others, current year tax computations and audited financial statements which form the basis of preparing the tax computations. The tax returns are due for filing not later than six (6) months from the end of a company's accounting year end.

Where, in any year of assessment, a company has no profits to be taxed, has no tax payable or the tax payable is less than minimum tax, such a company is required to pay minimum tax, except it meets any of the conditions for exemption, as stated in Section 33(3) of CITA.

One of such conditions for exemption from minimum tax, prior to FA 2019, was having "at least 25% imported equity capital". FA 2019, which was signed into law by the President on 13 January 2020, amended a number of tax provisions, including Section 33(3)b of CITA. The amendment to Section 33(3)b of CITA replaced "a company with at least 25 per cent imported equity capital" with "a company that earns gross turnover of less than ₦25,000,000 in the relevant year of assessment". This amendment repealed the minimum tax exemption previously granted to companies with at least 25% imported equity, prior to FA 2019.

The key question therefore, is whether companies with at least 25% imported equity, prior to the enactment of the FA 2019, can still enjoy minimum tax exemption for periods/ transactions that preceded the amendments to Section 33(3)b of CITA by FA 2019. This was the issue brought for determination at the FHC, sitting in Abuja, by Accugas against the FIRS.

Overview of the Federal High Court's Decision

Accugas, with a financial year end of 31 December, had more than 25% imported equity as at 31 December 2019. Based on its audited financial statements for 2019 financial year, Accugas made a loss and had no taxable profits for that year . Thus, the Company was ordinarily liable to minimum tax assessment, in line with Section 33 of CITA. Given the requirement to file its income tax returns by 30 June 2020 and the amendments introduced by FA 2019, Accugas had, in July 2020, written to FIRS to confirm if the amendment to Section 33(3)b of CITA would affect its right to enjoy minimum tax exemption on its income earned between January 2019 and December 2019.

In its response, FIRS stated that the amendments made to CITA by FA 2019 apply to the Company's tax returns for 2020 year of assessment (YOA), based on its income earned between January 2019 and December 2019.

FIRS' position was on the basis that the 2020 YOA tax returns became due for filing in June 2020, after the passage of FA 2019 in January 2020. Thus, Accugas could not enjoy exemption from minimum tax on its income earned between January and December 2019.

Although Accugas paid the minimum tax and filed its tax returns accordingly to avoid interest and penalty on late payment, the Company was not pleased with the FIRS' position and thus, challenged the FIRS' position at the FHC.

The Company's argument was that, by virtue of Sections 6(1) (b) and (c) of the Interpretation Act, the amendment to Section 33(3)b of CITA on 13 January 2020, by FA 2019 cannot apply retroactively. Thus, in line with the doctrine of vested rights, the amendments to Section 33(3)b of CITA on 13 January 2020 cannot deprive Accugas of its vested right to enjoy exemption from minimum tax on income earned between January and December 2019. Accugas further argued that an action or operation carried out before a law is repealed, subsists even after the law is repealed, and that any right or transaction incurred under a repealed enactment is saved. Thus, applying the amendments introduced on 13 January 2020 to transactions that occurred prior to 13 January 2020, would amount to giving a retroactive effect, which has no basis in law, except where the enactment expressly states an intention for a retroactive application or effect.

FIRS argued that the Company's duty to file its 2020 YOA tax returns arose after 13 January 2020, the effective date of FA 2019, stating that tax issues are treated in line with the law in force at the time of the assessment. FIRS also argued that the doctrine of vested rights is inapplicable in the case, given that income earned in 2019 financial year, is ordinarily taxable in 2020 and not 2019.

In reaching its decision, the FHC established that the legal consequence of the repeal of an enactment is that it no longer exists from the date the repealing enactment comes into force. Notwithstanding, where any right, privilege or obligation is accrued to an individual or entity, under an enactment, those right are preserved despite the repeal of such enactment. The FHC considered the provisions of Section 6(1) (b) and (c) which states thus:

The repeal of an enactment shall not:

• affect the previous operation of the enactment or anything duly done or suffered under the enactment
• affect any right, privilege, obligation or liability accrued or incurred under the enactment

In determining what law is applicable in assessing the tax returns of Accugas for income earned between January 2019 and December 2019, the FHC relied on a number of decided cases, where it was established that the law that applies to a cause of action is the law in force when the cause of action arose. In the case of Accugas, the applicable law for taxing its income earned between January 2019 and December 2019, is the law in force as at 31 December 2019.

The FHC further established that while certain laws may be made to apply retrospectively, such retroactive application must be expressly stated in the enactment of the law.

Implications

The decision of the FHC has clearly established that amendments to tax laws cannot be applied retroactively, except where the law expressly states so. It has also established that any right, privilege or obligation that accrued to taxpayers under an enactment, are preserved despite the repeal of such enactment.

While the scope of the decided case above is restricted to minimum tax, as amended by FA 2019, there is a potential that taxpayers may challenge FIRS on similar issues as they relate to implementation of FA 2019, or any of the later Finance Acts for that matter. In addition, taxpayers may look to extend the judgement to other tax laws which may have been applied retroactively, following amendments by the Finance Acts.

However, the FHC's decision may be a departure from what is obtainable in practice, where taxpayers have been known to prepare self-assessed tax returns based on the prevailing law at the time of preparation, in order to give effect to amendments introduced by the Finance Acts 2019, 2020 and 2021. Aligning the position of taxpayers to the FHC's decision may create a ripple effect, given the replicated impact on FA 2019 and subsequent Finance Acts, which have since been implemented after FA 2019. In addition, some taxpayers enjoyed certain incentives and reliefs introduced by FA 2019, such as reduction in CIT rate for medium-sized companies and exemption from CIT and tertiary education tax for small companies. The implication of this judgement is that such incentives and reliefs may be withdrawn for the affected financial year and may only become available in the financial year after the effective date of FA 2019 (13 January 2020).

Given the recent practice of introducing Finance Acts for each fiscal year, it is important to ensure that the accrued rights of taxpayers in previous Finance Acts are preserved, especially considering the likelihood of a provision being amended or repealed by a new Finance Act. Where the intention is for a provision to have a retroactive effect, as may be applicable, it should be clearly stated in the law so as to forestall unnecessary controversy.

One question that begs for an answer is whether taxpayers whose accounts for 2019 FY have been tax audited by the FIRS, based on retroactive application of amendments introduced by FA 2019, would be entitled to a refund where the tax audit exercise resulted in additional liabilities which have already been settled by the taxpayer.

In other jurisdictions such as Kenya, laws passed by the National Assembly are applied prospectively, unless the law expressly states that it will apply retrospectively. Enactment of retrospective legislation, including tax legislation, is not unconstitutional, since it is not prohibited in the constitution. However, retrospective law can be deemed unfair and unconstitutional when its retrospective application is impractical and unreasonable. In a case between Kenya Bankers Association and the Kenya Revenue Authority, the High Court of Kenya ruled that retrospective imposition of higher excise duty on fees for money transfer services charged by financial institutions was unfair and unreasonable, as the change in law required the collection of tax emanating from transactions that had already been finalized before the date of enactment of the law. This was especially so, considering that the financial institutions only act as collection agents and excise tax due on the fees charged on money transfer services is borne by the customers.

Conclusion

Given the recent practice of introducing Finance Acts every fiscal year, it is important that the Government builds in reasonable timeline for transition, especially for amendments with significant impact, such as imposition of new taxes, change in tax rates, withdrawal of incentives and benefits etc.

Since the FIRS may choose to appeal the FHC's decision at the Court of Appeal (CoA), it remains unknown whether the ruling will be upheld or the matter will further proceed to the Supreme Court. Therefore, taxpayers are advised to take proactive measures by reviewing their records, in readiness for the ripple effect that may be created and make necessary adjustments that may be required, as far as tax compliance requirements and timely application of relevant tax laws are concerned.

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.