We are delighted to share insights from recent tax cases from the Tax Appeal Tribunals and Courts in Kenya, Nigeria and South Africa. This seminal publication from PwC's Tax Controversy & Dispute Resolution Team aims to bring businesses and taxpayers up to date with landmark tax decisions.

Some of the cases analysed from Kenya include cases relating to the definition of exported services for VAT purposes, taxpayer's right to VAT refunds for exported services where no agency relationship exists, definition of "interest" for the purpose of the Excise Duty Act 2015 and whether interchange fees earned by banks issuing credit / debit cards are subject to VAT.

From Nigeria, we analysed decisions relating to the extent of the executive's power to make or amend tax statutes, applicability of Double Tax Treaty Commentary to the France-Nigeria Double Tax Treaty with respect to income from shipping operations, the applicability of Value Added Tax to commercial and residential leases as well as the precedent setting decision on the applicability of Withholding Tax to sales in the ordinary course of business, an appeal in which our Tax Controversy & Dispute Resolution team represented the taxpayer.

Finally, cases analysed from South Africa include cases relating to the Voluntary Disclosure Programme (VDP), particularly on the question of whether interests can be remitted and the definition of "voluntary" and "disclosure" under the VDP, instances where VAT refunds would be made to taxpayers and potential liability of representative taxpayer or withholding agent for taxes of third party taxpayer.

If any of these cases impact you or your operations directly or indirectly, we would be delighted to discuss them further with you. Please contact any member of our Tax Controversy & Dispute Resolution teams in the respective offices.

CMA CGM Delmasa SA v. FIRS

TAT/LZ/CIT/028/2017

Tax Appeal Tribunal rules that Commentary to Model Tax Convention is not applicable to Article 8 of the France-Nigeria Double Tax Treaty

Background

Section 14 of CITA provides special rules for taxing income from shipping activities which limits the taxable profit to income from outbound transport.

Article 8 of the OECD Model Tax Convention (MTC) allocates the taxing rights to the resident state of a shipping company on income arising from Shipping and Air Transport (in international traffic). The Double Tax Treaty (DTT) between France and Nigeria is modelled after the MTC. However, Article 8(2) of the DTT deviates from Article 8(2) of the MTC. It provides that income derived by the resident of a State from such activities in another State are exempt from tax in the other State, but where enterprises of only the State of resident carry on international traffic, tax at 1% of "earnings" is to be imposed by the other State from which the income is earned. MTCs are always supplemented by Commentaries which are intended to aid interpretation of DTTs modelled after the MTCs. These Commentaries are updated from time to time.

Facts of the appeal

In CMA CGM Delmasa SA v. FIRS, the taxpayer, an international shipping company, earned income from shipping activities including carriage of goods, demurrage, container cleaning, shipping line agency charge (SLAC), bonded terminal commission etc. FIRS assessed the taxpayer to tax on the income of over N1 billion for the years 2014 and 2015. The FIRS issued a notice of refusal to amend after the taxpayer objected.

Questions before the Tribunal

The questions for determination before the Tribunal were:

  • Whether the sums in dispute (demurrage, cleaning fees, container sales, shipping line agency commission, bonded terminal commission and NIMASA levy), being directly connected and ancillary to the carriage of goods from foreign countries into Nigeria are taxable in Nigeria?
  • Whether the Appellant is liable to penalty and interest in respect of the sums in dispute?

Taxpayer arguments:

  • By Article 8 of the DTT and the accompanying Commentary, such income, being ancillary to in-bound freight were exempt from tax in Nigeria,
  • According to the MTC Commentary, income from ancillary or non-freight activities such as leasing of containers, storage etc. are defined as arising from international traffic so are tax exempt.
  • Interest and penalty would not apply given that the assessment had not become final and conclusive.

FIRS' arguments:

  • By specifically listing the exempt income, Article 8 does not extend to non-freight income therefore such income would be taxable under the CITA regardless of whether they arise from in-bound or out-bound transport,
  • Since Nigeria was not a member of the OECD, the Commentaries could not be relied on to interpret the France-Nigeria DTT,
  • The taxpayer was subject to interest and penalty for failure to pay the tax in question as and when due.

The decision

The Tribunal held that based on treaty supremacy, the DTT would apply in place of section 14 of CITA. However:

  • the Commentaries were supplementary to DTTs and provided guidance only when the provisions of the DTT are similar with the MTC,
  • in this appeal, Article 8 of the DTT was substantially different from Article 8 of the MTC therefore the Commentaries could not be relied on to interpret Article 8,
  • the income in question - non-freight income was not covered by the provisions of Article 8 therefore, the income was subject to tax under CITA,
  • Finally, interest and penalty only stop to accrue once an appeal is filed but they attach upon payment of tax as and when due.

Analysis and takeaway

The crux of the appeal was whether the Commentaries to the MTC would apply when interpreting Article 8 of the France-Nigeria DTT. The question of whether the Commentaries are binding would usually depend on whether the Commentaries are static (extant at the time of negotiating the DTT) or ambulatory (amended after the DTT has come into force).

Generally, Commentaries in existence at the time DTTs are negotiated should be relied on by courts when interpreting DTTs. The rationale is that States are presumed to have intended to be bound by these except they registered reservations during treaty negotiations. Ambulatory commentaries may also be binding if it can be established that during treaty negotiations Contracting States expressed an intention to be bound by the terms consistent with the updated commentaries.

It is also necessary to note that courts and tribunals may be reluctant to apply Commentaries where the provisions in DTTs are not identical with the MTC. So, taxpayers intending to rely on the Commentaries must inquire whether DTT provisions are consistent with the text of the MTC. They must also find out whether any of the Contracting States made reservations or objections during negotiations. Where there are reservations or objections, it is less likely that the Commentaries are binding.

However, an examination of Article 8(1) of both the DTT and MTC show that both Articles are similar as they both allocate taxing rights to the State of residence of the shipping company. Therefore, the Commentary to Article 8(1) which defines the "profits" of such companies to include profits arising directly or ancillary to shipping operations such as renting containers, providing services etc. should be relevant for the purpose of interpreting Article 8(1) and the Tribunal should have relied on it. Taxpayers may, as an alternative to litigation, also explore the Mutual Agreement Procedure under DTTs.

It is instructive that the Finance Act 2020 has introduced a new subsection (5) to the section 14 of CITA which expands the category of taxable income of shipping and airline companies. Per the amendment, all incidental or non-freight income such as leasing income are taxable under CITA. It will be interesting to see how the amendment impacts Article 8 of DTTs.

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