Nigeria: Applicability Of The Doctrine Of Legitimate Expectation In Tax Disputes

The doctrine of legitimate expectation is a common law principle, which requires that public authorities respect a consistent practice or representation made by them to members of the public. The doctrine generally operates to limit a public authority's ability to act contrary to a person's legitimate expectation where such expectation is based on a consistent practice or representation made by the public authority to them. The doctrine is rooted in the equitable principle of fairness and is aimed at ensuring a degree of legal certainty.

The relevance of this doctrine came to the fore again, when on 10th June 2021, the Tax Appeal Tribunal (TAT) in the case of Federal Inland Revenue Service (FIRS) v New Cross Petroleum Limited (New Cross) held that New Cross was liable to pay the taxes assessed by the FIRS for 2011 to 2012, even though the Nigerian Investment Promotion Commission (NIPC) had previously granted Pioneer Status Incentive (PSI) to New Cross for 2008 – 2012 (5 years). The NIPC had subsequently reduced the PSI earlier granted to New Cross from 5 years to 3 years and communicated this via a letter dated 26th January 2015, thereby withdrawing the PSI for years 2011 and 2012. This article seeks to analyse the applicability of the doctrine of legitimate expectation in the resolution of tax disputes, with the New Cross case as a case study and the extent (if any) to which a taxpayer can rely on representations made by the tax authorities or other public officials in organising their tax affairs.

Brief Facts of the New Cross Case

New Cross filed its tax returns for the 2011 and 2012 Years of Assessment and attached its PSI certificate issued by NIPC. However, the FIRS issued a notice of assessment dated 29th January, 2015 and demand notice dated 30th January 2015 on the Company. Attempts by the parties to resolve the issues were unsuccessful. Thus, in August 2020, the FIRS instituted an action at the TAT, arguing amongst other things, that the NIPC lacked the power to issue PSI certificate to New Cross and that the PSI certificate issued to New Cross for a duration of 5 years is invalid in law given that the Industrial Development (Income Tax Relief) Act (IDITRA) allows only for an initial period of 3 years renewable for two additional years. The TAT agreed with the argument of the FIRS and held that the PSI certificate issued to New Cross had elapsed based on the reduction by the NIPC and that the IDITRA, does not cover the oil and gas industry.

Key Issues Arising from the New Cross Case

PSI was introduced in 1971 and the objective of the incentive is to grant tax exemption and tax reliefs to qualifying industries and products designated as priority areas, as a means of driving investment and growth in those industries. Based on the strict interpretation of the IDITRA, which defines 'Principal Act' as the Companies Income Tax Act (CITA), it can be inferred that PSI should ordinarily apply only to companies taxable under CITA. Furthermore, Section 26 of the IDITRA provides that the IDITRA should be read as one with the CITA.

Despite the provisions of the IDITRA, the NIPC issued PSI certificates to about 22 upstream companies, including New Cross, although they are not taxable under the CITA regime. New Cross' certificate covered a one-off five year period from 2008 to 2012, as against the initial three-year period provided for in the IDITRA.

Given the fact that it is the NIPC that administers and grants PSIs, it should ordinarily be presumed that a public authority would act within the ambit of the law and New Cross should be able to rely on the PSI certificate issued by NIPC.

Thus, should NIPC be able to validly reduce the PSI to 3 years after the company has already utilised the incentive? Should it be a tenable argument that the incentive should not have been granted to companies in the oil and gas industry, given the fact that the FIRS accepted and recognised the PSI certificate issued to New Cross (and other companies) covering the initial three years of 2008 to 2010 and did not contest same? Consequently, should the FIRS assess the company to tax on the basis of the retrospective reduction issued by NIPC and should the TAT have upheld this assessment? To what extent can a taxpayer rely on representations made by a public authority and to what extent (if any) would the doctrine of legitimate expectation apply in this case?

A Review of Relevant Precedents

Generally, the doctrine of legitimate expectation posits that public authorities should be bound by representations made, because legal certainty, being a tenet of the rule of law, requires that people ought to plan their affairs, secure in the knowledge of the legal consequences of their actions. In Kenya Airways v. FIRS¹ , Kenya Airways, a company engaged in air transport in Nigeria, had for a period of time been subjected to income tax at the minimum rate of 2% of the full sum recoverable in respect of carriage of passengers, livestock and goods loaded unto an aircraft in Nigeria. In 2015, FIRS directed all non-resident companies to file their annual tax returns in line with Section 55 of CITA i.e. based on their actual income. Thereafter, the FIRS audited Kenya Airways for 2009 - 2014 Years of Assessment and raised additional tax assessments and demand notices based on 6% of the airline's turnover. The airline contended that it paid taxes based on 2% of its turnover, as is the practice. The TAT held that Kenya Airways is entitled under the doctrine of legitimate expectation to expect that additional assessments should be based on a tax rate of 2% of its turnover based on the practice of the FIRS.

While it would appear that the courts can more easily resolve issues bordering on procedural legitimate expectation i.e. the procedure a public authority ought to follow, the courts have found it rather difficult to resolve issues of substantive legitimate expectation i.e. where a public authority makes a representation based on the substantive law.

In Saipem Contracting Nigeria Ltd v. FIRS² , Saipem obtained an Advanced Tax Ruling (ATR) from the FIRS in respect of a contract to determine whether or not the non-resident party to the contract will be taxable in Nigeria. The FIRS however assessed the non-resident party to tax. The court held that Saipem cannot rely on the doctrine of legitimate expectation, given that the ATR cannot override the mandatory provisions of the CITA. It was further discovered on appeal that Saipem had entered into the contract before obtaining the ATR from the FIRS and as such cannot be said to have relied on the ATR to its detriment.

Conversely, in Shell Petroleum Development Company Limited v. Federal Board of Inland Revenue³ , Shell entered into an extra-statutory agreement with the Federal Government (FG) to allow it deduct exchange losses and central bank commissions incurred by it; this led to reduced petroleum profits tax payable by Shell. The FBIR however assessed Shell to tax. The Supreme Court upheld the agreement between Shell and the FG. The court stated that although the agreement varied the statutory obligation of Shell, the agreement is not illegal and the tax authority being an agent of the FG is bound by the agreement between its principal and a taxpayer. In this case, it appears the court upheld the extra-statutory agreement between Shell and the FG, and by so doing, the Supreme Court protected the legitimate expectation of the taxpayer.

Concluding Thoughts

It is trite that the provisions of tax statutes should be construed strictly. As highlighted in some of the cases above, the courts seem to limit the application of the doctrine of legitimate expectation where the representation made by the revenue (or public) authority contradicts the clear provisions of the law.

The big question is what protection can be offered to taxpayers who have relied on a consistent practice or representation made by the revenue authority or other public authority to their detriment? Would it not be unfair and cause untold hardship to a taxpayer, for the court to disregard a previously accepted practice or representation or allow the public authority renege on its assurances? The narrow application of the doctrine adopted by our courts may affect taxpayers' and investors' confidence, and may weaken the trust reposed in our public administration system.

Taxpayers must therefore exercise caution when relying on representations made by tax authorities or on consistent practice of the tax authorities, as they may have no remedy in law even when such misrepresentation, negligent or unauthorised promises or assurances or practice of tax authorities or other public authority is to their detriment.

Footnotes

1 TAT/LZ/CIT/017/2015

2 (2014) 15 TLRN 76

3 (1996) LPELR-3049 (SC)

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