Nigeria: Re-Examining Whether A Speculative Tax Assessment Can Withstand Legal Scrutiny: Revisiting The 2012 Judgment Of The Tax Appeal Tribunal In Halliburton V. Firs

Background

Tax authorities have a duty to accurately and incorruptibly enforce tax laws. In recent times, it is not uncommon for individuals and corporations to receive "love letters" in the form of demands for payment of unsettled tax liabilities. On most occasions, a conflict immediately erupts and should the taxpayer and the tax authority fail to reach a common position, litigation beckons.

The 2012 tax appeals tribunal (TAT) case of Halliburton Energy Services Nigeria Ltd v. Federal Inland Revenue Service (FIRS)¹ featured a similar scenario. This was one of the country's most remarkable tax dispute experiences of the last decade.² This article revisits the judgment of the TAT in this case vis-à-vis the position of Nigerian tax laws on speculative tax assessments. We are optimistic that a review of similar tax judicial decisions would galvanize relevant tax authorities to action in improving current standards of tax administration.

Highlight of Facts

The Federal Inland Revenue Service ("FIRS" or "the Respondent") issued and served on Halliburton Nigeria, a notice of tax assessment dated 24^th February 2009 in the sum of $167,700,000 (one hundred and sixty-seven million, seven hundred thousand USD). By a follow-up letter dated 25^th February 2009, the FIRS attempted to shed light on its tax assessment in the following words:

In response, Halliburton Nigeria served FIRS a notice of objection dated 3^rd March 2009. The FIRS declined the objection and served a notice of refusal to amend (the tax assessment) on Halliburton Nigeria on 19^th March 2009. Aggrieved, Halliburton Nigeria commenced an appeal at the South West Zone of the TAT holden at Lagos State.

Halliburton Nigeria's (the Appellant) notice of appeal featured the following operative grounds:

1. The sum of $559,000,000.00 said to have been paid to the US authorities by Halliburton Inc (USA) was not representative of the amount of any alleged bribe payment.
2. Halliburton Inc (USA) does not conduct any trade or business in Nigeria, does not derive or accrue any income from Nigeria and does not have a fixed base in Nigeria so as to be chargeable to tax in Nigeria for any purpose whatsoever within the contemplation of the Companies Income Tax Act as amended (CITA).
3. The Appellant does not represent Halliburton Inc USA in Nigeria in any manner whatsoever and is not an agent or representative of Halliburton Inc USA in Nigeria.

In response, FIRS (the Respondent) filed its reply based on the following grounds:

1. The Respondent was right to issue the assessment because the Appellant is a member of the Halliburton Group. The parent company, Halliburton Inc USA is substantially present in Nigeria by virtue of the Appellant as per CITA. Investigations revealed that bribes were paid to Nigerian officials for operations within Nigeria which resulted in fines of $559 million being imposed on Halliburton Inc USA. The Appellant is a beneficiary of the bribe payment being the fixed base of the Halliburton Inc USA.
2. The notice of assessment was issued due to the amount paid by Halliburton Inc USA for operations in Nigeria.
3. The Respondent is of the opinion that the sum of $559m bribes paid by Halliburton for operations in Nigeria was again paid as fine.
4. Through its letter of 17^th March 2009, the Respondent declared the Appellant as agent of Halliburton Inc USA as provided for in CITA.
5. Halliburton West Africa Ltd, wholly owned by Halliburton Inc USA holds 70% of the Appellant's issued share capital.

During the pendency of the appeal, a Terms of Settlement and Non-Prosecution Agreement ("the Agreement") was executed on 11^th December 2010 between the Federal Government of Nigeria (FGN) and Halliburton Energy Services Inc USA. Clause 2 contains some instructive provisions which are reproduced hereunder:

Issues for Determination

The Tax Appeal Tribunal ("the Tribunal") preferred the issues for determination formulated by the Appellant which are presented as follows:

a. Whether the Terms of Settlement and Non-Prosecution Agreement entered into between the Federal Government of Nigeria acting by and through its authorised officials and agencies, and Halliburton Energy Services Inc and all its subsidiaries does not preclude the Respondent from making the assessment that is the subject matter of this appeal?

b. Whether the assessment issued by the Respondent and served on the Appellant in this case was valid?

c. Whether Halliburton Inc USA is a person chargeable to tax in Nigeria at all and in particular, whether it is chargeable to tax in relation to a sum of money paid by it as a fine to the government of the United States of America for breaching a law of the United States of America?

Relevant Legislations

1. Companies Income Tax Act (CITA).
2. Federal Inland Revenue Service (Establishment) Act 2007 (FIRSEA).

Arguments on Issues for Determination

First Issue

The first issue borders on the power/competence of the FIRS to issue the tax assessment which is the subject matter of this appeal.

Appellant's Argument

The Appellant submitted as follows:

1. The Agreement exempts the Appellant from criminal or civil suits.

Respondent's Argument

The respondent countered the appellant's arguments as follows:

1. Although Respondent admits that the Agreement exempts the Appellants from criminal and civil suits, the Appellant is not exempted from tax liabilities.

TAT's decision on first issue

The TAT brilliantly identified a potential obstacle to the determination of this issue. A quick glance at this issue would reveal that it is not derived from any operative ground in the Appellant's notice of appeal.³ The TAT then held that it was not, in a strict sense, an appellate court but a trial forum where evidence is led. Since the issue was raised indirectly; in the supplementary written statement on oath at paragraph 7, the TAT deemed the issue as an inseparable part of the Appellant's case during the trial.

With the obstacle out of the way, the TAT identified the essence of the Agreement as a major substratum of the Respondent's case. Then, the TAT held that the Respondent is precluded from either imposing a tax in relation to the substance of the Agreement, or commencing a civil or criminal suit against the Appellant; the Respondent is disallowed to renege on its agreement and maintain the instant action at the TAT.

Second Issue

The second issue borders on the validity of the tax assessment issued by the Respondent and served on the Appellant.

Appellant's Argument

The appellant submitted as follows:

i. There is no nexus ex facie, between the Notice of Assessment and Halliburton Inc. USA.

ii. The Notice of Assessment which describes the basis of the Appellant's tax liability as "disallowed expenses" is speculative.

iii. Sections 47 and 70 of CITA will not avail the Respondent as to validate the Respondent's Notice of Assessment.

In essence, the appellant argued that the Respondent's notice of assessment was invalid for being speculative, and for failing to correctly identify the parties sought to be charged.

Respondent's Argument

The respondent answered the appellant's arguments on the second issue as follows:

i. The Appellant is the Nigerian agent/representative of Halliburton Inc. USA.

ii. By the provisions of sections 47, 49(1) and 70 of CITA and section 31 of the FIRSEA:

For emphasis, section 70(2) of CITA (and its proviso) cited by the Respondent states thus:

Provided that in cases of assessment the notice thereof shall be duly served on the company intended to be charged or the person in whose name such company is chargeable and such notice shall contain, in substance and effect, the particulars on which the assessment is made".

TAT's decision on second issue

The TAT noted that the Appellant's witness admitted to the Appellant being a subsidiary of Halliburton Inc USA, making profits for which it is accountable to the US company to the extent of its stake. The TAT also deemed the Halliburton Inc USA's notice in writing appointing the Appellant as its agent as evidence of the Appellant's agency.

The TAT then held the Appellant as an agent of the US company within the meaning of section 38 of CITA. By this and section 70(2) of CITA, the TAT resolved the issue of the identity of the party sought to be charged in favour of the Respondent.

Meanwhile, the TAT also decided to address some "fundamental gaps" in the Respondent's Notice of Assessment. the TAT went on to highlight the following:

1. The notice of assessment asserts that $559 million amounts to "disallowed expenses" and must be computed as part of the "profits" accruing to the Appellant, on which tax must be paid.
2. The covering letter asserts that the said $559 million is a fine in lieu of bribes given to Nigerian officials.
3. The letter concludes by enquiring about the exact amount of the bribe, showing that its quantum is unknown by the Respondent.

From the points isolated above, the TAT observed that even if section 70(2)(a)(ii) of CITA would excuse the mis-description of any "profits", the Respondent's notice of assessment creates huge doubts as to the status of the amount in issue – "profits" or "fine"? In the absence of any evidence that either Halliburton Inc USA or the Appellant (or any of its subsidiaries) sought to claim the said $559 million as allowable deductions, the assertion by the Respondent that it amounts to "disallowed expenses" creates a burden of proof on the Respondent.⁴

The Respondent's failure to discharge this onus of proof brings into graphic focus the contradiction in its notice of assessment. While the notice itself claims that the tax liability arises from "profits" or "allowance", the covering letter claims that the liability arises from "a fine in lieu of bribery". The TAT found this contradiction as substantial and fatal to the Respondent's case. Therefore, the court held that the Respondent's case is speculative, contradictory, and untenable as to raise a valid tax liability against the Appellant.

Third Issue

The third issue addresses the questions of Halliburton Inc USA's taxability in Nigeria, particularly in relation to the sum of money paid by it as a fine to the USA government for legal breaches. The arguments of both parties did not deviate from their respective arguments on the first two issues as detailed above.

TAT's decision on third issue

Although the TAT agreed with the Respondent that a foreign company may, in appropriate circumstances, be liable to tax in Nigeria,⁵ it noted that the question raised by this issue transcends such general tax law principle. The court also noted that section 9(1) of CITA cited by the Respondent outlines a crucial ingredient to sustain a tax assessment on a foreign company as only profits of a foreign company "accruing in, derived from, brought into or received in Nigeria".

The court observed from evidence adduced that the Respondent speculated that the fine of $559 million or "the entire bribe would have formed part of the expenses that was charged in the tax returns to FIRS". The court found the Respondent wanting in the discharge of the onus to establish these important ingredients in relation to the sum in question - $559 million.

In conclusion, the court held that whilst the income of foreign companies may be taxable in Nigeria in appropriate cases, Halliburton Inc USA is not chargeable to tax in Nigeria with regard to the fine it paid to the American Government in the circumstances of this case.

Commentary/Conclusion

Like several tax provisions, sections 47 and 70(2) of the CITA could be combined by relevant tax authorities to devastating effect against hapless taxpayers. This is due to the possibility of misinterpretation. Thus, this case presented the TAT with a unique opportunity to shed much-needed judicial light on the propriety of speculative notices, and the tax assessments themselves.

Fortunately, the TAT exposed the Respondent's notice of tax assessment for the sham that it was. Indeed, human beings constitute tax institutions. A revisit of this TAT judgment presents a wholesome opportunity for the Respondent to include continuous staff (re)orientation as part of its tax administration capacity building programmes. The timeliness of this review has never been more self-evident at a time when the Respondent and the Lagos State Internal Revenue Service (LIRS) have forged a collaboration to drive tax compliance.⁶

Also worthy of note is the ingenuity and judicial activism displayed by the TAT. Had the TAT stuck to iron-fisted technicalities in its determination of the first issue, the core of the facts of the dispute between the parties would have been lost in evidence. Instead, the TAT modestly pronounced itself as a trial forum rather than an appellate court stricto sensu. It is submitted that this TAT posture is exemplary as the primary focus of the judiciary should be the attainment of substantial justice for the common good of the society.

Footnotes

1. Unreported. Suit No: TAT/LZ/003/2011.

2. Olalekan Sowande, 'Halliburton v. FIRS Judgment Review', S. P. A. Ajibade & Co, available at (https://spaajibade.com/halliburton-vs-firs-judgment-review/) last accessed 16^th June 2023.

3. On the authority of Management Enterprises Limited & Anor v. Jonathan Olusanya (1987) 2 NWLR (Pt. 55) 179 (upheld by the Supreme Court in IMB v. Tinubu (2001) 16 NWLR (Pt. 740) 670 at 691), a court of law particularly an appellate court, may only hear and decide on issues raised from the grounds of appeal filed before it. An issue not covered by any ground of appeal is incompetent and will be struck out.

4. Section 136(1) of the Evidence Act, 2011.

5. Section 9 of CITA.

6. Posted on 8^th June 2023 at 8:40 am via the official Twitter handle of the FIRS, "Federal Inland Revenue Service NG" @FIRSNigeria, (https://twitter.com/FIRSNigeria/status/1666711864015814656?t=aXwQOJAOP98a9DEBE9MdrQ&s=08), last accessed 13^th June 2023.

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