Introduction
In an increasingly globalized economy, Double Taxation Agreements (DTAs) serve as critical instruments for fostering cross-border trade, investment, and cooperation. These bilateral treaties are designed to eliminate or mitigate the burden of double taxation on income earned across jurisdictions, thereby promoting economic efficiency and fairness. Nigeria, as part of its international tax strategy, has signed DTAs with fourteen countries, with eight more pending ratification. These agreements are modeled largely on the OECD Model Tax Convention (MTC), and they allocate taxing rights to relevant countries, prevent tax evasion, and provide mechanisms for dispute resolution.
However, the practical implementation of accessing these treaties in Nigeria reveals a complex and often contentious landscape. At the center of this complexity lies the Nigerian Revenue Service (NRS, formerly Federal Inland Revenue Service (FIRS)), Nigeria's corporate tax authority, which has issued administrative circulars that significantly influence how treaty benefits are accessed. These circulars, while intended to guide taxpayers, have introduced procedural hurdles that raise fundamental questions about the nature of treaty rights, the role of administrative discretion, and the balance between enforcement and facilitation.
This article critically examines the weight attributed to the tax authority's circulars in interpreting DTAs and accessing treaty benefits in Nigeria. It argues for a rethinking of the current framework, advocating for greater transparency, consistency, and a shift towards automatic treaty relief.
The Legal Framework of DTAs in Nigeria
DTAs are international treaties governed by the principles of public international law, particularly the Vienna Convention on the Law of Treaties. They are negotiated and signed by sovereign states and, upon ratification, become binding legal instruments. In Nigeria, the DTAs are duly incorporated into the domestic law through legislative processes. The interpretation of DTAs typically relies on several sources:
- The provisions of the treaty itself
- Domestic tax laws (where applicable)
- Judicial decisions
- Commentaries from the OECD and UN Model Tax Conventions
- Administrative guidance, including circulars issued by tax authorities
While the first three sources are generally recognized as authoritative, the role of administrative guidance, particularly circulars issued by the NRS has become increasingly prominent and controversial.
FIRS' Circulars on Claim of Treaty Benefits: Guidance or Gatekeeping?
The FIRS has issued information circular(s) outlining procedures for accessing treaty benefits in Nigeria. These include requirements for submitting a treaty eligibility application, providing a certificate of residence from the relevant foreign tax authority, and undergoing a Principal Purpose Test (PPT) to assess the commercial substance of the arrangement.
While the information circular is intended to prevent treaty abuse and ensure compliance, it is not legally binding, as it does not have the force of law and cannot override the provisions of a treaty or domestic legislation. This is affirmed in the case between Halliburton West Africa Limited vs FIRS, where the court held that circulars are essentially explanatory notes and does not qualify as a form of legislation. Yet, in practice, the circular function as gatekeeping mechanisms that determine whether a taxpayer can access treaty benefits.
This duality, where non-binding guidance effectively dictates access to legally binding rights, creates a grey zone that undermines legal certainty and fairness. Taxpayers are therefore caught between the formal entitlements granted by the treaty and the procedural hurdles imposed by administrative discretion.
The Principal Purpose Test: A Double-Edged Sword
The PPT is a key anti-abuse provision introduced in the OECD's Base Erosion and Profit Shifting (BEPS) project. It allows tax authorities to deny treaty benefits if one of the principal purposes of a transaction or arrangement is to obtain those benefits in a manner that is not in line with the object and purpose of the treaty.
In Nigeria, the FIRS has adopted the PPT as part of its treaty eligibility assessment. While this aligns with global best practices, its implementation raises concerns about subjectivity, transparency, and consistency as highlighted below:
- Subjectivity: Determining the "principal purpose" of a transaction involves assessing intent, which is inherently subjective. Without clear guidelines or judicial oversight, this can lead to arbitrary decisions.
- Transparency: The criteria used by the FIRS to apply the PPT are not publicly disclosed, making it difficult for taxpayers to anticipate outcomes or challenge decisions.
- Consistency: The lack of standardized procedures means that similar cases may be treated differently, undermining the principle of equal treatment under the law.
The PPT, therefore, functions as both a shield against abuse and a sword that can cut off legitimate access. If not critically applied, it would introduce uncertainty into Nigeria's tax regime and may deter foreign investment.
Claim of Treaty Benefits: Automatic Entitlement or Requires Application?
One of the most contentious aspects of Nigeria's DTA implementation is the requirement for taxpayers to apply for treaty benefits. This procedural requirement transforms treaty access from a legal entitlement into a discretionary process.
In many jurisdictions, treaty benefits are granted automatically at source, based on documentation such as a certificate of residence. Nigeria's insistence on pre-approval reflects a compliance-oriented approach, but it also imposes a significant burden on taxpayers, as the approval process can be slow, leading to uncertainty and cash flow issues. There is also the risk of eligible taxpayers being denied the benefits based on subjective assessments.
This approach contradicts the spirit of DTAs, which are designed to facilitate, not hinder, cross-border economic activity. It also raises legal questions about whether administrative procedures can override treaty rights.
The Role of Administrative Guidance in Treaty Interpretation
There is no doubt that administrative guidance, including the issuance of information circulars, play an important role in clarifying complex tax administration issues. However, its legal status must be clearly understood. Circulars may be useful in interpreting ambiguous provisions and communicating the tax administrator's procedures for upholding the provisions of the law, but they must be consistent with the treaty and domestic law. This is because Circulars are not legislation, but a mere expression of the tax authority's views, which should not create new legal obligations. As such, taxpayers have the right to challenge administrative decisions that conflict with legal provisions.
In Nigeria, the weight attributed to the Circulars issued by the FIRS (now NRS) appears disproportionate. They have been misconstrued as de facto law, even when they conflict with statutory provisions or treaty texts. This undermines the rule of law and creates a climate of uncertainty.
Towards a More Transparent and Efficient System
To address these challenges, Nigeria should consider reforming its approach to treaty access. Our key recommendations include:
- Automatic Grant of Treaty Benefits
Move towards a system where treaty benefits are granted automatically at source, provided the taxpayer is resident in the relevant treaty country and documentation such as evidence of residency is available. For ambiguous arrangements, taxpayers can be encouraged to seek advance rulings from the NRS to confirm eligibility to the treat benefits. This would reduce compliance burdens and enhance certainty.
- Clear Guidelines for PPT
Develop and publish detailed guidelines on how the PPT is applied, including examples and criteria. This would provide guidance, improve transparency and allow taxpayers to structure their affairs with confidence.
- Judicial Review of Administrative Decisions
There should be a dispute resolution mechanism to address a situation where the taxpayers do not agree with the FIRS ruling on treaty eligibility. This would ensure that affected companies are eligible to seek judicial review or contest the FIRS decision in court. This would provide a check on administrative discretion and uphold the rule of law.
- Harmonization of Circulars with Legal Provisions
Review and revise information circulars to ensure they are consistent with treaty texts and domestic legislation. Circulars should be treated as interpretive tools, not binding rules.
Conclusion: Reimagining Treaty Access in Nigeria
Nigeria's DTAs are powerful instruments for economic diplomacy, but their potential is undermined by procedural hurdles and administrative opacity. The current system, which requires taxpayers to apply for treaty benefits and undergo subjective evaluations, transforms legal entitlements into discretionary privileges.
To unlock the full benefits of its treaty network, Nigeria must embrace a more transparent, consistent, and facilitative approach. This means recognizing the non-binding nature of administrative circulars, ensuring judicial oversight, and moving towards automatic treaty relief.
By reimagining treaty access, Nigeria can position itself as a more attractive destination for investment, enhance its international reputation, and uphold the principles of fairness and legal certainty that underpin the global tax system.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
