News

Court rules that only the NASS can alter the Taxes and Levies (Approved List for Collection) Act (Amendment) Order 2015.

June 16, 2020

On 8th May 2020, the Federal High Court, Lagos Division, delivered judgment in a matter between The Registered Trustees of Hotel Owners and Managers Association of Lagos (suing for itself and on behalf of all its members) (“the Plaintiff”) v The Attorney General of the Federation & the Minister of Finance (“the Defendants”).

The matter bordered on the constitutionality of the Taxes and Levies (Approved List for Collection) Act (Amendment) Order 2015 (Minister Order 2015) issued by the Minister of Finance pursuant to the provisions of Section 1(2) of the Taxes and Levies (Approved List for Collection) Act, Cap T2, LFN 2004 (Approved List for Collection), which grants the Minister of Finance the powers to amend the Schedule to the Approved List for Collection. The court held the Ministerial Order 2015 to be unconstitutional, null and void.

Highlights of the Case

The Plaintiff contended the power bestowed on the Minister of Finance under Section 1(2) of the Approved List for Collection. It claimed that the power conferred on the Minister of Finance encroached on the powers of the National Assembly under Section 4 of the Constitution, and the delegation of the power to amend the Schedule of the Approved List of Collection to the Minister of Finance is unconstitutional.

On the other hand, the Defendants argued that the Minister of Finance has the statutory power to amend the Schedule to the Approved List for Collection and that such exercise is not inconsistent with the provision of Section 4 of the Constitution.

The court held that the:

i. Power confined on the Minister of Finance under Section 1(2) of the Approved List for Collection, does not qualify as delegated legislation, as the exercise of the power affects the terms and wordings of an enactment, and the Minister of Finance cannot validly exercise such power.

ii. Ministerial Order 2015 seeks to add to the text of and change the main legislation. The power to legislate lies with the Parliament and cannot be shared with another body.

iii. Power exercised by the Minister of Finance was not under Section 315 of the Constitution but under Section 1(2) of the Approved List for Collection. The Minister does not fall under scope of Section 315 as it is not the appropriate authority with powers to reverse or rewrite the laws of the Federation.

iv. Ministerial Order is null, void and unconstitutional.

Our Thoughts

We agree with the reasoning of the court that the Minister of Finance or any other person (other than the National Assembly) does not have the power to amend or add to existing laws. Consequently, all the taxes and levies contained in the Ministerial Order 2015 can no longer be enforced as they are not contained in the Approved List for Collection or any other relevant tax legislation.

The decision of the FCT High Court in the case between Abuja Electricity Distribution Company (AEDC) v Kuje Area Council (KAC), also reiterates that the Government or any of its agencies have no legislative power to create or impose any tax or levy outside the ambits of the Constitution and the Approved List for Collection. The Court of Appeal in Eti-Osa Local Govt. v Jegede (2007) also confirms this fact when it held that taxes cannot be enforced, except they are contained in Part III of Decree No. 21 of 1998.

This judgement also reinforces our concerns as to the validity of the penalties imposed by the Federal Inland Revenue Service (FIRS) in the Income Tax (Transfer Pricing) Regulation 2018 and other Regulations issued by FIRS, as we are of the view that the tax authorities do not have the powers to add to or change the main legislation.
This recent judgment has made redundant the provisions of the Ministerial Order of 2015. Until this decision is upturned by a superior court, it remains the position of the law. Therefore, all taxes introduced by the Ministerial Order 2015 have become null and void and cases decided on its strength may be contested.

We hope that in line with this judgment, other delegated legislative powers exercised beyond limits will be rendered unconstitutional.

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Significant Economic Presence in Nigeria – The Minister of Finance Issues Clarification Order

June 2, 2020

The recently enacted Finance Act (“the Act”) which amends amongst other tax statutes, the Companies Income Tax Act (CITA), introduced a new clause in Section 13 of CITA on taxation of Non-resident Companies (NRCs) with a Significant Economic Presence (SEP) in Nigeria. The Act however did not clarify what constitutes a SEP but rather gave the Minister of Finance the power to determine what constitutes the SEP of a company other than a Nigerian company.

Accordingly, in exercise of the powers conferred on the Minister, the Companies Income Tax (Significant Economic Presence) Order 2020 (“the Order”) was issued clarifying what constitutes a SEP of a company other than a Nigerian company under Section 13(2)© of CITA.

Highlights of the Order

The Minister through the Order states that a company other than a Nigerian company shall be deemed to have SEP in Nigeria in any accounting year where it:

Derives gross turnover or income of more than N25 million or its equivalent in other currencies, in that year from any or a combination of the following:

Streaming or downloading services of digital content, including but not limited to movies, videos, music, applications, games, and e-books to any person in Nigeria.
Transmission of data collected about Nigerian users which have been generated from such users’ activities on a digital interface including websites or mobile applications.
The threshold of ₦25 million gross revenue also aligns with the exemption of companies with turnover of less from income tax.
Provision of intermediation services through a digital platform; website or other online application that links suppliers and customers in Nigeria.
Using a Nigerian domain name (.ng) or registers a website address in Nigeria.
Has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency.

2. Activities of connected persons of the NRC in the accounting year shall be aggregated in determining the ₦25 million threshold.

3. A non-resident company covered under a multilateral agreement or consensus arrangement which addresses the tax challenges arising from digitalization of the economy to which Nigeria is a party shall be treated in accordance with the provisions of such document(s) from the effective date in Nigeria.

4. A business comprising the furnishing of technical, professional, management or consultancy services is deemed to have SEP in Nigeria in any accounting year where it earns any income or receives any payment from a person resident in Nigeria or a fixed base or agent of a company other than a Nigerian company in Nigeria. Services of a technical nature mean any service of a specialized nature that is not professional, management, or consultancy, such as advertising, training, or the provision of personnel.

5. Payments made to an employee under a contract of employment, relating to educational activities and payments made by a foreign fixed base of a Nigerian company will not form part of the basis for determination of a SEP in Nigeria.

Our Comments

The Order has resolved the ambiguities surrounding the definition and interpretation of what constitutes SEP. The decision by the Minister to provide clarifications in this regard is therefore commendable.

The Organisation for Economic Cooperation and Development (OECD) remarks that a non-resident company has significant economic presence in a jurisdiction where it has a purposeful and sustained interaction via digital technology and other automated means. Other factors for determining what constitutes a SEP were also considered in the Order.

The threshold of ₦25 million gross revenue also aligns with the exemption of companies with turnover of less from income tax. This provides for fairness in the taxation of non-resident companies. Non-resident companies (NRCs) with SEP in Nigeria and with gross turnover above the threshold are now required to file income tax returns on the income generated from its operations in Nigeria. In the same vein, Nigerian companies dealing with such NRCs are also required to withhold tax on payments to those entities in line with relevant statutory provisions. The NRC can use such deducted WHT as credit against the income tax due at the time of filing the tax returns. It is pertinent to note that Section 13(2(e) exempts NRCs from further tax obligations other than the WHT suffered, where the transactions relate to the payment of technical, professional, management or consultancy fees.

Finally, the Order has provided further clarity on the tax obligations of NRCs which operate internationally particularly in this era of digital economy by ensuring that Nigeria earns her fair share of the profits generated from activities in Nigeria.