As a Freelancer, Should I pay Taxes?
A tax dispute is a conflict or controversy relating to tax especially one which has given rise to a legal process as set out in the relevant laws of the land. Arbitration is the submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard. In the following paragraphs I shall address the issue of arbitrablity of tax related disputes.
The provisions of relevant statutes will be revealed. Also, two landmark decisions of the Court of Appeal will be reviewed – the decisions in Esso Petroleum and SNEPCO v. NNPC and Shell v. FIRS. The question of law is the same in both cases – whether or not a contractual dispute under a Production Sharing Contract which resulted in the over lifting of available crude oil to satisfy royalty and tax obligations under the Petroleum Profit Tax Act [PPTA] was in essence a tax dispute and was therefore not arbitrable. The Court of Appeal answered this in the negative.
I concede that the above issue appears complicated, I shall simplify in the following paragraphs. The scope of this essay is to state the position of the law, its application in the cases and the consequence of the decisions reached.
The law as regards “arbitrability” of tax related disputes is rather settled, at least, prima facie. The Constitution in Section 251 provides inter alia:
“Notwithstanding anything to the contrary contained in this Constitution and in addition to such other jurisdiction as may be conferred upon it by an Act of the National Assembly, the Federal High Court shall have and exercise jurisdiction to the exclusion of any other court in civil causes and matters-
(a) relating to the revenue of the Government of the Federation in which the said Government or any organ thereof or a person suing or being sued on behalf of the said Government is a party;
(b) connected with or pertaining to the taxation of companies and other bodies established or carrying on business in Nigeria and all other persons subject to Federal taxation.”
Attention is to be paid to the clear provision of Section 251 (b) that summarily affects all taxes. Also, the jurisdiction conferred on the High Court is to the exclusion of any other court.
Complementarily, Section 35 of the Arbitration and Conciliation Act is to the effect that:
“This Act shall not affect any other law by virtue of which certain disputes- (a) may not be submitted to arbitration; or (b) may be submitted to arbitration only in accordance with the provisions of that or another law.”
It is therefore conclusive that both provisions of law operate to oust the jurisdiction of an arbitral tribunal in a tax matter. Consequently, Section 38 provides that the court may set aside an arbitral award if the court finds that the subject-matter of the dispute is not capable of settlement by arbitration under laws of Nigeria.
The two cases under review are (i) Shell (Nig.) Exploration and Production Ltd & 3 others v. Federal Inland Revenue Service (Appeal No. CA/A/208/2012) and (ii) Esso Petroleum and Production Nigeria Limited & SNEPCO v. NNPC (Appeal No. CA/A/507/2012) Both cases are similar in fact and in holding. Below is a brief summary.
1. Esso Petroleum v. NNPC
– ESSO Exploration and Production Nigeria Limited and SNEPCO (the Contractors) and the Nigerian National Petroleum Corporation (the Corporation) entered into a Production Sharing Contract (PSC).
– Under the PSC, the Contractors bear the full cost of operations, prepare the petroleum profits tax returns on behalf of the PSC parties and determine the lifting allocation of available crude oil between the parties. The Corporation is required to file the petroleum profits tax (PPT) returns prepared by the Contractors with the Federal Inland Revenue Service (FIRS), and lift the amount of available crude oil in accordance with the lifting allocation prepared by the Contractors.
– Contrary to the agreement, the Corporation unilaterally lifted more cargoes of crude oil than it was entitled to lift under the lifting allocation prepared by the Contractors; and allegedly altered the PPT returns prepared by the Contractors, or unilaterally prepared its own PPT returns and submitted them to the FIRS on behalf of the contract area.
– Pursuant to an arbitration commenced against the Corporation, the Contractors sought declarations that (a) the excess lifting was wrongful, and (b) the Corporation cannot under the PSC submit its own unilateral Petroleum Profit Tax Returns or alter tax returns prepared by the Contractors.
– The arbitral tribunal delivered its award on 24 October 2010 in favour of the Contractors. The Corporation then applied to the High Court to set aside the arbitral award on the ground that the arbitral tribunal acted without jurisdiction.
– The basis of the Corporation’s application was that the dispute referred to arbitration was a tax dispute which is not arbitrable under Nigeria’s Arbitration and Conciliation Act. The High Court agreed with the Corporation and in 2012 set aside the arbitral award, whereupon the Contractors appealed the decision of the High Court to the Court of Appeal.
On the issue of arbitrability, the Contractors as Appellants argued that the arbitral tribunal had jurisdiction to entertain the dispute because it was a contractual dispute and not a tax dispute. They emphasized that the dispute arose out of the Contractors’ right to determine Crude Oil lifting allocation and entitlement under the PSC; the preparation of PPT returns; and the stabilization claim, which are all contractual issues; and which the Corporation was alleged to have breached, by lifting more cargoes of available crude oil than it was entitled to under the allocation prepared by the Contractors, and presenting to the FIRS PPT returns different from the ones prepared by the Contractors.
The Corporation submitted that the dispute the Contractors referred to arbitration was a tax dispute which is not arbitrable by virtue of section 35 of Nigeria’s Arbitration and Conciliation Act. The Corporation’s position was that resolving the dispute entailed the computation and quantum of tax obligations of the parties under Nigeria’s Petroleum Profits Tax Act [the PPTA]; that the alleged alteration of the Petroleum Profit Tax returns will affect the obligations and liability of the Contractors under the tax laws and which will eventually determine the allocation of profit oil and cost oil to them.
The Court of Appeal’s Decision
The Court of Appeal observed that all the parties conceded that tax matters are not arbitrable in view of section 35 of Nigeria’s Arbitration and Conciliation Act, Cap A18, Laws of the Federation of Nigeria 2004 and that the court may set aside an arbitral award if the court finds that the subject matter of the dispute is not capable of settlement by arbitration under the laws of Nigeria or that the recognition or enforcement of the award is against public policy of Nigeria.
The Court of Appeal also reasoned that by section 251 of the Constitution of the Federal Republic of Nigeria, 1999, it is the Federal High Court that has exclusive jurisdiction over tax disputes, (but after exhaustion of remedies with the Tax Appeal Tribunal). In essence, tax disputes are excluded from arbitration. The court concluded that since the dispute between the parties was as to the eventual amount of PPT payable, the dispute was a tax dispute in the garb of a commercial dispute, which the arbitral tribunal lacked jurisdiction to entertain.
The Court of Appeal however declared that the aspect of the claim before the arbitral tribunal relating to preparation of the PPT returns and calculation of lifting allocations can be severed from tax dispute. It consequently affirmed the decision of the High Court which held that tax disputes are not arbitrable, but ordered a restoration of the final award of the arbitral tribunal in respect of preparation of PPT returns and calculation of lifting allocation, which were initially decided in favour of the Contractors by the arbitral tribunal but set aside by the High Court.
2. Shell v. NNPC
This case is similar to the aforementioned. The corporation in this matter is Shell Ltd instead. Perhaps the only difference is that upon learning of the arbitration, FIRS (a non-party in the arbitration) appeared in the proceedings to raise an objection to the arbitral tribunal’s assumption of jurisdiction. After this objection was overruled, the FIRS headed to the Federal High Court, Abuja, citing both the Contractors and NNPC as Defendants, to seek for declarations inter-alia that the Contractor’s claims before the arbitral tribunal is not arbitrable as the determination of such claims will impinge on FIRS’s statutory powers, and that the reference of claims which touch on taxation, (a subject matter which is exclusively reserved for the Federal High Court under Section 251(1) of the Constitution of the Federal Republic of Nigeria 1999) to arbitration is unconstitutional, null and void. The Federal High Court upheld FIRS’ arguments and granted orders which halted the arbitration proceedings. Dissatisfied, the Contractors appealed to the Court of Appeal.
Court of Appeal’s holding
As regards the apparent issue of Locus Standi, relying on Section 25 of Federal Inland Revenue Service (Establishment) Act which gives the FIRS power to administer all federal tax legislations, including the Petroleum Profit Tax Act, in Nigeria, the court held that FIRS must necessarily have an interest in any proceeding in which disputes relating to the assessment, computing, and payment of taxes in accordance with the PPTA is to be determined.
Referring to Section 251 of the Constitution, the court held thus:
“The above provision is a clear spelling, that when it comes to the revenue of the Government of Nigeria or its organ and on matters pertaining to taxation of companies and other bodies carrying on business in Nigeria, it is the Federal High Court that has exclusive jurisdiction to adjudicate upon same. There is no dispute about it. Therefore the claim filed before the tribunal, being substantially tax disputes, the tribunal would not have jurisdiction to pronounce upon them, as they are not arbitrable.”
In particular reference to the case of Esso Petroleum and SNEPCO v. NNPC, the Court of Appeal adopted a ‘split the baby’ approach by holding that a contractual dispute under a PSC which resulted in the over lifting of crude oil to satisfy royalty and tax obligations under the PPTA was in essence a tax dispute and was therefore non-arbitrable. The court however held that disputes as to the contractual right to prepare tax returns and to determine the allocation of oil lifting between the national oil company and the Contractor in the Production Sharing Contract were contractual claims and upheld the tribunal’s award in that respect.
It is easy to see the problem with this decision. Restoration of the award with respect to the declarations confirming the Contractors’ contractual right to prepare PPT returns and calculate of lifting allocation is false victory for the Contractor parties, as any breaches which will result in overlifting of crude oil Appeal has been held to be a ‘tax’ dispute and non arbitrable.
Esso v. NNPC and Shell v. FIRS are barely 5 weeks apart, thus, it may appear that the court in Shell v. FIRS case deliberately attempted to settle the question of the appropriate forum for the resolution of intra- parties disputes which touches on tax claims, by declaring that all tax disputes are inarbitrable in Nigeria. The problems this in turn raises are manifest.
First, it is important to recognize the unusual nature of Production Sharing Contract as they typically contain clauses which are replica of tax legislations or impact tax assessment issues. Thus, the complication of the decision is that disputing companies in PSC agreements cannot validly refer disputes to arbitration. Perhaps, the concerned provisions of law should be amended to broaden the jurisdiction of the arbitral court as in other jurisdictions.
Second, the scope and effectiveness of an arbitration clause in Nigerian PSCs remains unclear. For instance, an arbitration clause in an agreement operates to oust the jurisdiction of the court. Thus, if a dispute is brought to court directly, a party may validly raise an objection based on the existence of such arbitration clause. Conversely, a claim before an arbitral tribunal may also be met with an objection of non-arbitrability.
Third, the court in both cases relies heavily on the section 251 of the constitution which in turn provides that the Federal High Court shall have jurisdiction to the exclusion of any other court to determine matters relating to the revenue of the Federal Government of Nigeria, and taxation matters. The question to be asked is if arbitration tribunals which are never referred to as courts under Nigerian legal jurisprudence are necessarily excluded by this section. In addition, if the argument of exclusive jurisdiction is valid, the acceptance of the Tax Appeal Tribunal is difficult to understand as to how it shares in this exclusive jurisdiction.