Global Tax Alert | 27 November 2013

Nigerian High Court orders disbandment of Tax Tribunal and affirms deductibility of recharges under the deemed profit regime

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Executive summary

On 30 October 2013, Nigeria's Federal High Court (FHC) sitting at the Federal Capital Territory (Abuja) delivered a judgment in a suit between TSKJ Contruces Internationals Sociadade Unipessoal LDA (TSKJ) and the Federal Inland Revenue Service (FIRS).

The suit was an appeal against the decision of the Tax Appeal Tribunal (TAT) in which, TSKJ was ordered to pay the FIRS a total sum of $12,924,947 as outstanding tax liabilities from 1997 to 2002 computed on recharges paid by TSKJ to its Nigerian subsidiary.

The FHC upheld TSKJ's appeal and held that the TAT lacked the jurisdiction to adjudicate over tax disputes relating to federal revenue and taxation of companies in Nigeria as this was contrary to the provisions of the Constitution of the Federal Republic of Nigeria. The FHC also ordered the Minister of Finance to disband the TAT.

Detailed discussion


TSKJ, a nonresident company in Nigeria entered into a contract with NLNG for the construction of a liquefied natural gas plant in Nigeria. In executing part of the contract, TSKJ contracted its Nigerian subsidiary – TSKJ Nigeria – to render logistic support services to it during the course of the contract. TSKJ Nigeria was thereafter remunerated under a cost-plus arrangement, where the Nigerian subsidiary invoiced TSKJ on the actual cost incurred on the services rendered plus a mark-up, referred to as “recharges.”

TSKJ filed its tax returns under the Deemed Profit Tax Regime in accordance with the relevant provisions of the Companies Income Tax Act, 2004 as amended (CITA). In the TSKJ's returns, its turnover was presented as total receipts less recharges invoiced by the Nigerian subsidiary.

The FIRS questioned the TSKJ's decision to deduct these recharges from its turnover listing which formed the basis for arriving at the taxable profit of the company i.e., 20% of its turnover, and asserted that 80% of the turnover had already been set aside for the company to cover all expenses incurred in generating the turnover. The FIRS subsequently disallowed the recharges and raised additional assessment notices on TSKJ. Dissatisfied with the position of the FIRS, TSKJ lodged an appeal with the TAT.

The TAT ruled in favor of the FIRS and ordered TSKJ to pay the disputed amount adding that Section 26 of the Companies Income Tax Act cannot be interpreted to allow payments to third parties including local subsidiaries under a subcontract, as deductions in ascertaining the turnover for tax purposes.

Dissatisfied with the judgment of the TAT, TSKJ appealed to the FHC on the grounds that the TAT lacks the jurisdiction to adjudicate on tax matters, and that the TAT failed to follow the existing judgment in the case of Halliburton West Africa Limited vs. Federal Board of Internal Revenue (2006).

FHC Judgment

The FHC upheld the appeal of the TSKJ and set aside the assessment notices imposed on the company and gave the following orders:

  • An order restraining the Tax Appeal Tribunals in Nigeria from adjudicating on tax matters relating to the companies as this is inconsistent with Section 251(1)(a) &(b) of the Constitution of the Federal Republic of Nigeria 1999 (as amended) which empowers the FHC to exercise jurisdiction to the exclusion of any other court in civil cases and matters relating to the revenue of the Government of the Federation or pertaining to the taxation of companies; and
  • An order directing the Honorable Minister of Finance to disband the eight Tax Appeal Tribunals recently approved and reconstituted.

Significance of this Judgment

The TAT cannot adjudicate on tax disputes pertaining to federal revenue and company taxation

The jurisdiction of the TAT and the adjudication of tax disputes through arbitration have been in controversy for some time. In an earlier FHC case of FIRS v. Nigerian National Petroleum Corporation (NNPC) & Ors decided on 29 February 2012, one of the issues raised was whether disputes relating to company taxation could be the subject matter of arbitration proceedings.

The FIRS in that case invoked the provisions of Sections 251(1)(a) & (b) of the 1999 Constitution and the FHC gave judgment in favor of the FIRS stating that disputes pertaining to taxation of companies by the Federal Inland Revenue Service could not be resolved through arbitration because this is within the exclusive jurisdiction of the FHC.

The FHC judgment in the TSKJ case suggests that taxpayers dissatisfied with tax assessments raised by the FIRS can no longer file appeals against such assessments with the TAT. Consequently, an appeal has been filed with the Court of Appeal against the judgment in the TSJK case and an order for a stay of execution until the determination of the appeal has also been filed.

This will enable taxpayers to continue to file tax appeals at the TAT until the Court of Appeal reaches a decision on the matter. However, the risk is that such decisions may be set aside if the court of Appeal rules in favor of the FHC.

Recharges are tax deductible in calculating the turnover of a non-resident company

The FHC also affirmed that the facts of the TSKJ case before it were not materially different from that of the Halliburton's case in which the court ruled that recharges were tax deductible in arriving at the turnover needed to calculate the taxable profit, under the deemed profit regime.

The FHC added that the TAT is duty-bound to apply the decisions of that case to similar cases before the tribunal as this was the current law on the matter. The TSKJ case is not the only occasion in which the TAT has sought to distinguish the Halliburton case from the case before it.

On 30 July 2013 the TAT had in the case of Global Marine Offshore Drilling Corporation v. FIRS ruled in favor of the FIRS when the latter refused to grant the deduction of taxes from the turnover of a nonresident company in assessing the company for taxes under Section 26 of the CITA.

It would appear therefore that there is a practical difficulty in implementing the decision of the FHC on recharges. A solution to this recurrent issue of deductibility of recharges would be an amendment to the provisions of Section 26 of CITA to clarify the deductions permissible in computing the turnover of a non-resident company operating through a fixed base in Nigeria. There is also a need to clarify the jurisdiction of the TAT, either by amendment of the FIRS Establishment Act under which it is set up or delimiting its areas of jurisdiction, as it appears to be in conflict with the provisions of the Constitution which gives exclusive jurisdiction on company tax law to FHC.


The Federal Government and the FIRS have filed an appeal against the judgment of the FHC and they have sought to stay the execution of the judgment. Pending the outcome of an appeal, the FHC judgment on recharges would remain the valid judgment on recharges while the earlier judgments of the TAT will be sustained if they are not in conflict with decisions of the FHC or any other superior court.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Nigeria, Lagos
  • Abass Adeniji
    +234 802 301 3597
  • Edem Andah
    +234 708 768 1113
  • Chinyere Ike
    +234 803 571 7211
  • Ogochukwu Isiadinso
    +234 802 712 5450
  • Adebowale Adeniyi
    +234 706 397 3181
Ernst & Young (China) Advisory Services Limited, Pan African Tax Desk, Beijing
  • Rendani Neluvhalani
    +86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
  • Dele Olaogun
    +1 212 773 2546
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
  • Leon Steenkamp
    +44 20 7951 1976

EYG no. CM3998