Global Tax Alert | 17 October 2013

Nigerian Tax Appeal Tribunal rules on tax deductibility of recharges

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Executive summary

Nigeria's Tax Appeal Tribunal (TAT) in exercising its powers as the first-line adjudicator in tax disputes between taxpayers and Revenue Authorities recently delivered a judgment in favor of the Federal Inland Revenue Service (FIRS). The issue in dispute was the tax deductibility of recharges paid by a nonresident company (NRC) to its Nigerian subsidiary which provided support to the NRC in the execution of a Nigerian contract.

The NRC had filed its tax returns using the Deemed Profit Tax regime relying on a FIRS tax circular, which provided for a subcontractor cost deduction. The NRC cited a 2006 Federal High Court (FHC) ruling which allowed a deduction of such costs.

The TAT ruled against the NRC, affirming the FIRS' position that recharges paid to the Nigerian

subsidiary did not qualify as a valid deduction for tax purposes, considering that the NRC was assessed to tax on a deemed profit basis, and that its Nigerian subsidiary was not stated as a party in the contract.

Detailed discussion

The case

The NRC entered into a bi–party contract to provide drilling services in Nigeria. In fulfilling part of its obligation under the terms of the drilling contract, the NRC engaged the services of its Nigerian subsidiary to provide logistic support services. The Nigerian subsidiary was thereafter remunerated under a cost-plus arrangement, where the Nigerian subsidiary invoiced the NRC on the actual cost incurred on the services rendered plus a 10% mark-up, referred to as “recharges.”

The NRC 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 NRC's returns, its turnover was presented as total receipts less recharges invoiced by the Nigerian subsidiary.

The FIRS queried the NRC'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 affirmed 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 the NRC. Dissatisfied with the position of the FIRS, the NRC lodged an appeal with the TAT.

The NRC contended that:

  • Recharges are not reported as part of the turnover for the purpose of tax assessment.
  • Its deemed profit tax and corporate tax returns were computed and prepared based on the FIRS Information Circular No 9302 on Taxation of Nonresidents.
  • The Nigerian subsidiary had paid corporate tax on the recharges received from the NRC. Therefore, assessing the NRC to tax on the same income will result in double taxation.

The TAT ruling

In delivering its judgment, the TAT dismissed the grounds of appeal of the NRC and affirmed the position of the FIRS. The TAT premised its judgment on the following:

  • The NRC did not file its corporate tax returns on actual basis; therefore, it brought itself under the Deemed Profit Tax Regime, and hence cannot lay claim to privileges granted under the actual basis.
  • The FIRS is empowered under Section 30 of the CITA to assess an NRC to tax on a fair and reasonable percentage of the turnover derived from Nigeria. It is allowed to review returns and issue additional assessments as it deems necessary. The Deemed Profit Tax regime allows 80% of turnover incurred as expenses, leaving 20% of turnover liable to tax.
  • The Information Circular No.9302 does not supersede the provisions of Section 30 of the CITA. Circulars are explanatory notes which cannot override substantive provisions of the CITA.

Is this a challenge to existing precedence?

The ruling by the TAT is different in some respect from the existing precedence set by the FHC in an earlier case between another NRC and the FIRS also on the tax deductibility of recharges. The FHC in the earlier case, had ruled that recharges paid to a Nigerian subsidiary by the NRC, in line with the execution of the terms of reference in a tri-partite contract, in which the NRC and its subsidiary were parties to, constituted a valid deduction before arriving at the turnover needed to calculate the taxable profit of the NRC under the Deemed Profit Tax regime.

The facts of the FHC case were that the NRC, a Cayman company and its Nigerian subsidiary, entered into a tripartite agreement with another company in which the NRC agreed to pay its subsidiary a 4% management fee plus reimbursement for certain expenses (recharges).

The FIRS rejected the NRC's deduction of the recharges from its turnover for tax purposes. The Body of Appeal Commissioners (as it was then known) ruled in favor of the FIRS. On appeal by the NRC, the FHC overturned the decision of the Body of Appeal Commissioners (now TAT) on the basis that both the NRC and its Nigerian subsidiary were parties to the tripartite contract and that they were both entitled to the revenues. Therefore the NRC was right in deducting the amount paid to the subsidiary from its own total revenue in determining its revenue for the Deemed Income Tax regime.

The TAT made a distinction between the earlier FHC case and this case stating that NRCs who were sole signatories to a contract in Nigeria, and who file tax returns under the deemed profit regime, cannot deduct from their turnover for tax purposes, recharges disbursed to parties unknown to the contract. In this case, the Nigerian subsidiary was not a party to the contract unlike in the earlier FHC case in which the Nigeria subsidiary was a party to the contract.


The TAT ruling may result in a potential tax liability for NRCs who file their tax returns under the Deemed Profit Tax regime; and who rely on their Nigerian subsidiaries to carry out aspects of their Nigerian operations, where the NRC is the sole signatory to the contract.

In view of the TAT judgment, companies in similar circumstances may have to consider whether to file their returns on an actual basis rather than the Deemed Profit Tax regime. The FHC case is now before the Court of Appeal and unless overruled by the Court of Appeal, the judgment by the FHC will continue to stand. Therefore, the NRC affected by the TAT's ruling may consider an appeal against it and seek to establish that the decision in the FHC case should apply to its own case.

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
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. CM3890