Background
On June 26, 2023, the Federal High Court, Lagos Division (the “FHC”) held in CMA CGM Delmas SA v Federal Inland Revenue Service[1](“Delmas”), that income derived from reimbursements on ancillary shipping activities such as container demurrage, cleaning fees, shipping line agency commission, etc., does not constitute inbound freight income and is consequently liable to tax in Nigeria. In reaching this decision, the FHC found that the commentary on Article 8(1) of the 2017 model Double Tax Treaty (“DTA”) of the Organisation for Economic Cooperation and Development (“OECD”) – which contemplates a different conclusion – is inapplicable to the interpretation of Article 8(1) of the Nigeria-France DTA, notwithstanding the similarity of both provisions.
This commentary examines the rationale behind the court’s determination of inbound freight income in Delmas and what it means for the tax position of international shipping lines in Nigeria going forward. We argue that while almost two years later, this decision of the FHC still haunts the determination of inbound freight income in Nigeria, the decision presents commercial challenges that may adversely impact international shipping business in Nigeria. This may not be good for the country’s economy.
The Delmas case
The appellant (CMA CGM Delmas SA) is a French company engaged in the business of transporting freight from foreign countries to Nigeria. It also transports freight from Nigeria to other countries. The Federal Inland Revenue Service (“FIRS”) audited the appellant’s books for the 2014 and 2015 accounting years and found that the appellant had failed to make appropriate returns to the FIRS regarding the income earned from Nigeria within the relevant period. It consequently raised an additional assessment of N1,047,005,282.05 (One Billion, Forty-Seven Million, Five Thousand, Two Hundred and Eighty-Two Naira, Five Kobo) on the appellant for the said period. The additional assessment related to statutory expenses and income earned by the appellant from ancillary shipping activities like cleaning fees, container demurrage, shipping line agency commission, unreturned or damaged containers, Nigerian Maritime Administration and Safety Agency (“NIMASA”) environmental levy, and bonded terminal commission.
The appellant challenged the additional assessment on the basis that the income items constitute income from the operation of ships in international traffic, which are exempt from companies’ income tax under the Nigeria-France DTA. The company’s objection to the assessment was rejected by the FIRS, which led the appellant to file an appeal in the Tax Appeal Tribunal, Lagos Zone (“TAT” or the “Tribunal”). In a judgment delivered by the TAT on December 3, 2020, the Tribunal upheld the additional assessment raised on the appellant by the FIRS for the relevant period. The Tribunal reasoned that ancillary shipping activities such as container demurrage, cleaning fees, shipping line agency commission, unreturned or damaged containers, NIMASA environmental levy, and bonded terminal commission, do not constitute inbound freight income and is consequently liable to tax in Nigeria. The Tribunal found that the commentary on Article 8(1) of the 2017 OECD model DTA, which supports the appellant’s case, is inapplicable to the interpretation of Article 8(1) of the Nigeria-France DTA, notwithstanding the fact that both provisions are identical.
Dissatisfied with the decision of the Tribunal, the appellant further appealed to the FHC. The appellant argued at the FHC that the Tribunal should have based its interpretation of Article 8(1) of the Nigeria-France DTA on the commentary to Article 8(1) of the OECD model DTA on the basis that the provisions are identical. It relied on existing Nigerian case law which suggest that “the same phrase dealing with financial provisions in other statutes should not have different interpretations so as to avoid inconsistency”. It further relied on the provisions of the Vienna Convention on the Law of Treaties 1969, which has been ratified by Nigeria, and argued that the identical provisions of Articles 8(1) of both the Nigeria France DTA and the OECD model DTA should have been accorded a similar interpretation based on the commentary to the OECD model DTA. While the company acknowledged that it derives income from reimbursements on ancillary shipping activities like container demurrage, cleaning fees, etc., it emphatically argued that its primary source of income is the transportation of freight from foreign countries to Nigeria and vice versa and not the inevitable ancillary activities which are simply offshoots of its primary freight carriage business. The penalties and interests charged by the FIRS on the appellant in the additional assessment was resisted on the basis that the company had challenged the assessment and filed its appeal in the TAT within the time required by law. Accordingly, the interests and penalties should have been suspended until the appeal is determined.
The FIRS argued that the provisions of Article 8(1) of the Nigeria-France DTA are not identical to those of Article 8(1) of the OECD model DTA and therefore should not attract a similar interpretation based on the OECD commentaries relied upon by the appellant. It further argued that even if the provisions of Articles 8(1) of both the Nigeria-France DTA and the OECD model DTA are identical, there is still no justification to apply the interpretation contained in the OECD commentaries relied upon by the company. FIRS reasoned that the OECD commentaries are not international treaties or domestic statutes applicable in Nigerian courts and should therefore be rejected by the FHC. In any event, the OECD commentaries have never received widespread acceptance even amongst members of the OECD and the United Nations. Hence, while the OECD commentaries may be useful in certain circumstances, they are not binding international instruments in Nigeria. The FIRS relied on section 14 of the Companies Income Tax Act (as amended) (“CITA”) and Articles 3, 4, and 8 of the Nigeria-France DTA to contend that the ancillary streams of income earned by the appellant from reimbursements on ancillary shipping activities, do not constitute earnings from international traffic and should therefore be subject to tax in Nigeria. FIRS maintained that the ancillary shipping activities (reimbursement) earnings constitute domestic traffic earnings and should be subject to tax in Nigeria.
The key issues for determination before the FHC were: (i) whether income earned by the appellant from reimbursements on ancillary shipping activities like container demurrage, cleaning fees, shipping line agency commission, unreturned or damaged containers, NIMASA environmental levy, and bonded terminal commission, constitute inbound freight income that is liable to tax in Nigeria; and (ii) whether penalty and interest in respect of a tax assessment can be properly said to start running from the day a taxpayer was required to pay the self-assessed tax and not the day that the assessment becomes final and conclusive after the taxpayer’s statutory right of appeal against the tax assessment has been either exhausted or extinguished by operation of law. In its judgment delivered on June 26, 2023, the FHC agreed with the TAT’s decision that income earned from reimbursements on ancillary shipping activities like container demurrage, cleaning fees, shipping line agency commission, unreturned or damaged containers, NIMASA environmental levy, and bonded terminal commission, do not constitute inbound freight income which is exempt from tax under the combined provisions of section 14 of the CITA and Article 8 of the Nigeria-France DTA. Such earnings are consequently income derived from domestic traffic (and not international traffic as contended by the appellant), which is subject to tax in Nigeria. The question of when penalty and interests accrue on a tax assessment under Nigerian law was also resolved in favour of the FIRS, on the basis that penalty and interest was not disputed between the parties.
Commentary
The Delmas case has far-reaching and substantial implications for the current FIRS revenue drive against international shipping lines in Nigeria. Section 14 of the CITA provides for the taxation of outbound freight carried on by international shipping lines in Nigeria. Section 14(5) – a provision introduced to the CITA by the Finance Act 2020 – specifically exempts non-freight (and by extension, inbound freight) income from tax under section 14. It is noteworthy that section 14(5) of the CITA does not exempt from tax in Nigeria, income earned from non-freight (and by extension, inbound freight) activities carried on by an international shipping line in the country. It simply exempts such income from tax under section 14 on the basis that it is already subject to tax under section 9. In this regard, even if income earned by an international shipping line in Nigeria is found to be inbound freight or non-freight income exempt from tax under section 14, such income is not automatically exempt from tax in Nigeria as same will still be taxable under section 9 of the CITA unless there is an applicable DTA that exempts such income from tax.
However, in applying DTAs to escape tax in Nigeria, international shipping lines carrying on business in the country must recognise that international tax principles contained in international tax treaties and conventions are not superior to Nigerian domestic tax law – even if ratified by Nigeria, unless domesticated in Nigeria by an Act of the National Assembly as required under section 12(1) of the Constitution of the Federal Republic of Nigeria 1999 (as amended) (the “Constitution”). Nigeria operates the dualist system of international law. This requires that international treaties signed and ratified by the country must be further domesticated by an Act of the National Assembly before they can be binding in a Nigerian court. It is therefore not surprising that the FHC rejected the appellant’s reliance on the OECD commentaries in its interpretation of the provisions of Article 8(1) of the Nigeria/France DTA. International shipping lines operating business in Nigeria must consequently revisit their reliance on DTAs and other international tax principles contained in international tax treaties and conventions to determine if such instruments are in fact legally binding in Nigerian courts and tribunals. They must prioritise compliance with Nigerian domestic tax law applicable to their businesses in the country to ensure that they are not inadvertently exposed to avoidable tax liabilities.
The FHC decision in Delmas suggests that international shipping lines in Nigeria are now confronted with heightened compliance challenges, particularly in relation to distinguishing between income derived from international traffic and incidental non-freight income derived from domestic traffic. While the former will be exempt from tax in Nigeria, the latter will be subject to tax in the country based on the FHC decision in Delmas. It does not matter that the relevant activity from which the income was derived is an ancillary shipping activity and not the international shipping line’s primary business in Nigeria. This necessitates operational adjustments to ensure precise financial reporting and adherence to Nigerian tax laws. The FHC decision in Delmas demands a comprehensive revaluation of financial planning strategies for international shipping lines in Nigeria. Budgetary adjustments are imperative to accommodate potential increases in tax liabilities arising from the reclassified income streams. Entities must engage in strategic financial forecasting to safeguard profitability within the evolving tax framework based on the current FIRS revenue drive against international shipping lines operating business in the country.
It is however noteworthy that the FHC’s rejection of the appellant’s reliance on the OECD commentaries in Delmas may mark Nigeria as a trouble tax spot for international shipping lines which may lead to an avoidance of the country by these companies. This could have an adverse effect on the maritime and shipping industry in Nigeria. It is important for international shipping lines doing business in Nigeria to have a sense of consistency in the application of relevant international tax principles by Nigerian courts and tribunals. If Nigeria is perceived as a country that does not respect international law, it could have adverse consequences for foreign direct investment in the country by international shipping lines and other relevant stakeholders in the Nigerian maritime and shipping industry.
In addition, it appears problematic that the FHC effectively reached a finding that penalties and interests take effect from the date when the tax became due and not when same has become final and conclusive after the taxpayer’s statutory right of appeal against the tax assessment has been either exhausted or extinguished by operation of law. Notwithstanding that there is existing Nigerian case law supporting the FHC decision on accrual of penalties and interests in Delmas, we reasonably believe that the decision takes away the value of taxpayers’ statutory right of appeal against tax assessments. If penalties and interests run notwithstanding the pendency of an appeal challenging the tax assessment in court, it follows that the taxpayer is already adjudged liable to pay the tax even before such a finding is made by the court. It may also raise questions of fairness of the tax system in that the delay atypical of the Nigerian judicial process may mean that taxpayers get to rack up huge sums of penalties and interests on their tax assessments if their tax appeal is unsuccessful. This could discourage taxpayers from ventilating their grievance against unfavourable tax assessments in court and rather lead to a situation where taxpayers prefer reaching out of court settlements with the relevant tax authorities. This could be limiting for the development of Nigerian tax law. The courts may have to develop a more balanced and nuanced approach to the question of accrual of penalties and interests on tax assessments in the country, with a view to bolstering taxpayers’ confidence in the tax appeal process.
Finally, the blanket determination of income derived from ancillary shipping activities such as container demurrage, cleaning fees, shipping line agency commission, etc., as not constituting inbound freight income, which is consequently liable to tax in Nigeria, may be problematic. It suggests that all income earned by international shipping lines from ancillary shipping activities conducted in Nigeria should be automatically considered taxable in the country without any consideration of the applicable nuances. We reasonably believe that the FIRS (and the courts) should not take a blanket approach to determining the taxability of income derived by international shipping lines from ancillary shipping activities conducted in Nigeria. Such determination should be done on a case-by-case basis. A more realistic approach for tax purposes may involve recognising reimbursements as expenses when initially incurred by the international shipping line and then as income when subsequently reimbursed by the consignee. This could lead to a zero taxable profit for the international shipping line on the transaction which may encourage international shipping lines doing business in Nigeria to increase their economic activity in the country. This in turn could be good for the country’s economy.
International shipping lines are encouraged to consult their Nigerian tax lawyers for advice regarding the tax consequences of their business in Nigeria, to enable them to properly plan their tax affairs in the country.
[1] Unreported judgment delivered by Hon. Justice I. N. Oweibo of the FHC on June 26, 2023, in Suit No. FHC/L/1A/2021.
Disclaimer
This article is only intended to provide general information on the subject matter and does not by itself create a client/ attorney relationship between readers and either the author of this article or the Emmanuel Onyeabor Tax Initiative (EOTI), or serve as legal or tax advice to readers. Readers are advised to consult their Nigerian tax lawyers for legal and tax advice regarding their specific circumstances when they arise.
EOTI 
Leave a comment