FIRS contemplates next steps in collection of Nigerian Freight Tax

The ongoing FIRS exercise to recover back taxes from Non-Resident Shipping Companies (NRSCs) has crossed its first milestone. FIRS had made it clear in the demands sent out earlier in the summer that they required NRSCs to respond on or before 19th September. This had given NRSCs three months and the deadline was authorised by way of a Presidential Directive. This presented ship owners and their managers with a binary choice as to whether to engage or not. Anecdotally, there is a sizeable number who have opted not to give any response and have ruled out trading to Nigeria certainly in the near future. Others see an opportunity and recognise that early engagement represents the best way to seek the greatest discounts.

As the dialogue with the FIRS continues, it is gaining a greater understanding of the task in front of it and it is unsurprising that they see the collection of what it says is owed as a five year project. It would seem that the first round of demands only deals with about 4% of the total voyages to Nigeria in the relevant time. It is likely that those who have not received letters will do so although owners are being encouraged to check their junk mail and deleted emails. A demand for money from an unknown Nigerian email address is not going to be readily opened by anyone. The rules set now, will dictate the FIRS approach in the future and this is the time where the industry has most chance to influence how the tax will be applied. This article considers recent developments and looks at what may happen next.

By way of a reminder and as communicated by FIRS in their original letters of intent, it is their intention to recover back taxes for the period of 2010 – 2019 applying simple interest (as opposed to compound interest) and with the threat of a penalty to add further “encouragement”.

For the period after 2019, FIRS expects NRSCs to comply with section 55 of Companies Income Tax Act (CITA). In order to do this, they are expected to self-assess and report their income and profit derived from Nigeria as well as pay the taxes due for the years after 2019 and tax defaulters are at the risk of paying compound interest on taxes due but not paid for the period after 2019 to date.

The other point of note is that when the demands were first raised the reaction of the industry was that no-one had any idea that the tax was even an issue. Yet it seems that most if not all the liner operators were aware of the tax and have been paying it.

Industry engagement continues with meetings expected between senior FIRS officials and industry bodies but in the meantime the FIRS are mandated to continue to collect the taxes they believe are due.

Tax Calculation

As provided for under S. 14 of CITA, and in the absence of any hard data or the filing of annual returns, FIRS has adopted a method of deeming a cost and profit figure. Pursuant to section 30 of CITA, FIRS work out the tax liability by taking the total freight income (although these figures seem to be overstated) and they assume 80% of that is cost. The income tax rate at 30% is then applied to the 20% profit.  This equates to 6% of the total freight income.  

Where FIRS deems cost and profit but the NRSCs can show that their costs are higher than the deemed ratio, then the total tax liability will be reduced. The method of assessment is derived from the provisions of sections 14, 30 and 55 of CITA. Although the income used in this case is the freight income over the stated years, the Finance Act of 2019 allows for non-freight income to be regarded as taxable income.

The other option available for FIRS under Nigerian law is applicable where the NRSCs has filed their annual returns in compliance with Section 55 of CITA, then 30% of the actual profits shown in the annual returns is charged as tax. This seems an unlikely step for ship owners to take.

In terms of interest and the significant penalties that have been applied, the Tax Appeal Tribunal sitting in Lagos[1] held that FIRS cannot impose penalty and interest on tax that has not become final and conclusive. The implication of this judgement is that the interest and penalty imposed by FIRS on NRSCs for not paying taxes since 2010 is unlawful and should accordingly be removed from the letters of intent sent by FIRS, leaving the tax liability as the 6% on freight income alone.

NIMASA 3% levy

In some cases the voyage statement will show a charge of 3% of gross freight earnings on all international inbound and outbound cargo from ships or shipping companies operating in Nigeria to be collected and paid over to NIMASA (the Nigerian coastguard). This is a specific tax levied to help meet its operational costs. This is provided for at S.15(a) of the NIMASA Act. It has nothing to do with the Freight Tax collected under CITA and cannot be used to offset the total tax deemed to be payable.

Responses to date

The tax defaulter is the person that earned the freight income. Therefore, if an NRSC can provide cogent reasons that it did not earn the freight income (i.e. because, for example, it was the charterer that earned the freight) then FIRS will discharge the owners and pursue whoever is responsible. Vessels that called under time charters are likely to fall into that category.

Where an owner was the voyage charterer and earned the fright income then this will require a further analysis. If the ship has been sold, then the defaulter is unlikely to have any assets and the vessel now in the hands of an arms-length buyer cannot (under the present law) have his vessel sequestered for the debts of the seller. It is not a maritime lien which survives a change of ownership. If it hasn’t been sold, then the owner is going to have to engage and be prepared to prove that the original figure is wrong and that the costs were greater than 20%. Alternative and creative solutions are being proposed using the Time Charter Equivalent (TCE) multiplied by the time spent in Nigeria. There are ways of legitimately justifying much lower payments which may be accepted by FIRS.

At the moment, it does not seem to be the case that cargoes loaded from FPSO’s are caught up in the exercise to recover tax.

Pools create their own unique set of circumstances. Historic pools have been broken up and of course earnings distributed without deduction for tax. Whilst it is likely to be the pool that has entered into the charterparty with the third party they do not earn the freight. The same principles apply as between those vessels time and voyage chartered. But some creative thinking is required as to how a freight income for an individual vessel is calculated.

Those that have responded have now begun to receive follow up queries and questions with a deadline originally set for the 25th October although that is easily extended.

FIRS have also indicated that to confirm the tax payable then owners will have to provide details of their global income and prepare a tax return. This is likely to be completely unacceptable to the shipping industry and discussions are ongoing on this point. It is hoped that the FIRS will be persuaded to accept the tax calculation on a voyage-by-voyage basis. Even then the final calculation will have to be signed off by a local accountant.

Double tax treaty

NRSCs that are tax resident in Countries with Double Taxation Treaty (DTT) with Nigeria will be able to claim Treaty benefits. These include zero taxes or conditional/reciprocal taxes, depending on the terms of the Treaty. However, enjoying treaty benefits is not automatic as Companies are still expected to obtain their Tax Identification Numbers (TIN) and apply to the FIRS. Generally, TINs are easily applied for and take 24 – 48 hours to process.

We have recently learnt (but have not been able to confirm) that Turkey has entered a DTT with Nigeria. Even if true, the DTT will not have a retrospective effect.

For those who have not engaged

With regards to NRSCs that have decided not to engage FIRS, it is important to note two things. First, the notices already received by NRSCs requiring them to respond before 19th September 2023 are letters of intent. The expectation and hope of FIRS was that those they wrote to would  respond.

It is understood that the FIRS have now begun to issue formal Notice of Assessment/Demand Notices to those that have not engaged. The first issue is that the tax demanded is booked as “revenue” by the government which means that it is much more difficult to deal with. Upon the issuing of the Assessment the thirty-day time limit then starts and the defaulter they must object within that time.   

Any NRSCs that defaults in responding to these Assessment Notices within the thirty days will be deemed to have accepted liability to pay the assessed taxes. This is to say that the tax assessed will become final and conclusive.

That has two serious consequences. First, it is at this point at which FIRS will have the power to distrain assets and enforce the claim. This was recently confirmed in a recent (non-shipping) tax case[2]. Second, the NRSCs still have an opportunity to challenge the final and conclusive tax assessment albeit through a more onerous process by virtue of Order V Rule 3 of the Federal High Court (Federal Inland Revenue Service) Practice Direction. The Practice Direction provides that in order to challenge a final and conclusive assessment, the NRSC will have to approach the Nigerian court and will be required to deposit 50% of the tax assessed by FIRS into an interest yielding account of the Court before any appeal will be heard.  It is pertinent to mention that this judgement is regarded as a judgement of the court of first instance and is still subject to Appeal.

For  NRSCs  who chose not to  respond  to the FIRS  letters before the 19th date and as a result  are issued  formal  formal  Assessment Notices they are still  entitled to file  a Notice of Objection in writing to the FIRS albeit within 30 days .  This will  lead to a decision  on the tax liability on NRSC  the  outcome of which  is that a final assessment will be then  issued. Where the NRSC disputes this assessment it has the right to  appeal

to the Tax Appeal Tribunal within 30 days for the review of the assessment. The process of appealing the decision would also entail deposit  as security  the sum of 50% of the disputed amount into a designated account ordered  by the Tribunal before hearing of the appeal . If the NRSC is dissatisfied with the decision of the Tax Appeal tribunal it has a right to appeal  within 30 days against to the Federal High Court on points of law alone. The decision of the federal  High Court is also subject to appeal to the Court of Appeal and the Court of Appeal to the Supreme Court . This process could  take up to 10 years . 

Finally, the FIRS notices have only assessed the period of 2010 to 2019 leaving taxes payable from 2020 to date. We understand that FIRS still expects NRSCs to pay their taxes up to date and to do this, NRSCs have to self-assess themselves. The self-assessed tax is to be paid at the time of filing in accordance with section 55 of CITA. However, the NRSC may apply to the FIRS to pay the tax payable in installments.

Maritime Lien

Queries have been raised on whether the tax is a maritime lien. The answer is no. Section 5(3) of the Admiralty Jurisdiction Act 1991 defines a maritime lien as salvage, damage done by a ship, wages of the master or crew or master’s disbursements. The tax will also not qualify as a general maritime claim under Section 2 of the Admiralty Jurisdiction Act 1991 that could trigger in rem proceedings against a vessel. This also means that as the law stands there can be no associated ship arrest of ships under the same management.

Enforcement outside Nigeria

In common law countries the Revenue Law prevails which precludes from local courts the adjudication of foreign taxes and claims. Most countries will not allow judgements for foreign taxes to be enforced by their own courts. It is seen as a principle of international private law that has survived centuries. The text for example of the Convention on the Enforcement of Foreign Judgements excludes taxation. Treaties can (and have been made) that allow countries to help with tax collection but these are far and few between and usually only allow collection from nationals of the third party country.

Trading to Nigeria and going forward

Going forward the party earning the freight income will need to obtain a TIN. Indeed, we would expect to see “Tax Clauses” appearing in charters of vessels trading to Nigeria with voyage charterers in particular being asked to confirm that they have registered for tax or are exempt through a double tax treaty.

The letters and Notices sent out thus far are the tip of a large iceberg. The FIRS initiative has created a lot of work for the accounts teams of ship owners and managers as they grapple with determining the loss and profit on voyages that in some cases are over twelve years old. For those that have engaged, the process is ongoing to see if an acceptable outcome can be reached. Attention will now focus on those that have received formal Assessment Notices. It is always open to the Presidential Committee to adjust the rules to allow for the sequestration of vessels not least to make an example of someone to show the strength of intent to collect the back taxes.  

Having a coordinated approach remains important so that the regime that is imposed is fully understood and that there is some certainty about the cost of trading to Nigeria.