Halliburton vs. FIRS: Judgment Review

LAGOS Zone of the Tax Appeal Tribunal (the tribunal) on Friday, September 14, 2012, in what could be considered a watershed in the development of Nigeria’s jurisprudence on taxation, delivered its judgment in the case of Halliburton Energy Services Nigeria Limited (Appellant) vs. Federal Inland Revenue Service (FIRS). The judgment of the tribunal has, undoubtedly, reinforced the time-honored fundamental principle of tax law that what could be collected as tax by the state must be clearly enacted by the Legislature. The foundation of this principle was established in Article 4 of the English Bill of Rights (1689) where it was stated “that levying money for, or to the use of the Crown by pretence of prerogative, without consent of Parliament is illegal….”

It was evident in this case that the tribunal refused the attempt by the FIRS to violate the dual internationally recognised principles pursuant to which countries assert their jurisdiction to tax; the source and the residence basis; which also form the basis of the allocation of taxing rights under the Organisation for Economic Cooperation and Development (OECD) Model Convention on Taxation of Income and Capital.

In brief, the gist of this matter arose out of an appeal filed by the appellant wherein it challenged a FIRS assessment in the total sum of $167,000,000. As contained in the disputed assessment, the assessed sum was said to represent 30 per cent of the total sum of $559,000,000 which the FIRS purportedly classified as “Disallowed Expenses” and “Profits” made by the appellant and attributable to its operations in Nigeria. As contained in the FIRS assessment, the tax base of the sum of $559,000,000 was being disallowed as expenses as it represented the quantum of a fine of $559,000,000.00 that was paid by Halliburton Inc. USA (parent company of the appellant) to U.S. authorities in lieu of bribes given to Nigerian officials for operations in Nigeria by companies within the Halliburton group in contravention of the US Foreign Corrupt Practices Act (FCPA).

It was further claimed in the FIRS assessment that the entire fine sum of $559,000,000 would have formed part of the expenses that was charged in the tax returns earlier filed by the appellant and that this sum would, therefore, be deemed as profit accruable to the appellant arising from its operations in Nigeria.

In the notice of appeal filed by lead counsel to the appellant, Dr. B. A. M. Ajibade (SAN) of S.P.A. Ajibade & Co, it was contended, inter alia, that Halliburton Inc. USA, the entity within the Halliburton group that was fined by U.S. authorities, which fine formed the tax base upon which FIRS’ assessment was based, does not carry out any trade or business in Nigeria. Also, it was argued on behalf of the appellant that Halliburton Inc. does not have a fixed base in Nigeria so as to be chargeable to tax in Nigeria for any purpose whatsoever within the contemplation of the Companies Income Tax Act (CITA). It was further contended that the appellant does not represent Halliburton Inc. USA in Nigeria in any manner whatsoever and is not an agent or representative of Halliburton Inc. USA in Nigeria so as to be chargeable to tax under the circumstances. Further, it was the contention of counsel to the appellant that the bribe alleged to have been given to Nigerian government officials, as well as the fine paid to the U.S. authorities did not involve the appellant or any of its business activities in Nigeria and no related revenue or deduction were ever included or claimed in the appellant’s tax returns to the FIRS.

In its reply, the FIRS argued, inter alia, that the appellant’s company is a member of the Halliburton group and that consequently, Halliburton Inc. USA is substantially present in Nigeria. Further, the FIRS argued that the appellant constitutes a fixed base for Halliburton Inc. USA in Nigeria, such as to render the appellant an agent or representative of Halliburton Inc. USA in Nigeria. Relying on the provisions of Section 49 of CITA, the respondent contended that a tax assessment could be raised in the name of a company sought to be taxed, its principal officer, agent, attorney, factor, representative and receiver/liquidator as may become expedient. Also relying on Section 70 (1) and (2) of CITA, and in response to the appellant’s argument that the assessment failed to correctly identify the party sought to be charged to tax, as well as the assessed sum, it was the respondent’s contention that any mistake, defect or omission on the face of an assessment, will not have the effect of rendering the assessment invalid; provided the assessment conforms substantially with the provisions of CITA with respect to the company sought to be charged, as well as service of the assessment.

Upon conclusion of pleadings and hearing, the tribunal distilled three main issues for determination as formulated by counsel to the appellant. Issues two and three are relevant here and were exhaustively addressed by the tribunal in its judgment and are reproduced below:

Issue 2: Whether the assessment issued by the respondent and served on the appellant is valid.

Issue 3: Whether Halliburton Inc. USA is a person chargeable to tax in Nigeria at all and in particular, whether it is chargeable to tax in relation to a sum of money paid by it as a fine to the government of the United States of America for breaching a law of the United States of America.”

These issues were resolved in favor of the appellant.

In its judgment, the tribunal held that the respondent failed to establish the ingredients contained in Section 9 of CITA, which are the accrual and remittance basis of taxation of corporate income. It was held by the tribunal that no evidence was led on behalf of the respondent to establish the fact that the tax base of $559,000,000 was profit made in Nigeria by the appellant, or that it accrued in, derived from or was brought into or received in Nigeria by the appellant. The tribunal relied on the House of Lords decision in Russell vs. Scott as well as the decision in Alh. Ahmadu &Anor. Vs. The Governor of Kogi State.

On the issue of the validity or otherwise of the assessment, while the tribunal was in agreement with the contention of the respondent that the provisions of Sections 38 and 70 (2) of CITA were sufficient to resolve the issue of identity of the company sought to be charged in favor of the respondent, it was however, held by the tribunal that the assessment is defective as it was speculative, contradictory and inconsistent with the relevant tax laws. It was held that these defects could not be remedied or cured by the provisions of Sections 38 and 70 (2) of CITA.

By this judgment, a clear and unambiguous message has been sent to revenue officials that tax assessments must be raised after due regard has been had to the relevant tax laws. There should be no place for speculative assessments in the realm of tax law. A situation where there is no identifiable entity or subject sought to be taxed to be gathered from the face of an assessment will do no more than to render the assessment a speculative exercise and would be tantamount to a fishing expedition.

Taxation has been viewed by some scholars as “confiscation of private property” by the state. It is, therefore, important for revenue officials to adhere to the fundamental principles of rule of law in raising tax assessments. From the foregoing, it is arguable whether the practice of revenue departments of raising tax assessments based on “best of judgment”(BOJ) is legal. As it appears, BOJ assessments would be acceptable only in cases involving artificial or fictitious transaction as provided in Section 22 of CITA and also in order to counteract egregious tax schemes aimed solely at tax evasion.

In conclusion, it is important to comment on the duration of the prosecution of the appeal by the Tax Appeal Tribunal, which was filed in April 2009. The first hearing in the matter was held at the Bauchi Zone of the tribunal in November 2010. The delay in the commencement of hearing was due to the replacement of the Body of Appeal Commissioners (BAC) and Value Added Tax Tribunal (VAT-T) with the Tax Appeal Tribunal.

The matter was transferred to the Lagos Zone of the tribunal pursuant to the appellant’s application and hearing commenced on April 8, 2011. It is worthy of note that there were only seven adjournments until judgment was delivered on September 10, 2012; a period of 15 months after the first hearing on the matter. The dedication of the members of the tribunal must, therefore, be commended. This becomes important in view of the negative consequences which protracted tax disputes may have on the operations of companies and corporations doing business in Nigeria and in effect, the Nigerian economy.

• Sowande is an associate with SPA Ajibade and Co., Lagos.