Tax Appeal Tribunal Holds That Tax Exemptions Will Not Be Granted Unless All Conditions Precedent For Its Grant Are Fulfilled

March 27, 2020


On 23rd December 2019, the Tax Appeal Tribunal (Tribunal), Lagos Zone, in Appeal Number: TAT/LZ/ VAT/022/2016, SINOPEC International Petroleum Exploration & Production Nigeria Ltd v. Federal Inland Revenue Service held that a tax exemption cannot be granted except all the conditions precedent for its grant have been fulfilled.

The appellant in this appeal engaged Chesterton Limited (a non-resident company, registered in the UK) as consultant. The Federal Inland Revenue Service (FIRS) assessed the appellant to VAT and WHT in respect of the consultancy fees paid by the appellant to Chesterton Limited. FIRS also imposed WHT on the appellant in respect of interest payments arising from a USD150million loan granted to the appellant by a Hong Kong company (foreign loan).

The appellant challenged the VAT assessment on grounds that Chesterton Limited which rendered the services under the consultancy agreement was never physically present in Nigeria in the course of performing any of the services. The appellant challenged the WHT assessment imposed on the consultancy fee on grounds that Chesterton Limited does not have a permanent establishment in Nigeria and therefore is exempt from company income tax in Nigeria pursuant to the Double Tax Avoidance Agreement (DTA) between Nigeria and UK. The appellant also argued that interest payments on the foreign loan is exempt from WHT because the loan tenor was more than 13 years with a moratorium of more than 2 years.

Issues for determination
In delivering its judgment, the TAT examined the following issues:

  1. (i) Whether the consultancy fees paid to the UK company was subject to VAT;

  2. (ii) Whether the consultancy fees paid to the UK company was subject to WHT;

  3. (iii) Whether interest payments arising from the foreign loan are subject to WHT.


The TAT held as follows:

(i) The services rendered by the UK company do not fall within the category of services exempted from VAT. Furthermore, the service rendered by the UK company is an imported service “rendered in Nigeria by a non-resident person to a person inside Nigeria”. The Tribunal held that in determining liability to VAT, the tax residence of the supplier is immaterial. The primary determinant of VAT liability is the tax residence of the receiver, user or consumer of the goods/service.

(ii) The Tribunal held that FIRS validly subjected the consultancy fee to WHT. According to the Tribunal, the UK company derived the consultancy fee income from its business activities in Nigeria and thus was liable to WHT thereon pursuant to Section 9 of CITA. Furthermore, the Tribunal found that because the appellant and the UK company had common ownership and the appellant also acted as an “authorised representative” of the UK company in Nigeria, the UK company had established a fixed base in Nigeria.

(iii) The Tribunal held that interest payments by the appellant in respect of the foreign loan were subject to WHT because the original loan tenor was 3 years. Merely extending the loan repayment period to 13 years did not entitle the lender to tax exemptions on interest received on the loan. The Tribunal held that interest on a loan will only qualify for tax exemption if: (a) it is granted for a specific term; and (b) expressly includes a moratorium period in accordance with Section 11 CITA. The Tribunal held that the appellant’s failure to pay the loan within the first 3 years of the loan tenor and the lender’s failure to demand for the same cannot be construed as an implied moratorium.

Implications of this Judgment

This judgment adds to the body of judicial decisions affirming the application of the destination principle in Nigeria. The Finance Act has since then amended the VAT Act to codify the destination principle and the “reverse charge” mechanism in relation to VAT on imported services. The Finance Act has also clarified the ambit of what may qualify as a supply of goods and services to Nigeria as relates to VAT.

It appears that the Tribunal did not consider the Double Tax Agreement between Nigeria and the UK which might have exempted the UK company from WHT in Nigeria. Also, it is our opinion that the fact that two companies share common ownership or that one is an “authorised representative” of the other does not by itself create a fixed base relationship between the companies.

It should be noted that the Finance Act has significantly reduced the tax exemption rates available to interest on foreign loans as follows:

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