Legal Implications of the Decision of the Tax Appeal Tribunal Declaring the Country-by-Country Reporting (CbCR) Regulations, 2018 Unconstitutional and Void
A most ironic scenario played out on the 17th of August 2023 at the Tax Appeal Tribunal (Lagos Zone) (“TAT”) when the TAT, a tribunal created under the Federal Inland Revenue Service (FIRS) Establishment Act 2007, declared the Income Tax (Country-by-Country Reporting) Regulations 2018 (the “Regulation”), issued by the FIRS, ultra vires, illegal, null and void. This was in a tax appeal filed by Check Point Software Technologies B. V Nig Ltd against the FIRS – Appeal No: TAT/LZ/CIT/121/2022 (the “Appeal”).
What is the Income Tax (Country-by-Country Reporting) Regulations 2018?
The Income Tax (Country-by-Country Reporting) Regulations 2018 was issued on 1st January 2018 by the FIRS pursuant to delegated powers conferred on the FIRS under section 61 of the FIRS Establishment Act 2007 (“the Act”). The Regulation was issued by the FIRS to give effect to the provisions of a multilateral treaty, the Country by Country Multilateral Competent Authority Agreement (CbC MCAA) signed by Nigeria on the 27th of January, 2016 and ratified by the Federal Executive Council (FEC) on the 3rd day of August, 2016. The regulation sets the criteria for meeting reporting and compliance requirement obligations for Multinational Enterprises (MNEs) operating in Nigeria. MNEs operating in Nigeria with consolidated group revenues of up to ₦160 Billion (in the preceding financial year) are required to comply with the Regulation. Conglomerate entities or Group of companies operating only in Nigeria are not obligated to comply with the Regulation. The Regulation serves as an instrument for checking, mitigating or eliminating tax evasion, base erosion and profit shifting (BEPS).
The stipulated penalty for late filing is ₦10 million in the first instance and ₦1 million for every subsequent month of default. False declaration or filing of incorrect information is punishable under the Regulation with a penalty of ₦10 million. Also, failure to notify the FIRS of the identity and tax residence of the entity within the group that has the responsibility to file the country-by-country report (CbCR) on behalf of the group attracts a penalty of ₦5million in the first instance and ₦10,000 for every day of default.
What did the TAT say about the Regulation?
In accordance with the provisions of the Regulation, Check Point Software Technologies B. V Nig Ltd (CPS) was served with Notices of Administrative Penalties sometime in March 2022 for late filing of the 2019 and 2020 Country by Country Report/Notifications. CPS filed a letter of objection on the ground that the Regulation was ultra-vires, null and void. This contention of CPS was rejected by the FIRS and CPS instituted the Appeal at the TAT.
The TAT ruled in favour of CPS and held as follows:
- Section 61 of the Act gives powers to the Board of FIRS to make subsidiary legislations by way of regulations, rule forms and guidelines as are necessary or expedient in giving effect to the provisions of the Act.
- A careful consideration of the provisions of Section 61 of the Act shows that the National Assembly has delegated its powers specifically to the Board of the Federal Inland Revenue Service to make these rules, guidelines and regulations and to no other person or authority. Therefore, it is only a legally constituted and properly composed Board of the FIRS that can exercise the powers delegated by the National Assembly in Section 61 of the Act.
- CPS had presented concrete evidence before the TAT that during the period under consideration, the Boards of all federal parastatals and agencies (including that of the Federal Inland Revenue Service) were dissolved and had not been reconstituted. This fact was not disproved or contradicted by the FIRS. The non-existence of a Board during the said period under consideration would mean that a legal and legitimate exercise of the delegated powers under the provisions of Section 61 was not possible meaning that any step, process or action done in the name of the Board will be null and void. The Supreme Court has consistently maintained that the exercise of delegated powers must always be in strict compliance with the enabling Act and that such powers can only be exercised by the specific person or body addressed, which powers cannot be further delegated.
- The Regulation was not made by the Board of the Federal Inland Revenue Service that was legally constituted and properly composed since it was dissolved and had not been reconstituted by the government at the time when the Regulation was made.
- International agreements, treaties or conventions such as the CbC MCAA do not automatically have the force of law after ratification, as there is a constitutional requirement for every international instrument to be domesticated (i.e. enacted as a law or as part of an enabling law of the Nigerian legislature) before it can have the force of law. Section 12 of the 1999 Constitution of the Federal Republic of Nigeria (as amended) stipulates that:
“No treaty between the Federation and any other country shall have the force of law except to the extent to which any such treaty has been enacted into law by the National Assembly.”
- The Regulation imposed a penalty that is higher than what the Principal Act has imposed.
A subsidiary legislation derives its validity and authority from the substantive law and has no capacity to extend such authority, therefore, the provisions of the Regulation which seek to expand the provisions of Section 26 (3) (b) of the Act in relation the penalty is unconstitutional and void.
The Notices of Administrative Penalties served on CPS were quashed and the TAT directed the FIRS to raise fresh Notices of the Penalties based on the relevant provisions of the Act and other applicable laws.
What is the Implication of the TAT Judgement?
This judgement raises a fundamental issue regarding the constitutionality of regulations issued by the FIRS in the year 2018, chief amongst which is the Income Tax (Transfer Pricing) Regulations, 2018. Following this decision of the TAT, it could be argued that the Income Tax (Transfer Pricing) Regulations, 2018 was issued at a time when the FIRS was without a legally constituted board and as such, is unconstitutional, null and void. This will seriously impact tax administration and collection in Nigeria, throwing the country back to the pre-2012 era when there was no specific regulation on transfer pricing.
Furthermore, the penalties imposed under the Income Tax (Transfer Pricing) Regulations, 2018 could also be construed as an attempt to expand the provisions of Section 26 (3) (b) of the Act since the penalties are significantly higher than the penalty imposed under the Act which is the enabling statute.
Notwithstanding the above, please note that the decisions of the TAT are subject to the appellate jurisdiction of the Federal High Court. Appeals lie from the Federal High Court to the Court of Appeal and thereafter to the Supreme Court. Therefore, it is important to monitor the decisions of superior courts of record as well as those of other panels or divisions of the TAT on this issue.
What is the Way Forward?
It is advisable to obtain professional advice on all matters pertaining to tax compliance, especially with regard to fulfilling transfer pricing compliance obligations and reporting obligations specified under the regulation.
The very foundation of transfer pricing administration in Nigeria is shaken by this Judgment. The attributes of clarity and certainty which are fundamental to any system of tax administration have been tainted as far as transfer pricing is concerned. In the interest of tax administration, it is suggested that the FIRS and relevant policymakers/stakeholders should take the required steps to obtain legislative backing for regulations of “major importance” that practically and significantly affect the rights and obligations of individuals or corporate entities. Upon the issuance of such regulation, it is advisable to take additional steps to facilitate the sponsoring of a bill for an Act that will incorporate the provisions of such regulation. This amounts to “erring on the side of caution”, the immense benefit of which is the achievement of clarity, certainty and consistency within the regulated sector. A good example can be gleaned from the efforts exerted by relevant stakeholders in transforming the Nigeria Data Protection Regulation which was issued in 2019 into the Nigeria Data Protection Act 2023. The Nigeria Data Protection Act 2023 contains saving provisions that preserve the Nigeria Data Protection Regulation and all licenses, sanctions or regulatory measures implemented pursuant to the Nigeria Data Protection Regulation. To a large extent, this has provided some level of clarity and certainty within the Data Protection framework in Nigeria. It is thus suggested that this strategy should be adopted in the exercise of powers delegated under Section 61 of the FIRS Establishment Act 2007 and other applicable tax laws.
 The TAT relied the cases of NNPC & ANOR v FAMFA OIL LIMITED (2012) LPELR-1812SC and NNPC & Anor v Trinity Mills Insurance Brokers & Ors (2002) LPELR-7142 amongst other judicial authorities.
 Before the INCOME TAX (TRANSFER PRICING) REGULATIONS, 2018, there was the INCOME TAX (TRANSFER PRICING) REGULATIONS, 2012 which was the first regulation on transfer pricing to be issued in Nigeria.
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