Recently, the Federal Inland Revenue Service (“FIRS”) served tax assessments on international shipping companies that are considered to have generated income liable to Nigerian tax. The assessments on the international shipping companies relate to back taxes from 2010.
In Nigeria, international shipping companies are liable to tax on the revenue they generate from transporting passengers, goods, livestock, etc. out of Nigeria while revenue from inward transportation is outside Nigeria’s tax jurisdiction. The tax compliance status of international shipping companies has thus become crucial to their ability to carry on business in Nigeria without disruption.
The action of the FIRS in levying these assessments therefore has the potential to affect the operations of international vessels that load passengers or freight in Nigeria. By virtue of s. 14 (6) CITA, Nigeria’s shipping regulators are to require the production of proof of income tax filing for the preceding tax year and tax clearance certificates from companies that are taxable under CITA as a prerequisite for such companies to carry on business in Nigeria or obtain regulatory approvals or permits.
Certainly, international shipping companies that transport passengers, goods, livestock, etc. from Nigeria fall within the category of companies that are subject to this tax compliance requirement. Failure to comply with this requirement would therefore prevent an international shipping company from loading passengers or freight in Nigeria.
In this article, we shall examine the law governing the taxation of the transport income of international shipping companies and highlight key aspects of the income tax regime for international shipping companies that should be considered in assessing them to Nigerian income tax.
Tax Liability of Foreign Shipping Companies
Taxation of international shipping is governed by section 14 of the Companies Income Tax Act (“CITA”) which expressly stipulates that where a foreign company carries on the business of transport by sea and any ship owned or chartered by it calls at any port in Nigeria, the profit or loss of the shipping company to be deemed to be derived from Nigeria shall be the full profits or loss arising from the carriage of passengers, mails, livestock, cargoes/goods loaded in Nigeria.
Such profits are ‘deemed to be derived from Nigeria’ and are, as such, liable to Companies Income Tax. This means that outbound shipping of goods from Nigeria, is liable to Nigerian Companies Income Tax.
By virtue of section 66 (1) CITA, where the FIRS becomes aware that an eligible taxpayer has not been assessed to tax or was assessed to a less amount than the amount the taxpayer ought to pay, the FIRS may assess the taxpayer to tax or additional tax respectively, for profits derived in that year and for the six (6) years prior.
Six years is the general period of limitation. Tax can therefore be assessed for the period 2017 to 2023.
Extension of the limitation period
It should however be noted that CITA also empowers the FIRS to extend the six year period of limitation to an earlier period under the exception of wilful default or neglect in connection with any tax imposed under CITA.
The FIRS may argue that there is wilful default or neglect to pay tax under CITA because the international shipping companies are required to do a self-assessment and tender any tax resulting therefrom at applicable rates. This obligation is in section 55 (1) CITA, which provides that every company (which includes these non-resident vessel companies) shall, with or without notice from the FIRS, file a self-assessment return with the FIRS. The return shall contain evidence of payment of the whole or part of the Companies Income Tax due.
Under CITA, the time for filing the self-assessment returns is six months from the end of a taxpayer’s accounting period.
Therefore, failure to file self-assessment returns and pay any Companies Income Tax due within six months following the end of each accounting period between 2010 and 2019, may be regarded as wilful default or neglect in relation to the Companies Income Tax upon which the FIRS may be empowered to assess for a period of more than six years. Consequently, the assessment by the FIRS to 2010 may find support under this provision of Nigerian law.
Determination of profits
In computing the profits of international shipping companies, Nigerian law allows for different treatment of these companies by the FIRS on the basis of whether the home country of an international shipping company calculates profits in a manner that is different to that of the FIRS. By virtue of s. 14 (2) CITA, the profits and allowances of international shipping companies are computed by reference to whether the tax authorities of their home countries calculate profits in a manner that is similar to that of the FIRS.
If a country determines profits on a basis that is similar to that of Nigeria and the country certifies the ratio of profits or loss of an international shipping company in relation to the total sums receivable by the international shipping company from its global transport business, then the FIRS would determine the profits of that international shipping company by applying the above-mentioned ratio to the total revenue generated by the international shipping company from its global transport business.
But where the country computes profits in a manner that is materially different to that of Nigeria, then the profits of any international shipping company from that country would be calculated by FIRS on a fair percentage of the total transport revenue derived from Nigeria.
The implication of the foregoing is that the profits of international shipping companies whose home countries compute profits in a manner that is materially different from that of the FIRS would be determined on a best of judgment basis. However, where the country calculates profits in a manner that is similar to that of Nigeria, then the FIRS is bound to calculate the profits of the international shipping company by multiplying its global transport income from Nigeria by the ratio as certified by the home country of the international shipping company.
Double Tax Agreements
Ordinarily, an international shipping company would be liable to income tax in Nigeria for profits that it generates in Nigeria. If that company is registered in or has its place of management in another country that authorizes taxation of companies on their global income, then that particular income that was liable to income tax in Nigeria would also become subject to tax in that other country. Hence, the income would suffer double taxation.
Double Tax Agreements (“DTA”) exist to provide tax relief to a company from the taxation of an income in both the country where the income was generated and the home country of the company. DTAs therefore seek to prevent double taxation of an income.
International shipping companies are invariably the kind of companies that would, but for DTAs, suffer double taxation because they generate income in Nigeria, for instance, and the income tax law of their home country may authorize taxation of companies on their global income. A DTA between Nigeria and the home country of an international shipping company would therefore provide for tax relief to the company from double taxation. This tax relief may be full or partial relief from Nigerian income tax.
Full exemption or relief from Nigerian revenue tax is available to international shipping companies by either of two ways. First, it is enjoyed by such companies whose home countries have a DTA with Nigeria that grants unconditional exemption from income tax. The other way of receiving full profits tax relief can be found in DTAs where the contracting State grants income tax exemption to Nigerian companies on the basis of reciprocity.
For reciprocity to exist, Nigerian shipping companies would have to earn shipping income by the operation of international transportation to a contracting State. Where this is the case, the entire profits of the international shipping company from that contracting State would be exempted from Nigerian income tax.
In the event that no Nigerian shipping company earns income from international shipping to a contracting State, then partial income tax exemption would be available to shipping companies from that contracting State.
Full tax exemption on the basis of reciprocity is unlikely to apply considering that hardly if any Nigerian shipping company participates in international shipping. Consequently, only DTAs with unconditional tax relief would provide full exemption.
Under Nigerian law, international shipping companies are liable to income tax on their outbound revenue. While the FIRS can assess companies to back duty of not more than 6 years, exceptions to this general rule exist under Nigerian income tax law by which back duty assessments may be made for more than 6 years. Salient aspects of the tax regime for international shipping companies include the manner by which their profits are calculated and the applicability of DTAs.
Considering that the tax compliance status of international shipping companies is now determinative of their ability to carry on business in Nigeria, it behoves the FIRS to ensure that its assessments are consistent with Nigerian law.