The Federal High Court (FHC or "the Court") Lagos Division, on Monday 28 September 2020, overturned the judgment of the Tax Appeal Tribunal (TAT or "the Tribunal) in the appeal between the Federal Inland Revenue Service (FIRS or "the Appellant") and Total E&P Nigeria Limited (Total or "the Respondent") by ruling that petroleum investment allowance (PIA) should be included in the computation of balancing charge on disposal of assets used for petroleum operations.

Specifically, the FHC held that PIA granted by Paragraph 5 of the Second Schedule to the Petroleum Profit Tax Act Cap P13, Laws of the Federation of Nigeria (LFN), 2004 (as amended) (PPTA) should be added to annual allowance claimed on the assets for the purpose of computing balancing charge for disposed assets.

The Court, on the other hand, upheld the TAT's decision that tertiary education tax (TET) is not chargeable on balancing charge. It also upheld the Tribunal's decision that interest paid on intercompany loan qualifies as tax deductible expenses for petroleum profit tax (PPT) purposes, provided that the interest rate is at arm's length under terms prevailing in the open market.

Facts of the Case

Total held 10% interest in Oil Mining Leases (OMLs) 4, 26, 38, 41and 42. In 2010 and 2011, Total sold its interests in OMLs 4, 38 & 41 and 2 & 42, respectively. However, in computing the balancing charges applicable to the disposal, Total split the sales proceeds between tangible and intangible assets and computed balancing charge on only the tangible assets. The tangible assets included wells, infield pipelines, flow lines, manifolds and flow stations while intangible assets comprised hydrocarbon accumulation data, right to win, work and exploit petroleum in the OML area.

The FIRS challenged the split and argued that all the assets were qualifying expenditure in line with Paragraph 1 of PPTA. The FIRS also included the related PIA on the assets in determining the allowance claimed thereon and computed additional TET on the resulting balancing charge.

Further, the FIRS disallowed the interest on loan obtained by Total from Total Finance, a related party, on the basis that Section 13(2)(c) of PPTA precluded related party loans as allowable expense for petroleum profit tax (PPT) purpose.

Total had declared dividends out of its oil and gas profits without separating the profits. The FIRS maintained that dividend declared out of the Respondent's gas profits was liable to withholding tax (WHT) since gas profits were taxable under the Companies' Income Tax Act, C21, LFN, 2004 (as amended) (CITA) and dividend paid thereon was not exempt from WHT.

Total, aggrieved with the FIRS' position, filed an appeal at the TAT. In May 2016, the Tribunal, after reviewing the issues and arguments submitted to it by both parties, held that:

  1. interest paid on intercompany loan qualifies as deductible expenses under Section 10(1) (g) of the PPTA provided that the interest rate conforms with the arm's length principle. The interest paid by Total to Total Finance conforms with the arm's length principle and therefore qualifies as tax deductible expenses for PPT purpose.
  2. Total was liable to pay WHT on the dividend attributable to profits from its gas income as the company failed to separate the dividend attributable to its gas income from oil income. Therefore, Total must rely on FIRS' diligence and fairness mechanism to arrive at the percentage of the dividend attributable to its gas income and compute the WHT payable thereon.
  3. Total was not liable to include the assets purchased and disposed of in the same accounting period in the calculation of balancing charge as no capital allowance had been validly claimed in respect of the assets.
  4. PIA and annual allowance are separate and distinct allowances. Therefore, PIA should not be added to annual allowance for the purpose of computing balancing charge under Paragraph 9 of the PPTA.
  5. Assessable profit on which TET is charged is not inclusive of balancing charge. Thus, Total was not liable to pay any additional TET.

However, the FIRS was dissatisfied with the TAT's decision, and appealed the judgement at the FHC.

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