There is both apprehension and a degree of frustration in the maritime industry caused by notices issued by the Federal Inland Revenue Service (FIRS) on behalf of the Federal Government of Nigeria to Non-Resident (Petroleum) Shipping Companies carrying on business in Nigeria for the payment of back dated freight taxes.
The notices (framed as “Letters of Intent”) demand non-Nigerian shipping companies to pay back taxes and interest accrued for 2010 to 2019 which are the present years under review. They have been sent in a haphazard way to owners, operators and charterers of primarily tankers based on information from NIMASA, the ports and presumably NNPC. The number of vessels (or voyages – because some ships may have made multiple calls) is said to be over 1900.
This article seeks to set out the context and process involved and the steps that should be taken by industry bodies to seek urgent clarification and clarity in the process. We also consider actions to be taken by those who have been contacted or maybe contacted.



From the information available, in December 2021 the Federal Inland Rev-enue Service (FIRS) issued a Public Notice to various international ship-ping companies deriving income from Nigeria to regularise their tax com-pliance status at the Non-Resident Persons Tax Office not later than 28th February 2022 and bring their tax affairs in conformity with section 14 of the Companies Income Tax Act (CITA). It seems that that was largely ig-nored although there is anecdotal evidence that some kind of freight tax was levied by port agents as a port disbursement which may have been passed down to charterers. However, there is no certainty that the amounts collected by the port agents were passed onto the FIRS and re-ceipts obtained.
The new Nigerian government is facing a serious shortfall in revenue and in the face of a serious fiscal deficit the FIRS has been tasked to use the legislation to generate revenue.
Their determination to do that should not be underestimated but this does not in our view represent an imminent threat to vessels being seized or stopped in Nigerian ports.
Freight tax is not new and perhaps a good example is the Australian system where freight is deemed to be profits for the purposes of tax. Further, as now seems to be the case, tax is also payable on other income streams other than freight including demurrage earned presumably in both the load and discharge ports although it is clear that in Nigeria only out bound voyages apply.
So recently, the FIRS has purportedly started issuing “Demand Notices” to these international petroleum shipping companies to pay back taxes from 2010 to 2019 allegedly payable to the Nigerian Government for vessels that have loaded petroleum products for export. But the system lacks sufficient clarity as to how the tax should be calculated and who should pay it. A Presidential Technical Committee has been set up to look at this and International Association of Independent Tanker Owners (INTERTANKO) has been invited to attend. In the meantime a “six month moratorium” has been put in place although it is not clear if that is simply in terms of enforcement and that the letters of demand will continue.
This in our view represents the best opportunity to influence the framework going forward. It is under-stood that INTERTANKO are looking to get the FIRS to dispense with the retrospective nature of this and to focus on giving clarity going forward. In our experi-ence of dealing with the Nigerian authorities it seems unlikely that the FIRS will contemplate this particular-ly as this seems to have been a directive issued by the President. They will be very unwilling simply to write off what is potentially a huge pot of money.


The legislation

Section 14 of CITA creates special tax regime for non-Nigerian Shipping Companies that engage in shipping in Nigeria.
Under the section, it is “profit from the carriage of passengers, mails, livestock, and goods shipped or loaded in Nigeria” that is taxable. Like Australia that is said to be freight on outbound voyages.
By section 63 of the Act, companies are required to maintain Books of Account which would serve as Annual Returns for the companies from which taxes of companies would be assessed. Producing such accounts will be a serious challenge for those con-cerned.
FIRS is empowered by section 26 of the Federal In-land Revenue Service (Establishment) Act (FIRS Act) to request for Books of Account from companies.
Where a company fails to provide the Books of Account within the time specified in the request for the company’s Book of Accounts, the company will be liable on conviction to pay a fine worth 100% of the company’s tax liability.1 There is also a sugges-tion that an attempt to evade tax may mean that the time limit of 6 years could be circumvented.
However, where these Books of Account are not kept by International Shipping companies, by the provisions of section 14 of the CITA, FIRS is allowed to deem the returns of the company and assess the tax on a fair percentage which shall not be less than 2% of turnover from outbound carriages.
The legislation is not clear as to who is liable for the tax although logic suggests that it should be the party that earns the freight. In many cases where a vessel is on time charter, that will not be the ship-owner.
Section 77 of the CITA provides that the FIRS is re-quired to give 30 days’ Demand Notice in writing to the company liable to pay the tax (whether assessed or deemed). That Letter of Demand is not the same as the Letter of Intent.
The legislation also makes it clear that save in exceptional circumstances the time limit on back taxes is 6 years. If applied that should mean that the first applicable year is 2017.


Options after Letter of Demand

Once the Letter of Demand has been received, the company has two options which are
1. The company either accepts the tax assessed or;
2. The company objects to the tax assessed/deemed by filing a Notice of Objection within 30 days of service of the Notice of Assessment.
Where the taxed company fails to file a Notice of Objection within the 30 days, the company is deemed to have accepted the assessment of the tax. In both cases, the assessed taxes would become final and conclusive.
Tax assessment would also be deemed to be conclusive: (1) if the chargeable income has been determined or revised on objection, or (2) the assessment is made, agreed to and revised on Appeal, or (3) the assessment is determined on appeal. In any of these cases, the chargeable income shall be final and conclusive for the purpose of determining tax liability.
It is important to state that in all the above cases where the company intends to object to the tax assessment or chargeable income, such Notice of Objection is to be entered at the FIRS.
The FIRS would administratively review the tax assessment if needed. Where the company is not satisfied by the assessment, the company may Appeal to the Tax Appeal Tribunal and the burden of proof to establish that the tax assessed or deemed is excessive or not payable is on the Appellant.
This process may take time particularly if the cases start mounting up.
Once the tax liability in the Demand Notice is final and conclusive but remains unpaid after 30 days as prescribed in the Act, the provisions relating to enforcement of tax shall become exercisable by FIRS.
The most potent powers exercised by FIRS to recover tax is the power to distrain an asset of the company. If the tax liability is assessed to be on the shipowner then it is at that point that the vessel (among any other company’s assets) becomes vulnerable to detention. Such detention is mainly for the purpose of securing the taxpayer’s attendance and ensure compliance. However, It has to be in the jurisdiction and this is not a situation where a sister ship owned by a different entity can be detained.
Notwithstanding, it is public knowledge that the FIRS has indicated interest to work with local authorities in erring Shipping companies’ States to enforce compliance. The extent to which they can do this is to be interrogated.
To detain and seize the asset of the shipping company or any company at all, the FIRS would first have to obtain an Order from the Federal High Court which it can apply for ex parte (i.e. without notice to the Company).
The procedure entails FIRS applying to the Federal High Court for the distraining of the assets of the company.
The procedure at this stage is as follows:
1. The FIRS applies to the Federal High Court to dis-train the assets of the company. If the court grant’s the application, the Judge will make an Interim Order of Forfeiture of the property to FIRS. This order would operate as a “Post No Bill” if the Owners operate an account in a Nigerian bank. In our instance, it would operate as a temporary detention of the property of the company, which in this case, is the vessel. This order is usually valid for 14 days after which FIRS may apply for an Order Absolute to sell the distrained asset.
2. Shipping companies may then approach the court to vacate the order of court. This presents two further possibilities:
a. Where the company does not intend to contest the assessment of tax, the company may apply to the court for leave of court to pay the tax debt into the designated bank account and request the discharge of the entire application.
b. Where the company intends to challenge an Assessment served on him (after the asset has been distrained), the company shall pay 50% of the assessed amount in an interest-yielding account of the Federal High Court pending the determination of the application.
Whereas option “b” presents another opportunity to challenge tax assessed after the 30 days demand notice has lapsed, it is a more onerous process.
3. In the case of failure of the shipping company to appear before the court upon proof of service, the court may make the order absolute for default of appearance. Default of appearance means that the failure to appear before the court is a concession to FIRS’ claims.
However, based on what we have seen, the FIRS cannot yet undertake the enforcement process.
1. The notice issued by FIRS is a call for Books of Accounts under section 26 of the Federal Inland Revenue (Establishment) Act for the purpose of assessing the profit and income of the companies to derive the tax due. This, in and of itself, evinces that the assessment currently served on companies is not final and conclusive yet. It is an invitation to determine the tax liability of the companies which is unsurprising given that the FIRS
2. The FIRS has not issued a Demand Notice. Demand Notices must state: (a) the amount of the total profits (b) the tax payable (c) the place at which such payment should be made, and (d) set out the rights of the company under the next following section.
None of the purported demand notices we have seen at this moment have element C and the use of the conjunction “and” by the drafters of the Act is indicative that all four elements must be contained in every Demand Notice.
3. This being the case, that the FIRS is requesting the books of shipping companies in 2023 for the years 2010 to 2019 which is 9 years (total relevant period being 13 years from 2010 to 2023). It would appear that part of the period under review is caught by the limitation of action. A company is only required under law to keep a Book of Accounts for at least 6 years (sections 63 and 66 of CITA). In our opinion, the implication of this is that FIRS can only request for Book of Accounts for the last 6 years, that is, from 2017. Since the period of review is 2010 to 2019, the period the FIRS can legally ask for Book of Accounts is 2017 to 2019. It is highly unlikely that a party will be able to create Books of Account for past years which comply with the FIRS rules.
4. The only 3 grounds under CITA upon which the FIRS can deem taxes of international shipping companies between 2010 and 2016 is where FIRS can show that there has been fraud, wilful default or neglect has been committed by or on behalf of the company in connection with any tax imposed under CITA. If FIRS can establish any of these, they may at any time and as often as may be necessary, assess such company at such amount or additional amount as may be necessary for the purpose of making good any loss of tax attributable to the fraud, wilful default or neglect. Where either one of these three elements cannot be established, then the FIRS cannot extend their powers to assess tax rates for a period longer than the last 6 years, which would be 2 years only in this case.


Who pays?

As we have said above, the logical position would be for the FIRS to clarify that the party liable to pay is the party that earned freight.
That will mean in many cases that owners will not know who was paid freight and they will not be able to do more than pass on details of the charterers.
In any event, the charter parties may provide that a tax based on cargo would be for charterers account and in turn they would be seeking the same from the sub-charterers. if the vessel has been sold and the owners dissolved then it follows that there would be no chance that an asset of theirs could be distrained.
There is no suggestion that the owners of an associated vessel could be liable for the debts of another owner. Taxes do not tend to create a lien which attach to the shipowner’s vessel.


Double Taxation

Even if an owner or indeed operator was found to be liable then the final potential route of exemption could be via a double taxation agreement between Nigeria and the place of registration of the liable party. Nigeria has a double taxation treat with 16 countries. If such DTA exists, then one would need to consider the provisions of the Agreement as some countries are unconditionally exempted from the payment of income tax in respect of profits derived from operations of ships while other countries have conditional exemption.


What should those receiving letters of intent do?

At the end of the day those receiving letters will decide what is best for them. However, in our experience we would suggest being circumspect about engaging with the FIRS at the first time of asking and certainly not until further clarification has been given by the Presidential Technical Committee. Industry needs to lobby hard to ensure that there are no doubts about the tax regime in the past as well for the future.
At the present time there is no immediate direct threat to the ships themselves. There is time to clarify what the rules are and to carry out an internal audit to assess the contractual chain in respect of vessels that are still trading and may yet intend to trade to Nigeria. Our view is that owners on time charters are at less risk if they can show (as is likely) that they did not earn freight.
We sense that moving forward parties will need to make a provision for the tax based on the freight with the contractual position being made clear as to where this risk lies.
For industry bodies there is an urgent need to work out exactly what the issues are and to help frame a clear regime that is easily understood and can be applied fairly and Australia may be a useful template.
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