Monday April 19, 2021 / 2:00 p.m. / By Banwo & Ighodalo / Header image credit:HDFC Life
On April 15, 2021, the Federal Inland Revenue Service (“FIRS “) issued a public notice (the “Notice”) directing all licensed companies operating in Nigeria’s Export Processing and Oil and Gas Free Zones (the “Free trade zones “) to: (i) file income tax returns for 2021 and subsequent contribution years; and (ii) calculate income tax and pay tax due, if applicable.
Returns must be filed in the manner and at the time specified in the Corporate Income Tax Act (“CITA”). The opinion was issued in accordance with the provisions of Articles 58 and 59 of the 2020 Finance Law (the “Finance law “), which amended section 18 (1) of the Nigerian Export Processing Zones Authority Act (“NEPZA Law “) and corresponding Article 18 (1) of the Oil and Gas Export Processing Zones Act (“OGEFZA law “); and, in doing so, now subjects the operators of the Free Zone to the provisions of Article 55 (1) of the CITA, which imposes the obligation to produce declarations and provisional accounts. Failure to comply with the legal obligation to file returns results in the penalties provided for by the CITA and the Federal Lands Income Tax Assessment Act 2007 (“FIRS Act “).
Certain FIRS tax offices listed below are designated in the notice for the purpose of filing declarations compliance by free zone operators:
- Companies operating in the South-South region must file their returns with the Port Harcourt, Medium Tax Office (“MTO “);
- Companies operating in the Southeast region must file returns with Enugu, MTO;
- Companies operating in the Southwest region must file returns with Ibadan, MTO;
- Companies operating in the Northeast and Northwest regions must file returns with the Kano, MTO;
- Companies operating in Lagos State must file returns with Lagos Island, MTO; and
- Companies operating in the North Central region and the Federal Capital Territory of Abuja must file declarations with the MTO Abuja.
Free zones designated by order of the President, on the recommendation of the Nigerian Export Processing Zones Authority (“NEPZA “), in accordance with the provisions of the NEPZA law, and those so designated by the President, and operating in oil and gas export processing zones, and under the supervision and control of the Free Zones Authority of export of oil and gas (“OGEFZA “), benefit from several tax and other related incentives.
For example, in accordance with article 8 of the OGEFZA law and paragraph 5 (1) of the 2019 Oil and Gas Export Processing Zone Regulations (the “OGEFZA Regulation “), licensed companies operating in oil and gas industry free zones are exempt from all federal, state and local taxes, levies, rates and duties related to operations carried out in these free zones.
In addition, paragraph 5 (2) of the OGEFZA Regulation provides that a license holder in free zones in the oil and gas sector is exempt from providing, filing or submitting any document or information (which would have been required of them without the application of the OGEFZA regulation), for the purposes of assessing or collecting taxes, levies, rates or duties. In addition, Article 18 (1) (d) and (f) of the OGEFZA law provides that approved companies authorized to operate in free zones of the oil and gas sector will be entitled to several incentives, including the exemption from import or export licenses and right to rent-free land at the construction stage. More specifically, Regulation 6 (1) of the OGEFZA Regulation provides that license holders are entitled to exemption from: (i) taxes, levies and tariffs of federal, state and local governments; (ii) regulations relating to taxes, levies, duties and currencies; (iii) customs duties and associated costs; and (iv) value added tax (“VAT”) on all products imported in connection with approved activities, including VAT on site construction activities and locally produced materials, equipment and services.
To ensure transparency and control the activities of operators in free zones, articles 58 and 59 of the finance law, which amended articles 18 (1) (a) of the NEPZA law and of the OGEFZA law (which defined and preserved the tax exemption regime) provide, and now require that all companies registered and operating in free zones comply with the provisions of Article 55 (1) of CITA and render returns to FIRS in the manner prescribed and, in the event of default, will be liable to the penalties for non-compliance prescribed by both the CITA and the FIRS Act.
Even if the provisions of the finance law guarantee the tax-exempt status of companies in the free zone, they are now required and obliged to file tax returns.
In our opinion, communication is an administrative instrument through which the FIRS seeks to give life to the new tax obligation now imposed on companies in the free zone. In addition, we note that the amendments to the OGEFZA law and to the NEPZA law under the finance law, have now brought the free zones into line with article 55 (1) of the CITA; which already covers “any company, including a company benefiting from an exemption from incorporation, whether or not a company is liable to tax under the law “. It also aligned the operators of the free zone with the provisions of part 6 of NEPZA Investment Procedures, Regulations and Operational Guidelines for Free Zones in Nigeria 2004 (“NEPZA Regulation “), which oblige companies registered and operating in free zones to pay taxes for transactions in the customs territory, and also to file tax returns with FIRS in this regard. Likewise, paragraph 15 (a) of Part 2 of the NEPZA Regulation provides that goods cleared through customs territory will be classified as imports and will be subject to all applicable taxes, duties and levies.
The development and the new exemption are in accordance with the decision of the Tax Appeal Tribunal (“AT”) in the famous case of Nigerdock Nigeria Plc FZE v FIRS, where the appellant, a free zone operator licensed by NEPZA, provided services to unlicensed companies outside the free zone for a period of five (5) years, and FIRS subsequently increased the contribution on the appellant’s income from services provided outside the free zone. The appellant’s objection to the assessment was ultimately referred to the TAT for decision. The TAT considered that the tax exemption provided for in Articles 8 and 18 (1) of the NEPZA law only applied and was available to a free zone operator, where its operations are exclusively carried out within the limits of the free zone. He further considered that if the operator of the free zone carries out income-generating activities outside the free zone, he would be required to pay the taxes applicable to these activities outside the free zone.
In our opinion, the amendments made by the finance law to the OGEFZA law and the NEPZA law aim to maintain the sanctity of free zones by putting in place measures to ensure that the objectives of establishing free zones are updated. This prevents free zone operators from abusing the tax exemption regime granted under the statutes. We reasonably believe that the obligation for free zone operators to file tax returns will now allow FIRS to effectively monitor the activities of free zone operators to determine their tax liability with respect to transactions made outside free zones.
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