FHC overturns TAT judgment on the basis for computing balancing charge on petroleum assets
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.
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:
However, the FIRS was dissatisfied with the TAT’s decision, and appealed the judgement at the FHC.
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