In the case of Saipem Contracting Nigeria Ltd,  Saipem (Portugal) Comercio Maritimo, SU, LDA (Saipem Portugal) and Saipem S.A. (Saipem France) versus the Federal Inland Revenue Service (FIRS), the Attorney General and Shell Nigeria Exploration and Production Company Limited (Shell Nigeria), the Nigerian Federal High Court (FHC) in Lagos on 27 March 2014 held that the income derived by Saipem Portugal and France from a consortium agreement signed by the three Saipem group companies with Shell Nigeria are subject to corporate income tax and withholding tax in Nigeria on the basis that the income was derived from a single contract signed with a Nigerian company, irrespective of the fact the non-Nigerian resident companies executed their scope of works outside of Nigeria.

The Saipem group provides engineering, procurement, project management, construction and drilling services to the oil and gas industry.  The three group companies signed a consortium agreement with Shell Nigeria, clearly stipulating the scope of works to be executed by each group company and the proportionate contract price attributable to each such portion of works. The entire scope of works to be executed by the Portuguese and French companies was to be performed outside of Nigeria, with Saipem Nigeria responsible for all supplies and services in Nigeria.

In an attempt to obtain certainty regarding the Nigerian tax treatment of the proposed contracting structure, Saipem applied for and was issued with a written representation by the FIRS, confirming that the non-resident companies would not be liable to Nigerian corporate income tax, withholding tax or VAT on the works to be executed by them in terms of the contract with Shell.  However, the FIRS subsequently reversed its position and raised assessments on Saipem Portugal and France.

Saipem, not in agreement with the assessments, brought the case before the Lagos FHC.

The FHC issued judgement on two matters:  (1) whether the FIRS is barred from reversing its earlier written presentation to Saipem in respect of the tax treatment of the non-Nigerian resident companies and (2) whether Saipem Portugal and France are liable to corporate income tax, withholding tax and VAT in respect of their contract with Shell Nigeria.

On the first matter, the FHC ruled that the FIRS is not barred from reversing its position on an issue where such position does not conform with the law, as the FIRS’ representations cannot override the provisions of the relevant tax laws.

On the second matter, the FHC ruled that, as VAT is a consumption tax payable by the consumer of taxable goods and services, Saipem Portugal and France are not liable to pay VAT, since they did not consume any goods or services under the contract with Shell Nigeria.  However, the court held that the non-resident companies would be subject to corporate income tax in terms of the provisions of section 13(2) and 30(1)(b) of the Companies Income Tax Act (CITA).  Furthermore, in terms of section 81, the income of these companies is subject to withholding tax on the basis that income tax assessable on any company shall, if the Board so directs, be recoverable from any payments made by any person to such company.

In terms of section 13(2) of the CITA, the profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria if that trade, business or activities involve a single contract for surveys, deliveries, installations or construction.  Section 30(1)(b), in turn, provides that the Board may assess and charge that company on a fair and reasonable percentage of the turnover of the contract if it appears to the Board that for any year or assessment, the trade or business produces assessable profits which, in the opinion of the Board, are less than might be expected to arise from that business.

The FIRS also argued that Saipem Nigeria constituted a “fixed base” for Saipem Portugal and France in Nigeria and the non-resident companies are consequently subject to tax in Nigeria.  Portugal has not entered into a DTA with Nigeria, but in terms of article 7 of the France / Nigeria DTA, Nigeria would only be entitled to tax the business profits of Saipem France if such profits are attributable to a permanent establishment the company has in Nigeria. With no services being rendered in Nigeria by Saipem France, it is unlikely that it would have created a permanent establishment in the country. Although section 45 of the CITA generally confirms that the provisions of a DTA supersedes those of domestic law, the FIRS argued that the relevant income was derived from Nigeria as it was earned in respect of a Nigerian contract and should therefore be taxable in Nigeria.  The FHC did not overrule this contention.

This judgement raises significant concerns for groups contracting in Nigeria.  Written representations by the FIRS can clearly be reversed at any time, effectively reducing any tax certainty companies may obtain by approaching the FIRS for advance rulings on proposed transactions or contracting structures.

It is also of concern that the FIRS does not seem to adhere to internationally accepted interpretation of DTAs, despite its domestic legislation recognising the authority of DTAs.  Again, foreign companies resident in treaty countries, who wish to contract in Nigeria, may not be able to place reliance on the certainty afforded by a DTA entered into with Nigeria.  Non-resident companies providing offshore services in terms of a single Nigerian contract should carefully consider the risks inherent to such operating structure.