The Tax Appeal Tribunal (TAT) on 30 July delivered a judgment on the deductibility of recharges by nonresident companies filing income tax returns under the deemed profit regime. This was in respect of a case brought before it by Global Marine Baltic Incorporation (GMBI) against the Federal Inland Revenue Service (FIRS).
The TAT ruled in favour of the FIRS that where a nonresident company is assessed to tax on deemed profit, further deductions (outside the deemed cost) cannot be taken for subcontractor charges.
The OECD yesterday released two papers – one on the Revised Discussion Draft on Intangibles and the other on Transfer Pricing Documentation.
The functional value creation is at the forefront of the Revised Discussion Draft. Where transfer pricing may traditionally have been seen as the pricing on a transactional basis, it is clear that a thorough analysis of the corporate value chain and substance will form the starting point of a transfer pricing exercise. This is the focus of the Discussion Draft on Intangibles.
The OECD’s White Paper on Transfer Pricing Documentation fits in neatly with its other ongoing areas of work, including the BEPS Action Plan, the Discussion Draft on Intangibles and the Handbook on Risk Assessment in Transfer Pricing. The OECD sees potential for standardisation to reduce compliance costs for taxpayers, but equally puts emphasis on the role that transfer pricing documentation can play for enhanced transparency and improved risk assessment. In this sense, the White Paper takes stock of existing approaches to harmonise transfer pricing documentation, but goes considerably further by proposing a Coordinated Approach to Documentation based on a two-tier structure. Attached below are copies of the white papers for your use.
The debate on the constitutionality of the Lagos State Hotel Licensing Law 2003 (and its amendment) and the Hotel Occupancy and Restaurant Consumption Law 2009 enacted by Lagos State has been finally laid to rest by the Supreme Court on 19 July 2013.
The Hotel Licensing Law and the 2010 amendment established the Lagos State Hotel Licensing Authority (“LSHLA”) and made other provisions for the licensing of hotels. It further empowered Lagos State to make laws to regulate, standardise and grade tourism operations which was previously the exclusive preserve of a federal government agency, the Nigerian Tourism Development Corporation (“NTDC”).
In the exercise of its powers to license and regulate hotels, the Lagos State House of Assembly enacted the Hotel Occupancy and Restaurant Consumption Law. The Law imposes a 5% tax on consumption of goods and services in hotels, hotel facilities, events center and restaurants.
Overview of the Supreme Court Judgment
Position of the federal government
The federal government (before the Supreme Court) challenged the right of Lagos State to make laws on tourism specifically where the National Assembly had already legislated on the same issue through the NTDC Act.
The issues for determination were:
Whether matters pertaining to tourism fall under the exclusive legislative list of the Constitution of the Federal Republic of Nigeria 1999.
Whether the Lagos State House of Assembly and the Lagos State Government can enact and promulgate laws on matters within the exclusive legislative list.
Whether the Lagos State House of Assembly and the Lagos State Government can enact and promulgate laws which directly conflict with the provisions of an existing law of the National Assembly and if it can supersede the National Assembly law.
Position of Lagos State
Whether regulation, registration, classification and grading of hotels, guest houses, motels, restaurants, travel and tour agencies and other hospitality and tourism related establishments are matters in the Exclusive and Concurrent Legislative List and outside the legislative power of Lagos State House of Assembly.
Whether the relevant laws of the Lagos State are invalid by reason of their inconsistency with the provision of the Nigerian Tourism Development Act.
The apex court dismissed the federal government’s suit and delivered its judgment in favour of Lagos state. It was the view of the court that the NTDC Act went beyond its powers as stated in the Exclusive Legislative List of the Constitution which is to regulate “tourist traffic”. This effectively challenged the constitutionality of the NTDC’s powers to unilaterally regulate and control of hotels and tourism in Nigeria. The court therefore validated the respective laws of Lagos State.
Implications of the judgment
The judgment was given by the apex court and therefore cannot be challenged further on the same principle. However, the judgment did not address the issue of the imposition of tax and whether or not Lagos State has the constitutional right to impose the tax.
Hotels to be licensed and subject to tax by Lagos State
“…any building used as a guest house, inn, lodge, motel, tavern, night club, restaurant, event centre and any other place for the sale of food and drink within the premises of a hotel and includes fast food outlets and restaurants operating outside the premises of a hotel.”
The Licensing Law does not clearly define an event centre or a restaurant. These were defined in the Hotel Occupancy and Restaurant Consumption Law as follows:
Event centres includes hall, auditorium, fields and places designated for public use at a fee
Restaurant includes any food sale outlet, bar, tavern, inn or café, whether or not located within a hotel.
Both definitions have a wide scope and are potentially ambiguous. For example, an educational institution that provides its playing field or assembly hall for events such as weddings would be required to register as a ‘hotel’ based on the above definitions. Also, if any food outlet is considered a restaurant it would mean that the man or woman selling roasted corn on the roadside would be required to register as a hotel and pay the tax.
Lagos State would take necessary steps to enforce registration of hotel operators and similar businesses in Lagos. The Hotel Licensing Law came into effect in 2003 and provides that an application for license shall be made within 3 months of the establishment of the Act and imposes a penalty on any person that fails to comply with the requirement. Hotels, hotel facilities, event centers and restaurants must therefore proceed to register and obtain relevant licenses from Lagos State in line with the Hotel Licensing Law.
However, it is unclear if a hotel that has not made such an application due to the fact that a suit was pending will be penalised retroactively.
One can reasonably expect that the Lagos Internal Revenue Service (LIRS) would seek to enforce the payment of the 5% consumption tax. It should however be noted that the Supreme Court judgment did not specifically validate the tax so it is expected that the ongoing case in this regard should continue.
I thought you would be interested to receive our summary and comments on the OECDs Action Plan on BEPS which has just been released.
It is very likely that this BEPS initiative will have a material impact on the existing international tax rules and, given the likely impact on tax authority behaviours, also on the general tax environment in which business operates.
As always I welcome your comments and I do hope you find the Bulletin of interest.
At 10.00am Central European Time tomorrow, Friday July 19 the OECD will issue its much awaited Comprehensive Action Plan (CAP) in response to the concerns expressed regarding Base Erosion and Profit Shifting (BEPS). The actions are expected to include calls for various coordinated legislative and administrative responses with aggressive deadlines ranging from 6 to 24 months.
The environment in which multinational organisations operate will definitely change overnight....how much and in what ways is yet to be seen. It will differ by country, industry and the conflicting political agendas of various members of the G20 that have been driving the urgency of this process.
I hope to keep you posted on this development as things unfold.
As the thin line between aggressive tax planning and tax evasion becomes thinner, questions are being asked around the world as to whether taxation is only just a legal obligation or also a question of morality.