On 26th March 2018, in Federal Inland Revenue Service v. Mobil Producing Nigeria Unlimited (FHC/L/3A/2017), the Federal High Court (FHC) sitting in Lagos, Nigeria delivered judgment on the vexed issue of the tax treatment of gas flaring penalties paid by companies which flare associated gas. The FHC overturned the decision of the Tax Appeal Tribunal (TAT) that expenses incurred for flaring gas (penalties) are tax deductible.
Mobil Producing Nigeria Unlimited (MPNU) having flared gas made payments for the gas flared to the Ministry of Petroleum which in turn issued receipts titled “gas flaring penalty”. MPNU treated these gas flaring penalties as allowable deductions. However, FIRS disallowed this treatment and subjected the gas flaring penalties to tax as part of the revenue of MPNU in the years 2006 – 2008.
MPNU challenged the decision of the FIRS at the TAT. The TAT ruled in favour of MPNU and set aside the additional taxes which prompted the present appeal. The decision of the TAT was based on the fact that the Associated Gas Re-injection Act (AGRA) and other applicable laws have no provision for monetary penalties where gas is flared without the written permission of the Minister.
In summary, FIRS argued as follows:
The position of MPNU is summarized as follows:
In resolving the dispute, the Court formulated two issues for determination as follows:
The court held that MPNU could not validly flare gas without a written permission/certificate from the Minister. A written permission or certificate from the Minister is a condition precedent to flare gas in Nigeria. The court added that the Minister has the discretion on whether to grant permission or a certificate for gas flaring as it is not granted as a matter of course. The court concluded, that the delay or failure by the Minister to respond to the application for a permit or certificate for gas flaring should not be presumed as an approval– tacit or otherwise.
The court held that by failing to first obtain a written permit or certificate from the Minister before flaring gas, all payments by MPNU in respect of gas flared in 2006 – 2008 are invalid and illegal. The court further held that MPNU cannot rely on these illegal payments to claim tax deductions under Section 10 PPTA.
For many years the Minister failed to give written permission to companies to flare gas despite the fact that these companies duly applied for the permission. These companies were compelled to pay fees (penalties) to flare gas. It is our respectful opinion that the decision of the court that gas flaring fees are not tax deductible if paid without the written permission of the Minister, does not reflect the position of applicable laws for the following reasons:
Having said that penalties are allowable deductions, it is also clear that the labelling of payments by MPNU for gas flaring as “gas flaring penalty” has influenced the mind of the court in ruling that the “gas flaring penalties” are not allowable deductions. If the payments had merely been labeled as “gas flaring fees” as provided in the AGRA, the decision of the court would have be different. Thus, taxpayers are advised to ensure that transactions and payments are labelled consistently and accurately both in their books and in the books of the recipient. This can be a deciding factor in determining the tax treatment of such transactions or payments.
Maxwell Ukpebor, Samuel Esuga, Olumayowa Oluwole
Adebiyi Tax & Legal
House 20 Wema Terrace
Udi Street Ikoyi
This Legal Alert contains information on tax /legal issues. It does not constitute legal or professional advice on such issues. Where specific legal advice is needed, the services of a solicitor/tax adviser should be sought.