FHC Holds That It Is Utra-Vires The Powers Of The TAT To Classify As Royalty, Payments Classified By The Minister As Penalty For Gas Flaring


Once again, the vexed issue of the tax treatment of gas flaring penalties paid by companies that flare associated gas came under the judicial review of the Federal High Court (FHC) in the case of Federal Inland Revenue Service v. The Shell Petroleum Development Company of Nigeria Ltd (FHC/L/1A/2017). In a judgment delivered on June 25th 2018, the FHC (Justice Aikawa) did not only overturn the decision of the Tax Appeal Tribunal (TAT) that expenses incurred for flaring gas (penalties) are tax deductible but also held that it is ultra-vires the TAT to attempt to classify such expenses/penalties as royalty.

The Shell Petroleum Development Company of Nigeria Ltd (SPDC) had treated the fees it paid to the Ministry of Petroleum for gas flared by it as allowable deductions in its tax computation for the period between 2006 and 2008. This treatment was disallowed by the Federal Inland Revenue Service (FIRS) based on FIRS’ contention that the fees paid for flared gas without the approval of the Minister of Petroleum amount to penalties – not allowable for tax purpose. This decision of the FIRS was challenged by SPDC before the TAT, Lagos Zonal Division which overruled the decision of the FIRS thus giving rise to this appeal at the FHC.


Position of Court

In resolving the dispute, the court adopted the following two issues:

  1. Whether the Tax Appeal Tribunal (“The Tribunal”) acted Ultra-vires its powers when it held that the payment made by the Respondent to the Department of Petroleum Resources (DPR) for gas flared do not constitute a penalty, thereby reversing the decision of the Minister for Petroleum.
  2. Whether the Tribunal erred in law when it held that the Respondent was entitled to make tax deductions of the sum paid for the gas flared by the Respondent between 2006 and 2008 without finding that it med the requirements of being “wholly, exclusively and necessarily incurred” for Petroleum Operations as provided under S.10 of the Petroleum Profit Tax Act

On the first issue, the FHC held that while it is within the power of the TAT to determine what amount of tax is payable, the TAT acted outside the scope of its power by substituting the payment from penalty to royalty. The FHC held in respect of the above as follows:

…it [the Tax Appeal Tribunal] would be acting ultra vires if it proceeds to substitute the class of payment from penalty to royalty. This would be a direct encroachment on the administrative powers of the minister.”

– page 7 of the Judgement

On the second issue on the tax treatment of penalties incurred for flared gas, the FHC held as follows:

While I do not agree with the Learned counsel to the Appellant that gas flaring is out rightly illegal in Nigeria in view of statutory provisions and decided cases, I will however agree with him that fees for gas flaring is not within the category of expenses incurred wholly, exclusively from the Respondent’s petroleum operations as envisaged by section 10 of the petroleum profit tax act.

– page 12 of the Judgement

Implication of the Decision

The FHC has been consistent in holding that the fees paid by companies that flare gas without the approval of the Minister are not tax deductible. It is important to note that 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.

In our opinion, the decision of the FHC on the tax treatment of fees paid for gas flared without the written permission of the Minister, does not reflect the position of applicable laws for the following reasons:

  • There is no law in Nigeria that provides for monetary penalty when gas is flared without the written permission of the Minister. The penalties paid are compensatory (not punitive) and such penalties have been held to be tax deductible in other jurisdictions.
  • Assuming the payments made by the companies were penalties – the PPTA does not provide that penalties are not tax deductible.
  • On the issue of illegality, the Minister is not expected to receive payments from an illegal act. What the Minister is expected to do if it considers the act of flaring gas illegal is to suspend or withdraw the license of the person guilty of the illegality.

For more information, contact:

Maxwell Ukpebor +234 803 960 0520
Samuel Akpologun +234 806 526 4570

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.

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