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Legal Alert – April 2011 – Compulsory Insurance Regime
 
In this Issue:-
1. Legal News – Stamp Duties Office and Tax Clearance Certificates
2. Legal Alert – April 2011 – Compulsory Insurance Policies in Nigeria
3. Disclaimer
4. Subscribe & Unsubscribe
Legal News
Effective 21st March 2011, copies of the tax clearance certificates of the shareholders of a registered company and of the company itself will be required to be furnished at the Stamp Duties Office when a new company is to be incorporated or where an existing company applies to register an increase in its share capital.
Legal Alert – April 2011 - Introduction – Compulsory Insurance Policies in Nigeria
The National Insurance Commission ("NAICOM"), in pursuance of the provisions of the Nigerian Insurance Act 2003, and in a renewed attempt to reinvigorate insurance use, practice and regulations, recently fixed the end of March 2011 as the cut-off date from when all compulsory insurance policies, under various Nigerian statutes, will be fully enforced and penalties applied to defaulters.
This Legal Alert provides you with a summary of the various compulsory insurance policies in Nigeria.
Kinds of Compulsory Insurance Covers
There are six kinds of insurance policies that must be obtained and retained in Nigeria. They are:-
1. Statutory Group Life Insurance as required by Section 9(3) of the Pension Reform Act, 2004.
2. Employee's Compensation (which replaced Workmen Compensation) as required by Section 33 of the Employee's Compensation Act, 2010.
3. Occupier's Liability Insurance as required by Section 65 of the Insurance Act, 2003.
4. Motor Third-Party Insurance as required by Section 68 of the Insurance Act, 2003.
5. Builder's Liability Insurance as required by Section 64 of the Insurance Act.
6. Health Care Professional Indemnity Insurance as required by Section 45 of the National Health Insurance Act, 1999.
Now following is a summary of what each of the above insurance policy entails.
Statutory Group Life Insurance
In addition to the statutory pension contributions that employers and employees must remit under the Pension Reform Act, Section 9(3) of the Pension Reform Act mandatorily requires all employers to also make group life insurance premium payments towards "... maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee."
Employee's Compensation Contribution
The Employee's Compensation Act 2010 abrogated the Workmen's Compensation Act. Under the new 2010 legal regime, every employer is required, within the first two years of the commencement of the Employee's Compensation Act, to make a minimum monthly contribution of 1% of the employer's total employees' monthly payroll to the Employee's Compensation Fund. The Employee's Compensation Fund is created to pay adequate compensation to employees or their dependents for any injury, disease or disability arising out of or in the course of the employee's employment.
Occupier's Liability Insurance
Section 65 of the Insurance Act requires all public buildings to be insured against various hazards among which hazards are building collapse, fire, earthquake, storm and flood. The Insurance Act 2003 describes "public buildings" to be any tenement house, hostel, a building occupied by a tenant, a lodger or a licensee or any building used for the purposes of educational, medical or recreational services or for the transaction of any business.
Motor Third-Party Insurance
Section 68 of the Insurance Act and Section 3 of the Motor Vehicle (Third Party) Insurance Act requires that no person shall use, or cause or permit any other person to use, a motor vehicle unless such a motor vehicle is insured against damage to the property of third parties.
Builder's Liability Insurance
All Builder's of real property that have more than two floors must compulsorily register and insure such a building against all construction risks resulting from the Builder's negligence or the negligence of the Builder's servants, agents or consultants which negligence may result in bodily injury or loss of life or damage to the property.
Health Care Professional Indemnity Insurance
All Health Care Providers in Nigeria must compulsorily obtain and retain a Professional Indemnity Insurance cover from an Assurance Company approved by the National Health Insurance Scheme ("NHIS") Council.
Tax Benefit of Insurance
All insurance expenses are tax deductible in the computation of the tax payable by the employer and the employee under the various tax legislations in Nigeria.
Conclusion
Insurance administration and regulation in Nigeria has remained at a very appalling low ebb due to the general practice of insurance companies in only collecting insurance premiums but not settling legitimate insurance claims that may arise afterwards. The Regulator of all insurance businesses in Nigeria has equally failed to apply the statutory provisions on compulsory insurance compliance, as contained in the various statute books in Nigeria, to businesses and individuals in Nigeria.
Entrepreneurs will however now need to be on the alert by proactively assessing their businesses vis-a-viz what insurable risks they will need to obtain insurance covers against in order for these risks not to adversely affect their businesses or in some cases, out-rightly liquidate the business(es) should the insurable event occur.
In addition, there are very punitive penalties where an entrepreneur or business or individual fails to comply with the above-mentioned compulsory insurance provisions. The statutory penalties outstrip whatever short-term savings that the entrepreneur or business owner might think he or she is obtaining by non-compliance with these compulsory insurance regulations. You will therefore do well to assess your business insurance requirements and immediately contact your chosen licensed insurance company or agent to obtain the required insurance covers.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached
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This Alert and others produced by us are provided without any charge to you and without the creation of a client-attorney relationship. You can always subscribe to it, on behalf of other interested persons from whom you have their permission, by sending to us a one line e-mail with the words "Subscribe – Legal Alerts" followed by the desired email address.
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Legal Alert – March 2011 – Employee's Compensation Act
 
In this Issue:-
1. Legal News – Money Laundering (Prohibition) Bill, 2011
2. Legal Alert – March 2011 – Employee's Compensation Act, 2010
3. Disclaimer
4. Subscribe & Unsubscribe
Legal News
The Nigerian Upper House of Parliament, the Senate, has passed the "long overdue" Money Laundering (Prohibition) Bill. This Bill seeks to repeal the 2004 Money Laundering Act, which is reported not to be compliant with the recommendation of the Financial Action Task Force ("FATF"). According to reports, this Bill, when signed into law, will avail the financial regulators with more comprehensive statutory provisions prohibiting Terrorism Financing among other money laundering prohibited activities.
This legislation also seeks to increase the penalties for offenders of the provisions of this law to a maximum jail term of ten (10) years when compared to three (3) years in the 2004 Money Laundering Law. The new Money Laundering (Prohibition) Law will also expand the scope of the supervisory role of the various regulatory authorities like the Central Bank of Nigeria, the National Drug Law Enforcement Agency, etc in the area of money laundering prohibition in Nigeria.
Introduction - The Employee's Compensation Act
Various provisions of Nigerian legislations on employment or labour matters have always allowed the employers to wield enormous powers and discretion to the disadvantage of the employees. This legal position has currently not really changed.
The old Workmen Compensation Act was enacted to make provisions for the payment of compensation to employees for injuries suffered in the course of their employment. However, the compensatory provisions of this Act were mostly insufficient and inequitable when a workman gets injured in the course of his or her employment. The insurance provisions of this Act were also held more in disobedience than in compliance due to very weak enforcement machinery in Nigeria.
To address the flaws in the Workmen Compensation Act, the Employee's Compensation Act, 2010 was signed into law in late 2010. The Employee's Compensation Act, 2010 repealed the Workmen Compensation Act and made comprehensive provisions for the compensation that will accrue to an employee or the employee's estate in the event of death, injury, illness or any disability arising out of or in the course of the employee's contract or employment.
This legal Alert is our contribution to the discuss of this law and how it affects the Nigerian employees, employers and the economy.
Employee's Compensation Act
According to the Nigerian Federal Government, when announcing the signing into Law of the Employee's Compensation Act, the latter law is to "provide a more open and fair system of guaranteed and adequate compensation for all employees or their dependants for any death, injury, disease or disability of any kind arising out of or from the course of employment". The Employee's Compensation Act also seeks to provide a "solvent compensation fund which will be managed in the interest of the employees and their employers. This Act further makes provisions for the rehabilitation of employees affected by work related disabilities including mental illnesses.
The Employee's Compensation Fund is required to provide for a fair and adequate assessment system from which an appeal, whose procedure is simple, fair and accessible with minimal delays, is available to both the employers and the employees.
Like the Workmen Compensation Act, which was repealed by the Employee's Compensation Act, the provisions of the Employee's Compensation Act applies to all employers and employees in the public and private sectors of the Nigerian economy with the exemption of members of the Armed Forces who are not employed in a civilian capacity, and who not statutorily covered under the provisions of this law.
Regulator of the Employee's Compensation Fund
The Nigeria Social Insurance Trust Fund Management Board ("NSTF") is statutorily empowered to implement the provisions of the Employee's Compensation Act, and to manage the solvent compensation fund created thereof.
Statutory procedures for reporting and making claims resulting from workplace injury or disabling occupational disease or death can be found in Part 11 of this law. A failure by an Employer to make a report as statutorily required constitutes an offence unless the Employer is exempted in writing from making such a report by the NSITF Board.
The statutory procedures for paying compensation to employees for any disabling injury, death or disease, whether or not such disabling injury, occupational disease or death occurred in a workplace but arose in the course of the employee's employment must be in accordance with part iv of this law.
A waiver to receive compensation, or for an Employer to make the mandatory contributions to the Fund, is prohibited and such infringement attracts criminal conviction(s) and fine(s).
Compensation payments are required to be made on a monthly basis but without prejudice to the pension contributions of the Employee which pension contributions shall continue to be deducted in accordance with the provisions of the Pension Reform Act as will Pension benefits or entitlements not be prejudiced or stopped by the provisions of the Employee's Compensation Act.
The Functions of the NSITF Board
The key function of the Nigeria Social Insurance Trust Fund Management Board ("the NSITF Board") is the charge of the overall formulation of policies for the effective administration of the Employee's Compensation Fund ("the Compensation Fund")
A further function of the NSITF Board is the formulation of policies and strategies for the assessment of compensation, rehabilitation and welfare of employees who sustain injuries or contact occupational diseases at the workforce or in the course of their employment.
Employers Contributions to the Fund
Section 33 of the Employee's Compensation Act provides that "every employer shall within the first two years of the commencement of this Act, make a minimum monthly contribution of 1% of the total monthly payroll into the Fund." After the first two years, the NSITF Board is authorised to "... assess employers for such sums in such manner, form and procedure as the Board may, from time to time, determine for the due administration of this Act."
The NSITF Board is further authorised by Section 33(2) of this Act to from time to time, make regulations prescribing the categorisation of risk factors of each class or sub class of industry and the amount of contribution to be made and for different assessment rates applicable to each class or sun- class of industry, sector or work place.
The provisions of this Act also apply to independent contractors and subcontractors as their principals are required to withhold from the remuneration payable under such contract or sub-contract any amount that the principal is otherwise liable to remit under the provisions of the Employee's Compensation Act, and ensure the remittance of such amount to the Board,.
The penalty for non-payment of the assessment is an amount equal to 10% of the unpaid assessment or the value of the security required. It is an offence where an employer defaults in providing the security required or defaults in making the payment of any amount due to the Fund or contravenes the decisions of the Board.
Any person aggrieved with a decision of the Board is entitled to appeal against such a decision within 180 days from the date the decision was pronounced and the Board must determine such a decision within 180 days following the filing of the appeal. A further right of appeal, against the appellate decision of the Board, must be made to the National Industrial Court.
Employee's Compensation Fund
All contributions under this law with the take–off grant from the Federal Government of Nigeria, fees and assessments charged or made pursuant to this Law with the proceeds from the investments of the Fund, gifts and grants, etc, are required to be deposited in the statutorily created Employee's Compensation Fund.
All Income of the Fund shall be used to pay adequate compensation to employees or their dependents for any injury, disease or disability arising out of or in the course of the employee's employment. The fund is also required to make provisions for employees with work related disabilities.
Also established under this law is the Independent Investment Committee with the mandate to advise the Board on the investment of any income standing to the credit of the Fund.
Miscellaneous Provisions
In the event of an employer becoming insolvent, the Employer's contributions to the Fund shall constitute a lien in favour of the NSITF Fund for a period of five years from the end of the calendar year from when the assessment was levied, over and above all other liens, charges or mortgages of every other security or charge, wherever or however created, on the employer's property. Section 70(3) of the Law requires that where the employer is a body corporate and the body corporate becomes insolvent, the property of the body corporate shall include the property of any director, manager, secretary or other officer of the body corporate used in connection with the business of the body corporate.
Every offence that is committed under this Law by a body corporate shall be deemed to have also being committed by every Director, Manager, Secretary or other officer or officers of the body Corporate, or where a firm, by a partner or other officer of such a firm save where such a person is able to establish that the act or omission constituting the offence took place without his or her knowledge, consent, connivance or neglect and or that he or she took reasonable steps to prevent the commission of the offence.
Conclusion
As commendable as this legislation may be, the appointment of NSITF as the Regulator of the Employee's Compensation Fund gives cause for much concern in the light of the historical inability of NSITF to manage its statutory functions before the enactment of the Pension Reform Act. Under the new pension regime, there is no evidence that NSITF has practically improved on the discharge of the functions assigned to NSITF under the Pension Reform Act. To assign further statutory responsibilities and resources on NSITF places the Nigerian employee at further statutory and implementation risks and disadvantage.
The Employee's Compensation Act also grants to the NSITF Board over-bearing unfettered discretionary powers to assess employers more than the statutorily provided one per cent (1%) of total monthly payroll after the initial two years of the commencement of the Employee's Compensation Act. Of equal concern is the provision that an employer will be liable to make its contributions to the Fund even where the NSITF Board does not carry out its statutory duty of raising the assessment in the first place.
The addition of a one per cent payroll charge or tax, which percentage is expected to increase after the initial two years of the commencement of the Employee's Compensation Act, is a further tax burden on employers of labour who are presently unable to profitably overcome the problems of multiple taxation and poor infrastructural facilities in Nigeria. The latter will ultimately increase the cost of doing business in Nigeria, discourage direct foreign investments and continue to escalate and exacerbate unemployment in Nigeria.
Provisions in this statute that make the employers liable for outside work related injuries is open to future disputes on its interpretation and application to the disadvantage of the weak employee.
In spite of the flaws with this law, Employers will be better served by ensuring compliance while looking forward to the implementation of the law drawing up enough resistance to warrant some amendments.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached
Subscribe & Unsubscribe to Legal Alerts
This Alert and others produced by us are provided without any charge to you and without the creation of a client-attorney relationship. You can always subscribe to it, on behalf of other interested persons from whom you have their permission, by sending to us a one line e-mail with the words "Subscribe – Legal Alerts" followed by the desired email address.
You are equally free to terminate your subscription by sending to us a one line email with the words "Unsubscribe - Legal Alerts" and your electronic address would be removed from our list. In the future, you can return to our mailing list by visiting our web site www.oseroghoassociates.com to subscribe for the Legal Alerts.
Legal Alert – February 2011 – Tax Clearance Certificates
 
In this Issue:-
1. Legal Alert – February 2011 – Tax Clearance Certificates
2. Disclaimer
3. Subscribe & Unsubscribe
Legal Alert – February 2011 – Tax Clearance Certificates
The voluntary payment of direct taxes in Nigeria has over the years systematically deteriorated as has the quality of the services delivered by the various tiers of government to the citizenry. To combat the earlier mentioned malice of tax evasion, the Nigerian tax authorities introduced the issuance of Tax Clearance Certificates in the late 1970s to enable governments and other related third parties to, at a glance, and prima facie, confirm that the holder of the Tax Clearance Certificate has in the past three preceding years of the date of the issuance of the tax clearance certificate, paid his or her or its taxes.
In logical reverse to the statement in the above paragraph, persons that do not have a tax clearance certificate are presumed not to have paid their taxes.
Unfortunately, the non-automation of the various Inland Revenue Services all over the federation of Nigeria, coupled with bureaucratic delays and archaic tax laws, have resulted in the procedure for applying for and obtaining a Tax Clearance Certificate unnecessarily protracted which in turn has encouraged a culture of corruption which has led to a negation of the statutory objectives for issuing a Tax Clearance Certificate in the first place.
The efforts of the Inland Revenue Service to correct the negative culture of non-payment and in some instances the under-payment of taxes and also, the issuance of bogus Tax Clearance Certificates in other instances, may be negated by the lack of public information on the statutory provisions on this subject matter. This Alert is therefore intended to assist you with the basic information on this subject of Tax Clearance Certificates.
What is Tax Clearance Certificate?
Various legal writers, including Dr. Asada and Mr. Zumka Sekop have described a Tax Clearance Certificate to be a written confirmation from the revenue authorities that a tax payer's tax liabilities for the three years immediately preceding the current year of tax assessment, have been settled as at the date of the issuance of the Tax Clearance Certificate, and that no further tax is due for payment. These authors have also acknowledged that in some instances, a Tax Clearance Certificate may be issued to a tax payer who has some tax arrears due for payment but have entered into an agreement with the revenue authorities on how the tax arrears will be liquidated.
The best description on what a Tax Clearance Certificate is can be found in the statutory provision of Section 101(1) of the Companies Income Tax Act ("CITA") as amended, which provides as follows:- "Whenever the Board is of the opinion that tax assessed on profits or income of a person has been fully paid or that no tax is due on such profits or income, it shall issue a tax clearance certificate to the person within two weeks of the demand for such certificate by that person, or, if not, give reasons for the denial". Reference to the Board in this provision is the Federal Board of Inland Revenue.
A tax clearance certificate must disclose with respect to the last three preceding years of assessment, of the mentioned tax payer, the total profits or chargeable income of the tax payer, the tax payable, the tax actually paid and the tax amount outstanding for payment; and alternatively, a statement that no tax is due for payment.
Mandatory Submission of Tax Clearance Certificates
It is a mandatory statutory requirement that all departments of government and commercial banks must demand for the Tax Clearance Certificate, for the last three preceding years, of any person with whom they intend to have any dealing in the areas of applications for government loans, contracts and other businesses, registration of motor vehicles, applications for firearms license, foreign exchange transactions or the remittance of funds outside Nigeria, applications for certificate of occupancy of land, building plans, transfer of legal title to land, applications for plot of land, export or import licenses, pools or gaming licenses, distributorship, registration of a limited liability company or a business name, allocation of market stalls, etc. See Section 101(2) & 101(4) of Companies Income Tax Act, as amended, for further elucidation.
Is a tax clearance certificate final and conclusive?
A contentious question with regard to tax assessments and tax clearance certificates is whether they are by themselves final and conclusive tax documents? Section 76 of the Companies Income Tax Act (as amended) provides that where no valid objection or appeal has been lodged within the time provided in the relevant tax law against a tax assessment, or where the total profit and the tax payable on such profit of a company has been determined after an objection or an appeal, the determined assessment shall be final and conclusive for all purposes of compliance with the tax provisions of the Companies Income Tax Act, as amended.
In the Matter of Alhaji Audu Bado v. Commissioner of Revenue (1972) (4) SC (reprint) 57, the Appellant's contention was that the assertion that the Commissioner of Revenue's assessment certificate is sufficient and conclusive evidence of the tax owed was contrary to the constitutional provision on fair hearing, and therefore null and void. The Supreme Court considered this objection and held that a Tax Assessment Certificate is sufficient and conclusive evidence of the tax amount due for payment provided that no contradictory evidence is produced by the tax payer to displace the figures in the Tax Assessment Certificate. The Supreme Court was further was of the view and so held that the tax payer's Constitutional right to challenge the Assessment Certificate by calling contrary evidence is in compliance with the tax payer's constitutional right to fair hearing and this right was not infringed in this instance particularly as the Appellant was served with the notices of assessments, and the Appellant never raised any objection nor provided any contrary evidence challenging the assessments. The Assessment Certificate was therefore upheld to be valid for payment by the tax payer.
In another matter, Federal Board of Internal Revenue v. Owena MOTELS Limited, 2 TLRN March 2010, the Federal High Court sitting in Akure held that on the service of the notices of assessments on the Defendant, for the period of 1993-1998, without any objection by the defendant, it meant that the sums thereon stated became conclusive, final and due for payment thirty (30) days after the service of each notice of assessment on the Defendant. Judgment was accordingly entered in favour of the Federal Inland Revenue Service based on the preponderance of evidence before this Court.
There is however no specific Section or provision in the Companies Income Tax Act, as amended, or in any tax circular which makes the issuance of a Tax Clearance Certificate final and conclusive evidence of the tax paid or payable for the stated period. The professional view in this regard is that many Tax Clearance Certificates are generally issued based on the tax returns which are filed under the self-assessment procedure. However, should the tax authority detect any under-payment of tax or fraud in the payment or non-payment of tax, the various tax legislations allow the Inland Revenue Service to undertake a tax audit and or issue further tax assessments based on the audited accounts filed with the self assessment forms, or apply the best of judgment principle or other methods allowed under the tax laws to raise further tax assessment.
Therefore, the amount of tax paid and indicated as such in a Tax Clearance Certificate will be final and conclusive where it has been adjudicated upon and or finally determined by a judicial authority.
Conclusion
The non-alignment of the existing and sometime archaic tax legislations in Nigeria to address the present day realities of doing business and living in Nigeria in the twenty-first century will continue to promote tax evasion if these legislations are not, as a matter of urgent national economic emergency, amended.
Also, Nigeria remains one of the most expensive places to do business in the world as a result of poor governance, poor systems and poor infrastructures; e.g. poor power supply, multiple taxation, high cost of funds, poor transportation network, insufficient twenty-first century compliant human capital resources, poor water supply, etc. In addition to these defects are the issues of poor public and private governance, and a high level of public and private corruption which further encourage tax evasion. It is expected that improvements in public governance and corruption will align the entire economy including promoting tax compliance and economic growth in the nearest future.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached
Subscribe & Unsubscribe to Legal Alerts
This Alert and others produced by us are provided without any charge to you and without the creation of a client-attorney relationship. You can always subscribe to it, on behalf of other interested persons from whom you have their permission, by sending to us a one line e-mail with the words "Subscribe – Legal Alerts" followed by the desired email address.
You are equally free to terminate your subscription by sending to us a one line email with the words "Unsubscribe - Legal Alerts" and your electronic address would be removed from our list. In the future, you can return to our mailing list by visiting our web site www.oseroghoassociates.com to subscribe for the Legal Alerts.
Legal Alert – January 2011 – Interest Charged In Simple Contracts
In this Issue:-
1. Legal News – Employees Compensation Act, 2010
2. Legal Alert – January 2011 – Interest Charged In Simple Contracts Claims
3. Disclaimer
4. Subscribe & Unsubscribe
Legal News
The Workmen Compensation Act, 2004 has now been repealed by the Employees Compensation Act, 2010 which new statute was signed into Law in January 2011. The Employees Compensation Act, which applies to employees and employers in the public and private sectors of the Nigerian economy, seeks to provide a more open and fair system " ... of guaranteed and adequate compensation to all employees or their dependants for any death, disease or disability arising out of or in the course of employment."
Legal Alert - January 2011 – Interest Charged in Simple Contracts Claims
Introduction
Interest has been generally described as the sum payable in respect of the use of another party's money or asset which is called the principal. Interest has also been described as connoting a compensation allowed by law or fixed by the parties for the use or forbearance of an asset or money or such other consideration that the parties have agreed upon. Interest rate on the other hand refers to the percentage of an amount of money which is paid for its use for a specific period of time. See the decision in Veepee Industries Limited v. Cocoa Industries Limited (2008) 4-5 SC (part 1) 116 @ 129-130 for these legal definitions.
A reoccurring area in many disputes in simple contract claims, especially where the party claiming interest is not a licensed financial institution, is the question of whether interest is payable on an ascertainable business debt? Many business people, unaware of the correct position of the law, always contend that once a debt is owed to them and such a debt is not paid or liquidated within the period that the debt is contracted or expected to be paid or liquidated, or where there is no contracted period for payment then within a reasonable time, such a debt must attract interest. Is this however the correct position of the law?
Legal Basis to Charge Interest
At common law, the general rule is that a debtor is not allowed to charge or claim interest on a debt except there is an express contract to justify such a claim or charge and particularly where it was not within the contemplation of the parties at the time they were entering into the contract to envisage that the defaulting party will be required to pay interest on an outstanding liquidated contracted amount.
However, to every rule, there is usually an exception, and the following are some of the exceptions to the above mentioned common law rule.
The first exception is that where there is an express agreement to charge and pay interest, then interest can and must be paid on the claimed principal amount. Parties to a contract could expressly or impliedly contract to pay interest, at a prior agreed percentage, on any sum that remains due and outstanding under their contract after an agreed period of time has elapsed.
The second exception is mercantile custom. The Law recognises that certain trades or industries have their peculiar but acknowledged customs which though not written down have remained binding for many years. For equity and to avoid fraud, the Law is always willingly to enforce these customs including the ones that recognise that interest will be paid on a debt if such a debt is not settled within a certain period of time.
A third and further exception to the common law general rule which bars the payment of interest on ordinary contracts is the rule of implicit agreement. Parties under a fiduciary arrangement can as a matter of equity be deemed to have contracted to implicitly pay interest on a claimed ascertainable amount particularly if there exist evidence of previous instances when such interest was paid.
See the decision in Ekwunife v. Wayne (W.A.) Limited (1989) 12 SC 92 @ 111-112 for the general judicial position on the payment of interest in Nigeria.
Conclusion
Contracting parties will be guided to ensure that they keep in contemplation every possibility that could arise in their contract, negotiate and reach agreements on these possibilities which must then be transcribed into their written agreements. This is in the light of the harsh reality that litigation in Nigeria takes an average of about a decade and if no provision is made for interest to be paid in the event of a breach and subsequent award, the sum awarded would have being grossly eroded by inflation, etc.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed with many thanks.
This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached
Subscribe & Unsubscribe to Legal Alerts
This Alert and others produced by us are provided without any charge to you and without the creation of a client-attorney relationship. You can always subscribe to it, on behalf of other interested persons from whom you have their permission, by sending to us a one line e-mail with the words "Subscribe – Legal Alerts" followed by the desired email address.
You are equally free to terminate your subscription by sending to us a one line email with the words "Unsubscribe - Legal Alerts" and your electronic address would be removed from our list. In the future, you can return to our mailing list by visiting our web site www.oseroghoassociates.com to subscribe for the Legal Alerts.
1. Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012
2. Disclaimer Notice
3. Copyright Notice
The Income Tax (Transfer Pricing) Regulations, No. 1, 2012
Introduction
The proposed Income Tax (Transfer pricing) Regulations, 2012 ("TPRs") is published by the Federal Inland Revenue Service ("FIRS") in pursuance of the powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007.
The proposed commencement date for the implementation of the Transfer Pricing Regulations is 1st January 2013.
Objectives of the Transfer Pricing Regulations, 2012
One of the primary objectives of the Transfer Pricing Regulations is the provision to the Nigerian tax authorities, tools to fight tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm's length tax principle.
Two other objectives of the Transfer Pricing Regulations are the reduction of the risks of economic double taxation; and the provision of a level playing field between associated companies on the one hand and independent un-associated companies doing business in Nigeria on the other hand.
Transfer Pricing – Arm Length and Artificial Taxable Transactions
Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies' Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorises FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.
A transaction will be deemed to be artificial or fictitious where one of the parties either has control over the other party, or the parties are so related that the terms of the transaction will be biased or more favourable as amongst the controlled or related parties; in contrast to where the parties are engaged in the same or similar transactions as independent parties, dealing at arm's length basis.
A company that is affected by a decision of FIRS in the above regard has a right to appeal against such a FIRS decision in the first instance to a FIRS appointed Decision Review Panel, with a further right of appeal to the Federal High Court, the Court of Appeal and the Supreme Court which is the Court of last resort in Nigeria.
Permanent Establishments and Transfer Pricing Regulations, 2012
The proposed Nigerian Transfer Pricing Regulations, 2012 now formally provides that permanent establishments ("PE") will be treated under these Regulations as separate tax entities, and any transaction between a permanent establishment and its parent company or head office, or between it and another connected taxable persons, shall be treated as a controlled transaction liable to the application of the provisions of the Transfer Pricing Regulations, 2012.
Compliance with Arm's Length Principle, Documentations, Advance Pricing Agreements, etc.
Arm's Length Principle: The arm's length principle requires that the conditions of a transaction, between connected taxable persons, should not differ from the conditions that would have applied if the connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.
Connected persons are therefore required by Article 4 of the Transfer Pricing Regulations to always ensure that all taxable profits that result from transactions between them are in compliance with the arm's length principle. Where connected persons fail to abide with the arm's length principle, the Federal Inland Revenue Service is authorised to make such necessary tax adjustments that will bring the transaction within the parameters of the arm's length principle.
Transfer Pricing and Comparability Factors
Barring repetition, Article 9 of the proposed Transfer Pricing Regulations, 2012 provides that for the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm's length principle, the tax payer shall, in the first instance, ensure that the transaction is comparable with a similar or identical transaction between two independent persons carrying on business under comparable conditions.
Transfer Pricing Methods
Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm's Length Principle include (i) the Comparable Uncontrolled Price ("CUP") method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.
The Cost Plus Method is described by the proposed Transfer Pricing Regulations to mean the method in which the mark-up on the costs directly and indirectly incurred in the supply of goods, property or services in a controlled transaction is comparable with the mark-up on those costs directly or indirectly incurred in the supply of similar goods, property or services in a comparable uncontrolled transaction.
A connected taxable person however has the right to apply to FIRS for the application of a different transfer pricing method other than the ones stated in the TP Regulations provided that such a TP method gives rise to a result that is consistent with that which exists between independent contracting persons engaged in comparable business or circumstances. A connected taxable person is also permitted by the Transfer Pricing Regulations to enter into an Advance Pricing Agreement with FIRS.
Advance Pricing Agreements with FIRS
Regulation 7(1) of the proposed Income Tax (Transfer Pricing) Regulations, 2012 provides that "A connected taxable person may request the service (which is FIRS) to enter into an Advance Pricing Agreement ("Advance Pricing Agreement") establishing an appropriate set of criteria for determining whether the person has complied with the arm's length principle for certain future controlled transactions undertaken by the person over a fixed period of time provided that such agreement shall be consistent with the requirements established by this regulation."
It however appears from the proposed Regulation 7(d) that only tax payers with an annual cumulative transaction amount of not less than Two Hundred and Fifty Million Naira (N250,000,000) can make the request to enter into an Advance Pricing Agreement with FIRS.
Also, an Advance Pricing Agreement is only allowed to apply to controlled transactions for a period not exceeding three years. While the TPR is silent on the renewal or otherwise of these Agreements, it is expected that the Agreements will be renewable provided there is no prior breach, or non-compliance, or any material change in the tax legislations in Nigeria. Where any of the latter events occurs, FIRS is authorised to terminate the Advance Pricing Agreement.
Transfer Pricing Documentation
A connected taxable person is required to, in advance, record and provide sufficient information, data and analysis of the data submitted verifying that the pricing of the controlled transaction is consistent with the arm's length principle.
FIRS is however authorised to request for additional information where it deems it necessary to effectively carry out its functions under the proposed Transfer Pricing Regulations.
The burden of proof that the conditions of the controlled transactions are consistent with the arm's length principle is on the affected tax payer.
Transfer Pricing Disclosure
For each year of assessment, a connected taxable person must without notice or demand by FIRS, make a Transfer Pricing Disclosure in the form prescribed in the proposed Transfer Pricing Regulations. The Transfer Pricing Disclosure Form is required to be filed along with the connected taxable person's annual tax returns for each year of tax assessment.
Double Taxation Treaty and Transfer Pricing Regulations
The Transfer Pricing Regulations authorises FIRS to, upon request by a tax payer, make a corresponding tax adjustment where it is established that a connected taxable person, subject to tax in Nigeria, has suffered tax on a connected transaction in another country with which Nigeria has a subsisting Double Taxation Treaty ("DTT").
TPR and Supremacy of Tax Laws
All applicable Tax Laws in Nigeria shall prevail whenever there is any inconsistency between these tax laws and the 2012 Transfer Pricing Regulations or the United Nations ("UN") Practical Manual on Transfer Pricing, the OECD Transfer Pricing Guidelines for multi-national Enterprises and Tax Administrations.
Save for the above proviso, the Nigerian proposed Transfer Pricing Regulations, 2012 shall be applied in a manner consistent with the arm's length principle stated in Article 9 of the UN and the OECD Model Tax Conventions on Income and Capital as may be in force at the relevant time.
Limitation of Usage of Information
Documentation and correspondence provided by a connected taxable person for TP purposes shall only be used for the purpose of establishing the arm's length principle in respect of the controlled transaction for which the documentation was supplied to FIRS.
All records and data relating to any trade carried on by a tax payer for which documentation and or data are provided for any tax purpose are required to be preserved for a period of at least six (6) years from the date on which the tax return with the data relevant to their tax return was made.
Offences, Penalties & Dispute Resolution
Any taxable person who contravenes any of the provisions of the proposed Transfer Pricing Regulations, 2012 shall be liable to bear the penalties prescribed for such contravention as already stated in the applicable tax law.
Any dispute arising from the application of the various Transfer Pricing Regulations shall be referred to the Decision Review Panel set up by FIRS, for such Panel's further review and final decision. An aggrieved tax payer with any decision of the Review Panel has the right to appeal against such a decision to a Court with competent jurisdiction in taxation matters which is usually the Federal High Court when it comes to the taxation of corporations.
DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.
COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.
Oserogho & Associates
Business Solicitors, Tax Advisers & Notary Public
NEC Centre, 1 Engineering Close
2nd Floor, Suite 206, Off Idowu Taylor Street
Victoria Island, Lagos, Nigeria
Phone/Fax: (+234-1) 463 7414
Office Phone: (+234-1) 765 5635
Mobile: (+234-1) 803 326 4753;
P. O. Box 56261 Falomo Ikoyi Lagos
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.oseroghoassociates.com/

1.            Tax Alert – The Income Tax (Transfer Pricing) Regulations, No. 1, 2012

2.            Disclaimer Notice

3.            Copyright Notice

 

The Income Tax (Transfer Pricing) Regulations, No. 1, 2012

 

Introduction

 

The proposed Income Tax (Transfer pricing) Regulations, 2012 (“TPRs”) is published by the Federal Inland Revenue Service (“FIRS”) in pursuance of the powers conferred on it by Section 61 of the Federal Inland Revenue Service (Establishment) Act. No.13 of 2007.

 

The proposed commencement date for the implementation of the Transfer Pricing Regulations is 1st January 2013.

 

Objectives of the Transfer Pricing Regulations, 2012

 

One of the primary objectives of the Transfer Pricing Regulations is the provision to the Nigerian tax authorities, tools to fight tax evasion, which is usually promoted through over or under–pricing of transactions between associated enterprises or corporations not adhering to the arm’s length tax principle.

 

Two other objectives of the Transfer Pricing Regulations are the reduction of the risks of economic double taxation; and the provision of a level playing field between associated companies on the one hand and independent un-associated companies doing business in Nigeria on the other hand.

 

Transfer Pricing – Arm Length and Artificial Taxable Transactions

 

Section 17 of the Personal Income Tax Act (as amended), Section 22 of the Companies’ Income Tax Act (as amended) and Section 15 of the Petroleum Profit Tax Act authorises FIRS to disregard and substitute a proper tax assessment for a prior tax assessment where any transaction is intended to artificially or fictitiously reduce the amount of the tax that will otherwise be assessed and paid by a tax payer in Nigeria.

 

A transaction will be deemed to be artificial or fictitious where one of the parties either has control over the other party, or the parties are so related that the terms of the transaction will be biased or more favourable as amongst the controlled or related parties; in contrast to where the parties are engaged in the same or similar transactions as independent parties, dealing at arm’s length basis.

 

A company that is affected by a decision of FIRS in the above regard has a right to appeal against such a FIRS decision in the first instance to a FIRS appointed Decision Review Panel, with a further right of appeal to the Federal High Court, the Court of Appeal and the Supreme Court which is the Court of last resort in Nigeria.

 

Permanent Establishments and Transfer Pricing Regulations, 2012

 

The proposed Nigerian Transfer Pricing Regulations, 2012 now formally provides that permanent establishments (“PE”) will be treated under these Regulations as separate tax entities, and any transaction between a permanent establishment and its parent company or head office, or between it and another connected taxable persons, shall be treated as a controlled transaction liable to the application of the provisions of the Transfer Pricing Regulations, 2012.

 

Compliance with Arm’s Length Principle, Documentations, Advance Pricing Agreements, etc.

 

Arm’s Length Principle: The arm’s length principle requires that the conditions of a transaction, between connected taxable persons, shouldnotdifferfromtheconditionsthatwouldhaveappliedifthe connected persons were independent contracting parties engaged in comparable similar transactions carried on under comparable similar circumstances.

 

Connected persons are therefore required by Article 4 of the Transfer Pricing Regulations to always ensure that all taxable profits that result from transactions between them are in compliance with the arm’s length principle. Where connected persons fail to abide with the arm’s length principle, the Federal Inland Revenue Service is authorised to make such necessary tax adjustments that will bring the transaction within the parameters of the arm’s length principle.

 

Transfer Pricing and Comparability Factors

 

Barring repetition, Article 9 of the proposed Transfer Pricing Regulations, 2012 provides that for the purpose of determining whether the pricing and other conditions of a controlled transaction are consistent with the arm’s length principle, the tax payer shall, in the first instance, ensure that the transaction is comparable with a similar or identical transaction between two independent persons carrying on business under comparable conditions.

 

Transfer Pricing Methods

 

Some of the Transfer Pricing Methods that can be applied in determining whether a transaction is transacted within the parameters of the Arm’s Length Principle include (i) the Comparable Uncontrolled Price (“CUP”) method, or (ii) the Resale Price Method, or (iii) the Cost Plus Method, or (iv) the Transactional Net Margin Method, or (v) the Transactional Profit Split Method, or (vi) any other method as may be prescribed by FIRS, from time to time.

 

The Cost Plus Method is described by the proposed Transfer Pricing Regulations to mean the method in which the mark-up on the costs directly and indirectly incurred in the supply of goods, property or services in a controlled transaction is comparable with the mark-up on those costs directly or indirectly incurred in the supply of similar goods, property or services in a comparable uncontrolled transaction.

 

A connected taxable person however has the right to apply to FIRS for the application of a different transfer pricing method other than the ones stated in the TP Regulations provided that such a TP method gives rise to a result that is consistent with that which exists between independent contracting persons engaged in comparable business or circumstances. A connected taxable person is also permitted by the Transfer Pricing Regulations to enter into an Advance Pricing Agreement with FIRS.

 

Advance Pricing Agreements with FIRS

 

Regulation 7(1) of the proposed Income Tax (Transfer Pricing) Regulations, 2012 provides that “A connected taxable person may request the service (which is FIRS) to enter into an Advance Pricing Agreement (“Advance Pricing Agreement”) establishing an appropriate set of criteria for determining whether the person has complied with the arm’s length principle for certain future controlled transactions undertaken by the person over a fixed period of time provided that such agreement shall be consistent with the requirements established by this regulation.”

 

It however appears from the proposed Regulation 7(d) that only tax payers with an annual cumulative transaction amount of not less than Two Hundred and Fifty Million Naira (N250,000,000) can make the request to enter into an Advance Pricing Agreement with FIRS.

 

Also, an Advance Pricing Agreement is only allowed to apply to controlled transactions for a period not exceeding three years. While the TPR is silent on the renewal or otherwise of these Agreements, it is expected that the Agreements will be renewable provided there is no prior breach, or non-compliance, or any material change in the tax legislations in Nigeria. Where any of the latter events occurs, FIRS is authorised to terminate the Advance Pricing Agreement.

 

Transfer Pricing Documentation

 

A connected taxable person is required to, in advance, record and provide sufficient information, data and analysis of the data submitted verifying that the pricing of the controlled transaction is consistent with the arm’s length principle.

 

FIRS is however authorised to request for additional information where it deems it necessary to effectively carry out its functions under the proposed Transfer Pricing Regulations.

 

The burden of proof that the conditions of the controlled transactions are consistent with the arm’s length principle is on the affected tax payer.

 

Transfer Pricing Disclosure

 

For each year of assessment, a connected taxable person must without notice or demand by FIRS, make a Transfer Pricing Disclosure in the form prescribed in the proposed Transfer Pricing Regulations. The Transfer Pricing Disclosure Form is required to be filed along with the connected taxable person’s annual tax returns for each year of tax assessment.

 

Double Taxation Treaty and Transfer Pricing Regulations

 

The Transfer Pricing Regulations authorises FIRS to, upon request by a tax payer, make a corresponding tax adjustment where it is established that a connected taxable person, subject to tax in Nigeria, has suffered tax on a connected transaction in another country with which Nigeria has a subsisting Double Taxation Treaty (“DTT”).

 

TPR and Supremacy of Tax Laws

 

All applicable Tax Laws in Nigeria shall prevail whenever there is any inconsistency between these tax laws and the 2012 Transfer Pricing Regulations or the United Nations (“UN”) Practical Manual on Transfer Pricing, the OECD Transfer Pricing Guidelines for multi-national Enterprises and Tax Administrations.

 

Save for the above proviso, the Nigerian proposed Transfer Pricing Regulations, 2012 shall be applied in a manner consistent with the arm’s length principle stated in Article 9 of the UN and the OECD Model Tax Conventions on Income and Capital as may be in force at the relevant time.

 

Limitation of Usage of Information

 

Documentation and correspondence provided by a connected taxable person for TP purposes shall only be used for the purpose of establishing the arm’s length principle in respect of the controlled transaction for which the documentation was supplied to FIRS.

 

All records and data relating to any trade carried on by a tax payer for which documentation and or data are provided for any tax purpose are required to be preserved for a period of at least six (6) years from the date on which the tax return with the data relevant to their tax return was made.

 

Offences, Penalties & Dispute Resolution

 

Any taxable person who contravenes any of the provisions of the proposed Transfer Pricing Regulations, 2012 shall be liable to bear the penalties prescribed for such contravention as already stated in the applicable tax law.

 

Any dispute arising from the application of the various Transfer Pricing Regulations shall be referred to the Decision Review Panel set up by FIRS, for such Panel’s further review and final decision. An aggrieved tax payer with any decision of the Review Panel has the right to appeal against such a decision to a Court with competent jurisdiction in taxation matters which is usually the Federal High Court when it comes to the taxation of corporations.

 

DISCLAIMER NOTICE. This Legal Alert is a free educational material, for your general information and enlightenment purposes ONLY. This Alert, by itself, does not create a Client/Attorney relationship between yourself and our Law Firm. Recipients are therefore advised to seek professional legal advice and counselling to their specific situations when they do arise.

 

COPYRIGHT NOTICE. This Legal Alert is protected by Intellectual Property Law and Regulations. It may however be shared with other parties provided that our Authorship is always acknowledged and this Disclaimer Notice is attached.

 

Oserogho & Associates

Business Solicitors, Tax Advisers & Notary Public

NEC Centre, 1 Engineering Close

2nd Floor, Suite 206, Off Idowu Taylor Street

Victoria Island, Lagos, Nigeria

Phone/Fax:    (+234-1) 463 7414

Office Phone: (+234-1) 765 5635

Mobile:       (+234-1) 803 326 4753;

P. O. Box 56261 Falomo Ikoyi Lagos

Email:     This email address is being protected from spambots. You need JavaScript enabled to view it.

Website:   http://www.oseroghoassociates.com/