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Legal Alert December 2008 Employees Share Acquisition Schemes In Nigeria
 
In this Issue:
1. Case Law Update on Dishonoured Cheques Law.
2. Legal Alert for December, 2008 – Employees Share Acquisition Schemes In Nigeria.
3. Subscribe & Unsubscribe to Legal Alerts.
4. Disclaimer Notice.
Case Law Update on Dishonoured Cheques Law.
In our Legal Alert for February, 2007 we had drawn attention to the subsisting Dishonoured Cheques (Offences) Act and concluded this Alert by stating that the paucity of reported and concluded Court cases in this area is inhibiting business by encouraging the issuance of dud cheques. Mr. Osen Ohiosimuan has however, most kindly, brought the reported Supreme Court decision in the matter of ABEKE v. THE STATE (2007) 3 S.C. (Pt. 11) 105 to our attention.
In the case of ABEKE v. THE STATE (supra), the accused was charged under Section 1 (1)(b) of the Dishonoured Cheques (Offences) Act No. 44 of 1977 with obtaining a credit of N3,300.00 (Three Thousand Three Hundred Naira) by means of a cheque which when presented on due date was dishonoured on the ground that the accused/appellant had no sufficient funds in her account to cover the face value of the cheque. The Supreme Court held that a cheque issued by a drawer and accepted by the drawee serves the dual purpose of (1) documenting the particular transaction and (2) as a medium of payment. The Supreme Court further held that the accused committed a criminal offence under Section 1 (2)(b) of the Dishonoured Cheques (Offences) Act when she issued a cheque in settlement of an obligation, which cheque, when presented less than 3 (three) months afterwards, was returned unpaid. The conviction and sentence of the accused/appellant person by the lower Court was accordingly affirmed and the appeal dismissed for lack of merit.
Legal Alert for December, 2008 – Employees Share Acquisition Schemes in Nigeria – Law & Practice.
Growing competition in business is continually necessitating the development of new methods to motivate and retain the best employees of any corporation. A recurring long-term method of achieving this retention is for a corporation to make its employees part owners in the equity of the corporation.
It is also instructive that most jurisdictions have recognised the benefits of employees share acquisition schemes by providing tax advantages for government approved long term employees share schemes.
While these schemes encourage employee retention and higher motivation to the benefit of the corporation, the schemes also have some disadvantages, like:-
(a) They provide the employees with less immediate dispensable income.
(b) They restrict the free movement of labour as most employees would not want to leave an employment with such a scheme too soon in order not to loose the shares or tax benefits associated with the employee share scheme.
(c) The investment could become a burden or a loss to the employees if the corporation does not make consistent profits over the long term.
Employees Share Schemes Under Nigerian Company Law
Generally, the Companies and Allied Matters Act prohibits a company from providing direct or indirect financial assistance for the acquisition of the company's own shares. Some of the exceptions to this general rule are:
(i) Where it is ordinarily a part of the business of the company to lend money for all kinds of businesses.
(ii) Where the fully paid shares of the company or its holding company are being purchased by trustees of the employees of the company for the benefit of such employees including any directors holding a salaried employment or office in the company.
(iii) Where bona fide employees of the company are given loans to purchase or subscribe for fully paid up shares in the company.
A company that however infringes the general rule that is not covered by the above stated exceptions would be contravening the provisions of the Companies & Allied Matters Act and such a contract by the company would be void. Also, every officer of the company in default of these provisions above stated shall be liable to a fine not exceeding N500.00 (Five Hundred Naira).
Tax Implications of Employees Shares Schemes
There are no special tax provisions regulating employees share schemes in Nigeria other than the provisions of the Personal Income Tax Act (PITA).
PITA subjects all salaries, payments, gains or benefits–in–kind, by employers to employees, to tax. Employers and employees would therefore do well to seek professional advice from their tax consultants and especially from the Federal Board of Inland Revenue Service (FBIRS) and the Joint Tax Board (JTB), on whether there would be any exception(s) to tax for their employees share acquisition scheme particularly as such schemes encourage savings and investments in the long term.
The benefits from employees share schemes could equally be liable to Capital Gains Tax under the Capital Gains Tax Act. A Capital Gain is the credit excess between the cost of acquiring an asset and the cost of transferring or disposing of such asset to another party.
Conclusion.
Employees share schemes are a welcomed incentive to motivate and retain staff. The tax implications of these schemes should be clearly indicated in relevant legislation to encourage more schemes, increase staff retention and specialisation.
Subscribe & Unsubscribe to Legal Alerts
This Alert and others produced by us are provided without any charge to you. 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 permitted 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.
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 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.

Legal Alert December 2008 Employees Share Acquisition Schemes In Nigeria

 

To read this Alert in pdf format, please go to

http://www.oseroghoassociates.com/pdf/2008_12.pdf

 

In this Issue:

 

1.                Case Law Update on Dishonoured Cheques Law.

 

2.                Legal Alert for December, 2008 – Employees Share Acquisition Schemes In Nigeria.

 

3.                Subscribe & Unsubscribe to Legal Alerts.

 

4.                Disclaimer Notice.

 

Case Law Update on Dishonoured Cheques Law.

In our Legal Alert for February, 2007 we had drawn attention to the subsisting Dishonoured Cheques (Offences) Act and concluded this Alert by stating that the paucity of reported and concluded Court cases in this area is inhibiting business by encouraging the issuance of dud cheques. Mr. Osen Ohiosimuan has however, most kindly, brought the reported Supreme Court decision in the matter of ABEKE v. THE STATE (2007) 3 S.C. (Pt. 11) 105 to our attention.

In the case of ABEKE v. THE STATE (supra), the accused was charged under Section 1 (1)(b) of the Dishonoured Cheques (Offences) Act No. 44 of 1977 with obtaining a credit of N3,300.00 (Three Thousand Three Hundred Naira) by means of a cheque which when presented on due date was dishonoured on the ground that the accused/appellant had no sufficient funds in her account to cover the face value of the cheque. The Supreme Court held that a cheque issued by a drawer and accepted by the drawee serves the dual purpose of (1) documenting the particular transaction and (2) as a medium of payment. The Supreme Court further held that the accused committed a criminal offence under Section 1 (2)(b) of the Dishonoured Cheques (Offences) Act when she issued a cheque in settlement of an obligation, which cheque, when presented less than 3 (three) months afterwards, was returned unpaid. The conviction and sentence of the accused/appellant person by the lower Court was accordingly affirmed and the appeal dismissed for lack of merit.

 

Legal Alert for December, 2008 – Employees Share Acquisition Schemes in Nigeria – Law & Practice.

 

Growing competition in business is continually necessitating the development of new methods to motivate and retain the best employees of any corporation. A recurring long-term method of achieving this retention is for a corporation to make its employees part owners in the equity of the corporation.

It is also instructive that most jurisdictions have recognised the benefits of employees share acquisition schemes by providing tax advantages for government approved long term employees share schemes.

While these schemes encourage employee retention and higher motivation to the benefit of the corporation, the schemes also have some disadvantages, like:-

(a)       They provide the employees with less immediate dispensable income.

(b)       They restrict the free movement of labour as most employees would not want to leave an employment with such a scheme too soon in order not to loose the shares or tax benefits associated with the employee share scheme.

(c)        The investment could become a burden or a loss to the employees if the corporation does not make consistent profits over the long term.

Employees Share Schemes Under Nigerian Company Law

Generally, the Companies and Allied Matters Act prohibits a company from providing direct or indirect financial assistance for the acquisition of the company’s own shares. Some of the exceptions to this general rule are:

(i)                      Where it is ordinarily a part of the business of the company to lend money for all kinds of businesses.

(ii)                    Where the fully paid shares of the company or its holding company are being purchased by trustees of the employees of the company for the benefit of such employees including any directors holding a salaried employment or office in the company.

(iii)                  Where bona fide employees of the company are given loans to purchase or subscribe for fully paid up shares in the company.

A company that however infringes the general rule that is not covered by the above stated exceptions would be contravening the provisions of the Companies & Allied Matters Act and such a contract by the company would be void. Also, every officer of the company in default of these provisions above stated shall be liable to a fine not exceeding N500.00 (Five Hundred Naira).

Tax Implications of Employees Shares Schemes

There are no special tax provisions regulating employees share schemes in Nigeria other than the provisions of the Personal Income Tax Act (PITA).

PITA subjects all salaries, payments, gains or benefits–in–kind, by employers to employees, to tax. Employers and employees would therefore do well to seek professional advice from their tax consultants and especially from the Federal Board of Inland Revenue Service (FBIRS) and the Joint Tax Board (JTB), on whether there would be any exception(s) to tax for their employees share acquisition scheme particularly as such schemes encourage savings and investments in the long term.

The benefits from employees share schemes could equally be liable to Capital Gains Tax under the Capital Gains Tax Act. A Capital Gain is the credit excess between the cost of acquiring an asset and the cost of transferring or disposing of such asset to another party.

Conclusion.

Employees share schemes are a welcomed incentive to motivate and retain staff. The tax implications of these schemes should be clearly indicated in relevant legislation to encourage more schemes, increase staff retention and specialisation.

 

Subscribe & Unsubscribe to Legal Alerts

 

This Alert and others produced by us are provided without any charge to you. 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 permitted 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.

 

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 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.

November, 2001

 

Employer and Employee Relationship on The Use of The Internet from a Legal Perspective  

Introduction

The Internet is the interconnection of many networks through many gateways traversing many countries and continents of the world. Because of its travesty over many continents and constant changes occurring within it, it has been near impossible for legislatures around the world to make and maintain binding legislations governing and regulating relationships transacted on the Internet.

For an employer of labour and its employees, the inevitability and the necessity of the use of the internet has also come at a price as there have being instances where employees are reported to use an employer's internet system to download copyright protected materials, infringing on others patents and trademarks, compromising the employer's business by spending more valuable time browsing the Internet than in performing their contractual obligations to the employer, utilising employers resources via the internet for personal employee business, expending valuable management time browsing on sites that are not beneficial to the employer or the employee, downloading pornographic materials into an employer's hardware system, passing some of these materials to other employees and exposing the employer to possible sexual harassment claims and other unwarranted litigation, etc.,

Legal issues that continue to arise as a result of the above worldwide include:

  1. To what extent can an employer of labour monitor employee's electronic communication without infringing the employee's common law and constitutional right to privacy of personal communication?
  2. What is the best methodology by an employer in regulating the use and the downloading of materials from its systems by its employees?

The Law

Section 31 of the Constitution of the Federal Republic of Nigeria, 1999 provides that “the privacy of citizens, their homes, correspondence, telephone conversations and telegraphic communications is hereby guaranteed and protected”. This right, like other private right, is not absolute as Section 45 of the referenced Constitution provides that “(1) Nothing in Section 37, 38, 39, 40 & 41 of this constitution shall invalidate any law that is reasonably justifiable in a democratic society --------- (b) for the purpose of protecting the rights and freedoms of other persons”.

It is clear from the above Section that whilst the Constitution of Nigeria recognises an employee's right to privacy, it also recognises an employer's corresponding right to protect, secure and maximise its business environment.

In order for an employer and in some cases, an employee, not to be in contravention of any constitutional rights or tortious infringement of private rights or criminal trespass, it is recommended that internal internet staff audit of the use of the internet be undertaken by the employer at regular intervals with the knowledge of the employees.

Recommendations

The following are further recommended:

  1. Develop employment contracts and policies that regulate access and use of the employer's Internet facilities. There should in addition be clauses that inform the employee of the employer's right to undertake Internet use audit of its employees at regular intervals. The employer should however exercise caution when conducting these audits. The outcome of these audits should also be properly managed as it has been discovered that improper management can impair the productivity of employees and affect them psychological in the work environment.
  2. The employer should in a written memorandum define what constitute proprietary information and state that the employer owns any proprietary work done by the employee with the employer's resources.
  3. Educate and encourage senior managers on the need to handle sensitive company information via the Internet especially whilst outside the company's premises.
  4. Encourage disciplinary action for all infringement of company's policy on Internet use. However, employers are advised to obtain full facts with legal advice before acting especially where the decision is to terminate the employee's contract. This is to avoid unnecessary litigation.
  5. Post a notice on all employees computer system in the form of a warning clearly stating that the system and materials exchanged on it are not private and will be audited.

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February, 2002
 

The Rights & Responsibilities of External Auditors Under Nigerian Company Law

 

Introduction

Recent developments in the United States of America respecting the conduct of the management and an audit firm's handling of the books of accounts of ENRON have again brought to light deep rooted concerns, by members of the public and governments world-wide, about the role, rights and responsibilities of external auditors in the auditing of the books of accounts of companies, as statutorily provided and the declaration of "paper" profits by companies. These developments are also a remainder of the collapse of some financial institutions in Nigeria in the early 1990's, in spite of their public declared accounts showing massive profits. Also, the experience of Lever Brothers Nigeria Plc. in 1998 and most recently, that of another Nigerian company quoted on the stock exchange, are reminiscent of these kinds of development and concerns.

Unfortunately, in most of the above incidents, it was the shareholders and employees who invested in the stocks of these companies that were the victims and casualties whereas the parties who were entrusted with these huge investments, smiled to the banks in spite of their mismanagement of the investments.

Interestingly, there are a number of statutory and professional regulatory rules that should have prevented these incidents from occurring and also protected the audit firms and the directors of these companies from either civil or criminal liability or both. Also, as the client is king, the auditing firms and not interestingly, the directors and key managers of the companies, have suffered more public criticism, professional humiliation and loss of required good will whenever the books of accounts of a company are called to question.

Appointment of Auditors

Under Nigerian Law, Auditors are appointed by a special resolution passed at an Annual General Meeting of a company. Persons traditionally entitled to be appointed, as external Auditors of a company are usually Accountants who are licensed by either the Institute of Chartered Accountants of Nigeria ("ICAN") or members of the Association of National Accountants of Nigeria ("ANAN").

Persons disqualified by law, from being appointed as external Auditors of a company include: - (a) officers and servants of the company; (b) person(s) who are partners of officers or servants of the company; (c) a body corporate with the exception been individual members who are qualified for appointment as Auditors.

Function of Auditors

By the Companies & Allied Matters Act, 1990 ("CAMA") the primary functions of an Auditor of a company is to audit the financial statements of the company and form an opinion as to whether (a) proper accounting records have been kept by the company and, (b) the company's balance sheet and profit and loss account are in agreement with the accounting records and returns provided to the Auditor by the company.

Other ancillary functions of an Auditor include: - (a) making a report to the company and its shareholders; (b) qualifying its report where necessary; (c) ensuring its acquaintance with the articles and other statutes of the company so that its audit will be in due compliance; (d) investigation of and request for supply of information omitted from the company's financial statement supplied to the Auditor for the audit by the company.

It is therefore clear from the above that the role of an external Auditor is purely investigatory. He is not a watchdog neither is he detective, a bloodhound or a financial adviser.

Rights of Auditors

It is paramount that an external Auditor is as independent as possible. For this reason, his appointment is usually by special resolution, i.e. two-thirds majority of the voting members of a company, passed at an Annual General Meeting of the company. His removal is also by the same method, i.e. special resolution. In the event of a removal, he is entitled to attend the next Annual General Meeting of the company to present his report and if necessary, to defend himself against any allegations that may have been made against him by the Board of the company. The external Auditor is also entitled, whilst carrying out his audit, to request for all necessary books of accounts kept by the company. In the event of a refusal or failure to furnish these books, he is required to state this fact in his report.

Obligations Of An Auditor

The external Auditor by law, shares a special fiduciary relationship with the company that it audits its books. As a result, the law requires of the Auditor that he does, in the performance of his duties, exercise all due diligence and skills that a reasonably Auditor will deem necessary in the performance of his statutory duties.

The duty of an Auditor is more succinctly stated in the decision of IN RE: LONDON & GENERAL BANK (NO. 2) [1895] CH.D 673 @ 683 where the court said: - "It is the duty of an Auditor to bear on the work he had to perform that skill, care and caution which a reasonably competent, careful, and cautious Auditor would use. What are reasonable skill, care and caution must depend on the particular circumstances of each case. An Auditor … is not bound to do more than exercise reasonable care and skill in making inquiries… He is not an insurer; he does not quarantee that the books do correctly show the true position of the company's affairs; … He must be honest - i.e., he must not certify what he does not believe to be true and he must take reasonable care and skill before he believes that what he certifies is true ……. Where there is nothing to excite suspicion very little inquiring will be reasonably sufficient ……. Where suspicion is aroused, more care is obviously necessary; but still, an Auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion….."

Liabilities of Auditors

The general principle of negligence under the common law has been made to apply to statutorily appointed Auditors. This is because, as stated above, Auditors share statutory fiduciary relationship with their clients, the companies. Negligence is a breach of legal duty to take care, which breach result is damages undesired by the party in breach, to the other party.

There is also the related civil liability of misfeasance. Misfeasance is the improper performance of some lawful act. Where there exist facts to this effect, a company is entitled in law to file a court action against the Auditor.

An Auditor may also be criminally liable where he, in his report to a company makes a statement, which is false, knowing that the statement is false. Where this established, CAMA provides that the statement is false. Where this is established, CAMA provides that such statement is false. Where this is established, CAMA provides that such an Auditor is liable on conviction, by a High Court of Justice, to Two (2) years imprisonment or, alternatively, on conviction by lower court, i.e. a Magistrate Court, to a fine of =N=1,000 (One Thousand Naira) or Four (4) months imprisonment or both the fine and the imprisonment.

Conclusion

An Auditor is a professional who provides customer related services. His main stock in trade is the trust and goodwill of his client which ought to protect at all times otherwise he will go out of business. Also, with the advent of democracy in Nigeria and globalisation world-wide, professionals, including Auditors, should exercise more care and diligence in the performance of their statutorily responsibility in order to avoid loss of trade or incur civil and criminal liability as a result of a breach of statutory duty.

^ Return to top

March, 2002

Constitutionality Of Lagos State Sales Tax Law

Operating a democratic government in Nigeria have been very expensive. With dwindling revenues from the Federation Account to the State and Local Governments, most State Governments have again resorted to imposing various forms of levies and taxes in order to, at the minimum, settle their recurrent expenditures. The Lagos State Government has by its Sales Tax (Schedule of Amendment) Order, 2000 amended the schedule to the Sales Tax Law, Cap 175, Laws of Lagos State of Nigeria, 1994 ("the Law"). The commencement date for this Order is 2 nd November 2000 .

Brief History Of Sales Tax & VAT

A majority of the tax legislation in Nigeria have been adopted from tax legislation enacted in Britain . An appreciation of the history of tax legislation in Britain is therefore necessary for a greater appreciation of the tax legislation in Nigeria .

Sales Tax was introduced in Britain during the Second World War as a form of indirect tax on goods, to assist the British Treasury prosecute its war effort. This tax was replaced in Britain in the early 1970's by the Value Added Tax ("VAT") principally because the Sales Tax was very easy to evade, difficult to administer and more importantly, because the number of affected taxpayers were limited.

VAT was introduced into Nigerian legislation by the Value Added Tax Decree, 1993 ("VAT Act"). Interestingly, Section 41 of the VAT Act repealed the previously existing Sales Tax Decree, 1986.

VAT is imposed on the supply of all goods and services in Nigeria except goods and services specifically exempted in Schedule 1 of the VAT Act. The rate chargeable is 5% of the value of all goods or service. The exempted goods and services include medical and pharmaceutical products, basic food items, books and educational materials, baby products, locally manufactured fertilisers, all exports, plants and machinery utilised in the Export Processing Zone, etc.

VAT is administered, on behalf of the Federal Government of Nigeria ("FGN") by the Federal Board of Inland Revenue ("FBIR") as a sort of Trustee for the State Governments of the Federation. Under the VAT arrangement, all the States benefit collectively and equally to the tune of 50% of the entire Vat proceeds collected whilst the Local Governments share 35%. The 15% that is left is utilised to cover the cost of administering this tax regime.

Lagos State Sales Tax Law

The Law has as its commencement date, 19 th July 1982. The Law is principally a legislation authorising the Lagos State Government to impose the tax upon certain

goods and services rendered in Lagos State . The rate of the tax is also 5% of the classes of goods and services enumerated in Schedule 1 of the Law.

Taxable goods and services covered under this Law include beer, wine, liquor, spirits, cigarette and tobacco, jewels and jewelleries, electrical and electronic equipment, soft drinks, building materials, furniture and finishing products, sales and services in registered hotels, motels, catering establishments, restaurants (excluding drinks), etc.

The Taxing Agent under this Law is the "Seller or Supplier" who is defined in Section 13 of the Law to include “. a manufacturer , importer or distributor but does not include a retailer". The Italics and underlining are mine.

To comply with the fair hearing requirement of the Nigerian Constitution, the Law requires that any objection to an assessment under the Law must be made within 15 days of the service of the order by the Lagos State Board of Internal Revenue ("the Board").

Should the assessed party remain dissatisfied, he may appeal against the assessment to a Lagos High Court. This right of appeal is however subject to the Appellant paying into Court, within 7 days from the date of the filing of the Notice of Appeal, by way of security, a sum equal to the estimated assessed amount.

Contravention of the Law attracts a fine of =N=1,000 (One Thousand Naira) for a first offender and =N=2,000 (Two Thousand Naira) for any second or subsequent offences.

Constitutional Authority For Lagos State Sales Tax Law

The principal authority that has been canvassed as the constitutional basis of the Law is the fact that since the 1979 and 1999 constitutions do not confer exclusive jurisdiction over Sales Tax on the Federal Government, as it was under the 1960 and 1963 Nigerian Constitutions, it meant that it was a residual matter over which the State Governments could make laws.

Also, reliance has been placed on the Supreme Court decision delivered in 1984 in the matter of OGUN STATE v. ALHAJI ABERUAGBA [1984] SC 20 or [1997] 1 NRLR (Part 1) page 51 where the Supreme Court held, amongst others, that both the Federal and State Governments had the residual power to impose Sales Tax on any matter within their respective legislative competence.

The Supreme Court further held that only the Federal Government had the power to make Laws in respect of international trade and commerce and inter state trade and commerce whilst the State Government had the power to legislate on intra-state trade and commerce.

The Supreme Court held further in the above suit that Section 3 (1) of the Ogun State Sales Tax Law was unconstitutional as it sought to tax goods brought into Ogun State , which was a discriminatory tax against inter state or international trade and commerce. The taxes on petrol, diesel and petroleum products were equally held to be unconstitutional and void as these were items under the exclusive list to which the Federal Government had absolute control.

Comments On The Above Authorities

The first comment is that at the time the Supreme Court decided the Aberuagba's case, there was no VAT Act neither was there the Taxes and Levies (Approved List of Collection) Decree, No. 21, 1998 (“the Approved List Act”).

We concede that Section 1 of the Approved List Act, which expressly overrides Section 1(1) of the 1979 constitution and by implication the 1999 constitution (on the supremacy of the constitution), is invalid and unconstitutional to the extent of its inconsistency, the remaining sections of this Act remains an integral part of Nigerian Law by virtue of Section 315 of the 1999 Constitution.

The above Section of the 1999 Constitution provides that “subject to the provisions of this constitution, any existing Law shall have effect with such modification as may be necessary to bring it into conformity with the provisions of this Constitution and shall be deemed to be an Act of the National Assembly”. Italics and underlining are mine.

Also, there is no assurance that the implementation of the Law, in its present form, would not lead to double taxation, as the goods are also liable to tax under the VAT Act. It was held in the Second Street Properties' case, which is an American case, that “to constitute double taxation, the two taxes must be imposed on the same property, by the same governing body during the same period for the same taxing purpose”.

A brief comment on the Approved List Act is that the Act was promulgated by the military government at the time to harmonise and stem the taxes and levies that each tier of government was permitted to collect. In practice, this Act brought a lot of sanity and clarity to tax collection in Nigeria . As this Act is an existing Law under our Constitution, the items under the Lagos Law cannot be residual matters upon which the State can legislate.

Secondly, the definition of a Seller or Supplier under the Law to include a Manufacturer or Importer falls into the same error in the Aberuagba's case as it connotes that Lagos State can charge excise duty on goods manufactured within its territory by a Manufacturer and, import duty on goods imported by an Importer. This would be unconstitutional, as excise and import duties are items under the exclusive legislative list reserved for the Federal Government under the 1999 constitution.

Of equal concern is the requirement that an Appellant appealing against an assessment can only lodge a valid appeal if he deposits a sum equal to the amount charged as security for the appeal. This may not be constitutional as it might infringe on the Appellant's constitutional right and financial ability to prosecute the Appeal. Should this situation arise, it is suggested that the Appellant should challenge the Law itself instead of the assessment.

Conclusion

It is critical that all forms of double taxation must be discouraged, as they are another disincentive to the promotion of free private enterprise. The Lagos State Sales Tax Law should therefore be repealed.

Following from the above and in the interest of equity and fairness, the Federal Government should amend the VAT Act so that the distribution of its proceeds is based on derivation , the same way that its collection and charge is also based on residence. To continue with the current practice of equal distribution of proceeds between all the States and Local Governments, irrespective of the amount generated from each State, will only encourage multiple and or double taxation, unnecessary constitutional challenges, and political and economic tension between the States and the Federal Government.

Both the Federal and State Governments should also equip adequately the Federal and State Boards of Internal Revenue as this is the only way almost all the taxes due to all tiers of governments will be collected and available funds increased.

^ Return to top

 June, 2002

“Resource Control” Judgement – Attorney General of The Federation of Nig. V. Attorney Generls of 36 States

There arose a dispute between the Federal Government of Nigeria (“FGN”) and the eight littoral States of Akwa Ibom, Bayelsa, Cross Rivers, Delta, Lagos, Ogun, Ondo and Rivers State as to the seaward boundary of each of these littoral States (“the States”) in view of the fact that the determination of this issue would resolve whether or not these States were entitled to a minimum of 13% of all revenue accruing to the Federation Account on the basis of the derivation of natural resources from each of these littoral States.

It was the case of the FGN that the natural resources located within the continental shell of Nigeria are not derived from any of these States as their boundaries ends at the low water mark of the land surface of each of such littoral States. On the other divide, the case of the States, especially the littoral States, was that their territories extended beyond the low water mark, unto the territorial waters and also unto the continental shell and the exclusive economic zone. They therefore contended that natural resources from both offshore and onshore are derivable from the respective littoral States territory and in respect of which each State is entitled to “not less than 13%” allocation of all revenues derived from these natural resources.

The principal issue before the Supreme Court of Nigeria for resolution between the disputants was “A determination by this Honourable Court of the seaward boundary of a littoral State within the Federal Republic of Nigeria for the purpose of calculating the amount of revenue accruing to the Federation Account directly from natural resources derived from that State pursuant to the proviso to Section 163 (2) of the Constitution of the Federal Republic of Nigeria, 1999”. In simple English, this issue was what is the southern or seaward boundary of each of the eight littoral States.

Note that Section 162 (2) of the Constitution of the Federal Republic of Nigeria (“the 1999 Constitution”) empowers the National Assembly to determine the formular for distribution of funds in the federation account provided that not less than 13% of the revenue accruing to the Federation Account are paid directly to the State from which the natural resource is derived directly.

The Supreme Court in the leading Judgement of M.E. Ogundare, JSC held amongst others as follows: -

  1. That the Black's Law Dictionary defines natural resources as “any material in its natural state which when extracted has economic value.” The Supreme Court held that whilst natural resources like coal, natural gas, crude oil, potassium, etc fall within this definition, other items like ports, wharves, agricultural products, etc are not natural resources.
  2. That the southern boundaries of all the eight littoral defendant States must be the southern boundaries of the old Western and Eastern Regions as defined in Laws of Nigeria of 1954, i.e. the sea. This is also defined in Section 11 of the Nigeria Protectorate Order in Council, 1922 and of Lagos State as defined in the Colony of Nigeria (boundaries) Order in Council, 1013.
  3. On what was the boundary mark of the sea and the sea States, i.e. littoral States, the Supreme Court held that “if the boundary is with the sea, then, by logical reasoning, the sea cannot be part of the territory of any of the old regions ….” The case of the States that the boundary extended to the exclusive economic zone or the continental shell of Nigeria was therefore rejected as untenable on this ground.
  4. That the States as riparian owners, are entitled to the seaward extent of their land territory because at Common Law, all of the sea shore i.e. the seaward limit of their internal waters, belongs to the Crown.
  5. Finally held on the FGN's claim, that the seaward boundary of a littoral State for the purpose of calculating the amount of revenue accruing to the Federal Account directly from any natural resources derived from that State … is the low water mark of the surface thereof or … the seaward limits of the inland waters within that State for a State like Cross Rivers State that has a lot of Islands.

The littoral States in turn also filed Counter Claims against the Federal Government. A counter claim is similar to an independent action; the rules of our judicial system however allows it to be heard together with the main claim where the disputes between the parties are similar and so it would be more economical to hear the claim and counter-claim together.

On the littoral States counter claims, the Supreme Court held as follows: -

  1. That the Federal Capital Territory is not a State or a Local Government within a State as defined in the 1999 Constitution and accordingly, they were not qualified for distribution of moneys deriving from the Federation Account.
  2. That the 13% basis for computing the derivation to the States and upon which the States are counter claiming against the FGN could not be upheld by the Supreme Court as the 1999 Constitution gives the appropriate authority, in this case the President, pending a resolution by the National Assembly, a discretion on the percentage to apply provided that it is not less than 13%.
  3. That the FGN, as a trustee to the States of the Federation, was liable to render an account to all the States. To be entitled to an order of the Supreme Court compelling the FGN to render an account of all revenue deriving from all natural resources, the States must have firstly demanded for the accounts and the FGN after the demand or repeated demand has failed, refused or neglected to provide the accounts.
  4. That the FGN was constitutionally not empowered to deduct as a first charge from the Federation Account sums of money to service the country's external debts.
  5. That it was unconstitutional for the FGN to pay moneys directly to the Local Governments from the Federation Account to carter for primary education as by the 1999 constitution, the primary responsibility for this function is with the States and Local Governments.
  6. That it was constitutionally wrong for the FGN to charge the salaries, allowances and recurrent expenditure of the judiciary to the Federation Account in stead of the Consolidated Revenue Fund.
  7. That charging of the funding of the joint venture contracts and the Nigerian National Petroleum Corporation priority projects to the Federation account are inconsistent with the provisions of the 1999 Constitution and therefore invalid and unconstitutional.

The Supreme Court further held that the under listed policies of the FGN are unconstitutional:

  1. The exclusion of natural gas as a constituent part of derivation in computing natural resources.
  2. Non-payment to States of proceeds from the Capital Gains Tax and Stamp Duties tax revenues.
  3. Unilateral allocation of 1% of the revenue accruing to the Federation Account, to the benefit of the Federal Capital Territory , Abuja.
  4. The 1999 Constitution having come into force on May 29 th , 1999, the principle of derivation also came into force on the same date, i.e. May 29 th , 1999. The FGN is therefore obliged to comply forthwith with the Constitution from that date.

General Comments & Conclusion

Many commentators have argued that the issue for determination before the Supreme Court in this case was not about resource control but about the onshore/offshore dichotomy, particularly when it comes to the distribution of revenue accruing to the Federation Account. Retired Justice

of the Supreme Court of Nigeria, Karibi-Whyte, JSC ruled in an interlocutory decision before the final decision of the Supreme Court in this case that “I therefore am of the firm opinion that the Plaintiff's claim is limited and confined to the determination of the seaward boundary of littoral States. I so hold. Any other consideration will be preposterous and manifestly inconsistent with the fundamental principles of adjudication”.

There is a difference between derivation from natural resources on the one hand and the control of natural resources existing in a State, whether littoral or not, on the other. Derivation according to a legal commentator is “ … the recognition of a prior beneficial right that was subsequently expropriated. Thus, the principle of derivation is a form of compensation and/or reparation for an expropriated interest ….” Resource control on the other hand covers a much more wider sphere. Also, resource control is a politically sensitive matter.

The differences on whether the issue that was for determination was one of resource control or that of the dichotomy between onshore and offshore revenue would be avoided if a better appreciation of Nigeria 's adjudicative legal system is understood.

Under our adjudicative system, our courts are only permitted to adjudicate over legal issues, and not political or academic issues, properly brought before it. A misunderstanding of this fundamental function may have led to the confusion that presently exist. With more enlightenment, it is believed that greater understanding will prevail eventually.

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