Introduction
2.2
The Oil and Gas Free Zone Authority (“OGFZA” or
the “Authority”) has published a NOTICE for what
it termed as an efficient tax administration in the Oil
and Gas Free Zones. The OGFZA notice which
was issued in February 2015 created a Free
Zones Tax Administration Unit (FZTAU) and
Free Zones Global Investment Ltd (FZGIL). The
latter is saddled with the responsibility of
implementing the process. Although the notice
was to take effect retroactively from 1st of
January, 2015, however stakeholders in the
sector have raised concerns on the action of the
OGFZA over the propriety of the notice and the
choice of date.
The notice is said to derive its validity from Oil and
Gas Free Zone (OGFZ) Act and its Regulations.
2.
Highlights of the Notice
2.1
Commencement of the Notice
The notice was to take effect from 1st January
2015, upon which no free zone enterprise shall
interface directly with the Federal Inland Revenue
Services (“FIRS”) or State Internal Revenue
Services “SIRS”) or any public or private tax
agencies for tax matters without recourse to
FZTAU. It also stated that from the
commencement date, all such taxes payable in the
zone will be paid into the appropriate designated
banks as contained in its published schedule of
banks. Copies of all such payment schedules, are
expected to be submitted to the FZTAU for record
purposes.
Regulatory Framework
Regulation 34, of the OGFZ Regulations 2003
provides:
“A Free Zone licensee shall:
(a) at all times, comply with the
terms and conditions of the licence
and any lease agreement;
(b) comply with administrative
directives and circulars issued
by the Authority, from time to
time;
(c) comply with the laws of
Nigeria, to the extent in which
they are applicable in the Free
Zone;
(d) submit to the Authority, at such
intervals; that may be prescribed by
the Authority, such statistical data,
information and returns as regards
the audited accounts, sales,
purchases and other operations of
the licensee, as the Authority may
require or prescribe, from time to
time”
Section 13 (1) of OGFZ Act, 1996 also provides
thus:
“No person shall, without the prior
permission of the Authority, enter,
remain in or reside in the Export
Free Zone.”
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Section 5(1) (c), of the OGFZ Act,
1996 further provides that:
(1) In addition to any other
functions conferred on the Authority
by this Act, the functions and
responsibilities of the Authority
shall include –
(c) the approval of development
plans of the Authority and the
Export free Zone, the annual
budget in respect of infrastructures,
administrative buildings, promotion
of the Export Free Zone, the
provision and maintenance of
services and facilities;
By the combined effect of the foregoing provisions,
Free Zone licensees are bound to comply with the
directives of OGFZA and are equally bound by the
laws of Nigeria to the extent that they apply to the
Free Zones. Also no person shall enter the Free
Zone without the prior approval by the OGFZA as
the law allows the OGFZA to come up with
developmental plans within the Free Zones.
2.3
Establishment of FZTAU and FZGIL
The notice seeks to establish a Free Zone Tax
Administration Unit saddled with the responsibility
of collecting taxes, and to carry out a tax audit
process etc. in the Zone. To this effect, Free Zone
Global Investment Ltd has also been incorporated
by the OGFZA to undertake the installation of
efficient tax administration in all Oil & Gas Free
Zones
2.4
Taxes Allowable in the Free Zone
The notice contains a list of taxes deemed to be
excluded from exempted taxes in the Free Zone,
which include;
a. PAYE tax of employees of Free Zones
enterprises
b. Withholding tax of third parties transacting
in the Free Zones
c. VAT on third party transactions in the Free
Zones
d. ITF deductions for training of Free Zone
employees.
The OGFZA highlighted these taxes so as to be
consistent with the provisions of Section 8 of the
principal Act (OGFZ Act, 1996) which provides that
approved enterprises operating in the Export Free
Zone are exempted from Federal, State and Local
Government taxes, thus providing a clarification for
the taxable position of unapproved enterprises
operating in the zone.
2.5
Unit
Duties of Free Zone Tax Administration
The notice confers the following duties on the
FZTAU within the Free Zone:
a. To interface between free zone enterprises and
all tax agencies in order to minimize the
incidence of tax disputes.
b. To harmonize and coordinate the process of
collecting allowable taxes in all Oil and Gas
Free Zones.
c. To serve as a tax collection agent for all tax
agencies in the collection of allowable taxes in
the free zone.
d. Liaise with all tax agencies and obtain tax
clearance certificate for employees and
receipts for contractors of free zone
enterprises.
e. Submit all such tax clearance certificate and
receipts to free zone enterprises for distribution
to their employees and contractors.
f. Conduct periodic Tax Audit for all enterprises
operating in the zone to ensure compliance.
g. To issue periodic tax notifications to free zone
enterprises to remit all tax deductions as at
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when due in order to avoid unnecessary
penalty for late or non-payment of payable
taxes.
a. Implication on Tax Agencies (FIRS, SIRS
etc)
h. To arbitrate on any tax dispute arising between
a free zone enterprise and any tax agency.
i.
2.6
ii. Penalties and interest on the taxes will be
demanded from FZTAU where a default in
payment occurs.
The Free Zone Global Investments Ltd
The Free Zone Global investments Ltd is a
company incorporated by OGFZA to ensure
efficiency
and
professionalism
in
the
implementation of its new directive. The Company
shall be the Special Purpose Vehicle (SPV) of
OGFZA, towards undertaking the installation of
efficient tax administration in all Oil and Gas Free
Zones.
3.
Comments and Observations
3.1
Controversies leading to the Notice
The OGFZA raised concerns in its notice that
contrary to the OGFZ Act, there has been series of
reports of various government agencies entering
the Free Zones and demanding for payment of
taxes from the Free Zones Enterprises without
seeking permission.
It further observed that as a result of the direct
interface of Tax Agencies and Zone Licensees,
disputes and court cases have erupted. In order to
avoid such unfriendly occurrences in the Free
Zone and in compliance with Section 5 (1) (c) of
the OGFZA Act 1996 and other sections cited
above, the OGFZA decided to intervene and
interface directly with all such public organizations
to reduce incidence of frictions between free zones
enterprises and these agencies.
3.2
Implication of the Notice
Although there are a lot of arguments to be
canvassed for and against the notice, however the
anticipated effects the notice may have include:
The Tax agencies will have to demand
payment of payable taxes from the FZTAU
directly.
iii. The Tax agencies will have to sue FZTAU
where any default or issue arises requiring the
court to intervene.
b.
Implication on Free Zone Enterprises
(including their employees, contractors etc.)
i. The Free Zone Enterprises will have to pay the
taxes of their employees or contractor to the
FZTAU.
ii. All complaint on assessment, collection or
enforcement of taxes will be directed to
FZTAU.
iii. The Free Zone Enterprises may have to sue
FZTAU where any dispute arises.
c.
Oil and Gas Free Zone Authority
i. OGFZA through FZTAU acts as an intermediary
between the free zone enterprises and the tax
agencies.
ii. FZTAU will have to perform the functions of the
tax agencies e.g. tax audit, issuing tax
notification etc.
iii. FZTAU will have to ensure that taxes collected
are fully remitted to the tax agencies
concerned and ensure all necessary
documentations are prepared and forwarded to
the tax payers.
iv They must ensure that the indicative time lines
for payment of taxes are fully complied with.
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3.3
Legality of prohibiting entry of Tax
Agencies into the Free Zone
One recurrent question to ask is whether the notice
is made within the bounds of relevant Laws?
The Act allows the OGFZA to issue directives and
circulars to facilitate its administrative functions.
The Act further confers on the Authority the powers
to superintend the Free Zone, such that persons,
which will include bodies, public or private
agencies, who intend to gain access to the Free
Zone will have to first obtain permission. It is in this
light that the OGFZA issued the notice to regulate
the access and interactions affecting the Zone
Licensees.
Although the Act vested the power to administer
the zone in the OGFZA, it allows persons to gain
access into the Zone provided the permission of
the OGFZA is sought and granted. Consequently,
where the OGFZA issues directives precluding
persons or tax agencies as the case may be from
gaining direct access to the zone to carry out their
lawful duty, it may be argued that such directive
has enlarged their powers, whether they have
acted within their powers will be for the courts to
determine.
3.4
Legality of Collection of Taxes and
Conduct of Periodic Audit by FZTAU
The issue of tax is a constitutional matter. A closer
look at Section 163 of the 1999 Constitution (as
amended), expressly confers the powers to collect
taxes on the Federal and State Governments.
Section 8 of the Federal Inland Revenue
Establishment Act (FIRSEA) 2007 points out the
powers of the Federal Inland Revenue Service
(FIRS) to collect taxes on behalf of the Federal
Government. On the other hand, the States collect
taxes through the various State Internal Revenue
Services. The OGFZ Act limits the OGFZA only to
the regulation of the affairs of entities operating in
the zone and makes no provision for the body to
collect taxes. Therefore, for the OGFZA to enlarge
its statutory powers to include the collection of
taxes by a mere Notice, may mean a disregard of
existing order.
Also, the function of conducting audit is the
prerogative of the FIRS or SIRS consistent with the
provisions of Section 26 (4) of the Federal Inland
Revenue Service (Establishment) Act 2007
(FIRSEA) and Section 47 (4) Personal Income Tax
Act 2011 as amended. It is our view that taking up
this responsibility is contrary to the intendment of
the law and may bring the concerned entities to a
future double jeopardy.
3.5
Legality of the MOU
The notice reveals that parties concerned have
signed MOU in this regard. It may also be argued
whether the parties can sign such an MOU,
considering the fact that it will mean assigning its
powers to persons not envisaged by the law. In
law, parties are free to enter into agreements,
however the parties must have the capacity to
enter such agreement. Also parties are allowed by
law to delegate their powers in accordance to law.
The provisions of Section 8,Federal Inland
Revenue Service (Establishment) Act 2007,
empowers the FIRS to assess, collect, account
and enforce payment of taxes payable to them, (in
this case Value Added Tax and withholding taxes
of third party transactions within the Free zone).
Similar provisions are contained in Personal
Income Tax Act, which confer the same power on
the various State Internal Revenue Services to
collect PAYE taxes. Although the notice did not
specify the tax agencies that the OGFZA entered
the MOU with, however, it may mean that the
aforementioned government agencies may have
totally delegated their powers to the FZTAU within
the Free Zone.
3.6
Dispute Resolution
The Tax Appeal Tribunal (TAT) is the body saddled
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with the responsibility of settling disputes arising
between the tax payer and the tax authority. From
the Notice, Value Added Tax (VAT) and
Withholding taxes of third party transaction are
payable in the Free zone. These taxes are
administered by both the Federal Inland Revenue
Service (FIRS) and State Internal Revue
Authorities. It is our view that these tax regulatory
bodies should be the ones to enforce the payment
of these taxes and appear at tribunals or other
competent courts in tax disputes. Where the notice
purports to confer on the FZTAU the power to
collect taxes, the problem will be whether the
FZTAU can also enforce the collection of such
taxes in the Tribunal or court of law?
Conclusion
It is our view that the notice infringes on the powers
of the various Tax agencies, considering the fact
that their functions will now be performed by an
arm of the Oil and Gas Free Zone Authority
(.OGFZA). Also by assuming the status of an
intermediary in relation to taxes collectable within
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the Free Zone, OGFZA has enlarged its statutory
functions/ powers. We recommend that in
overseeing the Free Zone, - OGFZA through the
FZTAU, should neither act as a regulatory agency
nor as an intermediary because agencies like the
FIRS and the SIRS’s are regulators by law nor
have the capacity and specialization for this task.
Disclaimer
Please note that this memorandum is not intended to
give specific technical advice and it should not be
construed as doing so. It is designed to alert clients to
some of the issues. It is not intended to give exhaustive
coverage of the topic. Professional advice should
always be sought before action is either taken or
refrained from as a result of information herein. In any
case, Ascension does not accept any responsibility for
any decision whatsoever made based thereon or any
liability incurred for failure to consult with professionals
on any specific areas of issues raised.
Azeez Alatoye
08099934520
[email protected]
Ademola Olanrewaju
08098568889
[email protected]
Adeniyi Sunmola
08099934537
[email protected]
Ascension Consulting Services
178B, Prince Ade Odedina Str, Off Sinari Daranijo Str,
Victoria Island, Lagos, Nigeria.
Tel: +234 1 761 4701 Mobile: +234 805 401 2394
[email protected]