“Give unto Rivers what belongs to Rivers”
No, not Caesar this time, it’s the Rivers State Government.
Okay. Okay, I was not exactly quoting the Federal High Court (FHC) Judge on that tagline but it fairly represents what was meant in the recent decision taken by the FHC sitting in Port Harcourt, Rivers State, on the matter between A.G. Rivers State v. FIRS & A.G. Federation (FHC/PH/CS/149/2020).
The ruling given on Monday, August 9, 2021 has generated quite the reaction from the tax community and is largely centred on who has the right to collect a certain kind of tax.
Disclaimer. While I’m still yet to get a copy of the Court’s ruling, most of my commentary would be based on news reports of the court’s decision. I’d update the blog version of the letter with a download link as soon as I can lay my hands on one.*
A little background to the case.
Under the Nigerian taxation system, there are different forms of taxes and levies payable by taxable entities (you and I, and companies we work for). Off the top of my head, some of the taxes payable are the Companies Income Tax, Personal Income Tax, Petroleum Profits Tax, Education Tax, Value Added Tax, Stamp Duties, Capital Gains Tax, among others.
These different forms of tax which are governed by the following legislations: the Nigerian Constitution, the Taxes and Levies (Approved List for Collection) Act of 2015 (TLA, 2015), the different Tax Statutes, and the Finance Act, 2019 & 2020.
Now, the different tiers of governments across Federal and State levels all have what we call their Tax Authorities. In the case of the Federal Government, the tax authority is the Federal Inland Revenue Service, while respective States have their Board of Inland Revenue, e.g. the Lagos Inland Revenue Service for Lagos State. The third tier which are Local Governments also have councils which administer collection of levies.
By law, the different tax authorities have different kinds of taxes payable to them. There shouldn’t be a problem with such an assertion right? Well, no.
Regulating the Regulators
On the question of consumption taxes and the appropriate tax authority to administer it, there has been a continuous tax war. The laws creating some of the tax systems are partly responsible for the confusion, due to unclear and conflicting provisions.
While the Value Added Tax Act, the law that enforces VAT collection in Nigeria permits the FIRS to administer the collection of VAT on goods and services. On the other hand, a combined reading of Section 4(7) & the Fifth Schedule of the Constitution and the TLA (2015) would suggest that the power to administer tax on the supply of goods and services falls on the residual list - essentially, within the authority of State Governments.
Consequently, this has brought the FIRS and State Boards of Internal Revenue to loggerheads in many cases.
Elementary constitutional law would have us all conclude that the Nigerian Constitution is supreme, because any inconsistent provision of the VAT Act would be void to the extent of its inconsistency, bla bla bla... As such, it can be argued that VAT, being a consumption tax, is within the authority of State Governments.
Courts have mostly aligned with the argument in favour of States above. For instance, in this case between The Registered Trustees of Hotel Owners and Managers Association of Lagos (suing for itself and on behalf of all its members) v Attorney-General of Lagos State & Federal Inland Revenue Service (Suit No: FHC/L/CS/360/2018), the Federal High Court held in favour of the Lagos State Government, that it is the only lawful and competent authority empowered to administer tax on the supply of goods and services consumed in hotels, restaurants, and event centres within the State. You can read an in-depth analysis of the decision here.
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In this Rivers State case as well, the decision of the FHC has made clear that there is no constitutional basis for the FIRS to demand for and collect VAT, Withholding Tax, Education Tax and Technology Levy in Rivers State or any other State of the Federation, being that the constitutional powers and competence of the Federal Government is limited to taxation of incomes, profits and capital gains which do not include VAT or any other species of sales, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution.
What the decision means for the Regulators.
FIRS - Will be responsible for administering VAT generated in Abuja
State Board of Internal Revenue - Will be responsible for administering VAT generated in their respective states.
Lastly, winning the Battle but losing the War?
Tax Wars (or any kind of wars, really) are only great when you win. Winning even 90% of your battles is not enough if you lose the war, as we learn from people like Napoleon in history.
Well, an excellent analysis here by a respected taxman in Nigeria concludes that the ruling in favour of the Rivers State government may be a pyrrhic victory. Why?
Generating internal revenue is a big headache for majority of Nigerian states, apart from Lagos, Kwara, Anambra and Rivers States. You can read more about the IGR woes of States in this Budgit Report. Before the FHC decision, the model was for FIRS to collect consumption taxes from the different states, pool them and redistribute to all states using a sharing formula.
However, this practice will be changing as each State will now be left to bear its cross in the administration of consumption taxes. Presumably, this won’t bode well for States with low economic activity. But then, it may also be the necessary jolt lagging States need to catch up to Lagos and the Federal Capital Territory in terms of attracting investments into their local economies.
Reprieve. The FHC decision in the Rivers State case may still be appealed in higher courts, so we at Nigerian Regulations will be keeping our eyes peeled for updates!**
Plus everybody gets a Holdco?
Will everybody in Nigeria’s financial sector be getting a Holding Company soon?
While we ponder on that, let’s do a quick rundown of the new Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria. (“the Guidelines”). You can access a copy of the new Guidelines here.
This regulations was released by the Central Bank of Nigeria on August 3, 2021. The Guidelines were crafted by the CBN to facilitate the formation of Payment Service Holding Companies for companies which are interested in operating more than one license category under CBN’s License Categorization for the Nigerian Payments System, an updated licensing framework that was released late, last year.
Currently, there are 6 license categories for provision of payments services in Nigeria namely: the Switching and Processing License, Mobile Money Operator License, the Payment Solution Services License, the Payment Terminal Service Provider License, the Payment Solution Service Provider License, and lastly, the Super Agent License.
Therefore, a company which intends to operate with licenses in more than one of the categories highlighted above will be required by the Guidelines to register as a Payment Service Holding Company (PSHC).
The Guidelines make extensive provisions on the structure, licensing, ownership and control, permissible and non-permissible activities which a PSHC may undertake.
One of the notable provision of the Guidelines is that it allows a PSHC to have two hierarchies. Essentially, a PSHC’s subsidiary can also be a parent company of another subsidiary. The Guidelines also permit the PSHC to acquire controlling interest in a financial or technological company, with prior approval of the CBN. This potentially means a Payment Service company can potentially acquire licensed finance companies like Banks, etc.
The Guidelines makes it very clear that a PSHC shall be responsible for its subsidiaries. On the capitalization of its subsidiaries, the Guidelines provide that a PSHC which loses control of its subsidiaries for a continued period of 6 months, will be required to submit its license for cancellation.
PSHCs and their subsidiaries are also required to operate at arm’s length. The significance of the arm’s length principle is becoming pronounced with the risks accompanying holding companies and their subsidiaries and how this might impact transfer pricing and other shared service arrangements.***
📸: The WES Anderson Crew as Nigerian Payment Companies
The likely impact of the Guidelines on current operators are largely positive, I would predict. The Nigerian Payments System and financial services sector is getting more sophisticated by the day. I imagine that the CBN has created the new Guidelines to support the consolidation among participants in the Nigerian Payments space.
This is logical because when most Startups/Companies focus on a niche, they are also looking to cast their net wide in the provision of services. Therefore, restricting them to a particular category will limit this potential. Predictably, the Guidelines will increase the spate of strategic acquisitions and mergers. So get ready for more 🚀🚀🚀🚀 announcements from the Fintech sector.
* You can access a copy of the Court’s decision here.
** According to news reports, the FIRS/Federal Government have appealed the decision of the Federal High Court. Read more here.
*** Read more of my analysis on the new regulations in this piece.
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