Nigeria’s FIRS and the Principle of Expectation

The following article was written by Victor Onyenkpa and Abisoye Ayoola, Partner/Head of Tax and Senior Tax Adviser respectively, in KPMG Professional Services

We were having a meeting with a client the other day, on a peculiar tax situation they were likely to face on a proposed contract. We had expressed our view on the issue, but further suggested that the matter be referred to the Federal Inland Revenue Service (FIRS) for their opinion. But there was a problem. The problem, as pointed out by the client, was how much reliance they could place on the opinion from the FIRS.

The FIRS might soon find itself in a position where its views on corporate tax matters are considered irrelevant. This is because of the several occasions it had expressed a view on a tax issue and subsequently reversed itself.

The FIRS of course, reserves the right to change its position on a tax issue, if it subsequently realises that its previous position was wrong. What is worrying however, is the ability of the FIRS, to retrospectively penalise taxpayers who had relied on the publicly expressed position of the FIRS on the appropriate tax treatment of an issue, in running their affairs. This is clearly against the principle of legitimate expectation.

Simply put and in the context of tax authorities, the concept of legitimate expectation provides that where a tax authority gives an opinion or clarification on a tax issue (either on its own or in response to a specific request by a taxpayer, with full disclosure of the facts) and the taxpayer has relied on the clarification, then the tax authority should not retrospectively reverse its position. Any change in position has to be on a going-forward basis and be communicated to the taxpayer.

There are judicial pronouncements in several jurisdictions with respect to the principle of legitimate expectation. For instance, the European Court of Justice (ECJ), in arbitrating legitimate expectation claims, follows a two-step approach. The Court asks whether the administrator’s actions created a reasonable expectation in the mind of the aggrieved party, and whether that expectation is legitimate. If the answers to both questions are in the affirmative, then the Court will enforce the legitimate expectation.

The test for reasonable expectation is that the representation itself must be precise, specific and most importantly, lawful. Of course, European Union (EU) Law requires individuals to be careful in foreseeing that specific representations may be withdrawn or subject to change. But such withdrawal or change will be on a going-forward basis, not retrospectively.

The position is the same in South Africa and Canada, with minor variations (usually with respect to whether the matter should be dealt with procedurally or substantively).

In India, the Supreme Court of India, in Ram Pravesh Singh & Ors vs. State Of Bihar & Ors on 22 September, 2006, said: “What is legitimate expectation? Obviously, it is not a legal right. It is an expectation of a benefit, relief or remedy, that may ordinarily flow from a promise or established practice. The term ‘established practice’ refers to a regular, consistent predictable and certain conduct, process or activity of the decision-making authority. The expectation should be legitimate, that is, reasonable, logical and valid…. In appropriate cases, courts may grant a direction requiring the Authority to follow the promised procedure or established practice. A legitimate expectation, even when made out, does not always entitle the expectant to a relief. Public interest, change in policy, conduct of the expectant or any other valid or bonafide reason given by the decision-maker, may be sufficient to negative the ‘legitimate expectation”.

In Nigeria however, this is not always the case.

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David Okwara

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