TAT’s judgement on the tax deductibility of demurrage and other expenses

TAT’s judgement on the tax deductibility of demurrage

The Tax Appeal Tribunal (TAT or “the Tribunal”) sitting in Lagos recently delivered judgement in the consolidated tax appeals between Tetra Pak West Africa Limited (TetraPak or “the Appellant”) and the Federal Inland Revenue Service (FIRS or “the Respondent”) on the tax deductibility of certain expenses and the applicability of interest and penalty on assessments under dispute.

Wole Obayomi

Partner, Tax, Regulatory & People Services

KPMG in Nigeria

Cargo Ship

Specifically, the dispute was whether expenses, such as demurrage, training and education expenses etc., incurred by the taxpayer are legitimate business expenses which were wholly, reasonably, exclusively and necessarily (WREN) incurred in generating the company’s profits, and therefore, should be allowed for tax purposes.

Facts of the case

The Appellant filed its tax returns for 2011 year of assessment (YOA) in accordance with the provisions of Section 55 of the Companies Income Tax Act, Cap. C21 Laws of the Federation of Nigeria, 2004 (CITA). The tax returns show that the Appellant incurred tax loss for the year and, therefore, could not utilise its capital allowances. In 2014, the FIRS conducted a tax audit exercise on the Appellant’s tax returns for 2008 to 2012 YOAs. During the audit exercise, FIRS came across an unsigned tax return which showed that TetraPak made profits in 2011 YOA. Consequently, the FIRS relied on the unsigned tax returns and disregarded the signed copies of the returns submitted by the Appellant which show a loss and unutilised capital allowances positions.

In addition, the FIRS disallowed the following expenses incurred by the Appellant namely - demurrage, school fees of dependents of expatriate staff, training and education expenses. Further, the FIRS disallowed the investment allowance claimed by the Appellant on computers. The FIRS based its position on a joint reading of Sections 24, 27, 32(1) & (2) and Second Schedule of CITA. The FIRS also imposed interest and penalty on the alleged additional tax liabilities in its notices of assessment.

The Appellant disagreed with the additional assessments and objected in writing within the statutory 30-day period, after which the Respondent issued its Notice of Refusal to Amend.

Issues for determination

Based on the prayers and arguments submitted by the
parties, the Tribunal formulated the following two key issues
for determination:

  • whether the Respondent was right to disallow the items
    objected to by the Appellant; and
  • whether the Respondent acted in accordance with the
    provisions of CITA by imposing penalties and interest on
    the Appellant.

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