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August 24, 2023

Nigeria | Federal High Court upholds the Tax Appeal Tribunal's judgment on the taxation of non-freight income of foreign shipping companies in Nigeria

  • The Federal High Court of Nigeria (FHC) has ruled that incidental non-freight income derived from Nigeria by foreign shipping companies are taxable under Section 9 of the Nigerian Companies Income Tax Act as amended. Therefore, the income does not constitute shipping/freight income.
  • The FHC further upheld that penalty and interest on an assessment should be applicable when the underlying tax obligations become due, and not when the assessment becomes "final and conclusive."

Executive summary

On 26 June 2023, the Lagos division of the FHC upheld the ruling of the Tax Appeal Tribunal (TAT), in favor of the Federal Inland Revenue Service (FIRS) in a tax dispute centered on the taxability of incidental non-freight income that derived from Nigeria by foreign shipping companies (FSCs) and the applicability of penalties and interest on tax assessments.

The FHC established that incidental non-freight income that a company derived from Nigeria should be separated from inbound shipping income. Thus, the incidental non-freight income should be subject to Companies Income Tax (CIT) per the provisions of Section 9 of the Nigerian Companies Income Tax Act (CITA).

The FHC further ruled that penalties and interests should accrue on the outstanding tax from the time it became due, rather than from when the FIRS's assessment of the tax becomes final and conclusive.

Detailed discussion


The Company is a French shipping entity (the Company) that engages in the business of shipping transportation services across different jurisdictions (Nigeria inclusive). Following an audit of the Company's income tax returns for the 2014 and 2015 years of assessment, the FIRS (or "the Respondent") assessed additional tax liabilities of approximately one billion Nigerian Naira (N1 billion). The additional taxes related to various non-freight income earned from Nigeria, including container demurrage, damages, cleaning fees, Shipper's Load, Stow, and Count (SLAC) charges, NIMASA environmental levy, and bonded terminal commission.

In response to the FIRS's additional tax assessment, the Company raised objections, asserting that the incidental non-freight income should be treated as income from core shipping operations for tax purpose, which the Company premised on Article 8 of the Nigeria-France Double Tax Agreement (DTA).

Furthermore, the Company noted that the FIRS should have relied on the Organisation for Economic Co-operation and Development (OECD) Commentaries in interpreting Article 8 of the Nigeria-France DTA.

Notwithstanding the Company's response, the FIRS maintained its position and further issued a Notice of Refusal to Amend (NORA) the tax assessment.

Subsequently, the Company appealed the NORA tax assessment before the TAT. Ruling for the FIRS, the TAT held that non-freight income earned by FSCs in Nigeria should be taxable under Section 9 of the CITA, and that application of interest and penalties should be effective from the date when the taxes became due.

Following this, the Company appealed the TAT judgment, but the FHC upheld the TAT's ruling.

Technical overview

Taxation of income that FSCs earn from Nigeria are generally determined based on two major streams of income — freight income and non-freight income. Section 14 of the CITA specifies the rules for the taxation of an FSC deriving income from outbound freight activities in Nigeria.

Before the Finance Act 2020 (FA20) was enacted, there was no clear provision on the tax treatment of non-freight income. Now, FA20 differentiates non-freight income and other incidental income, and clearly provides that such income should not be taxed under Section 14 of CITA. In effect, incidental non-freight income should be taxable in accordance with the provisions of Section 9 of the CITA.

However, where the FSC is resident in a treaty country, as is the case with the Company, the appropriate provisions of the relevant tax treaty should apply. Specifically, Article 8 of the Nigeria-France Double Tax Agreement (DTA) provides for taxation of profits or gains derived from operations of ships in international traffic.

Thus, the Company posited that the Nigeria-France DTA should be the basis for taxing its profits in Nigeria because Article 8 of the Nigeria-France DTA does not explicitly differentiate between freight income and incidental non-freight income.

Issues for determination

The issues under contention were:

  • Whether there is any provision in the relevant tax laws that excludes non-freight income earned by the Company from taxation
  • Whether the position of TAT as to the exclusion of non-freight income from profits generated from international traffic is correct and thus deemed to be outside the scope of Article 8 of the DTA
  • Whether the TAT's position that penalty and interest should accrue on an assessment when the taxpayer is required to pay the self-assessed tax and not when the FIRS assessment becomes conclusive and final

FIRS's position

The FIRS submitted that the Commentaries on OECD Model Tax Treaty (the Commentaries) should not be applied in interpreting the DTA as claimed by the Company, because the Commentaries do not constitute an international treaty or national statue.

Furthermore, the FIRS stated that, based on the definition of Section 14 of the CITA, Articles 3, 4, and 8 of the DTA, incidental income that the Company earned does not qualify as profits or gains from international traffic. Specifically, the FIRS argued that, based on the provisions of Article 22 of the DTA, this income falls outside the scope of the DTA and should be taxable under CITA.

With respect to the timing for which penalties and interest become due, the FIRS stated that liabilities arise at the time when the Company failed to declare taxable profits — that is, when the taxes become due as opposed to when an assessment is determined to be final and conclusive.

The Company's position

The Company argued that the Commentaries should be applied as a supplementary means of interpretation of Article 8 of the DTA. Therefore, income earned from carriage of goods and other non-freight income is bound to occur in the ordinary course of its business activities. Hence, the Company argued that the incidental non-freight income should be considered as profits or gains from international traffic and should be exempted from taxes based on the principle of reciprocity in the DTA.

Furthermore, the Company submitted that it promptly objected to the assessment raised by the FIRS within the timeframe provided in the CITA and appealed to the TAT with respect to NORA subsequently issued by the FIRS. Thus, the liability to pay penalty and interest should only crystalize when the assessments/demand notices are final and conclusive, and the Company has not filed a further appeal/objection.

The FHC's judgment

The FHC ruled that the income the Company derived in form of damages, cleaning fees, SLAC charges, NIMASA environmental levy, and bonded terminal commission from Nigeria are separate streams of income from the outbound freight income; hence, such streams of income are outside the scope of earnings from international traffic provided for in Article 8 of the DTA. Thus, such income should be taxable in Nigeria in accordance with the provisions of CITA.

Also, the FHC agreed with the FIRS that penalty and interest should accrue from the time the taxes became due and not when the assessment becomes final and conclusive.


The FHC's decision not to rely on the interpretation of the OECD Commentaries mostly stems from the fact that the OECD/United Nations Commentaries are not regarded as laws/local statutes. The decision appears to emphasize that, for the existing tax practice in Nigeria, the Commentaries should be more persuasive than authoritative. As such, its provisions should not be legally binding, the FHC appears to conclude.

Based on the FHC's decision, if the position of the DTA on specific tax issues is not apparent, the proper recourse is to look to the local laws, rather than relying on interpretation presented by the Commentaries.

This development potentially poses a challenge, because in international taxation the Commentaries generally represent a widely accepted interpretative framework, particularly where there are divergent positions on interpretations of provisions of international treaties.

Following the FHC's judgment, FSCs are encouraged to proactively conduct an impact assessment to manage any perceived tax exposures in this regard. Depending on the outcome of their impact assessments, FSCs should prepare and submit a self-assessment that correctly reflects taxable freight income from non-freight income derived from Nigeria and remit taxes due in accordance with the relevant tax provisions.

Furthermore, every taxpayer should actively monitor its tax operations to ensure adequate and timely controls. This is to mitigate resulting exposures from defaulting on its tax compliance obligations.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Nigeria, Lagos

Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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