Matters Arising from the NEPZA + FIRS MOU: A Quest gone too Far?

Introduction:

By an undated Memorandum of Understanding (MoU)[1] executed between the Nigeria Export Processing Zones Authority (NEPZA) and the Federal Inland Revenue Service (FIRS), both organisations, largely agreed to collaborate on the administration of taxes arising from the operations of Free Trade Zones (FTZs) in Nigeria. Aside the broad details of inter-agency collaboration and remuneration contained in the body of the MoU, the Appendix to the MoU proceeds to detail the tax treatment of certain transactions of NEPZA’s Approved Enterprises (Approved Enterprises), among others. In this Brief, we undertake a review of the operative parts of the MoU, the nature and validity of inter-agency MoU’s in Nigeria and the future of FTZs in light of the NEPZA Act of 1992 (as most recently amended by Section 58 of the Finance Act 2020 (FA20).    

The MoU:

The MoU is stated to become effective upon its execution by NEPZA and FIRS. We estimate that this was done sometime in the first week of June 2022. The MoU recognizes NEPZA’s role as the administrator of the FTZs and FIRS’ role as the administrator of taxes in Nigeria. It recognizes that certain taxes do arise from operations in the FTZs. In this wise, the MoU recognized the existence of both Approved Enterprises and Unapproved Enterprises and jointly refers to them as Enterprises. No appropriate definition or distinction is created in the nature of operations in the FTZs that give rise to taxes administrable by FIRS. For example, the MoU does not expressly distinguish the fact that the operations of Approved Enterprises give rise to no tax incidence administrable by the FIRS whereas those of Unapproved Enterprises does. This distinction, particularly as it relates to Approved Enterprises would have been consistent with the very generous provisions of Sections 8(1) and 18(1)(a) of the NEPZA Act.

Largely, the MoU seeks for an avenue for FIRS to collect Value Added Tax (VAT), Withholding Tax (WHT) and Companies Income Tax (CIT) from Enterprises and other businesses in the Customs Territory that do business with Enterprises. The MoU additionally seeks to impose an obligation on employer-Enterprises to comply with the pay as you earn (PAYE) Personal Income Tax obligation to the relevant tax authority (RTA). The MoU recognizes FIRS’ role as NEPZA’s go to authority on the issues of the tax regime allowable in the FTZs

A monthly remuneration (dubbed a “transactional expense”) of (0.5% (zero point five) of all collections, is promised NEPZA by FIRS. The remuneration is explained to be administrative support to NEPZA for facilitating the remittance of WHT and payment of all relevant taxes arising from the administrative collaboration of the two agencies.

Operatively, the MoU provides the following transactions and tax incidences:

The MoU and Extant Nigerian Laws:

The MoU is simply a contract between NEPZA and FIRS. Its characterization as an MoU nonetheless, where it imposes lawful obligations on its Parties, the MoU may be enforced by the Parties, one on the other. It however cannot be enforced against a non-party to it. Accordingly, neither NEPZA nor FIRS can rely on the MoU to enforce its provisions on an Enterprise as such an Enterprise is a non-party to the MoU.

The non-bindingness of the MoU on non-parties nonetheless, the provisions of the MoU should cause concern for investing public, especially Approved Enterprises. Both the express and subtle non-recognition of the statutory principles and provisions of the NEPZA Act is the cause for worry here.

The FTZs are statutorily designated special economic zones where Nigeria’s fiscal laws and regulations do not apply. This is statutorily expressed in the far-reaching wordings of Sections 8(1) and 18(1)(a) of the NEPZA Act which states: Section 8 (1): Approved Enterprises operating within a Zone shall be exempted from all Federal, State, and Local Government taxes, levies, and rates. Section 18(1) (a): Approved Enterprises within the Zones shall be entitled to the following incentives – Exemption from taxes, levies, duties and foreign exchange regulations in accordance with Section 8 of this Act. These are very important words that largely underscore most investments in the FTZs in Nigeria.

The wordings are clear enough. The exemption from all Federal, States and Local Government taxes, levies and rates as well as foreign exchange regulations only enures to Approved Enterprises that are operating within the geographical confines of a FTZ. Hence the MoU’s application of VAT, WHT, CIT and PAYE on Unapproved Enterprises, the Head or Branch Offices of Approved Enterprises in the Customs Territory as well as on Businesses in the Customs Territory, is statutorily correct. To however seek to impose any Federal, States and Local Government taxes, levies, rates or foreign exchange regulations on Approved Enterprises that are operating within a FTZ is an anathema. It is illegal. This is the broad statutory principle for an Approved Enterprises’ investment in the FTZ and should be respected, save and until there is an express amendment of the NEPZA Act by Nigeria’s National Assembly.

It would appear that, both NEPZA and FIRS’ non-appreciation of the international trade status of businesses in the FTZs is largely responsible for some of the alt principles sought to be communicated in the MoU. Paradoxically, these principles are clearly legislated and interestingly referenced in the MoU, but incorrectly applied. Thus, where Sections 11(2) and 12(9) of the NEPZA Act referenced goods coming from Nigeria into the FTZ as exports from Nigeria, statutory allusion was being made to the international trade status of the business being conducted between an Approved Enterprise and the Customs Territory Business that is making the supply. Still on this example, it is, accordingly, the law that Customs Territory Business cannot impose VAT on the exports to the Approved Enterprise in the circumstance that the Approved Enterprise, operating within the FTZ, is exempt from any Federal, States and Local Government taxes, levies, rates or foreign exchange regulations. Further, and with due reference to the provisions of the VAT Act, 1993 (as most recently amended by the Finance Act 2021 (FA21)) (VAT Act), non-oil exports are zero-rated goods and only attract VAT at a rate of 0% at the time of purchase (Item 1, Part III of the First Schedule, VAT Act). Thus, even by the provisions of the VAT Act alone and without the admixture of the overriding provisions of Sections 8(1) and 18(1)(a) of the NEPZA Act, goods to be supplied or exported to Approved Entities in the FTZ by Customs Territory Businesses may only be subject to VAT at a 0% rate.

The wordings of Sections 8(1) and 18(1)(a) of the NEPZA Act are sacrosanct and only very clear and express words of a legislation on FTZs can upstage them. Where these words are held true, then, an appropriate rendition of each of the transactions and tax incidences in the Appendix to the MoU should be:

It is needed to state on WHT and PAYE obligations, that, in the circumstance that Sections 8(1) and 18(1)(a) of the NEPZA Act exempts an Approved Enterprise from any Federal, States and Local Government taxes, levies, rates or foreign exchange regulations, they are also exempted from any registration, filing or remittance obligation imposed by any such law. Only an express provision of an overriding legislation by the National Assembly, as done in the case of Section 58 of FA20 (which imposed an obligation on Approved Enterprises to submit CIT Returns directly to FIRS), can supplant this. The relevant beneficiary of an, ordinarily, WHT-liable or PAYE-liable payment should directly account to the RTA, the relevant corporate income tax or personal income tax that should ordinarily be paid on such income, respectively.

Conclusion:

Indeed, the use of the expression “Customs Territory” to differentiate FTZs from all other geographical areas in the Federal Republic of Nigeria (that is, the Customs Territory) holds true to the essence of FTZs. They are areas where general tariffs (customs) on imported and exported goods and services as well as general fiscal laws do not apply. They are special economic zones. This is the import of Sections 8(1) and 18(1)(a) of the NEPZA Act. The identification and association with “customs” is not borne of laziness in the choice of words, but a direct reference to the fact that, if it does not come within the remit of NEPZA (i.e. it is not an FTZ activity), then it should largely fall within the remit of the NCS – the revenue authority charged with the administration of taxes on imported and exported goods. The services bit lays with FIRS but then, only in relation to the Customs Territory Business.

Revenue administration associated with the FTZ, especially on goods imported into and exported from the FTZs is legally within the remit of the NCS and not the FIRS. This is because, even though all takes place within the Nigerian geographical confines, for purposes of FTZ administration, that “geographical confines” is split in two; the FTZ Territory and the Customs Territory. Approved Enterprises should ordinarily have no business with the FIRS. Until the incursion of Section 58 of FA20, that was the law; even after this antithesis to the conceptual understanding of FTZs, the limit of FIRS’ business with Approved Enterprises is currently limited to the filing of CIT Returns and no more. All administrative privileges that FIRS has taken to extend Section 58 of FA20 to include filing of Transfer Pricing Returns et.al., is without any legal basis as at date. The MoU clearly cannot validate such practices. A law of the National Assembly will be required for such validation.

Much is required of NEPZA to understand and appreciate the special responsibility afforded it by the NEPZA Act. It is the incubation hub for a new generation of businesses that are located within the Nigeria geographical confines, but for all intents and purposes are truly international businesses; for which all revenue/customs administration interfaces are largely secluded to the NCS. The MoU with FIRS chips off and at NEPZA’s statutory territory. It is a needless incursion that NEPZA should avoid, not after Section 58 of FA20. The MoU has no force of law. Needless to restate that NEPZA should show itself ready to protect businesses that have or are poised to undertake the relatively huge investment required to be an Approved Enterprise. NEPZA’s current flirtation with FIRS sends the very wrong signal of NEPZA’s fidelity to the FTZ cause. NEPZA’s rightful pandering to the revenue ambitions of the nation would best be expressed through a strengthening of the NCS and its obligations to revenue administration in the FTZs; not the coquettish MoU with FIRS.