Legality of penalty provisions in FIRS CBC regulations

The Federal Inland Revenue Service (FIRS) Country-By-Country Regulations 2018 (CBC Regulations) is a subsidiary legislation made by the FIRS partly to give effect to the provisions of tax legislations enacted by the National Assembly. Of Concern however appears to be the penalty provisions in the CBC regulations which appears to be inconsistent with the clear provisions of substantive legislations it sought to enforce. In this regard, Section 26 of the Federal Inland Revenue Service (Establishment) Act 2007 vis-à-vis Sections 11, 12 and 13 of the CBC Regulations, will be examined in order to ascertain whether the FIRS acted ultra-vires in the CBC Regulations by imposing penalties beyond those prescribed in the tax law, and the effect if that were the case

The Purpose of the Regulation
The Federal Inland Revenue Service Income Tax Country by Country Regulations, 2018 (“the Regulation”) was made by the Board of the Federal Inland Revenue Service in exercise of the powers conferred on it by Section 61 of the FIRS(Establishment) Act 2007 with the Approval of the Minister of Finance. The purpose of the FIRS CBC Regulations 2018 is to give effect to the provisions of-
a. the Country-by-Country Multilateral Competent Authority Agreement (CbC MCAA) signed by Nigeria on the 27th January, 2016 and ratified by the Federal Executive Council (FEC) on the 3rd August, 2016
b. sections 8(1)(i), 8(1)(t), 8(2), 26 and 27(1) of the Federal Inland Revenue Service (Establishment) Act 2007;
c. Sections 58 and 60 of the Companies Income Tax Act, CAP C21, Laws of the Federation of Nigeria, 2004 (as amended);
d. Sections 31 and 32 of the Petroleum Profits Tax Act, CAP P13, Laws of the Federation of Nigeria, 2004, and
e.regulation 6 of the Income Tax (Transfer Pricing) Regulations No. 1, 2012

Objective & Filing Obligation
While the objectives for making the CBC Regulations are to: (a) provide Tax Authorities with information about Multinational Enterprises’ (“MNEs”) global activities, profits and taxes; (b) provide Tax Authorities with information to better assess international tax avoidance risks; (c) improve transparency of MNEs in their tax practices; and (d) prevent tax evasion or avoidance through base erosion and profit shifting. In this regard, therefore Each Ultimate Parent Entity of an MNE Group that is resident for tax purposes in Nigeria is required to file a Country-by-country Report with the Federal Inland Revenue Service not later than 12 months after the last day of the Reporting Accounting Year of the MNE Group. Such report filed with the FIRS must conform to the requirements of sections 7 and 8 of this Regulations as to content and form.

Penalty Provisions in the Regulation
While Section 9 of the Regulations stipulates that the Country-by-Country Report required to be filed must be filed not later than 12 months after the last day of the Reporting Accounting Year of the MNE Group, the regulations have prescribed (in section 11, 12 and 13) penalties for late filing, filing incorrect or false report as well as failure to give the requisite notifications prescribed in the Regulations, to be N10,000,000.00, N5,000,000.00, N1,000,000.00 and N10,000.00 (daily penalty) respectively. This however runs contrary to section 26(3)(b) of the FIRS Act which provides as follows: “A person who defaults in complying with the provisions of this section- where the contravention relates to issues other than a tax liability, is liable to a penalty of N25,000.00 in the first month, and N10,000.00 for every subsequent month thereafter, in which the default continues”

From the foregoing provisions, late filing of CBC Report, filing an incorrect or false CBC Report as well as failure to provide Notification, are all contraventions not related to tax liability, and all come under the purview of Section 26(3)(b) of the FIRS Act, and the penalty provided for such contraventions in the FIRS Act is N25,000.00 in the first month and N10,000.00 for every subsequent month for which the default continues. This is contrary to the administrative penalties of N10,000,000.00, N5,000,000.00, N1,000,000.00 and N10,000.00 (daily penalty) respectively as prescribed in sections 11, 12 and 13 of the CBC Regulations. The question then is, when a subsidiary legislation such as the CBC regulations made pursuant to a substantive Act of the National Assembly runs contrary to the Act it seeks to enforce, what is the position of the Law? 

Position of Law on Conflict between Substantive & Subsidiary Laws
It is trite law that rules or regulations cannot override statutory provisions of the law.Hence regulations issued by the taxing authorities are issued pursuant to the taxing statutes and are therefore subject to the express provisions of the taxing statutes, as no rule or regulation can alter or be in conflict with a substantive law. In this regard, the Court of Appeal in the case of Famfa Oil Ltd v. A.G Federation & Anor, stated that subsidiary legislations must conform with the principal law which provided the source of their existence.

Re-echoing similar sentiment, the Supreme Court in a latter case of NNPC v. Famfa Oil Ltd, equally held that the subsidiary law sources its existence from the Principal legislation and as such, in the event of any inconsistency, the provisions of the principal Act shall prevail and that of the subsidiary legislation shall be void to the extent of the inconsistency.

Conclusion
In view of the above,  the penalty provisions in Section 11, 12 and 13 of the CBC Regulations 2018, to the extent of their inconsistency with section 26(3)(b) of the FIRS Act is null and void, and the provision of the FIRS Act supersedes. Furthermore, it is argued that the provision of section 26(3)(b) of the FIRS Act which stipulates a penalty of N25,000.00 in the first month and N10,000.00 for every subsequent month in respect of a contravention not related to tax liability, being a new amendment made to section 26 of the FIRS Act by Section 52 of the Finance Act 2020, the said amendment to section 26 of the FIRS Act by the National Assembly in 2020, was meant to cure the defect of the repressive and excessive penalty provisions in sections 11, 12 and 13 of the CBC Regulations 2018.

Flowing from the above therefore, it is submitted that every entity having obligations to file returns under the CBC Regulations, and who had been slammed with punitive administrative penalties pursuant to section 11, 12, and 13 of the CBC Regulations by the FIRS, as opposed to what is stipulated in section 26(3)(b) of the FIRS Act, do have a right and legal ground to seek legal redress at the Tax Appeals Tribunal, if their objection to such penalty is rejected by the Revenue body.
Odubunmi is a senior associate, Tax and Dispute Resolution at Hermon Legal Practitioners, Lagos.