Attitude Of The Judiciary And Legislature To Tax Planning And Tax Avoidance

By Ebube Godwin Onyejekwulum

Meaning of Tax and Interpretation of Taxing Statutes

Tax is a compulsory exaction of money by a public authority for public purposes or raising money for the purposes of government by means of contributions from individual persons.[1] Tax has also been defined as “a compulsory levy imposed on a subject or upon his property by the government having authority over him.”[2] Like all statutes imposing pecuniary burdens on the subject, tax statutes are construed strictly. It is generally recognized that taxing Acts are special type of statutes demanding a predictable and hence strict form of interpretation. This is due to the expropriatory nature of taxes and their impact on the right to property.[3] The principle was expressed by Rowlat J in Cape Brandy Syndicate v. IRC[4] thus:

“In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One has to look fairly at the language used.”[5]

This approach was approved and adopted in the Nigerian case of Aderawo Timber Company Ltd. v. Federal Board of Inland Revenue[6] Ikpeazu J stated that:

“It is the law that the language of a statute imposing a tax, duty or charge must receive a strict construction in the sense that there is no room for any intendment and regard must be had to the clear meaning of the words. If the state claims a tax under a statute it must show that the tax is imposed by clear and unambiguous words and where the statute is in doubt, it must be construed in favour of the subject, however much within the spirit of the law the case might otherwise be, but a fair and reasonable construction must be given to the language used without leaning to one side or the other”

Tax does not admit of emotions and thus in the case of Ayrshire Employers Mutual Insurance Association Ltd. V. I.R.C.[7] Where Section 31 of the Finance Act, 1933 clearly intended to widen the tax net failed to achieve that purpose, Lord Simonds in concurring with the Lord President declared:

It is at least clear what is the gap that is intended to be filled and hardly less clear how it is intended to fill the gap. Yet I can come to no other conclusion than that the language of the section fails to achieve its apparent purpose and I must decline to insert words or phrase which might succeed where the draftsman failed.

One of the important determinants of a good law is certainty and this judicial attitude to the interpretation of tax statutes promotes same. A tax payer should be in a position to calculate the tax consequences of his transaction beforehand and then make a decision on whether to proceed or not.[8] It is pertinent to note that this strict interpretation of tax laws works as a double edged sword, in the sense that it may work in favour of a tax payer or to his detriment. Where the language of a taxing statute is clear, the taxpayer is liable to pay no matter how harsh or burdensome it may be. In Coltness Iron Company v. Black[9] Lord Blackburn said:

“No tax can be imposed on the subject without words in any Act of Parliament clearly showing an intention to lay a burden on him. But when that intention is sufficiently shown, it is, I think, vain to speculate on what would be the fairest and the most equitable mode of levying that tax.”

Approaches to Tax Planning and Avoidance

Delving into the crux of the matter, it is observed that tax planning or tax avoidance is a developing trend in the field of taxation based on this strict rule of interpretation of taxing statutes. However, there has not been a legislative definition of the terms “tax avoidance” or “tax planning”. The terms can be defined as the systematic way of organising one’s affairs with a view to minimizing one’s tax obligation, as much as possible.[10] It is the “lawful carrying out of a transaction which was entered into, or which took a particular form for the purpose of minimizing taxation.[11] Hence, Tax evasion is illegal while tax avoidance/planning is legal. This is because tax evasion involves fraud/deliberate dishonesty on the part of a taxpayer.

The decision of the Supreme Court of Nigeria in Marina Nominees Ltd v. Federal Board of Inland Revenue[12] cast doubt upon the willingness of the apex of the Nigerian Judiciary to deal with issues particularly practices, transactions or circumstances which reduce tax liability to tax.[13] “The case was decided on the issue of the separate legal personality of a company distinct from its shareholders thereby, sidelining the cogent tax factors which ought to have been given the prime place of importance in its decision, since the case arose on the issue of tax liability.”[14]

With reference to the United Kingdom, in IRC v. Duke of West Minister[15] the Duke covenanted to pay his Gardeners a yearly sum by a deed of covenant in lieu of wages. The payment was without prejudice to the right of the Gardeners to claim the wages to which they may be entitled. However, the Gardeners understood that they were not expected to claim any wage for the duration of the covenant so long as payments were made under it in lieu. The object of the scheme was to make the Gardeners’ wages deductible in arriving at the Duke’s total income. The House of Lords upheld the scheme reasoning that in deciding the consequences of a transaction, the courts will look at the legal effect of the bargain which the parties have entered into and not take account of any supposed artificiality. With the advantageous tax result, the Duke escaped paying higher rate taxes on the covenanted sums. The court enunciated the principle thus:

“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be if he succeeds in ordering them as to secure this result, then, however unappreciative the commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This is so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally climbable.”

Thus a tax payer is meant to be taxed by reference to what he actually did and not by reference to what he might be more naturally expected to have done but did not do to achieve the same result. The court ought to consistently adopt this approach in deciding cases of tax planning. However, recent decisions of the courts tend to depart from this principle to adopt the role of “an unsolicited tax intelligence agency” for the Revenue.[16] To perform this role, the courts have coined various terminologies like “no commercial purpose”, “fiscal nullity” and “no appreciable effect” to nullify certain taxing transactions which they feel have a tax avoidance motive.[17]Indeed some of these transactions were “capable of explanation by reference to ordinary business or family dealing without necessarily being labeled as a means to avoid tax.”[18]

In the Nigerian cases of Nasr v. Federal Board of Inland Revenue[19] and Reiss and Co. Nigeria Ltd v. Federal Board of Inland Revenue[20] the suggestion that certain transactions were carried out with a tax avoidance motive were rejected on the grounds that no evidence was called which could have justified such finding.

The basic approach of the Nigerian tax system which followed the principle laid down in the Duke of Westminster case was stated by Bairamian JSC in the case of Akinsete Syndicate v. Senior Inspector of Taxes[21] that:

“It is trite that a person may use lawful means to avoid tax; what he may not do is to try to evade it. What he does should be genuine…not merely a verluo hide or dissemble the reality of things.”

The Westminster case is a triumph for the tax planners but it has a negative effect on tax revenue. This has led the legislature to adopt different interventions for restricting tax avoidance opportunities. “No matter how careful the legislature might have been in crafting a tax law, an adroit tax planner may still be able to exploit certain loopholes which the legislature may not have envisaged.”[22] Therefore, the legislature’s intervention may take the form of a general anti-avoidance provision. In Nigeria, there has been a series of anti avoidance legislations beginning with the now repealed section 14 Income Tax Management Act (ITMA) 1961 which provides that:

“Where a tax authority is of the opinion that any disposition is not in fact given effect to or that, any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, the tax authority may disregard the disposition or direct that such adjustments shall be made as respects the income of an individual, an executor or a trustee, as the tax authority considers appropriate so as to counteract the reduction of liability to tax effected, or reduction which would otherwise be effected by the transaction.”

The anti avoidance legislations were re-enacted in the provisions of Section 22 of Company Income Tax Act 2004, Section 20 Capital Gains Tax Act 2004 and Section 17 of Personal Income Tax Act 2004 which restated the repealed section variously.[23]

In order to prevent tax avoidance measures usually undertaken by connected persons or related parties, Section 17(3) of the Personal Income Tax Act[24] provides that:

“(3) for the purpose of this section-

• “disposition” includes any trust, grant, covenant, agreement or arrangement;
• transaction between persons one of whom either has control over the other or in case of individuals who are related to each other, or between persons both of whom are controlled by some other person, shall be deemed to be artificial or fictitious if in the opinion of the tax authority those transactions have not been made on terms which might fairly have been expected to have been expected to have been made by independent persons engaged in the same similar activities dealing with one another at arm’s length.”

Unfortunately, with the facts available, the Supreme Court has not given a judicial interpretation to the meaning of “artificial or fictitious transaction”. In the case of Federal Board of Inland Revenue v. Nasr[25] the apex Court stated that:

“At one stage in the High Court, the Board wished to submit that the transaction should be disregarded as an artificial one within the Income Tax Management Act but as this point has not been raised before the commissioners, the High Court refused to allow it to be raised on the further appeal and no evidence was called which could have justified such a finding.”[26]

However, while emphasizing the significance of the anti-avoidance legislation, it must be carefully stressed that the Akinsete principle was still law and had not been over-ruled. It may be distinguished like the Duke of Westminster’s case on the grounds that it:

“…was about a simple transaction entered into between real persons, each with a mind of his own…The kinds of tax avoidance schemes that have occupied the attention of the courts in recent years, however, involve interconnected transactions between artificial persons, limited companies without minds of their own but directed by a single master mind.”[27]

Legislative intervention may also take the form of specific tax avoidance provisions. For instance the Finance Act 2019 which amended the Companies Income Tax Act (CITA) amongst other tax laws, contained a series of provisions intended to curb tax avoidance measures by companies. For instance, Section 10 of the Finance Act substituted Section 24[28](a) of the CITA with a new paragraph (a) thus:

“(a)subject to the provisions of the seventh schedule to this act, any sum payable by way of interest on debt borrowed and employed as capital in acquiring the profits of a company”

The Finance Act also amended the Schedules to CITA and introduced a seventh schedule which provides for “Deductible Interest” particularly in paragraphs 1-2 thus:

“1. Notwithstanding any provisions of this Act, where a Nigerian company, or a fixed base of a foreign company in Nigeria, incurs any expenditure by way of interest or of similar nature in respect of debt issued by a foreign connected person, the excess interest thereon shall be a disallowable deduction for the purpose of this act.

2. For the purposes of paragraph 1, the excess interest shall mean an amount of total interest paid or payable in excess of thirty percent of earnings before interest, taxes, depreciation and amortization of the Nigerian company in that period.”

It is evident that these provisions were inserted with the intendment of restraining tax avoidance tactics of foreign companies that derive income from Nigeria through excessive interest charged on their loans to their Nigerian subsidiaries. Also, the “connected persons”[29] in Nigeria will no longer gain tax advantage by deduction of the excess interest paid on the loans.

 Also, prior to the amendment of the CITA, Section 29(9) of the Act gives incentives/tax concessions where related parties re-organize thus:

“Where a trade or business carried on by a company is sold or transferred to a Nigerian company for the purposes of better organization of that trade or business or the transfer of its management to Nigeria and any asset employed in such trade or business is sold or transferred, if the board is satisfied that one company has control over the other or that both are controlled by some other person or are members of a recognized group of companies, the board may in its discretion direct that-

(a) the provisions of subsection (3) and (4) of this section shall not apply to such trade or business and

(b) for the purpose of the second schedule to this Act, each such asset shall be deemed to have been sold for an amount equal to the residue of the qualifying expenditure thereon on the day following such sale or transfer.”

The effect of the above provision is that the company is exempted from the cessation and commencement rules and will thus enjoy tax concessions for those periods. Also, the assets employed for the business of such reorganizations will deemed to be sold or transferred at the tax written down value/residual value.[30]

Furthermore, Section 32 of Capital Gains Tax Act (CGTA) exempts chargeable gains arising from corporate reorganizations; to the extent that the gains acquired are non-monetary in nature. Further to the Finance Act’s amendments of the CITA,[31] CGTA[32], a reorganized group can only be recognized, for the purposes of enjoying the tax concessions available, subject to the group passing the “minimum holding requirement” test. The requirement is such that, an acquired company must have been a part of the group for a minimum period of 365 days pre reorganization and all underlying assets transferred must be held for another 365 days after the transaction date for the tax concessions to be enjoyed. These provisions were enacted to forestall companies who seek to gain tax benefits through short term acquisition and disposal of interests and assets/shares of a company.

Also, in order to forestall the frequent incidents whereby related parties claim deductions arising from “excessive” expenses before arriving at their assessable profits, Section 11 of the Finance Act 2019 amended Section 27 of the CITA[33] to include that “expenses within or outside Nigeria involving related parties as defined under the transfer pricing regulations except to the extent that is consistent with the transfer pricing regulations” are disallowable deductions.

Having considered the legislative interventions, I humbly submit with reference to the judicial attitude regarding tax-planning cases that the court ought not to disregard the transaction which a taxpayer has actually entered into and the rights and obligations which flowed from it and substitute for it some more straightforward transaction which would have achieved a similar economic or business result and hold that it was the transaction which the taxpayer would have entered into if he had not set out to reduce the incidence of tax.[34]

I refer to case of IRC v. Wolfson[35] where Lord Simonds rejected any rule of interpretation based on the policy of preventing the avoidance of tax thus:

“It was urged that the construction that I favour leaves an easy loophole through which the evasive taxpayer may find escape. That may be so, but I will repeat what has been said before. It is not the function of a court of law to give to words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which had the legislature thought of it, would have been covered by appropriate words.”

I am of the view that individuals and businesses have the right to plan their transactions in such a way that their tax liability is minimized thereby increasing their profitability. While tax avoidance can be effectively curbed through legislative intervention, with utmost humility, it is not the business of Judges to interpret taxing statutes in the light of their personal views and agenda to stifle any transactions which they feel has a tax avoidance motive. It has been captured excellently that “taxing statutes are gentlemen on whom, apart from building our trust, no interpretative violence should be inflicted.[36]

Conclusion/Recommendations

According to Radcliffe Commission[37] “By Tax avoidance…is understood some act by which a person so arranges his affairs that he is liable to pay less than he would have paid but for the arrangement. Thus the situation which he brings about is one in which he is legally in the right.” As long as the tax planning does not involve fraud or dishonesty, it is legal and the courts should so hold. The best that can be done is to discourage tax avoidance through impeccable drafting of tax laws and nothing more.[38] The battle against tax avoidance by the courts should be discouraged as that battle is primarily that of the legislature in line with the concept of separation of powers.[39] The courts will not stretch the terms of taxing Acts in order to improve on the efforts of parliament and to stop gaps which are left open by the statutes.[40]

“Everybody who does anything ought to think how are the income taxes going to affect or will they affect at all, this transaction I am entering into.”[41] Ultimately it accords with the extant law and available facts that, every man is entitled to plan his tax affairs.[42] Tax planning and avoidance will continue in the face of high rates of tax, difficult operating environment that hinder business growth and existence of legal loopholes in the taxing statutes. On a closing note, businesses should:

1. Integrate tax considerations at planning stage of their contracts/commercial transactions before execution.
2. Manage their corporate tax function.
3. Make consultation with tax information services.

Ebube Godwin Onyejekwulum ACIArb(UK), LLM Taxation (in view) Ebubeonyejekwulum@yahoo.com

[1] Matthews v. Chicory Marketing Board (Vict), (1938) 60 C.L.R. 263 at 276 per Justice Latham of the Australian Supreme Court

[2] See O. Akanle: Nigeria Income Tax Law and Practice, Centre for Business and Investment Studies Limited, Lagos, Nigeria, (1991), p. 4. Naiyeju also defined “tax” as “a compulsory payment levied on the citizens by the government for the purpose of achieving its goals. See 1.K. Naiyeju: Value Added Tax: The Facts of Positive Tax in Nigeria, Kupag Public Affairs, Nigeria, (1996), p. 12.

[3]Section 44 of the Constitution of the Federal Republic of Nigeria, 1999 (Hereinafter referred to as the” 1999 Constitution”) guarantees the right to property. Section 44(2)(a) however, further provides that “the prohibition of compulsory taking of property shall not be construed as affecting any “general law for the imposition or enforcement of any tax, rate or duty.”See section 44 of the 1999 Constitution.

[4] [1921] K.B. 64.

[5] This  has  been cited and approved by Lord Simon in Calladilm Eagle Oil Co. Ltd. v. R. (1946) AC 119, Lord Upjohn in Mapp v. Dram (1990) AC 362 and Lord Donovaan in Mangin v. IRC 919710 AC 739

[6] 1966 NCLR 416: 1966 LLR 195; See also, S.A. Authority v. Regional Tax Board 1970 All NLR 177:1 NTC 182

[7] (1946) UKHL 3

[8] S.O. Fashokun: “An Assessment of Efforts Against Tax Avoidance and Evasion in Nigeria: The Legal Viewpoint,” Vol. 10 (1976) Nigerian Law Journal, pp. 17-18.

[9] (1881) App Ca, 315 at p.330.

[10] Black’s Law Dictionary defines tax avoidance as the minimisation of one’s tax liability by taking advantage of legally available tax planning opportunities. See Black’s Law Dictionary, ed Bryan A. Garner, West Group, St. Paul, Minn., 5th ed, p. 1310.

[11] M.C. Flesch: “Tax Avoidance – The Attitude of the Courts and the Legislature” (1968) C.L.P. 215 at 215-216.

[12] (1986) NWLR (pt.20) 48

[13] M. T. Abdulrazaq Cases and Materials in Nigerian Taxation  Eastern Book Company 1st ed 2016 page 190

[14] ibid

[15] [1936] AC 1.

[16] Abdulrazaq (N10) P.201

[17] The modern developments of this attitude started from the case of Floor v. Davis (1980) AC 695, IRC V. Plummer (1980) AC 896, W.T. Ramsay Ltd. V. IRC (1982) AC 300, IRC v. Burmah Oil Co. Ltd (1982) STC 30 (HL) and Marina Nominees Ltd v. Federal Board of Inland Revenue(Marina Nominees) FCA/L/20/83 where the English courts and the Nigerian court in Marina Nominees seem to take the position that they were not precluded by the principle in the Duke of westminster case from interpreting otherwise especially as an essential feature of all the transactions was that when they were completely carried out, they did not result in any actual loss to the tax payer.

[18] Newton v. Commissioner of taxation of the commonwealth of Australia 1968 AC 450

[19] 1964 NCLR 93(SC)

[20] SUIT NO FRC/L/IA/76, dated 15-7-1977

[21] (1976) NTC 109.

[22] Abiola O. Sanni “Interpretation Of Tax Statutes: An Examination Of The Supreme Court Approach” UNILAG Law Journal (2006) available at INTERPRETATION OF TAX STATUTES.pdf (unilag.edu.ng)

[23] M.T. Abdulrazaq, K.I. Adam – “Anti-Avoidance Legislations: Issues & Doubts In The Application Of Tax Rules In Nigeria” AGORA International Journal of Juridical Sciences (2015 No. 4) available at  http://univagora.ro/jour/index.php/aijjs

[24] See similar provisions under Section 22(2) of CITA and Section 20(3) of CGTA

[25] 1 NTC 115, 116.

[26]  See also Aboud v. Regional Tax Board 1 NTC 125.

[27] Ramsay v. IRC [1982] STC 30 at 32. Sec Gammic, Strategic Tax Planning, Part D, p.17.s

[28] This section provides for deductible expenses for the purpose of ascertaining profits or loss of any company for a tax year.

[29] Paragraph 6 of the seventh schedule provides that connected persons means “(i)any person controlled by or under common control, ownership or management, (ii)any persons who is not connected but receives implicit or explicit guarantee or deposit for the provision of corresponding or matching debt or (iii) any related party as described under the Nigerian Transfer Pricing Regulations 2018.”

[30] Cost of asset – capital allowance(depreciation) = tax written down value/residual value

[31] Section 12 of the finance act 2019 amended section 29 of the CITA

[32] Section 49 of The Finance Act substituted section 32 of CGTA with a new section 32

[33] This section provides for deductions not allowed

[34] See Furniss v. Dawson The Times 24-12-1981 and Coates v. Arndale Properties Ltd. The Times 25-3-1982: (1982) 59 TC 516

[35] (1949) 1 All ER 865

[36] Abdulrazaq (N10) P.211

[37] The Royal Commission on Taxation of profits and Income, United Kingdom, 1955 Para. 1016.

[38] The Finance Act 2019 contains some tax avoidance provisions as earlier noted.

[39] M.T. Abdulrazaq  “Judicial and Legislative Approaches to Tax Evasion and Avoidance in Nigeria” [1985] Vol. 29 No. 1 Journal of African Law 59

[40] Lord Vesteys Executioners v. Inland Revenue Commissioners (1949) 1 All E.R. 1108

[41] Rowlatt J. in Seaham Harbour Dock Co. v. Crook (1930) 16 TC 333, 340

[42] See the Westminster case