Deductibility of Expenses in Determining Companies Income Tax in Nigeria:

Thoughts on the Decisions of the Tax Appeal Tribunal in MTN v FIRS and Tetra Pak West Africa Ltd v FIRS (Part 2)

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In this second and final version of our two-part series on this issue, we continue our conversation on recent decisions of the Lagos Zone of the TAT on the disputes between the Federal Inland Revenue Service (FIRS) and MTN and Tetra Pak West Africa Ltd (“TPWAL”) regarding the test for deductibility of expenses for corporate tax purposes.

Analysis of the Decisions in the MTN and TPWAL Cases

A major takeaway from the MTN and TPWAL cases is that the TAT is prepared to look at the nature and purpose of expenses sought to be deducted vis-à-vis the facts and circumstances of each case, before determining the question of deductibility. In MTN’s case, the Tribunal stated that the description of the sum imposed by NCC as a penalty did not conclusively foreclose its being deductible if the WREN Test was satisfied. Nor was the fact that the sum was incurred in producing the taxpayer’s profits sufficient in itself to render the expense deductible.

In TPWAL’s case, the Tribunal rejected the FIRS’ argument that the demurrage was imposed as penalty for failure to evacuate cargos after an agreed free period. The TAT noted that demurrage payments are by their nature contractual and compensatory, not being imposed by statute. Most importantly, the Tribunal found that the demurrage in this case met the WREN Test as the evidence showed they were not avoidable, having been incurred due to administrative and infrastructural challenges at the ports which delayed the evacuation of the taxpayer’s cargos. As such, if the FIRS had tendered evidence supporting its argument that the expenses were avoidable, the Tribunal would have decided differently.

The argument that penalties do not meet the WREN Test is one that the FIRS has maintained in previous cases. In Federal Inland Revenue Service v. The Shell Petroleum Development Company of Nigeria Ltd (SPDC) the Federal High Court (FHC) upheld the FIRS’ argument that fees paid to the Minister of Petroleum Resources by SPDC for flaring gas in the course of crude oil production were not incurred wholly, exclusively and necessarily for petroleum operations. This decision of the FHC is unhelpful in our view because the Court did not consider whether, on the facts and circumstances of the case, the gas flare fees were avoidable or if SPDC could have carried out its operations without incurring the expense.

A similar decision was reached by the FHC in FIRS v Mobil Producing Nigeria Unltd., where the Court decided that gas flare fees were not deductible expenses because they constituted a penalty paid for flaring gas without the Minister’s permission. These decisions of the FHC show, with respect, a lack of appreciation of the relevant provisions of the Associated Gas Re-injection Act (AGRA). Although AGRA requires the permission of the Minister before gas is flared, in practice, such Ministerial consent is rarely ever obtained before oil production. The Minister’s certificate is usually issued to oil producers who show that utilisation or re-injection of gas is not appropriate or feasible[i]; and the fees payable are determined by the Minister based on the standard cubic meter of gas actually flared. As such, the gas flare fees paid to the Minister are merely compensatory rather than punitive. To buttress this fact, the penalty which the AGRA imposes for a violation of the law is a forfeiture of the concessions granted to the defaulter in the particular field in relation to which the breach was committed.

In any event, assuming without conceding that gas flare fees constitute a penalty, we question the logic in disallowing them in the computation of income tax since the proceeds generated from the activity in respect of which the penalty was paid will be taxed. If the proceeds of a prohibited act are taxable, surely all expenses incurred in generating the income must also be deductible, except where the law provides otherwise. The Canadian Supreme Court held in this regard that:

“…it is well established that the deduction of expenses incurred to earn income generated from illegal acts is allowed…Allowing a taxpayer to deduct expenses for a crime would appear to frustrate the Criminal Code, R.S.C., 1985, c. C-46; however, tax authorities are not concerned with the legal nature of an activity. Thus, in my opinion, the same principles should apply to the deduction of fines incurred for the purpose of gaining income because prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income.”

It is noteworthy that there is a temptation for judges to rely on public policy as a basis for denying a taxpayer’s entitlement to deduct expenses not disallowed by law. This will introduce a lot of uncertainty as the extent to which the test of public policy should apply will be left to the imagination of the individual judge. To avoid creating this uncertain state of affairs, the Court in Edet v. Chagoon cautioned that:

“Public policy is traditionally described as an unruly horse, and a Judge has neither qualification nor experience in such equestrian matters. Thus, to render a decision solely on public policy or public good is to plague the law with uncertainty, and it is against public policy to produce uncertainty in the law…”

Another point to note from the MTN and TPWAL cases is that the duty continues to rest on a party who claims that an expense is deductible to provide ‘convincing’ evidence in support of that claim. In MTN, the TAT was not convinced that the sum imposed by NCC was a necessary business expense, and instead found that MTN had been negligent having failed to comply with regulations issued by its regulator.


The test for the deductibility of expenses is nuanced. As such, tax payers must be aware that the Tribunal will be prepared to determine each case on its peculiar facts and circumstances and on the evidence presented by the parties. We note that the Finance Act 2019 has amended section 27 of CITA to include “any penalty prescribed by any Act of the National Assembly for violating any statute” in the list of expenses not allowed. As such, the mere characterisation of an expense as a fine or a penalty by tax authorities, without reference to an Act of the National Assembly, will not be a conclusive determinant of the tax treatment of the expense.

We consider the MTN and TPWAL cases commendable, and hope that other Zones of the TAT and appellate Courts in Nigeria’s judicature would toe the line of reasoning undergirding these two decisions when determining similar cases in future.



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