Multichoice and Nigeria’s new rules for tax dispute resolution

A tax dispute between Multichoice and Nigeria’s Federal Inland Revenue Service (FIRS) is pending at the country’s Tax Appeal Tribunal. The case illustrates how regulations formed this year have confirmed rather than attenuated Nigeria’s high regulatory risk rating, by preserving space for discretionary decision-making and incentivising informal negotiations.  According to FIRS, South Africa’s Multichoice owes USD4.4 billion in back taxes – more than the company’s entire market value. Multichoice’s attempt to appeal the assessment in August was initially blocked at the tax tribunal based on rules that were set by Finance Minister Zainab Ahmed in June this year, just weeks before the current tax claim against the company. One of the rules is that an entity that is appealing against a tax authority must first pay 50% of the disputed amount to the tribunal as security.[1] The tribunal finally cleared Multichoice to begin its appeal last week (20 October), but this was after the company had deposited USD19 million with the tribunal.

Significance – Legitimate expectation

The FIRS Establishment Act 2007 empowers the finance minister to appoint members of the tax tribunal and set its procedure rules. However, the 50% deposit rule set in June this year appears to be inconsistent with the FIRS law. The law requires FIRS to first prove to the tribunal that a security deposit is expedient, and it allows a company to either deposit the amount that it paid as taxes in the preceding year or half the amount that is now in dispute (whichever is less) plus 10% of the disputed sum. Similar obligations were introduced by Nigeria’s federal high court a month before. The Practice Directions 2021 introduced in May state that a taxpayer who wants to contest an assessment in the high court must first pay half the amount to the court pending the outcome of the case. Multichoice would have been required to deposit more than USD2 billion as security before its appeal would be heard based on the new rule.

Further, the new High Court rules allow the court to approve a request by FIRS to freeze a company’s accounts, seize its immovable property and shut its premises without notifying the company beforehand during a probe. They also allow the court to grant FIRS an ex-parte order to search a company’s physical and digital records.[2] The current dispute with Multichoice is relevant here. FIRS ordered the company’s banks to freeze its accounts in July and claimed that the company had denied the tax authority access to its records.

Kenya Airways v. FIRS is another major case at the tax tribunal that highlights the risk of modifications to the rules outside legitimate expectations. In 2015, FIRS retroactively changed the terms by which it taxed Kenya Airways. Airlines previously paid 2% of their receipts from all carriage to FIRS. But then FIRS issued a public notice that they must instead pay 6% of their turnover based on a reinterpretation of the Company Income Tax Act. By this, the tax authority reassessed Kenya Airways for the preceding 15 years and ordered the airline to pay the additional sum for that period. The tax tribunal eventually annulled that decision in June this year.[3]

Outlook – Dispute settlement

The scale, dynamism and maturity of the Nigerian private sector is frequently on display internationally. For example, of the nine African tech unicorns established over the past three years, six are Nigerian. However, the investment climate is also characterised by a stubborn laundry list of political and regulatory risk. The system in place increases the frequency and cost of disputes. And the nature of demands from Nigerian regulators incentivise resolution through arbitrary or ‘offline’ steps rather than the de jure processes[4].

For the risk rating to change, specific gaps/conflicts surrounding key institutions would have to be addressed. Nigeria has not yet firmly established a mechanism for tax adjudication and there are loopholes in the relationship between the tribunal and the federal high court. Formed in 2010, the tribunal has had its jurisdiction questioned in the past because Section 251 of the constitution exclusively empowers the federal high court to rule on federal taxation.[5] This effectively leaves the tribunal subordinate to the court, but it is still not clear how a case would be treated between the three – FIRS, the court and the tribunal.

The FIRS law says a member may serve on the tribunal for a renewable term of three years. This leaves the tribunal vulnerable to political interference and instability given an incoming president will be able to replace members within her four-year term. Indeed, the tribunal has had unstable leadership since its inception. The current commissioners were appointed in July 2018 and their tenure has now expired, to be renewed or replaced by the incoming president after 2023 elections when President Muhammadu Buhari’s final term ends. The end result is an unpredictable path for the resolution of tax matters in dispute.

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[1] Tax Appeal Tribunal (Procedure) Rules (June 2021). Federal Republic of Nigeria.

[2] Practice Directions (2021). Nigeria Federal High Court.

[3] Kenya Airways v. FIRS (2021). Tax Appeal Tribunal.

[4] For instance, the central bank eventually agreed to accept a ‘notional reversal’ sum of USD52.6 million from another South African firm, MTN, in 2018, after the regulator had billed the firm USD8.1 billion for ‘illegal’ profit repatriation. The dispute was then resolved without further adjudication

[5] Constitution of the Federal Republic of Nigeria (1999). Federal Republic of Nigeria.

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