Introduction

On June 27, 2022, the Federal High Court (FHC) in Abuja ruled on the applicability of tax amendments to transactions predating such amendments. This ruling came from an appeal by Accugas Limited against the Federal Inland Revenue Service (FIRS) and the Attorney General of the Federation. The court’s decision addresses whether the Finance Act 2019 (FA 2019) could retroactively apply to transactions and income earned before its enactment on January 13, 2020. This article delves into the court’s decision and its potential implications for businesses.

Background

According to Section 29(1) of the Companies Income Tax Act (CITA), companies are assessed for tax on a preceding year basis. Thus, the tax assessment for the current year, 20X2, is based on the financial statements of the previous year, 20X1. Companies are required to submit their income tax returns, including current year tax computations and audited financial statements, within six months of their accounting year-end, as per Section 55 of CITA.

Prior to FA 2019, companies with at least 25% imported equity capital were exempt from minimum tax under Section 33(3)b of CITA. However, FA 2019, enacted on January 13, 2020, replaced this exemption with one for companies earning less than ₦25,000,000 in gross turnover for the relevant year. The primary issue in the Accugas case was whether companies with at least 25% imported equity before the enactment of FA 2019 could still claim minimum tax exemption for periods preceding the amendment.

The Federal High Court’s Decision

Accugas, which had over 25% imported equity as of December 31, 2019, incurred no taxable profits for that year and would have been liable for minimum tax. The company sought clarification from FIRS in July 2020 on whether the amendment to Section 33(3)b would affect its exemption status for income earned in 2019. FIRS responded that the amendments applied to the 2020 tax assessment year, which covered income earned in 2019, as the tax return was due after FA 2019 was enacted.

Although Accugas complied to avoid penalties, it challenged FIRS’s position, arguing that the amendment could not apply retroactively, based on Sections 6(1)(b) and (c) of the Interpretation Act. Accugas contended that the amendments deprived it of its vested right to exemption for the 2019 income, which should be preserved under the doctrine of vested rights.

The FHC ruled in favor of Accugas, stating that tax laws cannot be applied retroactively unless explicitly stated. The court relied on Section 6(1)(b) and (c) of the Interpretation Act, which preserves rights, privileges, obligations, or liabilities accrued under a repealed enactment. The FHC cited precedents establishing that the applicable law for a cause of action is the law in force when the cause arose. Therefore, for income earned in 2019, the law in force as of December 31, 2019, applied.

Implications

The FHC’s decision clarifies that tax law amendments cannot retroactively affect rights accrued under previous laws unless explicitly stated. This ruling may prompt other taxpayers to challenge the retroactive application of FA 2019 or subsequent Finance Acts.

In practice, taxpayers have often prepared tax returns based on the prevailing law at the time of preparation to comply with amendments. Aligning this practice with the FHC’s decision could lead to significant adjustments, particularly for those who benefited from incentives introduced by FA 2019. These incentives may only apply from the financial year following the enactment date, potentially requiring refunds for previously assessed taxes.

Given the frequent introduction of Finance Acts, it is crucial to preserve accrued taxpayer rights from previous Acts to avoid confusion and legal disputes. Explicitly stating any retroactive application in new laws can prevent unnecessary controversy.

Conclusion

The FHC’s decision in the Accugas case underscores the need for clarity and precision in tax legislation, particularly regarding retroactive application. As FIRS may appeal this decision, the final outcome remains uncertain. Meanwhile, taxpayers should review their records and ensure compliance with the current legal framework, preparing for potential adjustments based on the court’s ruling.

This case highlights the importance of clear legislative intent and the preservation of accrued rights, ensuring a fair and predictable tax environment for businesses in Nigeria.

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