Pros and Cons of Integrating ADR Into Management of Tax Dispute

By Chief J. Akingbola Akinola (SAN)

Tax disputes are unavoidable in taxation. Tax disputes between a taxpayer and a tax authority may arise from tax assessment, tax declaration, audit and collection. Dispute inhibits efficiency in tax collection, and impairs the relationship between the tax payer and the tax authority.
Litigation which is the traditional mode of resolving disputes in Nigeria has proven not to be the best mode of resolving tax dispute. This is because it is characterized by undue delays and attendant high cost; which has made it unattractive. It is therefore, imperative to consider the possibility of adopting other modes of dispute resolution in the resolution of tax disputes.

Alternative Dispute Resolution Methods. (ADR)
Over the years, the use of Alternative Dispute Resolution (ADR) Mechanisms has become attractive, because it gives the parties to a dispute the opportunity to use other means of resolving their dispute other than litigation.
ADR methods involve negotiation, mediation, conciliation, arbitration etc. we shall examine the possibility of applying these methods in the resolution of tax disputes in Nigeria.

1. Negotiation:
   Negotiation has been defined as a consensual bargaining process in which the parties attempt to reach an agreement on a disputed matter. Negotiation usually involves complete autonomy for the parties involved, without the intervention of third parties. Thus, negotiation is a process, where the parties to a dispute attempt to resolve the disputes themselves without the assistance of a third party.

The pertinent question is whether negotiation can be an effective tool to resolve tax disputes? It seems that tax laws in Nigeria clearly allow the use of negotiation to resolve tax matters. As a matter of fact, negotiation is the first step in the tax dispute resolution mechanism in Nigeria. For instance, by the provisions of section 69 of the Company Income Tax Act and Section 58 of the Personal Income Tax Act, a person that is disputing an assessment is not expected to rush to Tax Appeal Tribunal or the Courts. He can apply to the relevant tax authority by notice of objection in writing to review and revise the assessment. On receipt of the objection, the tax authority may request for more particulars or books and may invite any person who may be able to give information for examination. Where the tax payer and relevant tax authority agrees as to the correct amount of the tax chargeable, the assessment shall be amended accordingly. This is clearly a form of negotiation, and the fastest way of resolving disputes relating to tax assessment. It is when they are unable to agree that the tax payer will be left with no other option than to seek other ways to resolve the dispute.

2. Mediation:
   Mediation has been defined as ‘a method of nonbinding dispute resolution involving a neutral third Party who tries to help the disputing parties reach a mutually agreeable solution.’ Thus, mediation involves a third party assisting the parties to resolve the dispute, this will be necessary for instance, where negotiations have reached a deadlock, and it has become obvious that the parties cannot resolve the disputes themselves. It might be difficult to use mediation as a means of resolving tax disputes, because it is an informal way of resolving disputes, and has no statutory backing and as such the agreements may not be enforceable. Thus, parties may not be inclined to subject themselves to a mediation process.
3. Conciliation:
   Conciliation has been defined as ‘a process in which a neutral person meets with the parties to a dispute and explores how the dispute might be resolved, especially a relatively unstructured method of dispute resolution in which a third party facilitates communication between parties in an attempt to help them settle their difference.’ It can be argued that mediation and conciliation mean the same thing; as they both involve the process of a neutral third party helping the parties to arrive at an amicable settlement of the dispute. The difference between mediation and conciliation may be mere semantics. The difference seems to be that, while there is no legal backing for mediation under the laws of Nigeria, there is legal backing for conciliation. Sections 37-42 and the third schedule to the Arbitration and Conciliation Act provides for the use of conciliation in the resolution of disputes. Although, Conciliation is statutory unfortunately, the rules failed to provide for the mode of impeachment and enforcement of settlement agreement. There is hardly any known instance where parties have resorted to conciliation in tax matters. The lacuna on its enforceability is a major reason, and it may not be suitable for the resolution of tax disputes.
4. Arbitration.
   Arbitration has been defined as ‘a method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding.’ Party autonomy is the hallmark of arbitration. Arbitration is a creature that owes its existence to the will of the parties alone.

The freedom to arbitrate is limited by various state laws such that disputes arising from specified subject-matters are not arbitrable. There is no codified law on arbitrability in Nigeria – this is also the case in some other jurisdictions. Thus, case law is a good source to draw upon when describing the arbitrability situation in Nigeria. Since the focus of this presentation is on integrating ADR into management of tax dispute, we shall consider Nigerian case laws on arbitrability of tax dispute.
Recently, the Nigerian Court of Appeal decided on the arbitrability of tax disputes in Nigeria by virtue of its recent pronouncements in Esso Petroleum and Production Nigeria Ltd & Anor vs. NNPC (Esso) and Shell (Nig.) Exploration and Production Ltd & 3Orsvs. Federal Inland Revenue Service (Shell)

Facts of Esso
The appellants (“the Contractors”) and the Nigerian National Petroleum Corporation (“NNPC”) are partners to a Production Sharing Contract (“PSC”). The PSC provides that, any crude oil found should be allocated to the parties in accordance with the lifting allocation based on Royalty Oil, Cost Oil, Tax Oil, and Profit Oil. The Contractors are also to prepare Petroleum Profit Tax (“PPT”) returns on behalf of the parties for filing at the Federal Inland Revenue Service (“FIRS”). The Contractors contended that NNPC unilaterally nominated to lift more cargoes of crude oil than it was entitled. They also contended that NNPC unilaterally altered or submitted to FIRS, PPT returns it unilaterally prepared on behalf of the contract area. The Contractors consequently initiated arbitration against NNPC in line with the PSC arbitration clause. Part of the reliefs sought was a declaration that NNPC cannot under the PSC submit its own unilateral PPT returns or alter tax returns prepared by the Contractors; and an order restraining NNPC from making or purporting to make tax payments that are inconsistent with tax returns prepared by the Contractors. The arbitral tribunal delivered its award on 24 October 2010, in favour of the Contractors. NNPC consequently applied to the Federal High Court to set aside the arbitral award on the ground that the arbitral tribunal acted without jurisdiction. It specifically contended that a tax dispute is not arbitrable under Nigeria law and that the dispute submitted to the tribunal was a tax dispute. The Federal High Court upheld this contention and set aside the arbitral award in 2012.The Contractors consequently appealed against the decision to the Court of Appeal. Both parties agreed that tax disputes are not arbitrable in Nigeria such that the question presented for determination by the Court of Appeal was whether the dispute submitted to arbitration was a tax dispute or a contractual dispute.
In its judgment, the Court found that the dispute submitted was a tax dispute in the garb of a contractual dispute. The court observed that any grouse against tax assessments made by FIRS could only be addressed in the manner provided by Sections 38, 41 and 42 of the Petroleum Profit Tax Act (“PPT Act”). The court noted that the provisions do not permit arbitrating over tax disputes and that after exhausting the remedies provided under the Act, only the Federal High Court can exercise jurisdiction over tax disputes in the light of Section 251 of the Constitution of the Federal Republic of Nigeria, 1999, which provides for exclusive jurisdiction of the Federal High Court over tax disputes. The Court consequently severed the aspect of the claims before the arbitral tribunal that was not related to tax and consequently affirmed the decision of the Federal High Court which held that the dispute submitted to arbitration was a tax dispute and not arbitrable.

Facts of Shell
The case has similar facts to Esso. The Contractors similarly contended that NNPC acted contrary to the PSC – by lifting crude oil in excess of its allotment and unilaterally computing and filing tax returns at the FIRS thereby inflating the Contractors’ tax liability.
The Contractors initiated arbitration against NNPC essentially seeking for reliefs that: under the PSC, the Contractors were entitled to compute and allocate Tax Oil returns they prepaid under the PPT Act. They also sought for an order restraining NNPC from submitting tax returns and making tax payments that are inconsistent with their returns. FIRS [a non-party to the arbitration] got wind of the ongoing proceeding, appeared and challenged the jurisdiction of the arbitral tribunal on the basis that the proceeding undermined its (FIRS) statutory functions and powers to assess, collect, and account for taxes under the various tax legislations in Nigeria, particularly the Petroleum Profit Tax and Education Tax. The arbitral tribunal overruled the objection.
FIRS approached the Federal High Court, seeking for declarations that the Contractors’ claims before the arbitral tribunal are not arbitrable. It specifically argued that tax claims are exclusively reserved for the Federal High Court under Section 251(1) of the Constitution and to that end, reference of such claims to arbitration was unconstitutional, null and void. The court upheld FIRS’ contentions and granted orders sought which in effect, terminated the arbitral proceeding. Dissatisfied with the decision, the Contractors appealed to the Court of Appeal. On whether the claims submitted to arbitration were contractual matters or tax matters; and if so, whether tax matters are arbitrable in Nigeria, the Court of Appeal found the Contractors’ claims to be tax disputes arising from the application of the PPT Act, and not contractual disputes. On arbitrability of tax disputes, the court relied on Section 251(1) of Constitution in holding that tax disputes are not arbitrable. The Contractors have appealed against the decision to the Supreme Court.

The Court of Appeal found that the disputes submitted to arbitration in both cases are tax related and therefore not arbitrable in Nigeria on the basis of the exclusive jurisdiction of the Federal High Court on taxation.

National Tax Policy
It needs to be pointed out that the extant National Tax Policy encourages the use of ADR. The National Tax Policy 2017provides as follows:
“In the event of any dispute, the tax authority and relevant stakeholders shall leverage on all amicable means of dispute resolution including arbitration and only resort to judicial determination as a last resort.”

However, in practice tax authorities frustrate the use of arbitration in tax disputes. For instance, in Federal Inland Revenue Service v. Nigerian National Petroleum Corporation & 4 ors. The Plaintiff (tax authority) brought an action seeking the determination of whether the Arbitral Tribunal had jurisdiction to determine the subject matter of taxation of the Defendants by the Plaintiff; a jurisdiction which is ordinarily conferred on the Federal High Court by section 251(1) of the 1999 Constitution. The 2nd to 5thDefendants had dragged the 1st Defendant to an arbitral panel pursuant to the arbitration clause in their production sharing contracts. Before the awards were given, the FIRS approached the Federal High Court to stop the arbitral proceedings on the grounds that tax issues were raised in the arbitral proceedings, which are not resolvable by arbitration. The Federal High Court upheld the contention of the FIRS and voided the arbitral awards given while the court was still sitting.

Haven examined the possibility of applying ADR methods in the resolution of tax disputes in Nigeria, we shall now delve into the pros and cons of integrating ADR into management of tax dispute.
Benefits of integrating ADR in management of tax dispute:

1. Developed and developing countries opt for ADR in resolving tax disputes because of efficiency, trust and voluntary compliance which is a crucial corner stone for an effective tax system.
2. ADR enhances access to justice and contributes to respect for the Rule of Law, which is an essential precondition for development.
3. Prolonged litigation in tax disputes is unfavorable to both the tax payer and the state because a sizeable amount of revenues may be locked up in dispute. However, if the dispute is resolved amicably, the revenue that was locked up could have a significant impart in the economy.
4. ADR promotes quick and effective dispensation of tax disputes which ensures a healthy environment for business and market growth through maximization of profits and mended healthy working relationships, as well as high yields in taxes.
5. Taxation forms an important relationship between a tax payer and the government. Thus, equality in resolving disputes plays a significant role from a social justice perspective.
6. The implementation of ADR in solving tax disputes is aimed at fast tracking resolution of disputes. Undue delays in resolution of tax disputes may threaten amount of revenue collected by the States.
7. The availability of a fair, independent an impartial mechanism for tax disputes resolution between tax payers and revenue collection agency can be viewed as an indicator of advanced tax system of a country.

The challenges of integrating ADR in management of tax dispute in Nigeria:

1. During negotiation, parties must compromise in order to reach amicable settlement. Thus, the tax authority may be required to vary the tax rate payable by the tax payer in order to reach a settlement and save time and cost. The challenge herein is that any variation of tax rate by the tax authority in ADR process would be contrary to the Tax statutes which has already stated the exact rate of tax payable by the tax payer.
2. Conciliation is statutory, but unfortunately, the rules failed to provide for the mode of impeachment and enforcement of settlement agreement. The lacuna on its enforceability is a major challenge and it may not be suitable for the resolution of tax disputes.
3. Mediation has no statutory backing and as such the agreements may not be enforceable. Thus, parties may not be inclined to subject themselves to a mediation process. Tax authorities, being public agencies will naturally not be inclined to subject themselves to an informal third party especially when the outcome of the process may be difficult to enforce.
4. The Court of Appeal’s decision in Esso Petroleum and Production Nigeria Limited & SNEPCO v NNPC and Shell (Nig) Exploration and Production Ltd. &3 ors. V. Federal Inland Revenue Service that arbitral tribunals have no jurisdiction to determine any dispute with tax implication as same is exclusively vested in the Federal High Court, has foreclosed the use of arbitration in the resolution of tax disputes . The implication of these decisions of the Court of Appeal is that arbitral clauses usually included in production sharing contracts are not enforceable.