COURT OF APPEAL HOLDS THAT 2000 MOU CEASED TO HAVE EFFECT SINCE YEAR 2008

INTRODUCTION

The Court of Appeal, sitting in Lagos on the 15^th day of February 2017 gave a judgment to the effect that the Memorandum of Understanding between the Federal Government and Oil Producing Companies signed in the year 2000 (2000 MOU) was effectively terminated  as far back as year 2008. The court held that Mobil Producing Nigeria Unlimited (Mobil) was not entitled to the Education Tax (EDT) incentives provided for under the 2000 MOU effective from the 2009 Year of Assessment thereby upholding the decision of the Federal High Court on this issue.

SUMMARY OF FACTS

Mobil is a crude oil producing company in Nigeria and FIRS is a statutory agency with powers to administer the tax laws of Nigeria. Mobil was a party to an MOU with the Federal Government signed in the year 2000. One of the fiscal incentives set out in the 2000 MOU is that Mobil can set off Tertiary Education Tax liability against its PPT profits.

FIRS served Mobil EDT Assessments for 2008 Year of Assessment (YOA) and excluded some EDT off-sets contained in the 2000 MOU. FIRS contended that the off-sets were disallowed because the 2000 MOU was terminated in 2008. Upon appeal, the Tax Appeal Tribunal (TAT) upheld the contention of FIRS and ordered Mobil to pay the additional tax assessed. This judgment was upheld by the Federal High Court; hence, this appeal.

ISSUES

The issues before the Court of Appeal were as follows:

i.           Whether the provisions of the 2000 MOU and Petroleum Profits Tax Act (PPTA) provided any basis for the lower court to hold that a new fiscal regime had been introduced.

ii.            Whether the pre-conditions to the termination of the MOU 2000 had been satisfied

iii.          Whether the lower court properly appraised the concept of legitimate expectation, accord and satisfaction as they relate to the purported termination of the 2000 MOU

ARGUMENT OF PARTIES

Mobil submitted that by a combined reading of the 2000 MOU together with Sections 9(2a), 11(1c) and 23(3) of the PPTA, it is evident that the lower court erred in holding that a new fiscal regime had been introduced, it contended that the 2000 MOU is statutorily incorporated in the stated sections of the PPTA and this governed the fiscal regime which is to be applied to determine its ultimate tax liability. Mobil further argued that the Educational Tax off-sets are incentives that are statutorily backed and thus should continue to apply notwithstanding the termination of the agreement until the government comes up with a replacement fiscal regime after due consultation with the parties to the MOU as stated in Clause 7.3 thereof. Regarding the new fiscal regime introduced by virtue of the letter dated 17^th January, 2008, Mobil maintained that there was no “due consultation” arguing that the term due consultation envisages joint consideration which was not the case here and further argued that a new fiscal regime only commenced by 1^st September 2013 by virtue of the letters dated 19^th June, 2013 and 6^th September, 2013.

FIRS submitted that by the combined effect of Clause 7 of the MOU incentives including the Education Tax Off-sets in the said MOU not only ceased to exist but also got replaced by another fiscal regime on 17^th January, 2008 after due consultation with NNPC and Mobil. It argued that Mobil’s disagreement with the letter dated 17^th January 2008 is of no moment as Clause 7.3 requires “due consultation” and not agreement. It further posited that the letters of 2013 only made reference to pricing mechanisms and not Education Tax off-sets and re-iterated that the letter of 17^th January 2008 referred to and replaced the entire incentives provided under MOU 2000 including the Education Tax off-sets.

DECISION OF THE COURT

The court held that Mobil’s arguments are based on the misconception that Clause 7.3 of the 2000 MOU requires an agreement rather than due consultation between the Government and other parties. The Court, referring to the letters dated 17^th January, 2008 and 15^th February, 2008 between the OPTS and the government, further held that the government acting through the Ministry of Petroleum Resources duly consulted with the Industry Negotiating team which represented Mobil before providing the new fiscal regime.

The Court agreed with FIRS that the letters of 2013 only touched on the price mechanisms and categorically stated that the 2000 MOU with its incentives, Education Tax Off sets inclusive had been replaced by a new fiscal regime vide the letter of 17^th January 2008.

On the issue of legitimate expectation, the Court held that the 2000 MOU was terminated vide the letter dated 17^th January, 2008 and this terminated any legitimate expectation arising from the 2000 MOU and whatever accord arose from the said MOU came to an end and therefore the idea of satisfaction of the accord no longer arose.

CONCLUSION

Oil producing companies should therefore note that unless this decision is upturned on appeal, the 2000 MOU was effectively terminated in the year 2008. Thus, every incentive which accrued to the parties of the 2000 MOU ceased applicability from the year 2008 and has been replaced by a new fiscal regime.

However, the only issue with the judgment is its conclusion that the letters of 2013 only touched on the price mechanisms. The realizable price that the letters of 2013 provided for as the agreed price mechanism for 2009 – 2010 is a product of the 2000 MOU. If it accepted as held that the 2000 MOU was terminated in 2008, there would be no basis for the realizable price. The letters of 2013 gave life to 2000 MOU and by extension the incentives set out under the 2000 MOU.

We look forward to the decision of the Supreme Court on this issue.

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