October 17, 2023
Over the course of the past few years, the Federal Inland Revenue Service (FIRS) has been tenacious in its drive to encourage more companies to be tax-compliant, in the aim of achieving its objective of increasing the level of tax revenue collection. Following the amendments to Section 14 of the Companies Income Tax Act (CITA) in the Finance Act of 2023 and a large-scale intelligence-gathering operation which was coordinated with the assistance of the nation’s maritime authorities, the FIRS decided to direct its attention towards the business activities of the international shipping industry. In line with this, the FIRS launched a tax-investigative exercise into the industry in the form of a tax compliance review exercise, which was focused on the recovery of Companies Income Tax (CIT) liabilities from 2010 to 2019 financial years.
As numerous operators in the industry have begun responding to the correspondence sent out by the tax authorities, there have been multiple developments in regards to general knowledge of the shipping industry and its complicated value-chain.
In this publication, we examine the value chain of the global shipping industry, mode of operation and the tax implications for parties with operations in Nigeria.
The global shipping industry is a complex and inter-related web of different economic agents with specific responsibilities, underpinned by multiple charter-party contracts and arrangements. The value-chain allocates risks to certain parties which may create potential tax footprints for operators beyond their home countries.
As the registered owner of the vessel, the Ship Owner is typically the primary party in the value chain. This could either be an individual or a company that has legal ownership of the vessel and, in some cases, its crew. In some instances, the Ship Owner may lease the vessel(s) out to vessel management companies who will serve as the commercial operator for a vessel or a fleet of vessels on behalf of the Ship Owner.
The Management Company, being the commercial operator of the vessel, acts as the middleman between the Ship Owner and the potential third-party charterers. These companies assist the vessel owners in finding shipping jobs for the vessels and ensuring that those jobs are executed in line with the global shipping regulations. They perform this duty by entering into a charter party agreements, which could be “spot charter” or “time charter” arrangements, with potential third-party charterers.
Charter party agreements are special contracts in the maritime sector for the hire or use of a ship for the carriage of cargo or passengers. Under such agreements, the charterers would become the disponent owners for a certain period of time, as would be outlined in the charter party agreement. The disponent owner can be described as the party involved in chartering the ship directly from the Ship Owner, who would then proceed to charter that same vessel out to others under a sub-charter agreement. The vessel manager earns income based on a pre-agreed commission rate, which may be calculated on the income earned from the disponent vessel owners’ shipping activities.
The charterer of the vessel is the party that charters the vessel out to the actual freight consumer, on a voyage basis or time basis. They generally earn freight and non-freight income from the outbound carriage of goods.
The freight consumer pays for the outbound carriage of the relevant cargo, which they own, from one location to another location. Given the diversity of the business activities in the global value-chain, the tax implications of these arrangements and the taxability of incomes earned will vary accordingly.
In Nigeria, the CIT obligations for non-resident shipping companies with activities in Nigeria, is specified in section 14 of the Companies Income Tax Act (CITA). Section 14(1) of the CITA specifically provides that “where a company other than a Nigerian company carries on the business of transport by sea or air, and any ship or aircraft owned or chartered by it calls at any port or airport in Nigeria, its profits or loss to be deemed to be derived from Nigeria shall be the full profits or loss arising from the carriage of passengers, mails, livestock or goods shipped, or loaded into an aircraft, in Nigeria”.