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Abdulkabir Badmos1
With the transformation of the world into a global village, the need to conduct cross-border businesses has become inevitable with increased growth in global trade and investments. Under Nigerian law however, a foreign company may not carry on business in Nigeria without incorporation. Elsewhere, the opinion has also been expressed that transactions involving foreign companies is one taxable under the Value Added Tax (VAT) Act.2 What therefore makes “carrying on” business on the one hand without incorporation illegal and the transaction so conducted subject to tax? In this article, we examine the Supreme Court decision in CITEC INT'L ESTATES LTD v. EDICOMISA INT'L INC & ASSOCIATES3 and the subsequent judicial pronouncements with some recommendations for law reform.
By virtue of Sections 54 and 554 of the Companies and Allied Matters Act,5 without registration, a foreign company is prohibited from doing business in Nigeria except it falls within any of the exceptions stated in that section. Section 54 (1) provides:
“(1) Subject to sections 56 to 59 of this Act, every foreign company which before or after the commencement of this Act was incorporated outside Nigeria, and having the intention of carrying on business in Nigeria, shall take all steps necessary to obtain incorporation as a separate entity in Nigeria for that purpose, but until so incorporated, the foreign company shall not carry on business in Nigeria or exercise any of the powers of a registered company and shall not have a place of business or an address for service of documents or processes in Nigeria for any purpose other than the receipt of notices and other documents, as matters preliminary to incorporation under this Act.”
Demonstrating a clear intention to criminalize any business activity of these unregistered foreign companies, Section 55 of CAMA provides for penalties for breach as follows:
“If any foreign company fails to comply with the requirements of section 54 of this Act in so far as they may apply to the company, the company shall be guilty of an offence and liable on conviction to a fine of not less than N2,500; and every officer or agent of the company who knowingly and willfully authorizes or permits the default or failure to comply shall, whether or not the company is also convicted of any offence, be liable on conviction to a fine of not less than N250 and where the offence is a continuing one to a further fine of N25 for every day during which the default continues.”
Thus, it is beyond argument that CAMA prohibits business activities by unregistered foreign companies in Nigeria, the paltry sum of the penalty notwithstanding. It is settled that where a piece of legislation prescribes penalties for a particular act, it is illegal, intended to be punitive and defaulters will be criminally culpable.6
In the case of CITEC INT'L ESTATES LTD v. EDICOMISA INT'L INC & ASSOCIATES7 the Supreme Court of Nigeria was invited to interpret the above cited provisions of CAMA. The brief facts of the case are that the Appellant employed the Respondent (a company registered under the laws of the United States of America, with its principal business address in Madrid, Spain) as consultants to supply some machinery, equipment, and vehicles to some factories it was building at Nbera District of Abuja. Dispute arose when it was alleged that the Respondent supplied second-hand and fairly-used equipment contrary to the terms of the agreement, following which the Appellant terminated the contract. Aggrieved by the termination, the Respondent commenced an action at the trial court seeking mandatory order of injunction, special and general damages.
By way of a preliminary objection, the Appellant challenged the jurisdiction of the trial court on many grounds including the ground that the contract was a nullity having been entered into by the Respondent who was not incorporated under CAMA.
The trial court upheld the objection holding that the Respondent having not been incorporated in Nigeria lacked legal capacity to enforce the contract. On appeal to the Court of Appeal, the decision of the trial court was reversed on the ground that evidence ought to be allowed to be led before Respondent's legal capacity could be determined.
On further appeal to the Supreme Court, the decision of the Court of Appeal was set aside and the trial court's decision was affirmed. KEKERE-EKUN, JSC8 in interpreting sections 54 and 55 of CAMA held thus:
“I have had a careful look at the provisions of sections 54 and 55 of CAMA reproduced above. The language employed therein is clear and unambiguous. Section 54(1) clearly states that every foreign company incorporated outside Nigeria before or after the commencement of the Act must take steps to obtain incorporation in Nigeria. Until the process is complete and certificate of incorporation issued, the company is not entitled to carry on business in Nigeria nor can it exercise any of the powers of a registered company. It is forbidden from having a place of business or an address for service of processes in Nigeria for any purpose other than the receipt of notice and other documents, as matters preliminary to incorporation… I am of the considered view that the findings of the trial court, reproduced earlier, is a correct statement of the law on this issue. There is no doubt that the respondent is carrying on business in Nigeria without being incorporated under CAMA and therefore was in breach of section 54(1) of the Act. The consequence of the non-compliance is clearly spelt out in subsection (2). The agreement is null and void.”
EJEMBI EKO, JSC, further reiterating the illegality of foreign companies doing business in Nigeria without incorporation equally held as follows:
“Where a foreign company, not registered in Nigeria, purports to carry on business in Nigeria in defiance of section 54(1) of the Companies and Allied Matters Act, such a business is not only void, it is illegal and a crime to do so. That is the legislative intent or purpose of section 54(2) and 55 of the Companies and Allied Matters Act. It is the interpretational responsibility or function of the Court to construe statutory provisions to bring out and promote its purpose. The legislature enacted sections 54 and 55 not to allow a foreign company without being first duly registered in Nigeria in accordance with the provisions of the Companies and Allied Matters Act. That is why the conduct is expressly criminalized by section 55 of the Act.”9
From the above pronouncements of the apex court, it is not in any dispute that the law as at today is that a foreign company cannot legally do business in Nigeria without first acquiring the garb of incorporation. The illegality of the transaction/business so entered by an unregistered foreign company would stand as a bar from the enforceability of the contract. This bar, it is important to note, is limited to enforceability of the contract, and does not generally extend to the legal capacity of a foreign company to sue and be sued in Nigeria.
This distinction is necessary in view of the provisions of Section 60(b) of CAMA which provides: “nothing in this Chapter shall be construed as affecting the rights or liability of a foreign company to sue or be sued in its name or in the name of its agent.” As such, a foreign company can validly sue or be sued in Nigeria on a contract it entered outside Nigeria where, for instance, it is merely to enforce a claim against a person resident in Nigeria.10
The decision in CITEC has thus reaffirmed the belief that any foreign company that “carries on business” in Nigeria without registration is engaged in an illegality and such contracts would be null and void, as enforceable rights and liabilities cannot validly arise therefrom.
The Court of Appeal, in the case of VODACOM BUSINESS (NIG) LTD v. FIRS11 while considering the provisions of section 10 of the Value Added Tax Act12 held that a non-resident company (NRC) that supplies satellite network bandwidth services to a Nigerian company from its satellite in the orbit falls within the definition of “carrying on business in Nigeria” and as such the transaction is VATable. The court held:
“… The service to the Appellant by the non-resident foreign company was provided for a consideration, so it is a supply of service within the VAT Act. 'Imported service' is defined as service rendered in Nigeria by a non-resident person to a person inside Nigeria. Again, the foreign company is a non-resident person. The Appellant is a person inside Nigeria. The crucial question is whether Satellite network bandwidth capacities service which is the transaction between them is a service rendered in Nigeria. The key to unlocking this poser lies in recognizing the fact that the satellite network is in the orbit. It is neither in the residence of the foreign company nor is it in Nigeria. In order for the bandwidth capacities afforded by the Satellite network to be supplied for use, transmission goes to and fro the Satellite by signals, using the Appellant's transponders which are located in Nigeria… The reasoning and conclusion of the lower Court in this regard is unassailable. The integral construction of the stipulations of Sections 2, 10 and 46 of the VAT Act leads to the indubitable conclusion that the transaction between the Appellant and the non-resident foreign company is one for which the services were supplied in Nigeria. It is therefore VATable.“13
From the VODACOM case, it is clear that central to the reasoning of the court is the fact that the transaction falls within the definition of services “supplied in Nigeria”, and as such subject to VAT. First, the writer is not unmindful of the settled position of the law that the burden to pay VAT is usually borne by the consumer of the goods and services, the Nigerian company in this case. In fact, under the VAT Act, it is the Nigerian company that is required to remit the tax in the currency of the transaction.14
Since it is the Nigerian company that bears the liability, it was not surprising that they flew the kite of the defence of illegality of the contract before the Tribunal. However, when the Court of Appeal was confronted with the provisions of section 54 of CAMA vis-à-vis section 10(1) VAT Act, it made a distinction largely as to the purpose of the two legislations. OGAKWU JCA held:
“Without a doubt, Section 54 (1) of the Companies and Allied Matters Act stipulates that a foreign company shall not carry on business in Nigeria and shall not have a place of business or address for service of documents or processes in Nigeria for any purpose other than the receipt of notices and other documents as matters preliminary to incorporation in Nigeria under the Companies and Allied Matters Act. The said provision can however not be used as the basis upon which to construe “carries on business” as employed in Section 10 (1) of the VAT Act. This is because the thrust and purpose of the two legislations are not the same. The stipulation of the Companies and Allied Matters [sic] expressly forbids a foreign company from having a correspondence address in Nigeria except for purpose of preliminaries for incorporation in Nigeria. Contrariwise, the VAT Act recognizes that there could be intangible business transactions, as in the circumstances of this matter where a non-resident company carries on business in Nigeria, and expressly provides that in such circumstances the non-resident company is to use the address of the person with whom it has a subsisting contract as its address for purposes of correspondence relating to tax.“15
While the writer agrees that it is trite that each case is to be decided on its own peculiar facts, the distinction sought to be drawn by the Court of Appeal herein is like that of six and half dozen, especially when viewed through the prism of the Supreme Court decision in CITEC. In the same decision, the Court of Appeal had specifically found as follows:
“The bandwidth capacities are supplied in and are continuously utilised in Nigeria. So, by the nature of the transaction, the non-resident company has not merely done business with a Nigerian company, it continues doing something and therefore carries on business in Nigeria.“
The question that then arises is whether the finding of court that the non-resident company carries on business in Nigeria, which is hitherto illegal, is capable of conferring the FIRS with legal rights to demand for tax on the transaction? EKO, JSC answers this poser in CITEC16 where he held:
“An illegal act, that is a void act, does not confer any legal right whatsoever. In the instant case, the transaction or contract the Respondent wanted to enforce against the appellant was, by statute, an illegal and void contract or transaction. The respondent had no right in law to enforce such an illegality. The combined effect of sections 54(1) & (2) and 55 of CAMA which made it illegal for a foreign company to carry on business in Nigeria without first being duly registered to do so was that the transaction or the contract a foreign company, had with the appellant was an unenforceable transaction or contract.“
It is clear from the above that the Supreme Court has created no exceptions to the illegality of transactions entered into by unregistered foreign companies. Just like the CITEC, the Supreme Court did not bat an eyelid in jettisoning the emotive (sometimes legal) argument that a beneficiary of a contract cannot set up illegality as a defence to its enforcement.17
I am therefore of the opinion that although it is unclear right now whether the VODACOM case is on further appeal to the Supreme Court, the apex court ought to have another look at the VODACOM case. It accords with the principle of stare decisis for legal practitioners to be able to advise clients with a level of certainty on the law regarding any subject.
While it may be argued that the pronouncements in VODACOM regarding this subject are mere obiter dicta, it is the responsibility of the apex court to pronounce on the issue with a measure of finality. The exception of transactions involving foreign companies engaged in satellite services unconsciously created by the Court of Appeal in VODACOM solely to bring them within the tax net, is one that needs revisiting. To ask again, what makes transactions involving unregistered foreign companies susceptible to tax but are legally restricted from conducting businesses locally?
Although it is conceded that the principle of tax neutrality presupposes that the illegality of a transaction has no interest on its taxability.18 Once the transaction meets the requirement for it to be taxed, it should be subject to VAT. In other words, income generated from an illegal activity should be taxed irrespective of any other consideration.
It is also noteworthy that many charging provisions of taxing statutes do not take into account the legality of the transactions. However, the Court in VODACOM's case did not reference the principle of tax neutrality in reaching its decision as it did. In my opinion, in view of strict rules that relates to taxation in many commonwealth countries, there is an obvious need for clarity if indeed there is now a judicial amendment to sections 78 and 79 of CAMA.
In the writer's view, there ought to be a further amendment to sections 78 and 79 of the newly gazetted CAMA 2020, which essentially retain the provisions of sections 54(1) & (2) and 55 of the now repealed CAMA, 2004, to reflect these “judicial amendments” as it is settled law that courts do not make law but interpret laws.19 This view is however, with the supposition that the Supreme Court later agrees with the VODACOM decision, if it goes on further appeal.
The philosophy behind holding foreign companies to the requirement of registration before they can carry on business in Nigeria, in my view, may not be unconnected with the desire to check financial crimes and money laundering and corporate fraud. In other words, it is a rule in promotion of public policy. The tacit exclusion of transactions involving foreign companies for the purpose of taxation may have opened a new vista in this regard and the need for clear judicial and legislative intervention is required.
In conclusion, until the Supreme Court intervenes in the VODACOM decision or until we have a different legislative intervention, the last has not been heard of the legality of transactions entered into by a foreign company which is not registered in Nigeria.
Footnotes
1 Abdulkabir Badmos, Associate Dispute Resolution Department, SPA Ajibade & Co., Lagos, Nigeria.
2 VODACOM BUSINESS (NIG) LTD v. FIRS (2019) LPELR 47865 (CA) per Ogakwu JCA (pp. 24-32, paras E-D).
3 (2018) 3 NWLR (Pt.1606) 332 at 341.
4 Now Sections 78 and 79 of CAMA 2020.
5 Cap. C20, Laws of the Federation of Nigeria 2004.
6 See CITEC INT'L ESTATES LTV. v. EDICOMSA INT'L INC & ASSOCIATES (2018) 3 NWLR (Pt.1606) 332 at 355, paras C-D; 367 para C-D.
7 Supra.
8 Pages 366-367, paras G-H.
9 Pages 356 – 357, paras E-G.
10 See SAEBY JERNSTOBERI MASKINFABRIC A/S v. OLAOGUN ENTERPRISES LTD. (1999) 14 NWLR (Pt. 637) 128; BANK OF BARODA v. IYALABANI CO. LTD (2002) LPELR 743 (SC) per OGUNDARE, J.S.C (pp. 38-39, paras. G-C).
11 Supra., at pp. 24-32, paras E-D).
12 Cap V1 Laws of the Federation of Nigeria 2004.
13 Ibid., (pp. 10 -17, paras F-A).
14 Section 10 (2) VAT Act.
15 Pages 25-26, paras D-A.
16 Pages 355, para E 356, paras C-E.
17 Ibid., p. 361, paras A-B.
18 SP Van Zyl: “The Value Added Tax Implications of Illegal Transactions”, P.E.R. 2011 Volume 14 No. 4, available electronically at http://dx.doi.org/10.4314/pelj.v14i4.11 accessed on 2nd December 2020.
19 See I.G.P. v. A.N.P.P. (2007) 18 NWLR (Pt.1066) 457 at 496 -497, paras G-E.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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