Is the Issue of Tax Arbitrable? (Esso Exploration and Production Nigeria Ltd. v. Nigerian National Petroleum Corporation)

In a recent judgment between Esso Exploration and Production Nigeria Ltd v. Nigerian National Petroleum Corporation (decided on July 8, 2022, and cited as 19-3159 (L) (2d Cir. Jul. 8, 2022)), the United States Court of Appeals for the Second Circuit (“appellate court”) unanimously affirmed the judgment of the United States District Court for the Southern District of New York per Pauley J. (“district court”) which declined to enforce a USD1 billion arbitral award against the Nigerian National Petroleum Corporation (“NNPC”) in favor of Esso Exploration and Production Nigeria Ltd (“Esso”).

In urging the appellate court to discountenance the judgments of the Nigerian courts setting aside part of the Award, Esso attempted to demonstrate to the appellate court that the (‘Nigerian courts’) judgments were offensive to basic notions of justice and decency in the United States, making their enforcement contrary to public policy. However, after comparing the circumstances presented in the case of Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. Pemex-Exploración y Producción (832 F.3d 92 (2d Cir. 2016 (“Pemex”) with the case under review, the appellate court concluded that unlike the grounds of the judgment setting aside the contested award in Pemex, the judgments of the Nigerian courts are owed comity in the United States; hence, affirming the decision of the district court in declining to enforce the Award. Finally, in affirming the judgment of the district court in part and vacating it in part, the appellate court held, however, that the district court erred in failing to enforce the portions of the award that the Nigerian Court of Appeal reinstated and remanded the case for further proceedings consistent with the appellate court’s opinion.

In its judgment, the appellate court observed that under the Production Sharing Contract (“PSC”) between Esso and NNPC (the parties), it was agreed that any oil extracted would be divided, conceptually, into four tranches: (1) tax oil, to cover the taxes owed by Esso under the Nigerian Petroleum Profit Tax (“PPT”) Act; (2) royalty oil, to cover royalty payments owed to the Nigerian Government; (3) cost oil, to cover operating costs, which Esso alone bore; and (4) profit oil, which includes all remaining oil split between Esso and NNPC. Consistent with the tax oil allocation, Esso must calculate its tax liability for the operation and prepare tax returns in accordance with the PPT Act. The PSC further provided that “any dispute …” concerning the “interpretation or performance” of the contract between the parties was subject to binding arbitration, and that such arbitration must be conducted in Nigeria under Nigerian law.

It is a basic understanding of the concept of taxation that each sovereign state has the responsibility of generating revenue by way of taxes and has the power to promulgate relevant statutes and laws to assist in achieving that goal. The Federal Republic of Nigeria being a sovereign state, has its own tax laws, which when juxtaposed with the provisions of the arbitration agreement between the parties, shows that the arbitration agreement may have been couched in such a manner to, albeit in error, extend beyond arbitrable issues. This is more so as the parties’ agreement stated that “any dispute . . . concerning the interpretation or performance of the contract” may be subject to binding arbitration, with the stipulation that any such arbitration must be conducted in Nigeria and under Nigerian law.

By the provisions of the PPT Act, (Section 30 of the PPT Act seen at https://www.firs.gov.ng/wp-content/uploads/2021/01/PPTA.pdf.), every company engaged in petroleum operations in Nigeria is obligated to make an account of its profits and losses arising from their operations for an accounting period and deliver to the Board (the Federal Board of Inland Revenue (the “Board” or “FBIR”)) for the assessment of tax payable to the Federal Government of Nigeria. In performing that duty, the Board (section 35 ibid) is authorized to “assess every company with the tax payable for any accounting period of the company as soon as may be after the expiration of the time allowed to such company for the delivery of the accounts and particulars provided for in section 30,” and “make an assessment accordingly.” (ibid sub-section (2)(a)). Boldened for emphasis). 

Where a dispute arises between the paying entity–the company–and the assessment made by the Board, the power to intervene and adjudicate over such dispute resides exclusively in the Federal High Court (of Nigeria). That court has and exercises jurisdiction to the exclusion of any other court in civil causes and matters: (a) relating to the revenue of the Government of the Federation in which the said Government or any organ thereof or a person suing or being sued on behalf of the said Government is a party; (b) connected with or pertaining to the taxation of companies and other bodies established or carrying on business in Nigeria and all other persons subject to Federal taxation ((section 251(1) and (2) of the 1999 Constitution of the Federal Republic of Nigeria accessed at https://www.wipo.int/edocs/lexdocs/laws/en/ng/ng014en.pdf). Considering the clear provisions of the statute, the parties were not at liberty to confer on an individual or a body adjudicatory power on an issue relating to tax and taxation.

Issue of taxation can therefore be said to constitute one of the contemplated grounds on which recognition and enforcement of an Award may be refused under section V (2) of the New York Convention (1958 United Nations Conference on the international Commercial Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards). The section stipulates that “recognition and enforcement of an arbitral Award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that (a) the subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) the recognition or enforcement of the award would be contrary to the public policy of that country.“ (Boldened for emphasis). Under the current laws of the Federal Republic of Nigeria, taxation is a subject matter that may not be settled by arbitration and for which recognition and enforcement of an arbitral Award may be refused by the competent authority in the country where recognition and enforcement is sought, in this instance the United States courts.

From the foregoing, it is clear that under Nigerian law, taxation issue is not arbitrable, even where the parties to the arbitration agreement agree to arbitrate it. It is common knowledge that parties cannot, by agreement or consent, confer jurisdiction where they have no power to do so. This principle of law is expressed in the Latin maxim–nemo dat quod non habet. Unfortunately, the arbitration agreement between the parties seemed to have missed this crucial point, and instead, lumped up both the issues that were arbitrable and the one that was not arbitrable, into one single bunch by the use of the qualifier “any dispute arising” under the agreement.

With the continuous growth and development of the law, we look forward to a time when the borders of arbitration will be widened and allowed to encompass issues involving taxes and taxation considering the peculiar facts and circumstances of each case. Pending that time, the subtle reminder and gentle advise for both practitioners and arbitrators is “caveat emptor.”

This article was written by Oyeniyi Sodimu, LL.M in International Arbitration, University of Miami School of Law Coral Gables, Florida; LL.M, University of Lagos, Lagos, Nigeria.