Shift in interpretation of tax statute

BY TUNDE ESAN

The time honoured cannon of interpretation of tax statutes is to apply the literal rule.

Rowlatt J. in CAPE BRANDY vs IRC (1921) 2K.B 403 held thus:

“In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One is to look fairly at the language used”.

The courts adopted the above literal rule of interpretation and in IRC vs Vayrshire Employers Mutual Insurance Association Ltd (1946) 1 ALL E.R. 637, a case where a legislation intended to increase the tax net failed to achieve its desired objective, Lord Simmons held that: “It is at least clear what is the gap that it is intended to be filled; hardly less clear is how it is intended to fill the gap. Yet I can come to no other conclusion that the language of the section fails to achieve its apparent purpose and I must decline to insert words or phrase which might succeed where the draftsman failed”.

The literal rule of interpretation is based on the fact that taxing statutes are punitive in nature and so they are interpreted strictly in favour of the citizens. In S.A. Authority vs Regional Tax Board (1966) NCR 452 and Aderawo Timber Company Limited vs FBIR (1966) NCLR 416 at 422, Nigerian Courts also adopted the literal rule of interpretation.

It was assumed as settled that the applicable rule of construction of tax statutes was the literal rule until the decision of Bello JSC (as he then was) in 1977 in the case of Mobil Oil Nigeria Ltd vs Federal Board of Inland Revenue (1977) 1 NCLR 1 where he held inter alia: “In considering a statute, regard shall be given to the cause and necessity of the Act and then such construction shall be put upon it as would promote its purpose and arrest the mischief which it is intended to deter”.

The implication of Bello JSC’s dictum was that a tax statute was treated like any other statute where the mischief rule is applicable to discover the intendment of the legislature as against Rowlatt J’s observation in Cape Brandy vs. IRC (Supra) where he stated unequivocally that there is no room for intendment in construing a taxing statute. Also, the decision made it clear that a purposive interpretation is applicable in interpreting a taxing statute rather than a literal rule and its narrow strictures.

The supreme court also repeated this position that a purposive approach rather than a literal approach is applicable to tax statutes interpretation in the case of Shell Petroleum Development Company Limited vs Federal Board of Inland Revenue (1996) 8 NWLR (Pt 466) 256, where it applied equitable considerations in interpreting a tax statute.

By virtue of the doctrine of stare decisis, supreme court’s decisions are binding on all lower courts but the lower courts in open defiance of the rule of hierarchy of courts and without bothering to hide under the protection of distinguishing the facts as reason for non-compliance with the supreme court’s decisions on purposive nature of construing taxing statutes continued to apply the literal rule of construction of taxing statutes.

In Halliburton West Africa Limited V Federal Board of Inland Revenue N.R.L.R 2 (2013) 10 at P.34 Mustapha J (as he then was) stated unequivocally that:

“Tax Laws are interpreted strictly; a tax payer has a right to stand upon literal construction of the words used in a taxing statute whatever might be the consequences”.

Also in 7UP Bottling Company Plc V Lagos State Inland Revenue Board N.R.L.R 2 (2013) P.105 at 122-123) the Court of Appeal held interalia:

“Taxation provisions are strictly interpreted…..If a person sought to be taxed comes within the letter of the law, then such a person must be taxed. On the other hand, if the tax authority seeking to recover tax from a person is unable to bring him within the letter of the law, the person will be free, however apparently within the spirit of the law his case ought otherwise to be”.

Can the purposive interpretation of taxing statute displace the literal rule? The answer must be in the affirmative given the decision in Barclays Mercantile Business Finance Limited vs Mawson (2004) UKHL 51 STC 1 where Lord Nicholls stated unequivocally that:

“As Lord Steyn explained in IRC vs Mc Guckian the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language so far as possible in a way which best gives effect to that purpose” and that “Ramsay case liberated the construction of revenue statutes from being both literal and blinkered”.

The essence of the purposive approach is not to discard the literal approach in its entirety but that where the literal approach fails; the statute and every word in it can be examined to determine the intendment of the taxing statute. Therefore, it has been argued and forcefully too that an insistence on a literal construction of a taxing statute instead of a wider purposive interpretation may hurt rather than protect the subject of the tax.

It is interesting that centuries’ old interpretation by literal rule was challenged forcefully and brilliantly by the supreme court of Nigeria as far back as 1977 (Mobil Oil v FBIR) while the wisdom in a purposive interpretation of taxing statute became an international issue for discourse only in 2004, when the House of Lords adopted the same in Barclay’s case (supra).

Though taxing statutes are becoming more clinical and elaborate in order to combat the ever rising spate of contentious but legal tax avoidance schemes such as tax havens, there are many instances where only a resort to the purposive rule of interpretation will enable the court give effect to the intendment of the taxing statute.