Authored By: Oladosu Praise Rereloluwa
University of Lagos
Introduction
The taxation of petroleum operations in Nigeria forms the backbone of the country’s fiscal regime, with the Petroleum Profits Tax Act (PPTA) providing the legislative framework for assessing and collecting taxes from upstream oil producers. A recurring issue under this Act concerns the deductibility of capital allowances; statutory tax reliefs granted for qualifying capital expenditure.1
As Abiola Sanni aptly notes:
“The principle that tax reliefs must be strictly construed finds support both in Nigerian jurisprudence and international practice. Our courts consistently demand documentary precision before granting allowances.”2
The Court of Appeal’s judgment in Shell Petroleum Development Company v Federal Inland Revenue Service3 addresses the judicial approach to interpreting such tax reliefs and affirms the tax authority’s power to reject claims lacking statutory or evidentiary basis. This case remains a landmark in Nigerian tax jurisprudence, reinforcing the principle that tax exemptions and allowances must be grounded in clear statutory authority, and that tax statutes must be interpreted strictly and literally; never expansively or by implication.4
Case Citation
Shell Petroleum Development Company of Nigeria Ltd v. Federal Inland Revenue Service (2016) LPELR-40072(CA)
Court of Appeal – Port Harcourt Division
Coram: Uzo Ndukwe-Anyanwu JCA, Ibrahim Shata Bdliya JCA, Ugochukwu Anthony Ogakwu JCA
Judgment delivered: 14 July 2016
Facts of the Case
The appellant, Shell Petroleum Development Company of Nigeria (SPDC), a multinational oil company, filed its tax returns and claimed capital allowances on certain expenditures related to its petroleum operations. The Federal Inland Revenue Service (FIRS), acting under its powers to assess and verify returns, audited SPDC’s submissions and subsequently disallowed some of the claimed deductions.5
FIRS contended that the expenditures did not qualify as “capital expenditure” under the Petroleum Profits Tax Act (PPTA),6 and therefore Shell’s tax liability had been understated. A revised assessment was issued, resulting in a significantly higher tax obligation.
Dissatisfied with this assessment, Shell challenged the decision at the Tax Appeal Tribunal (TAT), which upheld FIRS’s position.7 Shell appealed to the Court of Appeal,8 seeking to reverse the ruling of the TAT on the basis that its interpretation of the PPTA provisions was correct and that the expenditures in question were indeed capital in nature.
Issues for Determination
The Court of Appeal was invited to resolve the following legal issues:
- Whether Shell was entitled to claim capital allowances on the disputed expenditures under the PPTA.
- Whether FIRS acted lawfully in disallowing the deductions and issuing a revised assessment.
- Whether the interpretation of the PPTA by the TAT was consistent with the statute’s purpose and text.
Arguments of the Parties
Shell’s Position:
Shell contended that the expenditures were wholly, exclusively, and necessarily incurred for petroleum operations and met the PPTA’s requirements for capital allowances. It argued that its submissions complied with accounting standards and that the FIRS’s rejection was arbitrary and inconsistent with the statutory framework.
FIRS’s Position:
FIRS maintained that not all operational expenditures qualify as capital for tax purposes. It argued that the deductions claimed by Shell did not fall within the closed list of “qualifying capital expenditures” defined under the Second Schedule to the PPTA. It further contended that tax reliefs must be explicitly provided for by law and cannot be inferred. FIRS also justified its reassessment under its statutory duty to ensure compliance and accuracy in tax reporting. It emphasised that tax reliefs must be expressly granted and strictly interpreted, and that it had a statutory duty to ensure accurate assessment of tax liabilities.
Judgment of the Court
The Court of Appeal upheld the decision of the Tax Appeal Tribunal and ruled in favour of the Federal Inland Revenue Service. It held that Shell’s claimed expenditures failed to meet the statutory threshold for capital allowances as set out in the Petroleum Profits Tax Act.
The court reinforced the principle that tax statutes must be interpreted strictly. It stated that companies are not entitled to reliefs or deductions unless they fall clearly and unambiguously within the letter of the law. The justices noted that the PPTA provides a closed list of qualifying capital expenditures and that any extension beyond this list must be expressly made by legislative amendment.
The court affirmed the FIRS’s power to reject unjustified deductions and issue revised assessments where necessary, as part of its statutory obligations. The reassessment was deemed lawful, and Shell’s appeal was accordingly dismissed.
Judicial Principles Established
The Court of Appeal held as follows:
- Taxpayers must strictly comply with statutory criteria in claiming capital allowances.
- Tax statutes must be interpreted literally, and any ambiguity must favour the revenue authority, unless expressly provided otherwise.
- FIRS acted within the law in rejecting Shell’s claims, as the expenditures lacked sufficient statutory basis under the PPTA.
Legal Analysis
The decision of the Court of Appeal in Shell v FIRS9is a critical reaffirmation of two foundational principles in Nigerian tax law: strict interpretation of taxing statutes and the requirement of statutory authority for tax imposition. At the heart of the dispute was the proper construction of provisions under the Petroleum Profits Tax Act (PPTA), particularly in relation to the deductibility of certain capital expenditures claimed by Shell.10
The Court adopted a literal and restrictive approach, consistent with the long-standing judicial position that tax deductions, exemptions, and allowances must not be presumed.11In disallowing Shell’s claims, the Court held that only capital expenditure “wholly, exclusively and necessarily incurred” for petroleum operations, are qualified for deduction.12 General operational or borderline costs were considered insufficiently connected to petroleum exploration and production.
This reasoning aligns with Lord Cairns’ celebrated dictum in Partington v Attorney-General:13
“A taxing statute is to be construed strictly. 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 tax. Nothing is to be read in, nothing is to be implied.”
The judgment of the case is seen to have imposed strict boundaries on the agency’s powers. However, the Court underscored that the FIRS cannot impose taxes, reassess liabilities, or enforce penalties without clear statutory backing.14 Where ambiguity arises, (particularly where it affects liability) it must be resolved in favour of the taxpayer.15 This dual reasoning ensures a balanced approach between revenue enforcement and constitutional protections, particularly the right to fair hearing under Section 36(1) of the Nigerian 1999 Constitution .16
Importantly, the case also aligns with the judgment in FIRS v Agromix Nigeria Ltd17, where the Court nullified a Best of Judgment assessment on grounds of procedural irregularity and lack of taxpayer participation in the audit process. In both Shell and Agromix, the courts demanded evidentiary justification and procedural compliance from the tax authority; strengthening the rule of law in fiscal matters.18
The decision also has significant implications for resource taxation and the investment climate in Nigeria. By enforcing strict compliance with the PPTA’s definitional and procedural standards,19the Court signalled to multinational corporations that Nigeria’s fiscal regime, especially in the oil and gas sector, is not susceptible to arbitrary or discretionary application.
This is particularly crucial given the highly technical and capital-intensive nature of petroleum operations and the state’s dependency on oil revenue.20
Additionally, the Court reaffirmed the FIRS’s statutory audit and reassessment powers under sections 8 and 9 of the FIRS (Establishment) Act 2007,21 but with an important caveat: such powers must be exercised within the confines of due process, transparency, and clear statutory authority. In doing so, the judiciary has drawn a line between legitimate tax administration and overreach.22
Ultimately, Shell v FIRS reflects a maturing jurisprudence where judicial scrutiny of tax enforcement is becoming more rigorous, thereby advancing the twin goals of revenue protection and taxpayer fairness.
Impact and Significance
The decision in Shell Petroleum v FIRS is a landmark in the development of Nigerian tax jurisprudence, particularly in the petroleum sector. The ruling clarified the limits of allowable deductions under the Petroleum Profits Tax Act (PPTA) and reinforced the authority of the Federal Inland Revenue Service (FIRS) to reject unsubstantiated claims of capital expenditure.23
First, the case entrenched the principle of strict statutory interpretation in tax law. Courts reaffirmed that fiscal statutes must be read literally, and no implication or expansion beyond the statute’s express words is permitted.24 This position curbs creative tax planning practices by large corporations, particularly those operating in the extractive industry, who might otherwise seek to exploit statutory ambiguities for tax relief.25
Second, the decision fortifies the powers of FIRS to conduct independent assessments and reassessments of tax liabilities based on audit findings. It confirms that tax authorities need not accept taxpayers’ submissions at face value, especially where the claims fall outside the scope of clearly defined legal provisions.26
Third, the judgment has broader implications for transparency and accountability in Nigeria’s oil and gas sector. With multinational corporations often employing complex accounting frameworks, this decision serves as judicial reinforcement of the need for compliance with domestic fiscal laws.27It also indirectly supports government efforts to plug revenue leakages and increase non-oil revenue mobilisation through effective tax enforcement.28
Lastly, the case serves as a precedent for future tax disputes involving capital allowances, statutory interpretation, and administrative discretion, making it an indispensable authority in Nigerian petroleum tax law.29
Comparative Analysis: Nigerian Position in Shell v FIRS and Global Tax Jurisprudence The Nigerian Court of Appeal’s decision in Shell v FIRS30reflects alignment with global tax adjudication standards. The Court upheld the principle that capital allowances are statutory concessions and must be strictly claimed and proven. Shell had argued that it incurred substantial qualifying capital expenditure under the Petroleum Profits Tax Act (PPTA) and was entitled to capital allowances, even though its documentation lacked sufficient detail. The Court rejected this, holding that the taxpayer bears the burden to precisely substantiate each claim with clear records and statutory linkage.31
This mirrors judicial reasoning in the United Kingdom, where in Hargreaves v Revenue and Customs Commissioners32, the Tribunal ruled:
“It is not sufficient to make a claim without supporting documentation… there must be clear compliance with the statutory criteria.”
In India, the Supreme Court in Vodafone International Holdings BV v Union of India33 affirmed that:
“When it comes to taxation statutes, equity has little role to play. Interpretation must be rooted strictly in legislative text.”
Similarly, in Canada, the Federal Court of Appeal in Canada v Imperial Oil Ltd34 stated: “A taxpayer cannot expect deductions without substantiating the claim. The onus is on the claimant.”
These cases reflect a shared global stance: tax benefits must be granted strictly within the bounds of legislation. Nigerian courts, as in Shell, require documentary evidence and legal precision, not assumptions or equitable arguments.35 This strengthens tax governance and ensures predictability in fiscal adjudication. By adopting this rigorous evidentiary threshold, Nigerian tax jurisprudence adheres to international norms and reinforces investor confidence in rule-based taxation.36
Policy Implications
This case underscores Nigeria’s efforts to tighten tax compliance in the petroleum sector, especially with the backdrop of fiscal constraints and economic diversification.37It also aligns with global trends toward greater transparency and verification in tax administration.38 The decision provides a judicial endorsement of FIRS’s authority to demand accountability from multinational corporations and validates the use of audit mechanisms to prevent revenue leakage.39
However, it also serves as a cautionary tale to regulatory bodies to ensure fair opportunity is given to taxpayers to present their case.40 The balance between revenue mobilisation and investor confidence is delicate, and tax administration must uphold both efficiency and fairness.41
Conclusion
The Shell v FIRS decision affirms the Nigerian judiciary’s commitment to legal certainty, procedural discipline, and statutory interpretation in tax law.42It serves as a crucial precedent in petroleum taxation and reflects an increasingly robust jurisprudence that balances tax enforcement with fairness and clarity.43 As Nigeria continues to seek non-oil revenue and regulatory reform, this case provides a foundation for building a more predictable and transparent tax regime.44
Reference(S):
1 Petroleum Profits Tax Act Cap P13, Laws of the Federation of Nigeria 2004 (as amended), ss 9, 10, 20–23.
2 Abiola Sanni, Nigerian Taxation: Law and Practice (3rd edn, University of Lagos Press 2020) 315.
3(2016) LPELR-40072(CA).
4 See generally Petroleum Profits Tax Act (n 1); Sanni (n 2); Shell v FIRS (n 3).
5 Federal Inland Revenue Service (Establishment) Act 2007, s 8(e); Tax Appeal Tribunal (Establishment) Act 2003, s 11(1).
6 Petroleum Profits Tax Act, Cap P13, Laws of the Federation of Nigeria 2004, ss 10, 20 and 21.
7 Tax Appeal Tribunal, Shell Petroleum Development Company of Nigeria Ltd v Federal Inland Revenue Service, Appeal No: TAT/LZ/CIT/082/2012 (Unreported, 2015).
8 Shell Petroleum Development Company of Nigeria Ltd v Federal Inland Revenue Service (2016) LPELR-40072(CA).
9(2016) LPELR-40072(CA).
10 Petroleum Profits Tax Act, Cap P13 LFN 2004, ss 10–13; Second Schedule.
11 See Ahmadu Bello University v Miss S. A. Molokwu (2003) 9 NWLR (Pt 825) 265 (CA) 288.
12 PPTA, Second Schedule, para 1(a).
13 (1869) LR 4 HL 100, 122 (Lord Cairns).
14 Federal Inland Revenue Service (Establishment) Act 2007, ss 8–12.
15 See FBIR v Integrated Data Services Ltd (2009) 3 TLRN 38 (CA)
16 Constitution of the Federal Republic of Nigeria 1999 (as amended), s 36(1).
17 (2024) 87 TLRN 1 (CA).
18 Shell v FIRS (2016) LPELR-40072(CA).
19 Petroleum Profits Tax Act, Cap P13 LFN 2004, ss 10–13; Second Schedule.
20 See J Iheduru, The Political Economy of Oil and the Reform of Nigeria’s Tax Regime (2018) 36(2) Nigerian Journal of Energy and Environmental Law 155, 161.
21 Federal Inland Revenue Service (Establishment) Act 2007, ss 8–9.
22 See FBIR v Integrated Data Services Ltd (2009) 3 TLRN 38 (CA); Shell v FIRS (n 2).
23 Shell v FIRS (2016) LPELR-40072(CA).
24 ibid; see also Partington v Attorney-General (1869) LR 4 HL 100, 122 (Lord Cairns).
25 O Akanle, ‘Statutory Interpretation and the Tax Avoidance Problem in Nigeria’ (2019) 13(2) Nigerian Tax Review 87.
26 Federal Inland Revenue Service (Establishment) Act 2007, ss 8–9; Shell v FIRS (n 1).
27 E Ojukwu, ‘Fiscal Discipline and the Nigerian Oil Economy: A Legal Examination’ (2020) 26(1) Nigerian Journal of Petroleum and Energy Law 105.
28 OECD, Revenue Statistics in Africa 2023: Nigeria Country Note (OECD Publishing 2023) https://www.oecd.org accessed 25 July 2025.
29 Shell v FIRS (n 1); see also FBIR v Mobil Producing Nigeria Unlimited (2013) 6 TLRN 35 (CA).
30 Shell v FIRS (2016) LPELR-40072(CA).
31 ibid.
32 [2017] UKUT 84 (TCC).
33 (2012) 6 SCC 613 (Supreme Court of India).
34 [2006] FCA 101 (Federal Court of Appeal of Canada).
35 Shell v FIRS (n 1); see also S Gutu and J Shuaib, ‘Taxpayer Obligations and Evidence-Based Compliance in Petroleum Taxation’ (2021) 9(2) African Journal of Tax Law and Policy 55.
36 OECD, Principles of Good Tax Administration (OECD Publishing 2019) https://www.oecd.org/tax accessed 27 July 2025.
37 Shell v FIRS (2016) LPELR-40072(CA); see also International Monetary Fund, Nigeria: Selected Issues in Fiscal Policy (IMF Country Report No. 22/45, 2022) https://www.imf.org/en/Publications/CR/Issues/2022/02/21/Nigeria-Selected-Issues-513885 accessed 27 July 2025.
38 OECD, Tax Administration 2023: Comparative Information on OECD and Other Advanced and Emerging Economies (OECD Publishing 2023) https://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/tax-administration-2023.htm accessed 27 July 2025.
39 Federal Inland Revenue Service Act 2007, ss 8–9; see also S Gutu and J Shuaib, ‘Taxpayer Obligations and Evidence-Based Compliance in Petroleum Taxation’ (2021) 9(2) African Journal of Tax Law and Policy 55
40 Shell v FIRS (n 1); compare Federal Inland Revenue Service v Agromix Nigeria Ltd (2024) 87 TLRN 1, where failure to involve the taxpayer rendered the assessment invalid.
41 C Ijeoma, ‘Revenue Generation, Investor Confidence, and Fair Taxation in Nigeria’s Oil Sector’ (2020) 14(1) Nigerian Journal of Oil and Gas Law 42.
42 Shell v FIRS (2016) LPELR-40072(CA); see also Petroleum Profits Tax Act Cap P13 LFN 2004, s 10
43 I Olofinlade, ‘Judicial Interpretation of Tax Statutes in Nigeria: Towards a Balanced Approach’ (2021) 6(1) Nigerian Tax Research Journal 89, 92
44 OECD, Enhancing Domestic Resource Mobilisation in Nigeria (OECD 2021) https://www.oecd.org/tax/tax-policy/enhancing-domestic-resource-mobilisation-in-nigeria.htm accessed 27 July 2025.
