Taxation of Non-Resident Companies with Significant Economic Presence in Nigeria

Tuesday, August 04, 2020 / 04:40PM / Olisa Agbakoba Legal /Header Image Credit: Oxford University Press

Introduction

The Finance Act 2019 (“the Finance Act” or “the Act”) was signed into law on 3 February 2020. The major aim of the Act
is to make the provisions of existing tax legislations more responsive to tax
reform. The Act amended the Companies Income Tax Act, Cap C21, Value Added Tax
Act, Cap. V1, Customs and Excise Tariff, Etc. (Consolidation) Act, Cap. C49,
Personal Income Act, Cap. P8, Capital Gains Tax Act, Cap. C1, Stamp Duties Act,
Cap. S8 and Petroleum Profit Tax Act, Cap. P13, Laws of the Federation of
Nigeria 2004.

One of the highlights of the Act is the
introduction of a new tax regime for non-Nigerian companies with ‘significant economic presence’ (“SEP”)
in Nigeria. Section 4 of the Finance Act amended Section 13(2) (c), (e) and (4)
of the Companies Income Tax Act and empowered the Minister of Finance to, by
order; determine what constitutes the significant economic presence of a
company other than a Nigerian company.

In exercise of the above powers, the
Honourable Minister of Finance, Budget and National Planning made the Companies
Income Tax (Significant Economic Presence) Order, 2020 (“the Order”).

The Order sets out, among other things,
the criteria for determining non-resident companies with significant economic
presence.

Significant Economic
Presence as Basis for Taxation of Foreign Companies

Section 13(2) (c), (e) and (4) of the
Companies Income Tax Act(“CITA”) as amended by Section 4 of the Finance Act
provides as follows:

“The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from or taxable in Nigeria:

(c) if it transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity;

(e) if the trade or business comprises of furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria;

Provided that the withholding tax income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection (2) (a)-(e).

(4) For the purpose of subsection (2) (c) and (e), the Minister may by order, determine what constitutes the significant economic present of a company other than a Nigerian company.”

In the light of the foregoing, the
Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”)
provides that for the purpose of the above provisions of CITA, a non-Nigerian
company shall have significant economic presence in Nigeria where it derives
gross turnover or income of more than N25 million or its
equivalent in other countries, in that year, from any or combination of the
following:

“(i)streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games and e-books to any person in Nigeria,

(ii) transmission of data collected about Nigerian users which has been generated from such users’ activities on a digital interface including website or mobile applications,

(iii) provisions of goods or services… directly or indirectly through a digital platform to Nigeria, or

(iv) provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria”;

In determining the N25 million threshold
above, the activities of connected persons shall be aggregated. The Order
defines “connected persons” to mean associates or business associates where one
person is involved in the management, control or capital of the other or where
same person or persons are involved in the management, control or capital of
both enterprises.

The Order also provides that where a
non-resident company uses Nigerian domain name (.ng) or registers a website
address in Nigeria; or has a purposeful and sustained interaction with persons
in Nigeria, including reflecting the prices of its products and services in
Nigerian currency or providing options for billing or payment in Nigeria
currency, such company will be deemed to have significance economic presence in
Nigeria.

Furthermore, a non-resident company will
be deemed to have significant economic presence in Nigeria if the company
provides technical (including advertising services, training and provision of
personnel), professional, management or consultancy services in return for
payment to a person resident in Nigeria or to a non-Nigerian company with a
fixed base or agent in Nigeria except where such payment is made to an employee
of the person to whom the services are rendered under a contract of employee as
well as payments made for educational purposes or by a foreign base of a
Nigerian company.

The Order defines “any other electronic
or wireless apparatus” as used in Section 13(2)(c) of the Finance Act to
include digital or related activities carried on through satellite.

Implications of this New
Tax Regime

In the light of the foregoing,
non-resident companies with SEP are now required to register for income taxes,
prepare financial statements in respect of the income generate from Nigeria;
determine the profits that are attributable to their activities in Nigeria, and
file annual tax returns to the Federal Inland Revenue Service (“the FIRS”) as
provided by CITA.

On the other hand, Nigerian companies
are now required to deduct withholding tax (“WHT”) from payments made for services
provided by non-Nigerian companies.

Additionally, the Order provides that
foreign companies covered under any multilateral agreement to which Nigeria is
a party, or any consensus arrangement aimed at addressing the tax challenges
arising from the digitalization of the economy, will be treated in accordance
such agreement or arrangement from the effective date in Nigeria.

This is noteworthy since Nigeria is a
member of the Organization for Economic Co-operation and Development’s
Inclusive Framework on Base Erosion and Profit Shifting (“the OECD Framework on
BEPS” or “the framework”). Thus, the government recognizes that an agreement
may be reached under the framework on a unified approach for the allocation of
taxing rights and profits pertaining to SEPs.

However, the framework’s current unified
approach will only apply to groups with annual revenues above â‚¬750 million
($840 million). Also, even where this threshold is met, a group may still be
excluded from the scope of the approach if its profit margins are below a
threshold which is yet to be determined. The implication of the foregoing is
that many non-resident groups that do not qualify to be taxed under the current
unified approach may continue to be taxed under the extant SEP Order and the applicable
rules.

It is therefore advisable for
non-resident companies who wish to rely on the any tax treaties or consensual
arrangement including the OECD Framework on BEPS, to engage FIRS in this
regard, to claim benefit under such arrangement.

Challenges

The first challenge to be noted with
respect to this tax regime is that while the Order was published on 29 May
2020, the effective date is 3 February 2020 which is the effective date of the
Finance Act, having been signed by the President of Nigeria on that day. The
implication of this on transactions and/or payments carried out before 29 May
2020 is still unclear. It is expected that the Minister and/or FIRS will issue
a circular to provide guidance in this regard.

It is also not clear how the FIRS
intends to enforce this Order with respect to non-resident digital companies.
While Nigerian customers of such companies may be expected to make withholding
tax (“WHT”) deductions and remit to FIRS; FIRS may yet issue a circular to this
effect.

Moreover, neither the Finance Act nor
the Order states how to determine the amount of profits of a foreign digital
company that will be taxed. While the OECD public consultation document, of 13
February 2019 on Addressing the Tax
Challenges of the Digitalisation of the Economy, contemplates that only a
portion of the profits from the transaction should be taxed in the jurisdiction
where the non-resident company has significant economic presence, it is not yet
settled whether this can be applied in Nigeria in view of the arm’s length
principle of profit attribution provided in the Income Tax (Transfer Pricing)
Regulation 2018 and other relevant legislations, and reemphasized by the Tax
Appeal Tribunal in the case of Prime Plastichem Nigeria Limited v. Federal
Inland Revenue Service, Appeal No.: TAT/LZ/CIT/015/2017, judgment delivered on 19 February
2020. Thus, fractional apportionment of profit may only apply to companies with
SEP, if a new legislation or guideline is introduced to allow such method of
determining taxable profit.

In practice, when FIRS is unsure about
the taxable profits of non-residents, an assessment is based on a percentage
(usually 6%) of the Nigerian sourced turnover. It must however be noted that
companies with SEP are not included in the categories of non-residents that can
be taxed in this manner. Nevertheless, FIRS can still employ this method of
taxation, relying on sections 30 and 65 of CITA that allows FIRS to tax
companies using a best of judgment assessment.

Conclusion

Non-resident companies with a customer
base in Nigeria are advised to consider how this new tax regime affects them.
While we await clarifications from FIRS on the gray areas pointed out above,
affected companies may, in the meantime, engage FIRS on these issues. This will
help to avoid disputes and possible double taxation.

Nigerian companies are also advised to
consider deducting WHT from payments made to non-resident digital companies in
view of this new tax regime.

Non-resident companies with SEP in
Nigeria are also advised to bear in mind the provisions of relevant treaties
and arrangements that may affect their tax liability when negotiating
agreements. Both resident and non-resident companies are advised to seek expert
opinion on specific issues that may affect them.

Contact
Persons

Ugochukwu Eze Ifeatu
Medidem

Trainee Associate Senior
Associate/Practice Manager,

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