Prior to the enactment of the Finance Act, 2019 (FA), Section 13 of the Companies Income Tax Act (CITA) as amended, provided the basis for the taxation of the profits of non-resident companies (NRC) in Nigeria. The provisions of the section required a non-resident company to have an identifiable physical presence ("fixed base" or "permanent establishment") in Nigeria, before the NRC can be deemed to be carrying on a business in Nigeria, for the purpose of taxing its profits.

Based on the provisions, the profits of a foreign company were only liable to CIT where the company, has a fixed base in Nigeria, is involved in a turnkey project, has a business or trade carried on by a dependent agent on its behalf, or where the transactions between the foreign company and a related party are deemed to be artificial or fictitious. In addition, the courts ruled that a fixed base may also be created by the presence of an employee of the NRC or an equipment of the NRC located in an office in Nigeria. Consequently, the emphasis on physical presence, as a trigger for creating a taxable presence created a situation where the profits of some NRCs whose operations did not require any form of physical presence could not be taxed in Nigeria.

The Finance Act however introduced the concept of Significant Economic Presence (SEP) which ensures that even companies with no physical presence in Nigeria can be taxed based on the volume of their economic activities. The SEP primarily creates a taxable presence for NRCs based on their digital/technological footprints in Nigeria. The Minister of Finance is empowered to define what will constitute SEP in Nigeria and in this light, the Companies Income Tax (Significant Economic Presence) Order, 2020 ("the Order") was passed.

This article focuses on the impact of the Order on transactions of foreign companies with Nigerian companies in the consumer markets and financial services sectors in Nigeria.

Provisions of the SEP Order

The Order states that;

  1. An NRC who provides digital or related services via satellite will be deemed to have SEP in Nigeria in any accounting year where it -
    1. derives income of more than ?25million from - streaming or downloading services, transmission of data, digital provision of goods and services, or provision of intermediation services. (For the purpose of determining if a company meets the threshold, activities of connected parties will be aggregated);
    2. uses a Nigerian domain name i.e. (.ng); or
    3. customizes its website to target persons in Nigeria (including but not limited to displaying prices in Naira).
  2. Foreign companies with trade or business relating to technical, professional or consultancy services will be liable to CIT in Nigeria, if such company has SEP in Nigeria. The Order further defines Technical Services as any service of a specialized nature; including advertising services, training or the provision of personnel.
  3. A foreign company under Section 13(2)(e) of the CITA will be deemed to have SEP in Nigeria in an accounting year if it earns any income or receives payment from a person resident in Nigeria, a fixed base or an agent of a foreign company.

However, an NRC will not be considered to have SEP, where it makes payment to its employee under a contract of employment, or for teaching in an educational institution. SEP will also not be applicable where payments are made by foreign fixed base of a Nigerian company.

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