In brief

The FIRS on 24 July 2014 stated at a stakeholder meeting that the income tax returns filed by nonresident companies doing business in Nigeria would no longer be accepted unless accompanied with audited financial statements as well as tax and capital allowance computations.

This directive takes effect from 2014 tax year. The FIRS requires nonresident companies that have already filed their 2014 tax returns to resubmit them as soon as possible.

In detail


In line with section 30 of the Companies Income Tax Act (CITA), the Federal Inland Revenue Service (FIRS) is empowered to assess companies to income tax based on a reasonable percentage of turnover (deemed profits).

In practice, in assessing nonresident companies to tax, the FIRS prescribed a deemed profit of 20% of turnover derived from Nigeria, which is then taxed at the corporate income tax rate of 30%. This results in an effective tax of 6% of turnover.

This assessment basis was widely adopted by nonresident companies, mostly due to its simplicity and the fact that disputes regarding tax deductibility of costs would be avoided.

However, the deemed profit basis is meant to be an alternative basis of assessment. The primary requirement in line with the CITA is that companies file their returns based on actual profits.

Historically, the FIRS had always accepted (and in fact prescribed) the deemed profit tax basis accompanied with a statement of turnover derived from Nigeria as sufficient for tax returns purposes by nonresident companies.

The FIRS letter

The Transfer Pricing unit of the FIRS issued a letter on 24 July 2014, stating that the income tax returns submitted by nonresident companies were not compliant with the provisions of Section 55 of CITA. Section 55 stipulates that companies should submit the following documents along with their duly completed tax returns:

  • Audited financial statements (AFS);
  • Tax and capital allowance computations; and
  • Other documents as required by CITA.

The above items are required in addition to a duly completed self-assessment form to be attested to by a director or secretary of the company and evidence of full or part payment of the tax due.

Based on the law, failure to file returns within 6 months of the end of an accounting year attracts a fine of NGN 25,000 (circa USD 156) for the first month and NGN 5,000 (circa USD 31) for each subsequent month. In addition, the responsible personnel may on conviction be fined up to NGN 100,000 (USD 625) and/or a jail term of up to 2 years. Every company is required to designate a representative who is knowledgeable in tax matters to answer every query relating to the company's tax matters.

Key questions and issues for further considerations

This new position of the FIRS, which is coming as a result of transfer pricing implementation, is meant to provide the FIRS with useful information to ensure full tax compliance and address potential transfer mispricing. This however raises a number of questions:

  1. Would it not be more efficient to request for the additional information on a case by case basis during desk review or tax audits as the cost may outweigh the benefits in many cases?
  2. Should there not be sufficient advance notice to allow a change over given that the FIRS had accepted this established practice to date? In fact, any attempt to file tax returns based on actual profits in the past was resisted by the FIRS.
  3. Does this mean that going forward tax should be paid on actual profit or still on deemed profit? If on actual profit will FIRS refund excess tax where the 5% withholding tax is more than the tax due?
  4. How will the FIRS verify costs relating to a Nigerian PE including head office charges and deal with capital allowances on assets not wholly attributable to the PE?
  5. Would it be sufficient to provide the nonresident company's financial statements or audited accounts of the PE? What if the foreign accounts are in a different language, would there be an extension of time to allow for a translation?
  6. Should there not be a threshold where turnover information could be considered adequate (say based on amount and/or where the duration of a project is less than one year)?
  7. In providing tax and capital allowance computations, how will a nonresident company deal with commencement and cessation rules in the case of a short term project?

The takeaway

The FIRS' directive that nonresident companies must include audited financial statements and 'actual profit' tax computation in their returns is in line with the law albeit there are questions regarding practicability and usefulness of the information within the context of a deemed profit tax regime.

Pending when the FIRS communicates directly with affected entities and/or provides further clarifications, such companies should take necessary to revisit their 2014 tax returns to ensure full compliance sooner rather than later.

This should include submission of the transfer pricing declaration and disclosure forms for 2014.


Due to the change in practice, taxpayers that are affected by the directive should take active steps to file (or refile) their full tax and TP returns for the 2014 tax year.

A related issue to consider by affected nonresident companies is whether their operations in Nigeria comply with Section 54 of the Companies and Allied Matters Act which requires a foreign company doing business in Nigeria to incorporate a Nigerian entity for that purpose. Branch operations are generally prohibited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.