The rules for determining what constitutes a permanent establishment or fixed base in Nigeria have been straightforward for quite some time. However, the concept of significant economic presence, introduced by the Finance Act 2019, has expanded the ways in which a permanent establishment may be created in Nigeria. The Presidential Executive Order for Planning and Execution of Projects, Promotion of Nigerian Content in Contracts and Science, Engineering and Technology ("Executive Order 5") which came into force on 2nd February 2018 has also introduced new factors to be considered in determining whether a permanent entablement has been created in Nigeria.
Executive Order 5
For non-resident companies providing certain services to agencies of the Federal Government of Nigeria, the local content requirements of Executive Order 5 have had an impact on whether such companies are deemed to have created a permanent establishment in Nigeria. Executive Order 5 seeks the development of local capacity in the Nigeria's information technology and engineering sector through increased Nigerian content in public procurement. To achieve this, it mandates all ministries, departments, and agencies ("MDAs") of the Federal Government to give preference to Nigerian companies and firms during procurement. It also mandates that Nigerian companies or firms (companies with at least 51% control vested in Nigerians) shall be the lead in any consultancy involving joint venture relationships and agreements relating to Law, Engineering, ICT, Architecture, Procurement, Quantity Surveying, etc.
The impact of Executive Order 5 in determining if a non-resident company has created a permanent establishment in Nigeria was brought into sharp focus by the decision of the Tax Appeal Tribunal (the "Tribunal") in New Skies Satellites B.V. v FIRS. New Skies Satellites B.V. ("NSS"), a company incorporated and resident in the Netherlands, provides satellite capacity across the globe. In 2016, NSS entered a contract with CCNL, an entity licensed by an MDA, the National Broadcasting Commission ("NBC"), to provide satellite support for the implementation of NBC's digital switchover in Nigeria. The NBC guaranteed the performance of CCNL's contractual obligations to NSS.
In 2018, the NBC revoked CCNL's licence and assumed the performance of CCNL's obligations to NSS. Subsequently, the NBC requested that a Nigerian entity be made a party to the contract with NSS in compliance with Executive Order 5 which required that in contracts of this nature, a Nigerian entity must be the lead consultant. Accordingly, a new agreement was executed between the NBC, NSS and SES Nigeria Limited ("SNL"), a Nigerian company described by the Tribunal as a related party to NSS.
To obtain clarity on its tax obligations, NSS sought a tax ruling from the Federal Inland Revenue Service ("FIRS") on whether it had a permanent establishment in Nigeria. The FIRS ruled that NSS had indeed created a permanent establishment in Nigeria. Unhappy with the FIRS' decision, NSS filed an appeal at the Tribunal. After hearing the arguments of NSS and the FIRS, the Tribunal found that NSS had created a permanent establishment in Nigeria.
The Tribunal held that pursuant to Executive Order 5, NSS could not have secured the NBC contract without the participation of SNL and that SNL's role in the contract was not merely as a "front" or "dummy" for the foreign entity, but as a provider of a "physical location and [a performer of] responsibilities [under the contract] since the Nigerian company is seen to be representing the Foreign entity". Furthermore, the Tribunal found that the introductory part of the contract stated expressly that SNL was representing NSS in the contract which meant that SNL had the power to conclude contracts on behalf of NSS. In addition, the Tribunal found that payment for the services provided by NSS was to be made through SNL.
While the decision of the Tribunal is correct in the light of the specific facts of the NSS appeal, it should be noted that compliance with Executive Order 5 (by being in a consortium with a Nigerian entity as a lead consultant) does not automatically create a permanent establishment. The decision of the Tribunal highlights the importance of conducting tax checks on transactions before putting pen to paper to determine the likely tax obligations which may arise from any contractual relationships and how they can be avoided. Parties to contracts with MDAs of the Federal Government must conduct these tax checks to ensure that their contracts comply with Executive Order 5 without attracting unnecessary tax liabilities.
Nigeria's constantly evolving tax landscape demands that firms doing business in Nigeria must seek expert counsel to ensure that they are abreast with new laws which can impact on their overall tax outlook.
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