Prior to January 2020 when the first Finance Act was signed into law, the Nigerian tax laws had not been reviewed for several years and tax positions adopted by non-resident companies (NRC) on their Nigerian tax matters tended to subsist for a long time. This has since changed as the Federal Government has used annual Finance Acts as a fiscal tool to amend relevant laws that impact how businesses are carried on in Nigeria.

The introduction of the Finance Act to improve the ease of doing business and align the tax laws to global best practices has been largely positive. To date, about 167 amendments have been introduced and the full impact of these amendments will only be seen in the next couple of years as the business environments improves with the imminent change in Government by May 2023.

As the country awaits the President's assent on the latest Finance Act 2022, this article seeks to evaluate some of the amendments to the tax laws introduced by the Finance Act that impact NRCs operations in Nigeria.

Companies Income Tax – The Quest to Include More NRCs in the Tax Net

On 24 July 2014, the Federal Inland Revenue Service (FIRS) mandated NRCs to file full tax returns like their Nigerian counterparts. This was a departure from the norm as NRCs were previously subject to tax on deemed tax basis. In effect, the NRCs were required to include actual profits made from Nigerian operations, capital allowance computations and audited financial statements effective from 1 January 2015 based on a Public Notice issued by the FIRS. The intention of the FIRS was to have more visibility on the actual financial results of NRC's operations in Nigeria with the hope of collecting more tax revenue.

The above approach did not yield much results as many NRCs reported losses. Some NRCs were also not liable to tax based on the extant laws at the time. Consequently, the basis of taxing NRCs as provided in Section 13 of the Companies Income Tax (CIT) Act was reviewed and amended by the Finance Acts. Currently, NRCs are subjected to tax where;

  1. the NRC has a fixed base (i.e., a place of business) in Nigeria to the extent that the profit is attributable to the fixed base;
  2. the non-resident company habitually operates a trade or business through a person in Nigeria or maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company;
  3. the trade or business or activities of the non-resident involves a single contract for surveys, deliveries, installations or construction;
  4. the non-resident company does not have physical presence in Nigeria but derives income from Nigeria through digital activities to the extent that it has a Significant Economic Presence (SEP) in Nigeria;
  5. the trade or business of the non-resident involves the remote provision of technical, management, consultancy or professional services to a Nigerian resident; and
  6. the trade or business or activities is between the company and a related party, which is considered not to be at arm's length.

The amendments introduced in paragraph (iii) to (v) above brought more NRCs into the tax net even where they did not have a fixed base or permanent establishment in Nigeria. Many NRCS earn more than ₦25m (requirement to qualify for SEP) from remote operations in Nigeria which may not have been the case prior to the amendment. Thus, NRCs operating in Nigeria should review their operations and ascertain that they do not have new tax obligations in Nigeria based on the above.

Are Double Tax Treaties Sufficient to Shield NRCs from Tax?

Nigeria has Double Tax Treaties (DTT) with 16 countries which is aimed at ensuring a company resident in the DTT state suffers tax only once for income derived from any of the contracting jurisdictions. Typically, the DTTs provide that an NRC will only be liable to CIT in Nigeria where it has a Permanent Establishment (PE) in Nigeria. A PE is essentially a Fixed Place of business through which the business of an enterprise is wholly or partly carried on.

Consequently, where there is no PE, there is no CIT applicable to the NRC. Given most DTT between Nigeria and other countries have not been updated to cover remote digital, technical, professional, management or consulting services, an NRC located in a DTT country will not be liable to tax in Nigeria if it does not have a PE in Nigeria (or other conditions for taxation under the DTT) even where the income earned from Nigeria exceeds the SEP threshold. Section 45 of the CITA is very clear that arrangements between Nigeria and other countries under a DTT supersedes the provisions of the CIT Act.

The above notwithstanding, the FIRS issued a circular dated 3 June 2021 on the claim of DTT benefits in Nigeria. Based on the circular, the claim of DTT benefit is no longer automatic as intending companies are required to submit a formal application to the relevant tax authority, complete a certificate of residence and a claim for the applicable tax credit.

In addition, the reduced tax rate of 7.5% applicable on dividends, interests and royalties earned by taxable persons resident in a DTT state has been terminated by the FIRS with effect from 1 July 2022. Consequently, the applicable withholding tax (WHT) rate provided in the enabling laws will apply except where such rate exceeds the maximum rate provided in the applicable DTA. Hence, NRCs receiving passive income based on their investment in Nigerian companies will pay more taxes based on the amendments introduced by the Finance Acts.

Capital Gains Tax and Withdrawal of Incentive Associated with Investment in Nigerian Companies

Prior to the Finance Acts, where a Nigerian company has 25% imported equity, such a company is exempted from minimum tax. Based on the amendment introduced by Finance Act 2019, this incentive has been removed. The introduction was intended to create a level playing ground for Nigerian companies without imported capital. However, this may impact the attractiveness of investing in Nigerian companies given that minimum tax is 2.5% of turnover and investors may have to take loans to pay the minimum tax due to the government where the company is making losses.

In addition, Finance Act 2021 removed the Capital Gains Tax (CGT) exemption on the disposal of shares in a Nigerian company by amending relevant provisions of the Capital Gains Tax. Thus, where a company sells its equity investment in a Nigerian company worth at least ₦100m in any twelve consecutive calendar months, the gains associated with the sale are to be taxed at 10% subject to certain exemptions including where the proceeds from the disposal of the shares are reinvested within the same tax assessment in the acquisition of shares in either the same or another Nigerian company.

Section 32 of the CGT Act was also amended to introduce CGT on restructuring arrangements between related entities. To qualify for exemption from CGT, companies involved in a restructuring exercise must be related for 365 days before the restructuring, either by way of one entity having control over the other entity, both entities having same parent or both entities being members of the same group. In addition, the assets involved in the restructuring exercise must not be disposed within 365 days after the restructuring exercise.

Furthermore, Finance Act 2019 provides that the amount of interest deductible for tax purposes by a Nigerian Company from loan advanced by a related NRC is limited to 30% of Earnings before Interest Tax Depreciation and Amortization ("EBITDA") in each accounting period. Interest in excess of 30% of EBITDA will be deductible within a maximum period of five years.

Key Amendments Relating to Transaction Taxes

For several years prior to the Finance Acts, the Value Added Tax (VAT) implication of services provided by an NRC to persons in Nigeria was in dispute. Section 10 of the VAT Act required NRCs carrying on business in Nigeria to register for tax and include VAT in the invoice issued for the services provided. However, the definition of "carrying on business" was not provided in the VAT Act.

The latest court case on this issue was the 2019 Court of Appeal (COA) case between Vodacom and the FIRS where the COA ruled that the supply of satellite bandwidth to the satellite transponders located in Nigeria is liable to VAT.

The above notwithstanding, services provided by an NRC to persons in Nigeria were not liable to VAT where those services were provided exclusively outside Nigerian Tax Jurisdiction. However, the Finance Act has laid all controversies on the matter to rest by shifting the determinant of the VAT implication on such transaction from where the service was provided to where the beneficiary of the service is registered or located. Consequently, a service will be liable to VAT in Nigeria if the service is provided by a person physically present in Nigeria at the time the service is provided in Nigeria or if the service is provided to a person in Nigeria, regardless of whether the service are rendered within or outside Nigeria. Based on the amendments, the Nigerian beneficiary is required to self-account for the VAT even where the services are provided entirely outside Nigerian tax jurisdiction.

The above exposes cross-border transactions to double tax and additional cost as the Nigerian company may be required to pay the local transaction tax where the foreign company is resident. Conversely, where the services are provided by a Nigerian Company to a person outside Nigeria, such services are considered to be exported service and not liable to VAT. The amendment to the VAT Act which exempts companies with revenue less than ₦25m is a welcome development targeted at small and medium scale enterprises. However, this may not be beneficial to NRCs as most Nigerian operations exceed ₦25m (about $55,000) revenue.

Similarly, where an NRC provides technical, consultancy, management, or professional services outside Nigeria, the fees earned are liable to WHT deduction provided the fees exceed $25m. What typically happens in practice is that the service provider increases the cost of providing this service by the WHT amount, thus increasing the cost of doing business.

Furthermore, prior to the Finance Act amendments, foreign companies could enjoy full (100%) or partial (10%, 40% or 70%) WHT exemptions on interest relating to loans advanced to Nigerian companies provided the terms of the loan meet certain moratorium / grace period in the CIT Act. The Finance Act modified the exemption to 70%, 40% and 10% thus reducing the incentive available to NRCs on such loans.

Other proposed Amendments to consider in the 2022 Finance Bill

  • To avoid double taxation, importation of taxable goods purchased through an online electronic or digital platform operated by a Non-Resident Supplier (appointed as a VAT collecting agent of FIRS) into Nigeria are not subject to VAT at the point of clearance with the Nigerian Customs Service where the importer furnishes evidence of registration or appointment of such collecting agent with the FIRS and VAT charged on the sales invoices of the goods.
  • Imposition of a levy of 0.5% on all eligible goods imported into Nigeria from outside Africa to finance capital contributions, subscriptions and other financial obligations to the Africa Union, African Development Bank, Africa Export-Import Bank and other multilateral institution.
  • The scope of services liable to excise duty under the Customs, Excise Tariff, etc. (Consolidation) Act is to be expanded to include all services.
  • Introduction of 50% investment tax credit on qualifying expenditure incurred by medium and large companies involved in the commercial winning, capture, production and utilization of associated and non-associated gas.
  • Introduction of a new corporate tax rate of 50% to be levied on Companies engaged in gas flaring.
  • Removal of Investment Allowance of 10% applicable on capital expenditure incurred on plant and equipment. In addition, the Rural Investment Allowance ranging from 15% to 100% applicable on capital expenditure incurred for the provision of certain facilities for the purpose of trade or business which is located at least 20 kilometers away from such facilities provided by the government has also been removed.

Tax as a Fiscal Tool to Provide Stable Source of Government Revenue

Amidst crude oil price volatility and reduced crude oil production which fell by 23% (1.14 million barrels per day1) in 2022, the amendments to the tax laws introduced by the Financial Acts have helped the government increase its tax revenues. Few days ago, the FIRS reported that it collected ₦10.1trillion2 as tax revenue in 2022 which is about 63% higher than the tax collected in 2021. Although some analysts opine that there has not been much improvement in dollar terms, this is an indication that the Government can place more reliance on taxes as a stable source of revenue.

The FIRS has made tremendous efforts in digitalizing tax compliance process with the introduction of TaxPro Max; an online digital platform that allows taxpayers submit tax returns online. While there are views that the online tool impacts on the right of the taxpayer to self-assessment since approvals have to be obtained from the FIRS for the treatment of certain tax items, the TaxPro Max has reduced the cost of compliance for both taxpayers and the tax authority. With the introduction of online instant issuance of Tax Clearance Certificate which typically takes two weeks or more before approval is granted, it is expected that the FIRS will make more improvements that will positively impact the tax administration and compliance.

The above notwithstanding, it is not clear whether there is a direct relationship between the declining FDI and the amendments to the tax laws as there are other factors that may be contributory to the decline in foreign investment inflows like the challenging foreign exchange regime and insecurity in some parts of the country. Given the World Bank's growth projection of 2.9%3 for 2023, the Nigerian Government must be mindful to strike a balance between the quest for increased tax revenues and the need to stimulate economic growth. There will be more tax revenue where economic activities improve and the citizens can link the taxes collected with increased social infrastructure provided by the government that impact the quality of life of the citizens.

According to the International Monetary Fund (IMF), tax to GDP ratio should be at least 123/4%4 to accelerate economic growth and development. In 2020, Nigeria's Tax to GDP ratio dropped to 5.5%5 due to the impact of Covid-19 pandemic. For context, this was the lowest in Africa and the Organization for Economic Co-operation and Development (OECD) average is 33.5%. The Nigerian Government must find creative ways to improve the Tax to GDP ratio by expanding the tax net to include the informal sector and show more accountability on how taxes collected are utilized.


As the Nation prepares for elections in few days, the next Government will have to evaluate the existing tax regime in order to simplify it further, expand the tax base and explore new initiatives that will attract the much-needed investment to stimulate the economy. NRCs should continue to monitor developments in the tax space so they can take full advantage of the investment opportunities that exist in Africa's biggest economy.







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