Nigeria's New Tax Laws On Taxation Of Non-Resident Companies: Departing From International Standard Principle

President Bola Ahmed Tinubu signed the four tax bills into law on 26 June 2025. Two of the laws took effect from 26 June 2025 while the Nigeria Tax Act and the Nigeria Tax Administration Act will become effective on 1 January 2026. The laws borrowed from some of the legal framework from other jurisdictions. They departed, in some instances, from the Organization for Economic Cooperation and Development (OECD) Tax Model by giving credence to tax laws from jurisdictions that are no longer at ease with the current international tax framework that is in place to curtail, to an extent, the negative impact of Base Erosion and Profit Shifting (BEPS).

Nigeria has not signed any of the multilateral agreements on tax models for curtailing BEPS, especially those relating to Pillars One and Two. The Federal Government has, however, incorporated most of the suggested tax models into the local legislation. The new laws have also incorporated laws from jurisdictions that completely ignore the principle of limiting tax payments to economic activities that occur within their respective jurisdictions.

In this article, we will be reviewing some of the provisions of the tax laws in respect of taxation of non-resident entities that are at variant with the standard OECD principle. We will also consider some of the unintended consequences on businesses in Nigeria.

Standard principle on taxation of cross border transactions

Nigeria instituted Transfer Pricing Regulations in 2012 (revised in 2018) (The Regulations). The key driver for the Regulations is to enable the country properly assess income derived by multinational enterprises (MNEs) from Nigeria to tax. Two of the objectives of the Regulations are to "ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria..." and "reduce the risk of economic double taxation."¹

The current legal framework for the taxation of income derived by foreign companies in Nigeria follows this model. Section 13(2) of the Companies Income Tax Act, 2007 (as amended by Finance Acts) outlines the conditions precedent that would make foreign companies that are deriving income from Nigeria to be liable to taxation:

1. Creation of fixed base or permanent establishment (PE).
2. Carrying out business through dependent agent.

• Creation of Significant Economic Presence (SEP) through digital platform.

1. Execution of turnkey project.
2. Furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident subject to creation of SEP.
3. Existence of artificial transactions designed to shield taxable income from Nigeria tax.

Each of the conditions clearly aligns with international standard model where the law imposes tax on income derived based on the level of activities attributable to Nigeria's economic zone. Where none of these conditions is present, foreign companies that earn income from Nigeria are not required to pay tax in the country. The framework also ensures that foreign companies from jurisdictions that do not have Double Tax Agreement (DTA) with Nigeria are not exposed to double taxation. Even where a country has DTA with Nigeria, the standard principle is that the foreign companies based in DTA jurisdiction would only obtain credit in their home country for valid taxes that are paid in the host country. If any company pays tax that is not envisaged in the treaty based on the lopsided nature of the host country's tax laws, the affected company would not be able to get reprieve from the tax that it has 'unjustly' suffered.

We have identified some of the provisions in the new tax laws that run contrary to this standard principle.

Newly introduced tax laws for taxation of foreign companies in Nigeria

Part III of the Nigeria Tax Act (2025) outlines the basis for the taxation of non-resident persons in Nigeria. The combined reading of Section 17, subsections 17(3) and 17(3)(b) provides as follows:

"Profits derived from any trade, business, profession or vocation carried on by a non-resident person are taxable in Nigeria where...payment is made by a person resident in Nigeria or a permanent establishment of a non-resident person in Nigeria, in respect of services furnished from outside of Nigeria to a resident of Nigeria or a Nigerian permanent establishment of a non-resident person"

This new provision has extended the taxation of income in some instances to where there is absence of 'economic activities deployed by taxable persons in Nigeria'. This would not "reduce the risk of economic double taxation." The fact of making payment for a service rendered outside of Nigeria to a resident of Nigeria or a Nigeria permanent establishment of a non-resident person should not constitute taxable presence that should trigger income tax liability. It is an overreach where Nigeria will be subjecting an income derived solely outside of Nigeria in respect of economic activities carried out outside the shores of the country to tax.

We have demonstrated this under three scenarios as follows:

1. Services rendered and consumed outside Nigeria – These are services provided by companies outside Nigeria by foreign companies and consumed by residents of Nigeria when the latter (i.e. Nigeria residents) are within the economic zone of the foreign country. The fact that Nigeria residents pay for the service from Nigeria does not drag the foreign service provider into the country's tax net. OECD Tax Model limits the taxing power and authority to the host country.

An example is the provision of telecommunication services to 'foreigners' when within the host country's jurisdiction. Telecommunication charges for roaming of mobile telephone in foreign jurisdiction should not bring the foreign telecommunication company of the host country within the Nigeria's tax net. The subscriber is using the telecommunication facility of the foreign company in their host country. It is therefore out of place for Nigeria to seek to subject the income earned by the company for providing services to their guest in their country to tax.

2. Professional services provided outside of Nigeria for the benefit of persons in or outside Nigeria – Nigeria, like many other developing countries, has significant interdependent relationships with several other countries for various services. The modern world has also advanced in terms of breaking down international barriers to access services from other jurisdictions. These services, in most instances, are provided fully in those countries and sometimes consumed there.

For instance, a Nigerian hospital generally requires services of foreign laboratories to analyze samples sent from Nigeria. The analyses are carried out in those foreign countries without any form of contact with Nigeria and the results sent to the beneficiaries in Nigeria. Under the NTA, payment to the non-resident laboratories by Nigerian hospitals on behalf of their resident patients would be liable to tax (WHT) in Nigeria, where the foreign laboratories do not have a PE or SEP in Nigeria. Thus, payment by a person resident in Nigeria for services provided by non-residents without a PE or SEP in Nigeria even where the services are provided outside of Nigeria will be liable to tax (WHT) in Nigeria.

3. Services jointly provided by Nigeria companies and independent foreign service providers outside Nigeria forming one block service – These are instances where Nigeria companies require collaboration with similar service providers in other jurisdictions to provide services to customers. The customers enjoy those services outside of Nigeria, even though payment for the entire service is made to the local company being the originating country.

Examples in this area are those operating in the aviation and telecommunication industries. International flights and calls require similar service providers in foreign jurisdictions to provide interconnect services based on the requirement of the consumers. In such instance, the foreign service providers would be providing the services using their assets within their jurisdictions to provide the services. The consumers (although tax resident in Nigeria) would, at the time the services are being provided, consume the services within the jurisdictions of the host countries (i.e., services are provided and received outside Nigeria).

Compliance requirements

Companies income tax

Section 11(1) of the Nigeria Tax Administration Act provides as follows:

"Every company, including a company granted exemption from incorporation, whether or not it is liable to pay tax under Nigeria Tax Act, 2025 or any other tax law, for a year of assessment, with or without notice from the Service, shall file a self- assessment return with the Service in the prescribed form at least once a year"

Section 11(2) and subsection 11(2a) further provide that:

"Where a non-resident company derives profit from or is taxable in Nigeria under Chapter Two of the Nigeria Tax Act, 2025, such company shall submit a return for the relevant year of assessment containing the company's full audited financial statements and the financial statement of the Nigerian operations, attested to by an independent, qualified or certified accountant in Nigeria."

Section 17 of the Nigeria Tax Act also provides as follows:

(6) Where the total profits attributable to a permanent establishment or significant economic presence in Nigeria cannot be ascertained in accordance with subclause (5), the total profits shall be the amount resulting from applying the profit margin of the non-resident person to the total income generated from Nigeria.

(7) Where the total profits attributable to the permanent establishment or significant economic presence in Nigeria is lower than an amount resulting from applying the profit margin of the non-resident person to the total income generated from Nigeria, the total profits shall be the amount resulting from applying the profit margin of the non-resident person to the total income generated from Nigeria.

(8) Notwithstanding the provisions of subclauses (6) and (7), the tax payable under this clause shall not be less than the tax withheld at source under Nigeria Tax Administration Act, and where the income is not liable to a deduction of tax under Nigeria Tax Administration Act, 4% of the total income generated from Nigeria.

The combined reading of the above clauses is that where a non-resident company has a PE or SEP in Nigeria, even if it stays within its jurisdiction to provide services to companies in Nigeria and receive payment accordingly, if we assume that the services is not liable to deduction of withholding tax, the company would be required to register and file annual income tax returns in Nigeria. It will require the services of Nigeria licensed auditors and tax consultants to certify the returns. It will submit its audited financial statements to the Nigeria tax authority and pay income tax which will not be less than 4% of the gross revenue derived from the country. Thus non-resident companies would need to evaluate their PE or SEP status as the NTA provides a broader and more expansive definition of a PE.

Consequences of the new tax regime for non-resident companies

Non-resident companies will face herculean task in complying with the new tax regime. One of the reasons is that, even with the existence of Double Tax Agreement (DTA), residents of a State would not get tax credit where they pay tax that should not have been paid in the other State. The cost of doing business with residents of Nigeria will most likely increase if the supplier is able to pass the cost to the consumers. If it is difficult to pass the cost, some may evaluate the benefit of continuing to provide services to residents of Nigeria.

It is also possible that other countries may implement reciprocal legislation. In 2019, France passed a Digital Service Tax (DST). The tax was aimed at the leading technology firms in the world, which are mainly based in United States of America (USA). USA responded and threatened retaliatory measure including punitive tariffs on imports².

Thus, Nigeria companies may suffer because of this new law. This will arise in situations where the non-resident service providers resist the charge and seek to place the burden of compliance on the local companies. The affected Nigerian companies may then bear the cost as part of additional cost of doing business. It is best imagined how companies that are currently struggling from the current challenging economic environment would now need to cope with accounting for tax of non-resident service providers in addition to their regular tax burden.

Concluding remarks

The new tax laws is a welcome development in harnessing tax revenue to match the expected economic development. There are, however, some new provisions in the law that are ex-territorial. It is out of place to seek to subject income derived from outside Nigeria's economic zone to tax. This contradicts the principle of fairness and equity in international tax principle. It is irrelevant that some other countries have put similar laws in place. An eye for an eye would eventually make everyone blind. This is advancing the course of multiple taxation when the world and Nigeria are seeking for laws and regulations that would reduce hurdles to free movement of goods and services across international boundaries.

Finally, it is suggested that companies without PE or SEP in Nigeria should not be required to file tax returns in Nigeria.

Tayo Ogungbenro and Nana Abu are partner and senior manager, respectively, in Tax, Regulatory and People Services Division of KPMG Advisory Services, Nigeria. The opinions expressed in this article are strictly personal and do not represent that of the Firm or any other association or organization that they belong.

Footnotes

1 Income Tax (Transfer Pricing) Regulations 2018 - Regulations 2(a) and (c). It should be noted that the Transfer Pricing Regulations (2018) was also passed at a time when the Board of Federal Inland Revenue Service had not been constituted. The Tax Appeal Tribunal (TAT) (Upheld by Federal High Court) has held that the issuance of Country-By-Country Report (CbyC) at a time when the Board was not constituted is unconstitutional, illegal and void. It is therefore likely that if the TP Regulations is also challenged, it may be voided by the courts.

2 France faces US backlash on 3% digital services tax | Business & Accountancy Daily

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.