The Nigerian tax landscape is undergoing significant transformation with the introduction of four new tax bills, namely Nigeria Tax Bill (NTB), Nigeria Tax Administration Bill (NTAB), Joint Revenue Board (Establishment) Bill (JRBEB), and Nigeria Revenue Service (Establishment) Bill (NRSEB), which seek to simplify tax administration, reduce ambiguity and consolidate the tax laws, broaden the tax base, reduce the number of taxes to a single digit, and ensure greater compliance by both resident and non-resident persons. As Nigeria continues to strengthen its fiscal policies, this reform is timely and would change the dynamics of the nation's tax system through fiscalization and usage of technology to automate tax processes, and widens the tax net by capturing other taxable persons including corporate entities (resident and non-resident), individuals, trustees, etc.
A non-resident company (NRC) is a company that is incorporated in other jurisdictions outside Nigeria but carries out activities in Nigeria from which income is derived. The income, profits or gains derived by a NRC in Nigeria is taxable in Nigeria to the extent that such NRC has a Permanent establishment (PE) or a Significant Economic Presence (SEP) subject to an anti-avoidance double taxation agreement (ADTA) between Nigeria and a contracting state to which the NRC is a member.
Prior to the year 2020, it was practically impossible to tax the activities carried out in Nigeria by NRCs if such activities did not create a PE for the NRC. However, the release of the Significant Economic Presence Order 2020 (SEP Order) made it possible for digital services provided by NRCs to a resident of Nigeria to be taxed in Nigeria even when such NRC do not have PE. While the SEP Order streamlined the taxation of NRCs, it is important to note that the tax reform bills, particularly the NTB has addressed a lot of aspects regarding NRCs operations (digital services, shipping, air transport, and other cross-border business activities) in Nigeria and the tax treatments. Some of these aspects include redefined compliance measures, expanded taxation framework with limitations to allowable deductions, establishing taxing rights based on PE, SEP rules, and minimum tax thresholds among others.
This article explores the key proposed provisions for NRCs in the NTB, highlighting the implications and strategies businesses should adopt to remain compliant while managing potential tax exposures.
Taxation of Non-Resident Companies in Nigeria
The NTB broadens the taxation framework for NRCs by ensuring that income, profits, or gains accruing in, or derived from Nigeria are taxable. This includes:
- Gains from disposal of chargeable assets located in Nigeria at the time of disposal.
- Gains from disposal of assets relating to the business carried on in Nigeria.
- Profits derived from trade, business, profession, or vocation where the NRC has a permanent establishment or significant economic presence in Nigeria.
- Payments made by Nigeria residents or permanent establishments of NRCs for services provided outside Nigeria.
- Payments made by a Nigeria resident or a Nigerian PE of an NRC for insurance premiums or risks insured from Nigeria.
Under the bill, an NRC will be deemed to have a permanent establishment (PE) in Nigeria if the following occurs and profit is attributable to it:
- Has a physical place through which business is wholly or partly carried on.
- Conducts business through an authorized agent in Nigeria.
- Maintains a stock of goods or merchandise in Nigeria for delivery to a third party.
- Furnishes services through employees or agents.
- Solely or jointly execute a project in Nigeria, including surveys, designs, deliveries, construction, assembly, installation, commissioning, or decommissioning, regardless of entity splits or whether part of the project occurs in or outside Nigeria.
Additionally, a SEP is recognized when a NRC provides digital services to Nigeria, including online teaching services (where the NRC is not an educational institution) and profit can be attributed to the business activity carried out in Nigeria. It is imperative to state that employment of a Nigerian by a NRC for employment duties performed in Nigeria primarily not for customers in Nigeria does not constitute a PE or SEP for a NRC.
Ascertainment of Profit Attributable to Permanent Establishment in Nigeria
Pursuant to section 17(5) of the NTB, the income, profits or gains of a non-resident person that are attributable to its permanent establishment in Nigeria shall be the taxable profit derived from sales or merchandise of goods and services furnished by the NRC, or its connected persons less relevant expenses incurred to produce the taxable profits.
Note that the expenses incurred by the NRC are deductible to the extent that they are incurred for the purpose of generating the taxable profit relating to the Nigerian operations subject to the deductibility criteria of wholeness and exclusiveness.
Based on existing practice and in line with regulations 7(5) of the Income Tax (Transfer Pricing) Regulations 2018, royalty costs incurred for intellectual property between connected persons and PEs of NRCs are allowable for deduction subject to 5% of Earnings Before Interest, Tax, Depreciation, Amortisation and the Consideration (EBITDAC). However, such expense and other similar related party payments will no longer be allowable as tax deductible under the NTB, except for reimbursement of actual expenses.
Minimum Tax Assessment
Where the total profits attributable to the NRC in Nigeria cannot be determined or lower than the amount derived by applying the profit margin to the total income generated from Nigeria, then the total profit shall be the amount resulting from applying the profit margin of the non-resident person to the total income generated from Nigeria.
The profit margin shall be computed as the ratio of the EBITDA to total revenue in the NRC's full Audited Financial Statement (AFS). In the absence of the full AFS, the profit margin of a comparable entity shall be adopted.
Nevertheless, the tax payable shall not be less than the withholding tax already deducted from the NRC's invoices where such income is liable to WHT and where the income is not subject to WHT, the minimum tax payable shall be 4% of the total income generated in Nigeria.
While this may be seen as a welcome development, it is important to note that the 4% minimum tax is lower when compared to the 6% deemed profit adopted in practice by the Federal Inland Revenue Service (FIRS) as empowered by Section 30(b) of the Companies Income Tax Act (CITA). This may undoubtedly impact the tax revenue derivable from the NRCs.
Notwithstanding the above expansion, payments related to providing technical, professional, management or consultancy services, and other passive income such as dividends, interest, and royalty are not subjected to further taxation other than the deduction at source (withholding tax) which is the final tax unless the NRC has a permanent establishment or significant economic presence in Nigeria.
VAT Obligations
NRCs making taxable supplies to Nigeria are required to register for VAT and obtain a Tax Identification Number (TIN). Likewise, they are mandated by law to include VAT on their invoices in respect of the taxable supplies to Nigeria. Based on the current compliance arrangement of selfaccount/charge by the recipient of such invoice, NRCs are not able to collect VAT and remit it to the Federal Inland Revenue Service (FIRS) except where appointed as a collection agent.
While the provisions of the existing tax laws regarding VAT obligation have not specifically changed for NRCs, it is worthy to note that the electronic fiscalization system (EFS) (i.e., deployment of software solution for electronic invoicing) introduced by the NTB might be extended to the NRCs where possible.
Key Considerations
Given that Paragraph 1(1a) of the SEP Order 2020 regarding the ₦25million revenue threshold for taxing NRC that provides digital service to Nigeria remains unchanged, there seem to be a bit of concern about the confusion that may arise as a result of non-alignment of the revenue threshold in the above paragraph with small business's ₦50million revenue threshold as provided in Section 203 of the NTB.
However, since Section 17(9b) of the NTB empower the Minister to issue any regulations for the purpose of ascertaining SEP for NRCs who carried out digital services in Nigeria, one would expect that the issue of revenue threshold is carefully addressed to prevent any misgivings considering that NRCs are now subject to minimum tax of 4% irrespective of the revenue threshold of their operations in Nigeria. Notwithstanding the 4% minimum tax, where a NRC is a constituent entity of an multinational enterprise (MNE), the minimum tax payable shall be 15% effective tax rate. In addition, technical, professional, management, or consultancy services may no longer create SEP for NRCs.
Finally, the Service might consider an expansion of its approved VAT collection agents to include all NRCs to make them accountable for the taxable supplies to Nigeria.
Conclusion
The ongoing tax reform is a positive step toward strengthening Nigeria's tax system by simplifying and harmonizing the tax laws to enhance compliance, prevent evasion, and boost government revenue. It is expected to attract investment and improve the ease of doing business. However, its success in driving sustainable economic growth depends on effective implementation, transparency, and political commitment.
While the reform aims to ease tax burden and simplify compliance, provisions such as profit attribution and nondeductibility of certain expenses may increase the tax burden of NRCs. Non-compliance with the new tax requirements could lead to sanctions and penalties, making it essential for NRCs operating in Nigeria to seek expert advice to assess their compliance position and mitigate potential risks associated with the new tax regime
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.
