Introduction
A non resident company is a company registered or incorporated under the laws of another country. They can also be seen as entities that are not registered or incorporated in Nigeria but derive income or profits from Nigeria by engaging in some kind of venture. By virtue of being a foreign company, they generally have no obligation to have a physical presence in Nigeria. However, the provisions of section 78 of CAMA 2020, require foreign companies to be incorporated in Nigeria before they can carry on business in Nigeria.
The Withholding Tax (WHT) is not another form of tax, rather, an advance payment of income tax on specific transactions. Generally, when such transactions are executed, the person or company making payment is required by law to deduct WHT at the specified rate depending on the type of transaction and the party involved. The tax withheld is then remitted to the relevant tax authority. The objective of withholding tax is basically to minimize tax evasion, ensure that more taxpayers are captured into the tax net and provide revenue to the government to meet up with its budget.
The object of this paper is to examine the Nigerian Deduction at Source (Withholding) Regulations 2024, as it pertains to withholding taxes and the attendant impacts it has on Non resident companies (NRCs).
Incidence of Taxation of Non Resident Companies
Generally, taxation is an attribute of sovereignty, a way in which states and Governments exercise their power over entities within their territory. There are various reasons why non resident companies are taxed in any territory including Nigeria, which are:
- Derivation of income from a country (Source) – the principle of derivation posits that taxation being an attribute of sovereignty subject to exemption on policy on other considerations. Mere presence of a foreign company in Nigeria without more therefore does not create tax liability.
- Linkage with the country (Nexus) – residence, nationality, domicile etc - protection Remittance on income derived elsewhere into the country – formed part of the economy.
- Principle of territoriality – Boucher v Lawson, Government of India v Taylor.
In Boucher v. Lawson, 95 Eng. Rep. 53 (K.B. 1734) (Lord Hardwicke, C.J.), the court acknowledged that its concerns with promoting British trade led it to uphold a transaction that violated Portuguese export laws. Chief Justice Lord Hardwicke stated that to do otherwise "would cut off all benefit of such trade from this kingdom, which would be of very bad consequence to the principal and most beneficial branches of our trade." The rule is part of Canadian law, United States common law, international law, and the national law of other common law jurisdictions. The revenue rule respects sovereignty, concern for judicial role and competence, and separation of powers. Lord Denning explained the rationale in Attorney General of New Zealand v. Ortiz, [1984] A.C. 1 (H.L.) as follows:
"The class of laws which will be enforced are those laws which are an exercise by the sovereign government of its sovereign authority over property within its territory or over its subjects wherever they may be. But other laws will not be enforced. By international law every sovereign state has no sovereignty beyond its own frontiers. The courts of other countries will not allow it to go beyond the bounds. They will not enforce any of its laws which purport to exercise sovereignty beyond the limits of its authority."
See also: Judge Learned Hand's rationale for the rule:
"[A] court will not recognize those [liabilities] arising in a foreign state if they run counter to the 'settled public policy' of its own. Thus, a scrutiny of the liability is necessarily always in reserve, and the possibility that it will be found not to accord with the policy of the domestic state ... No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."
Lord Keith of Avonholm, having approved of the judgment of Kingsmill Moore J. in the High Court of Eire in Peter Buchanan Ld. & Macharg v. McVey, reported as a note in [1955] A.C. 516, suggested two explanations for the rule:
"One explanation of the rule thus illustrated may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties."
A second explanation is that scrutiny of a tax judgment would require analysis of the policy underlying the tax, which would imply review of the policies of a sovereign jurisdiction.
"This would require the court to rule on the provisions for the public order of another State, which may commit "the domestic State to a position which would seriously embarrass its neighbour. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."
Article 26 OECD Model Convention (2017)
(1) The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2. 2.
"Foreseeable relevance" is a vague test. Relevance is determined at the time that the State makes its request. The OECD Commentary states that the standard of "foreseeable relevance" be interpreted broadly, but not so broadly as to extend to "fishing expeditions" and "irrelevant information". Hence, it is sufficient that there is a "reasonable possibility" that the requested information is foreseeably relevant at that time, regardless of its subsequent immateriality.
The Commentary states:
A "request may therefore not be declined in cases where a definite assessment of the pertinence of the information to an ongoing investigation can only be made following the receipt of the information. The competent authorities should consult in situations in which the content of the request, the circumstances that led to the request, or the foreseeable relevance of requested information are not clear to the requested State. However, once the requesting State has provided an explanation as to the foreseeable relevance of the requested information, the requested State may not decline a request or withhold requested information because it believes that the information lacks relevance to the underlying investigation or examination."
Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorizes such use.
Paragraph 3 limits the power of Contracting States to exchange information.
(3) In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).
Hence, "a Contracting State is not bound to go beyond its own internal laws and administrative practice in putting information at the disposal of the other Contracting State." The Commentary speaks of cooperation to the "widest extent possible". However, it does not overrule domestic laws, such as the "revenue rule".
The Multilateral Convention to Implement Tax Treaty Related Measures (MLI), a form of international GAAR for tax treaties, incorporates a principal purpose test (PPT) to test the validity of treaty benefits. Article 7 denies tax benefits where it is "reasonable to conclude" test based on the "relevant facts and circumstances" that one of the "principal purposes" of any transaction was to obtain tax benefits unless the benefit was within the object and spirit of the tax agreement.
Article 7 – Prevention of Treaty Abuse
1. Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.
Governments adopt a combination of the above approaches, especially the sovereignty revenue law in order to protect their financial territory as the basis and underpinning factor for taxation of NRCs.
Incidence of Withholding Tax (WHT)
This is an advance and indirect source of taxation deducted at source from the invoices of the tax payer. Applicable transactions include dividends, interests, royalties, rent, contract and commissions and consultancy, management and technical fees. The main purpose of withholding tax is to prevent tax evasion and protect the tax bases from leaks and base erosion. It can also be seen as an advance payment of income tax and other forms of tax but not a separate form of tax.
Impacts of the Deductions of Tax at Source (Withholding) Regulations 2024 on NRCs
The Deductions of Tax at Source (Withholding) Regulations 2024 was enacted by the Minister of Finance and Co-ordinating Minister of the Economy In exercise of the powers conferred upon him by section 81(9) of the Companies Income Tax Act, Cap C21, LFN, 2004, section 56 of the Petroleum Profits Tax Act, Cap P13, LFN, 2004, section 73(6) of the Personal Income Tax Act, Cap. P8, Laws of the Federation of Nigeria, 2004, and of all other powers enabling him to enact subsidiary legislations such as this.
By the provisions of R. 4(1) of the Regulations, persons that are empowered to deduct WHT at source include corporate and unincorporated entities, government ministries and agencies, other institutions and enterprises including those exempted from paying tax. It provides specifically thus:
"4.—(1) For the purpose of regulation (3) of these Regulations, the following
persons are required to deduct tax at source on eligible transactions —
(a) a body corporate or unincorporate, other than an individual ;
(b) a Government Ministry, Department or Agency ;
(c) a statutory body ;
(d) a public authority ;
(e) any other institution, organisation, establishment or enterprise including
those exempt from tax ; and
(f ) a payment agent representing any person under paragraphs (a)-(e)
of this sub-regulation."
The above captured organisations are the only ones empowered by the regulations to be able to deduct withholding tax at the source from every transaction from both resident and non resident entities.
Ease of Obtaining Receipts to Apply for WHT Credit
By virtue of the provisions of R. 8 of the Regulations, a person making a tax deduction from any payment to issue a tax receipt to the supplier or customer for the amount withheld upon remittance to the Relevant Tax Authorities. For ease of reference, the provisions of the regulation would be represented hereunder:
"8.—(1) A person who makes a deduction from any payment shall, upon
remittance to the relevant authority, issue a receipt for the tax so deducted
and a statement in the format prescribed in the Third Schedule to these
Regulations or as may be prescribed by the relevant tax authority from time to
time, containing the following information, that is the —
(a) name, address and the TIN of the person from whom the deduction
was made ; provided that where the beneficiary has no TIN, such a person
shall provide, in the case of —
(i) an individual, a NIN, and
(ii) a company, an RC number ;
(b) nature of transaction in respect of which the payment was made ;
(c) gross amount payable or settled ;
(d) amount deducted ; and
(e) month to which the payment relates."
The main purpose of these receipts are to enhance the ease of obtaining WHT credit by tax payers, tax payers including NRC would be able to submit the issued receipt and obtain tax credit from the relevant tax authority whether or not the tax has been remitted. Moreover, whenever any part of the tax is not remitted, it becomes a tax liability of the body the deducted the withholding tax. On this note, R. 8 (2 & 3) of the Regulations provides thus:
"(2) A person from whom a deduction has been made may submit the receipt under sub-regulation (1) of this regulation to the relevant tax authority as evidence of the amount deducted for the purpose of claiming tax credit for the amount so deducted.
- Where a person issues a receipt for any amount deducted and yet to be remitted to the relevant authority, the beneficiary shall nevertheless be credited by the relevant tax authority and the amount so unremitted shall be treated as the tax liability of the person who made the deduction, and shall be recoverable with applicable penalty and interest"
Deductions Shall not be Regarded as a Separate Tax
R.5 of the regulations provides thus:
"5. A deduction made from a payment shall not be —
(a) regarded as a separate tax or an additional cost of the contract or transaction ; or
(b) included in the contract price, but treated as an advance or final tax of the supplier, as the case may be."
The implication of the above provisions is that deduction made from a payment shall not be regarded as a separate tax and cannot be regarded as additional cost of the contract or transaction. It would not be included in the contract price but treated as an advance or final tax of the supplier. The aim of this is to prevent the shifting of the tax burden to the recipient of the service or the final consumer of the goods. The implication of the above on NRCs is that, they will not be able to treat WHT like all other indirect taxes where the burden would be shifted to the final consumers.
The Tax Rates
A perusal of the first schedule to the Regulations provides for an array of rates as regards certain transaction and a glance through of the WHT rates would reveal that the Regulations imposes more WHT for NRCs, with some of them going as high as twice the rate for resident companies. This seems to portray the fact that the Regulations seeks to incentivize NRC to register and become established as resident entities.
The regulation also provides that where the supplier/recipient has no TIN the rate shall be double the amount as stated in schedule. This was provided for in R. 3(c) of the Regulations, which provides thus:
"3(c) In the case of supply of goods, rendering of services or any eligible transaction involving non-passive income, the amount to be deducted at source shall be twice the rate specified in the Schedule where the Recipient has no Tax Identification Number"
Exemptions
There are about 12 exemptions to the deduction of WHT under regulation 10 of the Regulations. R. 10 (f) seems to have more of an impact on NRCs. It provides that imported goods by foreign suppliers shall be exempted from deduction at the source where the foreign supplier does not create a taxable presence in Nigeria.
Moreover, a small company or an unincorporated entity regarded as small is exempt from the requirement to deduct WHT if the supplier has a TIN and the value of the transaction is N2,000,000.00 or less.
According to the provisions of R. 10 (2) exemption from WHT is not an exemption from tax liability except as provided in the particular principal tax statute or enabling law.
Double Taxation
There is always the probability of double taxation when an entity has economic presence in two or more jurisdictions and it more evident as it regards to NRCs who are generally not resident in a particular country but have economic activities that would require them to be taxed while operating out of another country.
The Regulations under R. 3(b) provides thus:
"(b) Reduced rates as specified under a Treaty between Nigeria and any other country for the avoidance of Double Taxation shall apply to an eligible recipient who is resident in a treaty country to the extent that such reduced rates are contained in the relevant Treaty or protocol duly ratified by the National Assembly"
The above provision of the Regulations essentially provides that reduced rates shall apply for the avoidance of Double Taxation to any eligible entity who is resident in a treaty country to the extent that such reduced rates are contained in the relevant treaty as ratified by the National Assembly. This implies that a NRC who operates out of country that has a double taxation agreement with Nigeria shall be eligible for the reliefs contained in such an agreement if the treaty has been ratified by the National Assembly. This provision is also in tandem with section 12 of the 1999 CFRN.
Summary and Conclusion
This article sought to examine the Nigerian Deduction at Source (Withholding) Regulations 2024, as it pertains to withholding taxes and the attendant effects it has on Non resident companies (NRCs).
The Deduction of Tax at Source (Withholding) Regulations 2024 has significant implications for Non-Resident Companies (NRCs) operating in Nigeria. NRCs are companies incorporated outside Nigeria but derive income from Nigerian sources. Although they are not required to have a physical presence in Nigeria, they may still be subject to taxation under principles such as derivation, nexus, and territoriality.
Withholding Tax (WHT) serves as an advance payment of income tax and applies to specific transactions, including dividends, interests, royalties, rents, and consultancy fees. The primary objectives of WHT are to curb tax evasion, increase tax compliance, and enhance government revenue.
The 2024 Regulations empower various entities—including corporate bodies, government ministries, and statutory bodies—to deduct WHT at the source. Importantly, the regulations facilitate ease of obtaining WHT credit, ensuring that taxpayers can claim deductions based on issued receipts. Additionally, WHT deductions are not considered a separate tax or an additional cost to contracts, meaning NRCs cannot shift the burden onto consumers.
A key provision of the Regulations imposes higher WHT rates on NRCs, in some cases doubling the rates applicable to resident companies. This move appears to incentivize foreign entities to establish a permanent presence in Nigeria. Moreover, where a supplier lacks a Tax Identification Number (TIN), the WHT rate is doubled.
The Regulations also introduce certain exemptions, particularly for imported goods from foreign suppliers without a taxable presence in Nigeria. Small businesses are exempt from WHT deductions for transactions below ₦2,000,000, provided they have a TIN. However, WHT exemptions do not equate to an exemption from tax liability unless specifically provided for under relevant tax laws.
Regarding double taxation, the Regulations provide relief for NRCs from treaty countries that have ratified Double Taxation Agreements (DTAs) with Nigeria. This aligns with international tax principles and Nigeria's legal framework, reducing tax burdens on foreign investors.
The Regulations introduced changes that aid the ease of doing business and fostering a business friendly environment especially for companies operating in Nigeria.
The 2024 Deduction of Tax at Source (Withholding) Regulations marks a significant shift in Nigeria's tax administration, particularly concerning NRCs. By increasing WHT rates for non-resident entities, the government aims to encourage foreign businesses to register locally while securing tax revenue. This might become counter-productive as it may lead these NRCs to engage in rigorous tax planning, tax avoidance or in the worst case, tax evasion. The streamlined process for obtaining WHT credit and the inclusion of exemptions reflect efforts to balance enforcement with economic growth. However, NRCs must navigate potential challenges such as higher tax burdens and compliance requirements. The interplay between these Regulations and international tax treaties will be critical in determining the long-term impact on foreign investment in Nigeria.
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