The Companies Income Tax Act (CITA) is the primary legislation that governs the taxation of companies in Nigeria while the administration of the Companies' Income Tax in Nigeria is vested in the Federal Inland Revenue Services(FIRS). A Nigerian company is taxable on its worldwide income while a foreign company is liable to tax in Nigeria only on its profit attributable to the business carried on in Nigeria. There are legal questions regarding what a foreign company can and cannot do in Nigeria without incorporating a Nigerian company. Some scholars are of the opinion that there is a conflict between the provision of Section 54 of the Companies and Allied Matters Act which provides that every foreign company (except those exempted by virtue of Section 56 of the CAMA) with intentions of carrying on business activities in Nigeria must register a company in Nigeria on one hand, and the Provision of CITA, which suggests that it is legally possible for a foreign Company to generate business income from Nigeria without being registered on the other hand.

Foreign companies are also known as non-resident entities, they can earn incomes in Nigeria through two ways, which shall be briefly discussed below.

Investment (Passive) Income

By this method, foreign companies earn income from mediums such as dividends, interest, royalty and rent, etc. In this case, the CITA imposes tax by way of withholding tax deducted at source by the Nigerian payer as the final tax. Foreign companies who earn money through this medium do not require a presence in Nigeria and as such need not worry about tax filing obligations but are required to register and obtain a Tax Identification Number (TIN) without which the Nigerian payer will not be able to remit the withholding tax deducted.

Business (Active) Income

Foreign companies who earn income through this medium are required to register for tax and file full tax returns just as a Nigerian company. Before July 2014, foreign companies doing business in Nigeria prepared and pay their income taxes using the deemed profit basis, this was because of the challenges associated with the legal requirement of filing complete tax returns. When filing returns under the deemed profit regime, foreign companies were only required to submit the deemed profit tax calculations accompanied with a statement of the turnover derived from Nigeria. The schedule of withholding tax deducted on the income is usually provided to support the claim for tax credit in line with Section 30 of the CITA.

In 2014, the Transfer Pricing (TP) Division of the Federal Inland Revenue Service (FIRS) issued a directive that foreign companies who derive income from Nigeria are now required to include audited financial statements, tax computations and other relevant information in their tax returns commencing from January 1, 2015, in line with Section 55 of the Companies Income Tax Act (CITA). The FIRS noted that the deemed profit basis of taxation that was widely adopted by foreign companies, mostly due to its simplicity and the fact that disputes regarding tax deductibility of costs would be avoided is meant to be applied solely at the discretion of the FIRS, as it is meant to be an alternative basis of assessment and, not a waiver of the legal requirement of filing.

In conclusion, the legal requirement of filing complete tax returns is not without its challenges, the major one been how to verify actual expenses incurred abroad and determination of capital allowances attributable to the Nigerian operation to establish the actual profit to be taxed. This new directive by the Federal Inland Revenue Service has raised so many issues for consideration, including questions regarding practicability, and has left so many questions unanswered. In light of the above, it has become necessary for the Federal Inland Revenue Service to address certain issues brothering taxation of foreign companies to avoid confusion and ambiguities especially on the part of foreign companies.

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.