Tax Liability Of Non-Resident Foreign Companies In Nigeria

Introduction

The Federal Government of Nigeria, recently revealed its plans to tax foreign digital service providers, offering services to Nigerians and earning revenue in Naira. Digital service providers such as Netflix, Alibaba Express, PayPal, EBay, Amazon, Facebook, YouTube, Twitter and a host of other foreign platform, that are video streaming websites, social media platforms, and companies that offer downloads of digital contents are expected to pay digital tax to the Federal Inland Revenue Service(FIRS).

This plan has ever since been greeted with mixed reactions, as many have queried this decision on the ground that these platforms are not Nigerian companies, and even have no physical offices in Nigeria.  

Taxes

In Matthew v. Chicory Marketing Board (1938) 60 C. L. R. 263 at 276, Latham CJ of the High Court of Australia defined tax as: “a compulsory exaction of money by a public authority for public purposes enforceable by law, and is not a payment for services rendered“. Daniel Defoe, in his book: “The Political History of the Devil, notes that: “things as certain as death and taxes, can be more firmly believed“. This was also rehashed by Benjamin Franklin, one of the founding fathers of the United States of America, in his letter to Jean-Baptiste Leroy in 1789, that:”…but in this world nothing can be said to be certain, except death and taxes…“

The above assertions, attest to the certainty of tax and a tax system in every government of the world. The tax system of any government is often a pale reflection of the society’s economic and social needs or requirements, as conceived by the governing authorities at any particular time. This explains why tax laws are subjects of frequent changes from time to time.

Position Under The Companies Income Tax Act (CITA)

The statute governing corporate taxation in Nigeria primarily, is the Companies Income Tax Act, Cap C2, LFN 2004 as amended (hereinafter referred to as CITA).  Section 105(1) CITA, defines a ‘foreign company’, as:

 “Any company or corporation (other than a corporation sole) established by or under any law in force in any territory or country outside Nigeria”

Under CITA, companies which although not incorporated in Nigeria, but derive profit from Nigeria, are liable to tax in Nigeria.  S 13(2) CITA provides that a foreign company is liable to pay tax on profits it derives in Nigeria from basically:

• A fixed based business in Nigeria, to the extent that company’s profit is attributable to the fixed base in Nigeria.

• A business or trade carried on via a dependent agent, makes on its behalf;

• Execution of a turnkey project (i.e. a single contract for surveys, deliveries, installations or construction); and

• A related party in Nigeria transactions deemed artificial.

In Offshore International v. FBIR (2011) 4 TLRN 59, at 78-82, it was held that no section of CITA provided an exemption from payment of tax to a company because it was not incorporated in Nigeria or because it has no place of business in Nigeria.

The Position Of The Finance Act, 2019

Section 4 of the Finance Act, 2019 however, has made certain radical amendments to the provisions of S 13 of the Companies Income Tax Act, by inserting new paragraphs (c) and (e) to S 13(2) of CITA to make companies involved in digital, electronic or online business in Nigeria, and having significant economic presence in Nigeria liable to tax.

This new trend in taxation is aimed at taking a trip from the ‘permanent establishment’ (PE) principle -fixed base requirement, to the ‘significant economic presence’, principle, which will in a way, allow for the need to dispense, with the need for a physical presence, i.e. having a physical office in Nigeria, before such non-resident foreign company can be taxed in Nigeria.

This ‘significant economic presence’ principle, will help create a virtual intangible ground for taxation of non-resident foreign companies in Nigeria, with or without a physical office in Nigeria.

The Organization for Economic and Community Development (OECD), for instance, in a bid to tackle the concept of permanent establishment, especially as it affects digital economy, did come up with the suggestion of the significant economic presence principle to its 35 member States in 2015.

This new practice of significant economic presence, has been adopted in countries such as Israel (especially with non-resident companies resident in countries having no double tax agreement with Israel), Italy (by amending Article 162 (2) of the Italian Income Tax Code of 1986- fixing the annual revenue threshold of €5.5 million), India and Saudi Arabia.  Japan, even as far back as 2015, imposed the “Japanese Consumption Tax” on foreign entities involved in digital and electronic supplies to Japanese residents. The Japanese Consumption Tax registration threshold is 10 million Yen yearly.  Facebook paid the United Kingdom, a whooping sum of 28 Million Pounds in tax, after generating a record revenue of 1.6 Billion Pounds in the United Kingdom.  France, in fact, just passed a law requiring large digital service companies to pay a 3 percent tax on total annual revenue generated by providing services to French users. The Czech Republic is equally mulling over same.

The Finance Act however, fails to provide what constitutes significant economic presence in Nigeria, instead, S 4(4) of the Finance Act, empowers the Finance Minister to determine what constitutes the significant economic presence. Pursuant to this power, the Minister of Finance, Mrs. Zainab Shamsuna Ahmed did issue the Companies Income Tax (Significant Economic Presence) Order 2020 (SEP Order) with a commencement date of February 3, 2020 in the federal gazette.

The Significant Economic Presence (Sep) Order, 2020

This order provides for two types of non-resident foreign companies that can be affected. They include: digital service providers, and those providing technical (for example, training, advertising or supply of personnel), professional, management or consultancy services

• For non-resident foreign companies engaging in digital services, they include those whose activities include any of the following:
• Streaming or downloading of digital contents (e.g. applications, e-books, music, videos, games, movies etc.) to anyone in Nigeria;
• Transmission of data collected about users in Nigeria;
• Provision of goods or services directly or indirectly through a digital platform in Nigeria; or
• Provision of intermediation services via digital platforms, websites, or other online applications that link suppliers and customers in Nigeria.

The above non-resident companies shall have a significant economic presence in Nigeria in any accounting year, where it:

• derives income of N25m or its equivalent in other currencies from Nigeria in a year;
• Uses Nigerian domain name (.ng) or registers a website address in Nigeria;
• Has a purposeful and sustained interaction with persons in Nigeria by customizing its digital platform to target persons in Nigeria.

In determining the 25 Million Naira threshold, activities carried out by connected persons will be aggregated. The Order further makes provisions with regards to any company covered under any multilateral agreement to which Nigeria is a party. Such will be treated in accordance with those agreements from the effective date in Nigeria.

See Also

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The Order provides that a non-resident company carrying on a trade or business that includes the provision of technical, professional, management, or consultancy services shall be deemed to have a significant economic presence in Nigeria in any accounting year, where it earns any income or receives any payment from:

• A person resident in Nigeria; or
• A fixed base or agent of a non-resident company in Nigeria.

It is noteworthy that, in the category above, the withholding tax on the income of a non-resident company where it is not liable to tax under S 13(2) CITA.

It follows that electronic and online businesses of non-resident foreign companies can now be liable to pay tax from income derived in Nigeria, even where the companies have no physical offices in Nigeria. What must be considered is if the non-resident company has significant economic presence, with reference to the SEP Order, 2020.

However, a non-resident foreign company shall not have significant economic presence where it makes payment:

• To its employees, under an employment contract;
• For teaching in an education institution or for teaching by an educational institution; or
• By a foreign fixed base of a Nigerian company.

Conclusion

This bold step in seeking to get more revenue by the Nigerian government is a very commendable one, considering the high level of income, these non-resident companies derive from the country. This however, doesn’t come with its ineluctable b fears. This Significant Economic Presence Order, 2020, for instance, does not provide for how non-resident companies who have significant economic presence can have their profit determined, which can pose quite a bottleneck.

Furthermore, there is the problem that may come with administration, implementation enforcement and compliance with digital taxation, which is not one that can be swept under the carpet. It’s a reality that has trailed digital taxation almost everywhere.

Also, the problem that may come with tracking digital transactions is one that must be well. It is noteworthy that Nigeria has a double tax treaty with some countries (e.g. with, The United Kingdom, The Netherlands, Canada, Belgium, Pakistan, South Africa, China, France, Sweden, Mauritius, Italy etc.), and owing to the supreme nature of treaties, non-resident companies that operate from any of these countries, will not be affected by the SEP Order, until changes are made to the double tax treaties.

The SEP Order, in fact, provides that if Nigeria enters into a multilateral agreement or consensus arrangement with respect to the challenges of tax arising from digital economy, the provisions of that agreement or arrangement will apply. And this agreement or arrangement prevails over the SEP order itself

Whilst these possibilities are still such to mull over, stakeholders in the tax sector are entreated to comply with the provisions of this law for its smooth operation, and the tax authorities should put up necessary measures in place to tackle these likely hiccups.

Israel Olawunmi writes from Lagos. He has a keen interest in intellectual property, corporate practice, property law, litigation and general law practice. He can be reached at Olawunmiisrael10@gmail.com