The recent and drastic fall in oil
prices in the global market has hit hard on oil revenue dependent nations,
Nigeria inclusive. Thus, this has led the Government to create budgetary
policies seeking to resort to other sources of revenue, taxation being at the
forefront. However, if the Nigerian government is determined to increase its
tax revenue base, then certainty of laws governing corporate taxation of both
Nigerian and foreign companies carrying on business in Nigeria has to be at the
While a Nigerian company is taxable on
its worldwide income, a non-resident entity is liable to tax in Nigeria on its
profit attributable to the business or trade carried on in Nigeria. The issue of
taxation of foreign unincorporated companies in Nigeria has often stirred up
legal controversy.

This may be attributed to the conflicting provisions in the
Companies and Allied Matters Act and the Companies Income Tax Act. While the
CAMA provides that foreign companies seeking to carry on business in Nigeria
must first incorporate with the Corporate Affairs Commission (except companies
exempted under the CAMA) before they can be allowed to carry on business in
Nigeria, the CITA offers a sharp contrast to this rule, stating that a foreign
company need not be incorporated before it can be deemed to have carried on
business in Nigeria, insofar as it falls under the provisions of section 13
of the CITA. Thus, supporters of the derogation of the rule in section
of the CAMA by the CITA may reiterate the dictum of Lord
in Ministry of Finance v Smith (1927) AC 193 at 193,
where the court stated that if a company carries on trade illegally and makes a
profit, such profit is subject to tax.
Taxation of Foreign Companies under the
Section 9(1) of the Nigerian Companies
Income Tax Act (CITA)
provides that tax is payable at the specified rate
upon the profits of any company accruing in, derived from,
brought into, or received in Nigeria in respect of certain transactions
(emphasis mine). The specified rate for corporate taxation in Nigeria,
excluding companies involved in upstream petroleum operations is 30% CIT and 2%
Education tax.
By the provisions of Section 13(2)
of the CITA, the profits of a company, other than a Nigerian company,
from any trade or business are deemed to be derived from Nigeria in the
following circumstances-
1.     If that company has a
fixed base (as limited in section 13(3)) of business in Nigeria to the extent
that the profits are attributable to the fixed base.
2.     If it does not have a
fixed base but habitually operates a trade or business through a person in
Nigeria, or in circumstances set out in section 3(2)(b)
3.     If the trade or
business involves a single contract for surveys, deliveries, installation or
construction, the profit from the contract (turnkey contract).
4.     Where the trade or
business are not made at an arm’s length.
The Supreme Court while interpreting
the meaning of “fixed base” in Shell International Petroleum BV v
stated that the phrase should not be confused with “residence”, but
that in the context of the CITA, it connotes a place where a company has
carried on business for a long time notwithstanding that it is not the owner of
the place.
It is noteworthy to note that sequel to
a ruling obtained in SAIPEM v FIRS, where the court held that the
profits of a foreign company once derived from Nigeria are subject to tax
regardless of whether any of the conditions in section 13 has been met, the
FIRS has utilized the provisions of section 30 of the CITA which empowers the
Federal Inland Revenue Service (FIRS) to assess companies to income tax based
on a reasonable percentage of turnover. This is referred to as the deemed
profit basis, best of judgment assessment or presumptive taxation.
In practice, the FIRS while assessing
non-resident companies to tax, prescribes a deemed profit of 20% of turnover
derived from Nigeria (assuming all tax deductible expenses and capital
allowance of 80%), which is then taxed at the corporate income tax rate of 30%.
This results in an effective tax of 6% of turnover. This assessment basis has
been widely adopted by non-resident companies, mostly due to its simplicity and
the fact that disputes regarding tax deductibility of costs would be avoided.
A clear reading of the decision of the
court in SAIPEM v FIRS would deduce that a non-resident company who
although does not fall under the fixed base rule or other provisions of section
13 of the CITA would still be liable to Nigerian Corporate Tax if the FIRS can
prove that the company derived income from Nigeria.
However, in a judgment delivered by
Justice M.B IDRIS of the Federal High Court sitting in Ikoyi on September 18th
2015 in the case between JGC v FIRS, being an appeal from the Tax Appeal
Tribunal, the court overruled its earlier ruling in SAPIEM’s case. In the
aforementioned case, the FIRS had raised notices of assessment on JGC who had
entered into a contract with Mobil Nigeria Unlimited but had not performed any
part of the contract in Nigeria. The court held that JGC was not liable to pay
Nigerian corporate tax unless it falls under the provisions of section 13 of
the CITA.
The varying judgments of the Federal
High Court in SAIPEM v FIRS and JGC v FIRS coupled by the recent
directive issued by the Transfer Pricing Division of the FIRS where it directed
non-resident companies to comply with the provisions of the CITA and file its
full tax returns, all are unneeded uncertainties which will only harm the trust
placed on the revenue authorities in this time when the country is in dire need
of tax payers money.