Finance Act 2019 (“the Finance Act” or “the Act”) was signed into law on 3
February 2020. The major aim of the Act is to make the provisions of existing
tax legislations more responsive to tax reform. The Act amended the Companies
Income Tax Act, Cap C21, Value Added Tax Act, Cap. V1, Customs and Excise
Tariff, Etc. (Consolidation) Act, Cap. C49, Personal Income Act, Cap. P8,
Capital Gains Tax Act, Cap. C1, Stamp Duties Act, Cap. S8 and Petroleum Profit
Tax Act, Cap. P13, Laws of the Federation of Nigeria 2004.
of the highlights of the Act is the introduction of a new tax regime for
non-Nigerian companies with ‘significant
economic presence’ (“SEP”) in Nigeria. Section 4 of the Finance Act amended
Section 13(2) (c), (e) and (4)of the Companies Income Tax Act and empowered the
Minister of Finance to, by order; determine what constitutes the significant
economic presence of a company other than a Nigerian company.
exercise of the above powers, the Honourable Minister of Finance, Budget and
National Planning made the Companies Income Tax (Significant Economic Presence)
Order, 2020 (“the Order”).
Order sets out, among other things, the criteria for determining non-resident
companies with significant economic presence.
Presence as Basis for Taxation of Foreign Companies
13(2) (c), (e) and (4) of the Companies Income Tax Act(“CITA”) as amended by
Section 4 of the Finance Act provides as follows:
“The profits of a
company other than a Nigerian company from any trade or business shall be
deemed to be derived from or taxable in Nigeria:
(c) if it transmits, emits or receives
signals, sounds, messages, images or data of any kind by cable, radio,
electromagnetic systems or any other electronic or wireless apparatus to Nigeria
in respect of any activity, including electronic commerce, application store,
high frequency trading, electronic data storage, online adverts, participative
network platform, online payments and so on, to the extent that the company has
significant economic presence in Nigeria and profit can be attributable to such
(e) if the trade or
business comprises of furnishing of technical, management, consultancy or
professional services outside of Nigeria to a person resident in Nigeria to the
extent that the company has significant economic presence in Nigeria;
Provided that the
withholding tax income under this paragraph shall be the final tax on the
income of a non-resident recipient who does not otherwise fall within the scope
of subsection (2) (a)–(e).
For the purpose of subsection (2) (c) and (e), the Minister may by order,
determine what constitutes the significant economic present of a company other
than a Nigerian company.”
the light of the foregoing, the Companies Income Tax (Significant Economic
Presence) Order, 2020 (“the Order”) provides that for the purpose of the above
provisions of CITA, a non-Nigerian company shall have significant economic
presence in Nigeria where it derives gross turnover or income of more than ₦25
million or its equivalent in other countries, in that year, from any or
combination of the following –
downloading services of digital contents, including but not limited to movies,
videos, music, applications, games and e-books to any person in Nigeria,
(ii) transmission of
data collected about Nigerian users which has been generated from such users’
activities on a digital interface including website or mobile applications,
(iii) provisions of
goods or services… directly or indirectly through a digital platform to
provision of intermediation services through a digital platform, website or
other online applications that link suppliers and customers in Nigeria”;
determining the ₦25 million threshold
above, the activities of connected persons shall be aggregated. The Order
defines “connected persons” to mean associates or business associates where one
person is involved in the management, control or capital of the other or where
same person or persons are involved in the management, control or capital of
Order also provides that where a non-resident company uses Nigerian domain name
(.ng) or registers a website address in Nigeria; or has a purposeful and
sustained interaction with persons in Nigeria, including reflecting the prices
of its products and services in Nigerian currency or providing options for
billing or payment in Nigeria currency, such company will be deemed to have
significance economic presence in Nigeria.
a non-resident company will be deemed to have significant economic presence in
Nigeria if the company provides technical (including advertising services,
training and provision of personnel), professional, management or consultancy
services in return for payment to a person resident in Nigeria or to a
non-Nigerian company with a fixed base or agent in Nigeria except where such
payment is made to an employee of the person to whom the services are rendered
under a contract of employee as well as payments made for educational purposes
or by a foreign base of a Nigerian company.
Order defines “any other electronic or wireless apparatus” as used in Section
13(2)(c) of the Finance Act to include digital or related activities carried on
Implications of this
new tax regime
the light of the foregoing, non-resident companies with SEP are now required to
register for income taxes, prepare financial statements in respect of the
income generate from Nigeria; determine the profits that are attributable to
their activities in Nigeria, and file annual tax returns to the Federal Inland
Revenue Service (“the FIRS”) as provided by CITA.
the other hand, Nigerian companies are now required to deduct withholding tax
(“WHT”) from payments made for services provided by non-Nigerian companies.
the Order provides that foreign companies covered under any multilateral
agreement to which Nigeria is a party, or any consensus arrangement aimed at
addressing the tax challenges arising from the digitalization of the economy,
will be treated in accordance such agreement or arrangement from the effective
date in Nigeria.
is noteworthy since Nigeria is a member of the Organization for Economic
Co-operation and Development’s Inclusive Framework on Base Erosion and Profit
Shifting (“the OECD Framework on BEPS” or “the framework”). Thus, the
government recognizes that an agreement may be reached under the framework on a
unified approach for the allocation of taxing rights and profits pertaining to
the framework’s current unified approach will only apply to groups with annual
revenues above €750 million ($840 million). Also, even where this threshold is
met, a group may still be excluded from the scope of the approach if its profit
margins are below a threshold which is yet to be determined. The implication of
the foregoing is that many non-resident groups that do not qualify to be taxed
under the current unified approach may continue to be taxed under the extant
SEP Order and the applicable rules.
is therefore advisable for non-resident companies who wish to rely on the any
tax treaties or consensual arrangement including the OECD Framework on BEPS, to
engage FIRS in this regard, to claim benefit under such arrangement.
first challenge to be noted with respect to this tax regime is that while the
Order was published on 29 May 2020, the effective date is 3 February 2020 which
is the effective date of the Finance Act, having been signed by the President
of Nigeria on that day. The implication of this on transactions and/or payments
carried out before 29 May 2020 is still unclear. It is expected that the
Minister and/or FIRS will issue a circular to provide guidance in this regard.
is also not clear how the FIRS intends to enforce this Order with respect to
non-resident digital companies. While Nigerian customers of such companies may
be expected to make withholding tax (“WHT”) deductions and remit to FIRS; FIRS
may yet issue a circular to this effect.
neither the Finance Act nor the Order states how to determine the amount of
profits of a foreign digital company that will be taxed. While the OECD public
consultation document, of 13 February 2019 on Addressing the Tax Challenges of the Digitalisation of the Economy,
contemplates that only a portion of the profits from the transaction should be
taxed in the jurisdiction where the non-resident company has significant
economic presence, it is not yet settled whether this can be applied in Nigeria
in view of the arm’s length principle of profit attribution provided in the
Income Tax (Transfer Pricing) Regulation 2018 and other relevant legislations,
and reemphasized by the Tax Appeal Tribunal in the case of Prime Plastichem Nigeria Limited
v. Federal Inland Revenue Service, Appeal No.: TAT/LZ/CIT/015/2017, judgment delivered on 19 February
2020. Thus, fractional apportionment of profit may only apply to companies with
SEP, if a new legislation or guideline is introduced to allow such method of
determining taxable profit.
practice, when FIRS is unsure about the taxable profits of non-residents, an
assessment is based on a percentage (usually 6%) of the Nigerian sourced
turnover. It must however be noted that companies with SEP are not included in
the categories of non-residents that can be taxed in this manner. Nevertheless,
FIRS can still employ this method of taxation, relying on sections 30 and 65 of
CITA that allows FIRS to tax companies using a best of judgment assessment.
companies with a customer base in Nigeria are advised to consider how this new
tax regime affects them. While we await clarifications from FIRS on the gray
areas pointed out above, affected companies may, in the meantime, engage FIRS
on these issues. This will help to avoid disputes and possible double taxation.
companies are also advised to consider deducting WHT from payments made to
non-resident digital companies in view of this new tax regime.
companies with SEP in Nigeria are also advised to bear in mind the provisions
of relevant treaties and arrangements that may affect their tax liability when
negotiating agreements. Both resident and non-resident companies are advised to
seek expert opinion on specific issues that may affect them.