Introduction
Prior to January 2020, when Nigeria’s first Finance Act was enacted, the country’s tax laws had remained static for many years, resulting in long-standing tax positions adopted by non-resident companies (NRCs) on their Nigerian tax matters. However, this scenario has evolved significantly as the Federal Government has employed annual Finance Acts as a fiscal tool to amend relevant laws, thereby impacting business operations in Nigeria.
The introduction of the Finance Act aimed at improving the ease of doing business and aligning Nigeria’s tax laws with global best practices has been largely positive. To date, approximately 167 amendments have been made, and the full impact of these changes is expected to unfold in the coming years as the business environment continues to improve.
Companies Income Tax: Expanding the Tax Net for NRCs
On July 24, 2014, the Federal Inland Revenue Service (FIRS) mandated NRCs to file full tax returns similar to their Nigerian counterparts, departing from the previous norm of taxing NRCs on a deemed tax basis. NRCs were required to report actual profits from Nigerian operations, including capital allowance computations and audited financial statements, effective from January 1, 2015. This move aimed to enhance the FIRS’s visibility on NRCs’ financial results and boost tax revenue.
Despite this effort, many NRCs reported losses or were not liable for tax under existing laws. Consequently, Section 13 of the Companies Income Tax (CIT) Act was reviewed and amended by the Finance Acts to broaden the tax base. Currently, NRCs are subject to tax if:
1. The NRC has a fixed base in Nigeria, with profits attributable to that base.
2. The NRC habitually operates through a person in Nigeria or maintains a stock of goods in Nigeria for regular deliveries.
3. The NRC engages in a single contract for surveys, deliveries, installations, or construction in Nigeria.
4. The NRC derives income from Nigeria through digital activities and has a Significant Economic Presence (SEP).
5. The NRC provides technical, management, consultancy, or professional services to a Nigerian resident without a physical presence.
6. The NRC engages in transactions with related parties that are not at arm’s length.
These amendments have brought more NRCs into the tax net, even without a fixed base in Nigeria. NRCs earning more than ₦25 million from remote operations in Nigeria should reassess their tax obligations.
Double Tax Treaties: Are They Adequate?
Nigeria has Double Tax Treaties (DTT) with 16 countries to ensure that a company resident in a DTT state is taxed only once for income derived from any contracting jurisdiction. Typically, these treaties stipulate that an NRC is liable for CIT in Nigeria only if it has a Permanent Establishment (PE) in the country. A PE is essentially a fixed place of business through which the enterprise’s business is carried out.
However, many DTTs have not been updated to cover remote digital, technical, professional, management, or consulting services. Consequently, an NRC in a DTT country without a PE in Nigeria might not be liable for tax, even if the income exceeds the SEP threshold. According to Section 45 of the CITA, arrangements under a DTT supersede the provisions of the CIT Act.
The FIRS, in a circular dated June 3, 2021, mandated a formal application process for claiming DTT benefits. Furthermore, the reduced tax rate of 7.5% on dividends, interests, and royalties for DTT residents was terminated from July 1, 2022, making NRCs liable to the standard withholding tax (WHT) rates.
Capital Gains Tax and Withdrawal of Investment Incentives
Before the Finance Acts, companies with 25% imported equity were exempt from minimum tax. This incentive was removed by the Finance Act 2019 to create a level playing field for Nigerian companies. However, this change may impact the attractiveness of investing in Nigerian companies, as investors may need to take loans to pay the minimum tax during loss-making periods.
The Finance Act 2021 removed the Capital Gains Tax (CGT) exemption on the disposal of shares in Nigerian companies. Gains from such disposals, worth at least ₦100 million within twelve consecutive months, are now taxed at 10%, subject to certain exemptions.
Additionally, Section 32 of the CGT Act was amended to impose CGT on restructuring between related entities unless specific conditions are met. The Finance Act 2019 also limited the interest deductible for tax purposes by Nigerian companies from loans advanced by related NRCs to 30% of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).
Key Amendments Relating to Transaction Taxes
The VAT implications of services provided by NRCs to Nigerian residents were clarified by the Finance Acts. Services are liable for VAT if the beneficiary is registered or located in Nigeria, regardless of where the service is rendered. Nigerian beneficiaries must self-account for VAT on such services, exposing cross-border transactions to potential double taxation and additional costs.
Moreover, the Finance Act reduced the WHT exemptions on interest for loans advanced to Nigerian companies, impacting the attractiveness of such investments.
Proposed Amendments in the 2022 Finance Bill
The 2022 Finance Bill proposed several amendments to address various tax issues, including:
– Exempting VAT on imported goods purchased online from VAT-registered suppliers.
– Imposing a 0.5% levy on eligible goods imported from outside Africa.
– Expanding excise duties to cover all services.
– Introducing a 50% investment tax credit for gas-related activities and a 50% corporate tax rate for companies engaged in gas flaring.
– Removing investment allowances on certain capital expenditures.
Tax as a Fiscal Tool for Government Revenue
The amendments introduced by the Finance Acts have significantly increased government tax revenues, with the FIRS reporting ₦10.1 trillion in tax collections for 2022, a 63% increase from 2021. The digitalization of the tax compliance process through the TaxPro Max platform has reduced compliance costs and improved efficiency.
However, the declining foreign direct investment (FDI) may not be directly linked to tax law amendments but rather to other factors such as foreign exchange challenges and insecurity. The Nigerian government must balance increasing tax revenues with stimulating economic growth to improve the tax-to-GDP ratio and ensure the effective utilization of tax revenues for social infrastructure.
Conclusion
The Nigerian government needs to evaluate and simplify the existing tax regime, expand the tax base, and explore new initiatives to attract investment. NRCs should stay informed about tax developments to leverage investment opportunities in Africa’s largest economy.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
