This article examines these conditions and evaluates the implication of the Finance Act 2019 and SEP Order on NRCs in Nigeria
Over the years, the World has evolved into a global village and the way business is carried out has changed greatly. With the advent of technology, the rate at which businesses have expanded their coverage from one part of the world to another is unprecedented and faster when compared with the evolution of international tax in Africa and domestic tax laws which guides the taxation business operations. This has resulted in either double taxation or nontaxation of revenue because the existing domestic laws in some African countries do not cover the taxation of Non-Resident Companies.
It is to this extent that the Nigerian Minister of Finance issued a clarification via the Companies Income Tax (Significant Economic Presence) Order 2020 (the SEP Order). The SEP Order details the conditions that create a taxable presence for Non-Resident Companies (NRCs) providing digital, technical, management, consultancy or professional services in Nigeria.
Taxation of NRCs in Nigeria Prior to the Finance Act 2019
Prior to the enactment of the Finance Act 2019, the conditions that create taxable presence for NRCs based on Section 13(2) of the Companies' Income Tax (CITA) are as follows:
a. the company has a fixed base of business in Nigeria;
b. it habitually carries on business through a person in Nigeria authorized to conduct business on its behalf (a dependent agent);
c. it executes a single contract for survey, deliveries, installations, or construction (turnkey project); and
d. it carries on business with connected parties in Nigeria on conditions not deemed to be at arm's length.
However, with the introduction of the Finance Act 2019 and SEP Order, the conditions that create taxable presence for NRCs have been widened to cover the provision of digital, technical, management, consultancy or professional services in Nigeria. Based on the SEP Order, NRCs providing digital, technical, management, consultancy or professional services would be deemed to have a taxable presence in Nigeria if they have a significant economic presence and profit can be attributed to the business activity carried out in Nigeria.
Conditions for Establishing a SEP for NRCs Providing Digital Services
In accordance with the SEP Order 2020, an NRC providing digital services will be deemed to have a significant economic presence in Nigeria in any accounting year where it; a. Derives from Nigeria, a gross turnover or income exceeding N25 million or its equivalent (about US$65,8761 ); b. from any or a combination of digital services provided; c. Uses Nigerian domain name (.ng) or registers a website address in Nigeria; or d. Has a purposeful and sustained interaction with persons in Nigeria, by customizing its digital platform to target the Nigerian market, including reflecting its product or service price in Nigerian currency or providing options for billing or payment in Nigerian currency.
In order to determine the gross turnover or income of an NRC in any particular year, the business activities carried on by the NRCs with its related parties would be considered. However, where an NRC is covered under a multilateral agreement or consensus arrangement that addresses the tax challenges arising from the digitization of the economy, the basis of taxation of the NRC will be determined based on the agreement. By implication, the significant economic presence conditions will not apply to any NRC covered by a Double Tax Treaty (DTT) which takes into consideration the tax challenges arising from the digitization of the economy.
Digital services have been described to include streaming or downloading services of digital contents (such as movies, videos, music, applications, games, e-books, etc.) to a person in Nigeria; transmission of data collected about Nigerian users generated from such users' activities on websites or mobile applications; provision of goods or services (including intermediation services) through a digital platform, website or other online applications that link suppliers and customers in Nigeria.
Conditions for Establishing an SEP for NRCs Providing Technical, Management, Consultancy or Professional Services.
An NRC involved in the provision of technical, management, consultancy or professional services will 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. a person resident in Nigeria; or
b. a fixed base or agent of an NRC.
Please note that technical services include advertising, training and provision of personnel as specified in the SEP Order. Further, the payments under the following arrangements by an NRC will not create a significant economic presence in Nigeria:
a. in respect of a contract of employment for teaching in or for teaching by an educational institution; or
b. by a foreign fixed base of a Nigerian company.
Practical Considerations on the SEP Order
NRCs providing digital, technical, management, consultancy or professional services that meet the conditions and thresholds stated in the SEP Order will be required to register for Companies' Income Tax (CIT) in Nigeria. However, the provision to Section 13(2)(a) -(e) of the Finance Act, 2019 provides that the final tax applicable on the income of NRCs providing technical, management, consultancy or professional services will be limited to Withholding Tax (WHT). It is expected that the applicable WHT will be deducted at source by the Nigerian customers and remitted to the Federal Inland Revenue Service (FIRS).
The Organization for Economic Co-operation and Development (OECD) is currently championing a consensus-based approach to determining significant economic presence. However, Nigeria like other countries of the world has adopted a unilateral-based approach, notwithstanding the work being done by the OECD. While this may be considered as a step in the right direction, there is the need for Nigeria to consider aligning with the OECD's approach upon finalization, in line with global best practices.
Nigeria's approach of setting turnover/income threshold of N25 million differs from the approach adopted by other countries of the world that have also adopted the unilateral approach. For instance, the Indian government via its 2020 Budget imposed a 2 per cent tax on NRCs carrying on business in India without a taxable presence. The threshold for creating a significant economic presence is US$267,000. In Indonesia, foreign e-commerce service providers carrying on business in the country will be deemed as having a permanent establishment under the local law and therefore subject to domestic tax. It is however not clear whether there is a minimum turnover/income threshold.
Although, the SEP Order provides further guidance on the conditions for determining a significant economic presence, it raises concerns on our how profit will be attributed to business activities carried out in Nigeria. Notwithstanding the above, the introduction of the significant economic presence is a welcome development as it provides a basis for the taxation of income from digital, technical, management, consultancy or professional services provided by NRCs in Nigeria. The incomes from these services have hitherto not been taxed in Nigeria, thereby resulting in a huge tax leakage and loss of tax revenue that should have ordinarily accrued to the Nigerian government.
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.