Taxation Of The Aviation Industry In Nigeria

By Oyetola Muyiwa Atoyebi, SAN.

Introduction:

Over the years, the Nigerian Aviation Industry has provided several benefits to the Nigerian economy, such as an increment in capital investment and safety and quality management systems. The Aviation sector contributes about 59 billion Naira to the national Gross Domestic Product (GDP) through the provision of a significant number of jobs, while contributing at least 8.5 billion Naira in tax annually. With Nigeria being a lower-middle-income economy with verse unexplored natural and intellectual resources, the teeming population provides a vast market and labour force to support industrial growth.[1]

Hence, the Nigerian Federal Government, realizing the role of air transport in the nation’s development, made significant attempts to develop the country’s air transport system.

This article seeks to examine the concept of Taxation in the aviation industry, as well as its contribution to the economic growth in the country.

Concept of Aviation in Nigeria:

In Nigeria, aviation entails the transportation of passengers and cargo by planes and helicopters. It is a mode of transportation that involves the movement or carriage of people or goods by air, using planes and helicopters. It has become the principal mode of public transportation. Long distances and high-value cargoes provide the most efficiency and value. Nevertheless, because the time and cost savings acquired decline as the distance travelled decreases, air transportation is typically advantageous even for relatively small distances. It also serves as a communication connection between the many groups of persons engaged, which is sometimes critical.[2]

Economic Contributions of the Aviation Industry in Nigeria

Nigeria’s air transport sector contributes the second-highest percentage of modal contribution to transport production. The Statistics show that the aviation sector in Nigeria supports 254,500 employments and contributes US$940 million (N184.7 billion) to national GDP13. The aviation sector generates 49% of this total (US$462 million or N90.8 billion) in direct production (through airports, airlines, and ground services), while the rest is obtained indirectly (via the supply chain).[3]

Tax Implication for Aircraft Trading/Operating in Nigeria

Aviation has a unique fiscal regime.  In many countries, it is subject to specific taxes and charges, such as a departure tax or a solidarity levy, etc.

Under the Nigerian Law, the Federal Inland Revenue Services (the FIRS) has issued a circular (Circular on 2021/14), to include the taxation of companies engaged in, air transport which replaces the previous Circular /2019/11 of 21 October 2020, on the same subject.

In light of the above, we have highlighted the key areas and tax allowable/not allowable under the extant laws;

1. Value-Added Tax (VAT);
2. Capital Gain Tax (CGT);
3. Stamp Duty; and
4. Withholding Tax.

VALUE-ADDED TAX (VAT)

The Federal Inland Revenue Service, in information Circular No. 9701, provided for exemption of aircraft, aircraft spare parts and ancillary equipment from payment of VAT.

Also, interest earned by a lessor on a finance lease is a return on investment and is thus not liable to a charge of VAT.[4]

CAPITAL GAINS TAX (CGT)

CGT is a tax imposed on capital gains arising from the sale or disposal of chargeable assets at a rate of 10 per cent. The sale of an aircraft would attract CGT. It should be noted, however, that where the sale of aircraft is done with such frequency as to be classified as a source of income rather than the disposal of an asset, then, income tax rather than CGT may apply in that instance.[5]

Stamp Duty

Stamp Duty is payable on documentation and instruments including sale and lease agreements, for example, the rate of the duty payable on the lease agreement depends on the term of one to seven years. The applicable duty is 0.7 per cent; although in some cases, the commissioner for stamp duty has assessed stamp duty at 1.5 per cent.[6]

WITHHOLDING TAX (WHT)

Income on a property (rent, hire or rights (royalties), or lease payments) situated in Nigeria is liable to tax, notwithstanding the place of payment. Where rent is to be paid to an individual or company, WHT at a rate of 10 per cent is applicable. It applies also to lease payments and loan payments. Grossing up is not unlawful.[7]

Parameters for ascertaining assessable and total profits in the aviation industry

1. Nigerian Companies: According to Section 13(1) of CITA, Nigerian companies operating in shipping, air transport, or cable operations are liable to taxation based on their worldwide income, regardless of whether the income was received in or transported into Nigeria.[8]
2. Foreign Companies: For Non-Resident Companies (NRCs) that carry out shipping, air transport or cable operations, the Circular highlighted as follows:
3. a) Under domestic tax laws: Section 14 of CITA contains specific rules for dealing with the taxation of profits of NRCs that carry out international shipping, air transport or cable operations in Nigeria. The FIRS’ interpretation of these rules are as follows:

• Profits of foreign airlines or shipping companies derived from Nigeria are taxable in Nigeria.
• Such profits may either be:

1. a) freight income or
2. b) nonfreight income.

Section 14 will apply to freight income (income from the carriage of passengers, mails, livestock or goods shipped, or loaded into a ship or an aircraft in Nigeria). In this regard, only the outbound freight income from Nigeria will be taxed under this Section.[9]

Section 14 will not apply to non-freight income (income from other activities including commission, demurrage, clearing fees, container damage fees, stevedoring, and so on). Instead, such income will be taxable in line with the taxable presence (or Permanent Establishment) rules in Section 13(2) of CITA.[10]

Where Section 14(2) cannot be applied, the FIRS is empowered to deem the profits on the revenue sourced from Nigeria for tax purposes, in line with Section 14(3). In practice, this is usually deemed at 20%.

Notwithstanding any of the 3 approaches above, the minimum tax payable by the NRC is 2% of their outbound freight from Nigeria.

Where there is a Tax Treaty: Where an NRC that carries out shipping and air transport activities is domiciled in a country which has a Double Taxation Agreement (DTA) with Nigeria, such NRC will be subject to tax based on the Article on Shipping and Air Transport in the relevant treaty. However, the treaty relief will only apply to the activities specifically listed in the DTA, and any other income will be considered under the Article on Business Profits and will be subject to tax accordingly. Also, for DTAs that require reciprocity (i.e companies resident in both countries must operate in the other country) ships and aircrafts are not interchangeable in meeting the conditions for the treaty relief. Filing of CIT returns in line with Section 55 of CITA, all companies including NRCs are required to submit tax returns to the FIRS, which will include the following:

1. Global consolidated audited financial statements of the company;
2. Financial statement relating to Nigerian operations, attested by an independent qualified accountant in Nigeria;
3. Tax computation schedules;
4. True and correct statement of profits attributable to Nigerian revenue sources;
5. Completed CIT Self-Assessment forms;
6. Evidence of payment of tax due if any.

Income from the leasing of ships and aircrafts: The FIRS clarified that in the absence of a DTA, where an NRC earns income from leasing ships or aircrafts, such income does not relate to the operation of ships or aircrafts and therefore is not taxable under Section 14 of CITA. Rather, such income is treated as non-freight income and is taxed under the relevant CITA rules. This is regardless of whether the lessor retains ownership of and manages the ship/aircraft (such as in a time/voyage or operating/wet lease arrangement), or if this is passed on to the lessee for the specified period (such as in a bareboat/demise or dry/finance lease arrangement).[11]

The relevant filing requirement for foreign shipping and airline companies is Section 55(1) which only requires such NRCs to submit audited financial statements (without including their global FS). Section 33 of CITA includes a general minimum tax provision for companies, assessed at 0.5% of companies’ gross turnover (subject to certain exemptions). However, Section 14 of CITA also includes a 2% minimum tax on the outbound freight income of Shipping and Airline NRCs. Based on legal principles and as clarified by the FIRS, the general minimum tax provision should not apply to freight income earned by Shipping and Airline NRCs, as this is specifically covered by Section 14.

Also, the FIRS clarified that non-freight and other ancillary income earned by Shipping and Airline NRCs are subject to VAT in Nigeria, but was silent on international freight activities. This should imply that VAT does not apply to international air and sea transportation. With regards to CGT, the FIRS highlighted that where a DTA exists and the aircrafts/vessels are not used in international traffic, CGT applies if the asset constitutes a PE and is in Nigeria at the time of disposal. However, the application of CGT in all DTA situations should not depend on whether a PE exists.

In addition, CGT requirements are not uniform across all DTAs, and each treaty needs to be considered for relevant transactions. Taxpayers should be aware that circulars are not law and cannot be relied on if they are inconsistent with law, or in line with judicial precedents. In addition, it may have been preferable if the FIRS provided additional guidance on the application of the rules to NRCs engaged in the transmission of messages under Section 15 of CITA. There may be questions about the current relevance of this provision, considering the recently introduced Digital SEP rules, which seem to address similar grounds. However, it is considered that NRCs that provide telecommunication or network-related services should remain taxable under Section 15.[12]

Other issues may be whether the reference to “transmission of messages” refers to the transmission of all forms of data, and how to practically delineate outbound from inbound transmission for CIT purposes.

1. The FIRS also clarified that such non-freight or ancillary activities are subject to VAT as applicable.
2. Any profits arising from the transhipment of passengers, livestock or other items are not chargeable to tax in Nigeria. The FIRS’ interpretation of the ways of computing the NRC’s profits are:
3. Based on the financial statements submitted with respect to Nigerian operations;
4. Where the NRC is resident in a country with similar CIT assessment rules to that of Nigeria, the FIRS can adopt the foreign country’s profit ratios to total revenue, and apply such ratios on the NRC’s revenue sourced from Nigeria, in line with Section 14(2) of CITA;

However, where the NRC is resident in a treaty country, time/voyage or operating/wet lease income will fall under the Article on Shipping and Air Transport, while bareboat/demise or dry/finance lease income will be treated as non-freight income unless specifically included by the DTA.[13]

CAPITAL GAINS TAX (CGT)

In the absence of a DTA, CGT will apply to any capital gains on the disposal of a ship or aircraft used in international traffic (notwithstanding the physical location of the asset), where:

1. The owner of the ship or aircraft is resident in Nigeria; or
2. A resident of Nigeria owns an interest in or right in the ship or aircraft.

For gains on disposal of vessels and aircrafts not used in international traffic, CGT will apply if either the vessels/aircrafts or their owners are physically located in Nigeria. Where a DTA exists, a non-resident will only be subject to CGT in Nigeria where the aircrafts/vessels are not used in international traffic, and the aircrafts/vessels are located in Nigeria at the time of the disposal, and constitute permanent establishments (PE) for the non-residents.[14]

CONCLUSION

Generally, taxation in the Aviation industry exists to primarily sustain the growing contribution of the sector, to the nation’s Gross Domestic Product (GDP). More so, the industry’s contribution to the nation’s Gross Domestic Product has also been attributed to the good taxation policies and development, that improved infrastructure and encouraged passenger traffic.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN.

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.

Mr. Atoyebi has expertise in and a vast knowledge of Corporate and Commercial Law and this has seen him advise and represent his vast clientele in a myriad of high level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

COUNTRIBUTOR: Jamilu Samaila

Jamaila is a member of the Corporate and Commercial Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Nigerian tax law helping clients comply with tax rules and regulations.

He can be reached at jamilu.samaila@omaplex.com.ng.

[1] Suleiman Laden, ‘An Analysis of Air Transportation in Nigeria’ https://www.researchgate.net/publication/311695328_AN_ANALYSIS_OF_AIR_TRANSPORTATION_IN_NIGERIA accessed May 17th 2022

[2] Adebukola Daramola, ‘Air Travel and Article Operations in Nigeria: Market Potentials and Challenges https://www.intechopen.com/chapters/64849 > Accessed on 15^th May, 2022

[3] https://www.researchgate.net/publication/311695328_AN_ANALYSIS_OF_AIR_TRANSPORTATION_IN_NIGERIA< accessed on 17^th May, 2022>

[4] https://iclg.com/practice-areas/aviation-laws-and-regulations/nigeria<accessed on 20^th May, 2022>

[5] Ibid2

[6] Ibid3

[7] Ibid3

[8] https://www.pwc.com/ng/en/assets/pdf/firs-circular-international-logistics.pdf< accessed on 20^th May, 2022>

[9] ibid

[10] https://www.firs.gov.ng/wp-content/uploads/2021/06/TAXATION-OF-COMPANIES-ENGAGED-IN-SHIPPING- AIR-TRANSPORT-AND-CABLE-UNDERTAKINGS.pdf<accessed on 20^th May, 2022>

[11] https://www.pwc.com/ng/en/assets/pdf/firs-circular-international-logistics.pdf< accessed on 20^th May, 2022>

[12] ibid

[13] ibid

[14] ibid