In this article, two Associates of Pinheiro LP Aanuoluwapo Babalola and Stephen Jones identify and analyse the steps Nigeria is taking to adequately address the problem of taxation of NRCs.
Taxation is a vital stream of revenue generation for Nigeria and in order to maximise this, there has to be valiant provisions to ensure the country generates enough revenue into her coffers. Taxation is the imposition of levies and financial obligations on citizens and corporate entities. Taxation revenue includes companies’ income tax, customs and excise duties, value-added tax and personal income tax.
For decades, Nigeria’s mainstream revenue has been through the trade of crude oil, until the oil crisis in 2014, which led Nigeria into an economic recession. Before then, the country had long neglected other viable sources of income (such as taxation, particularly the taxation of digital companies.) To salvage the prevailing negative economic position at the time, the regulatory authorities directed their minds towards tax optimisation which shift has resulted in the enactment of the Finance Act 2020 (FA 20). The FA 20 has widened the tax net by imposing taxes on the activities of Non-Resident Companies (NRCs) that generate income from Nigeria. This article will focus specifically on the taxation of (NRCs) carrying on business in Nigeria and the practicability of the laws, by examining whether or not the purpose and intent of the legislature are realistic and achievable.
NRCs are foreign companies which are not domiciled/incorporated in Nigeria, although carrying on business in Nigeria or having the intention to carry on business in Nigeria.
The challenges faced with the taxation of NRCs are not problems specific to Nigeria, but a worldwide conundrum and there have been concerted efforts to tackle this. The Organisation for Economic Co-operation and Development (OECD) is currently leading multilateral efforts to address tax challenges from digitalisation of the economy.
In the interim, we would be dedicating the remainder of this article to identifying and analysing the steps Nigeria is taking to adequately address the problem of taxation of NRCs.
First, Section 78 (1) of the Companies and Allied Matters Act No. 3, 2020 (CAMA) mandates that NRCs having the intention of carrying on business in Nigeria shall take all steps necessary to obtain incorporation as a separate entity in Nigeria for that purpose, but until so incorporated, the foreign company shall not carry on business in Nigeria or exercise any of the powers of a registered company.
Section 78 (2) of CAMA goes on to provide that any acts of NRCs in contravention of the incorporation mandate is void. It is the opinion of the author that the purpose and intent of these provisions is to ensure that through incorporation in Nigeria, the NRCs fall within the ambit of section 55 of Companies Income Tax Act Cap. C21 (CITA) which mandates every company in Nigeria to at least once a year without notice or demand therefrom, file their audited accounts, as well as tax computations. It ensures that through incorporation, NRCs become taxable in Nigeria. Examples of NRCs that comply with these provisions include Standard Chartered Bank, Domino’s Pizza, Shell Nigeria, Texaco, KPMG, amongst others.
In reality, there are NRCs who carry on business in Nigeria without registration/incorporation, thereby not paying tax in Nigeria. Examples of such companies include Netflix, Spotify, Twitter, YouTube, among others.
There have been three (3) main enactments by legislators to mitigate the loss of tax revenue that Nigeria suffers as a result of this tax leakage, these are namely: CITA, the Finance Act 2019 (FA 19) amendments, and the further amendments by Finance Act 2020 (FA 20). These will be dealt with individually.
Companies Income Tax Act (CITA)
Section 13 (2) of CITA was the first provision with the aim of imposing tax on companies other than Nigerian companies. It provided thus:
The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria-
(a) if that company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base;
(b) if it does not have such a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorised to conduct on its behalf or on behalf of some other companies controlled by it or which have a controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company, to the extent that the profit is attributable to the business or trade or activities carried on through that person;
(c) if that trade or business or activities involves a single contract for surveys, deliveries, installations or construction, the profit from that contract; and
(d) where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the company and such person in their commercial or financial relations which in the opinion of the Board is deemed to be artificial or fictitious, so much of the profit adjusted by the Board to reflect arm’s length transaction.
CITA was enacted in 1977 and the provisions cited above did a good job in qualifying how a foreign company should be taxed at the time. The business landscape at the time of CITA’s enactment was very different as this was before the advent of the internet and other modern communication tools that made it easier for people and businesses to interact without being physically present in the same place. However, the growth of technology and ease of doing business has broken down a lot of barriers to entry in carrying on business.
The world has become a global village, as such companies are able to tap into different markets without being domiciled in that market. An example is Spotify, a digital music streaming service that gives its users access to podcasts and millions of songs. Spotify recently made its services available in Nigeria; its offering contains a specified pricing plan that takes into effect the economic position and buying power of its Nigerian target market. Spotify is not incorporated in Nigeria, nor does it have a fixed base/office in Nigeria, as such per the application of the CITA provisions cited above, the profits Spotify makes in Nigeria would not be deemed to be derived from Nigeria and therefore not taxable. This provision occasioned tax leakage in the light of technology advancements and thus needed to be amended.
Finance Act 2019
It is important to note that the Finance Act 2019 made amendments to CITA which took effect on January 13, 2020. The aim of the amendments pertaining to NRCs was to widen the categorisation of NRCs that will be taxable in Nigeria to reflect technological developments since the world becoming a global village. Section 4 of FA 19 introduced new provisions to section 13 (2) of CITA, it added new subsections (c) and (e):
The profits of a company other than a Nigerian company from or taxable in any trade or business shall be deemed to be derived from Nigeria-
(c) if it transmits, emits or receives signals, sounds, messages, images…to Nigeria in respect of any activity,…high frequency trading…to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity;
(e) if the trade or business comprises the 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.
These provisions, particularly (c) was added so that digital companies such as Spotify, Facebook, Twitter, YouTube, Netflix, amongst a plethora of others who operate in Nigeria without incorporation in Nigeria or having an office in Nigeria will become taxable in Nigeria.
The words “Significant Economic Presence’’ alluded to in the new provisions added by FA 19 was defined in Companies Income Tax (Significant Economic Presence) Order 2020 as where a NRC derives gross turnover or income of more than N25 million or its equivalent in other currencies from its digital operations in Nigeria in that year.
Section 3 of FA 19 also introduced a new provision which substitutes the provision of Section 10 of CITA. This new provision requires every company operating in Nigeria to obtain a Tax Identification Number (TIN) which shall be displayed by the company on all business transactions with other companies and individuals. Conversely, one of the requirements in obtaining TIN in Nigeria is a Certificate of Incorporation in Nigeria as well as other Incorporation documents. This requirement means NRC not incorporated in Nigeria would find it impossible to obtain TIN without first incorporating the company in Nigeria.
Finance Act 2020
The further amendments pertaining to NRC made by FA 20 to CITA focuses on how NRCs will pay tax. It provides thus:
1A) Where any company other than a Nigerian company derives profit from or is taxable in Nigeria under section 13 (2) of this Act, such company shall be required to submit a return for the relevant year of assessment containing:
a) the company’s full audited financial statements and the financial statement of the Nigerian operations, attested by an independent qualified or certified accountant in Nigeria;
b) tax computation schedules based on the profits attributable to its Nigerian operations;
c) a true and correct statement, in writing, containing the amount of profits from each and every source in Nigeria; and
d) duly completed Companies Income Tax Self-Assessment Forms:
Provided that in a year of assessment where a company other than a Nigerian company only earns income on which withholding tax is the final tax under this Act, the obligation to file a tax return in the manner prescribed shall not apply to such company in that year of assessment.
These provisions mandate that NRCs who derive profit from Nigeria shall submit financial statements of their Nigerian operations as well as the financial statements from every country in which it operates at least once a year to the Federal Inland Revenue Service. This is a clearly onerous and ambitious responsibility being placed on NRCs, especially as the aim of the legislation is to ensure that NRCs become easily compliant with the taxation requirements in Nigeria, as well as promote the ease of doing business in Nigeria which is one of the goals of the present administration as laid out by the Presidential Enabling Business Environment Council (PEBEC).
There is also the issue of ascertaining exactly how much revenue is derived from their Nigerian operations as well as ascertaining capital expenditure attributable to the Nigerian market, i.e. issues of determining the tax deductible expenses from the total accrued income. How an independent certified accountant in Nigeria can satisfy itself of the true position on the profits of NRCs generated within and outside Nigeria remains unclear.
What are the penalties for failure to comply?
Section 55(4) of CITA provides that any company that fails to comply with the time of filing returns shall be liable to pay as penalties:
(a) N25,000 in the first month in which the failure occurs; and
(b) N5,000 for each subsequent month in which the failure occurs.
To put these fines in perspective as it targets NRCs who more often than not transact in foreign currencies, a defaulting NRC would be liable to pay $200 per annum (based on current exchange rate) as penalties for failure to comply with the time of filing returns. This in the opinion of the author is pittance and does little or nothing as the deterrence it is intended to be.
Additionally, section 85(1) of CITA provides that if any tax is not paid within the period of assessment, a sum equal to 10 percent per annum of the amount of tax payable shall be added, the tax due shall also carry interest at bank lending rate. Interestingly, this provision also applies even where the NRCs have not submitted its tax filings as section 65(3) of CITA provides that:
Where a company has not delivered a return and the Board (Federal Inland Revenue Service) is of the opinion that such company is liable to pay tax, the Board may, according to the best of its judgment, determine the amount of the total profits of such company and make an assessment accordingly.
This means that even where a NRC does not file its returns, the Board may exercise its discretion in determining the taxable profits attributable to the NRC, using the best judgement assessment.
The penalties set out in section 55(4) of CITA has largely remained unchanged since 1977 and are shrouded in ineffectiveness and uncertainty, thereby making them pointless and/or inapplicable to the realities of NRCs.
Also to be noted is that a majority of NRC that fall under these new taxation provisions are companies that carry on business in other countries through a permanent establishment situated therein. As such, they might fall under the Double Taxation Relief (DTR) Orders Nigeria has with other contracting States which precludes them from paying tax in Nigeria as they have already paid tax in the contracting state. Nigeria currently has DTR with 14 countries, namely: The United Kingdom, Netherlands, Canada, South Africa, China, France, Philippines, Singapore, Slovakia, Czech Republic, Romania, Belgium, Pakistan, Italy, and all these treaties are comprehensive except that of Italy which covers Air and Shipping Agreements only. An example of a NRC that may fall under the DTR is Spotify. Spotify is domiciled and pays tax in the United Kingdom; based on this Spotify may be exempted from paying Companies Income Tax in Nigeria.
Is there a silver lining? (Conclusion)
These amendments are welcome improvements as they mean that the legislative arm of government are becoming pragmatic and not stuck in the old ways of doing things. However, there is a realisation that some of the provisions of the legislation might be difficult to enforce, or such enforcement would lead to more damage than good to Nigeria’s economy. For example, deciding to ban the operations of NRCs who do not comply with the taxation requirements in Nigeria would likely lead to more harm than good; there would be public outcry if the Federal Government decides to ban Twitter.
Also, there is no clear way to ascertain revenue generated in Nigeria vis a vis the capital expenditure on the Nigerian market. This therefore creates a clog in the way of enforcing taxation by non-resident companies.
The innovative amendments have done a good job in widening the tax net to account for the world becoming a global village and the changes in how companies operate. For example cryptocurrency and commodities trading platforms that operate in Nigeria such as Binance, eToro, and DriveWealth are now taxable in Nigeria. These platforms are a departure from the traditional way of trading commodities which required people going to registered stock brokers before they could trade stocks.
The applicability of the provisions has not been smooth sailing as the provisions impose onerous filing obligations on the NRCs. If the intention of the legislators were to make NRCs tax compliant in Nigeria, then the focus should be on the ways to make it easy for them to comply with the said provisions. For example, the requirements of NRCs to submit the company’s full audited financial statements from all territories in which it operates and the financial statement of the Nigerian operations should be eased; NRCs should only submit the full audited financial statement of its Nigerian operations.
The legislators were relying on the good faith and integrity of the NRCs to willingly comply with the taxation requirements. However, business owners operate a cutthroat culture and expecting them to willingly submit to paying tax is akin to viewing the world through an unduly idealistic, optimistic, or wistful perspective. Whilst the theoretical part of the provisions sounds good, its application has failed to live up to expectations.
Overall, the improvements made to CITA are laudable as they seek to plug the hole of tax leakage and will increase the revenue generated from tax in the country. This is however the first iteration of such policies, therefore there are bound to be areas for improvement. Subsequent iterations would seek to cure the oversight and/or lack of proper structure occasioned by its implementation.
The OECD leading multilateral efforts to address tax challenges from digitalisation of the economy would create a consensus-based solution thereby evicting the need for Nigeria to act unilaterally.
To further strengthen Nigeria’s drive towards taxation of NRC, we recommend:
That regulatory authorities particularly the FIRS engage with relevant stakeholders to clarify grey areas of implementation.
That the relevant regulatory agencies draw up clear and implementable strategies which would prevent tax evasion by NRCs.
Investment in the creation of a central database for all companies operating physically and digitally in Nigeria in order to harmonize information.
Upward revision of the penalties provided for default to file returns to meet present commercial needs.
The requirements for obtaining TIN should be eased specifically for NRCs. The requirement of CAC Number/Certificate of Incorporation should be removed for NRCs in order to encourage compliance.
Written by Babalola and Jones are Associates of Pinheiro L