Understanding The Companies Income Tax (Significant Economic Presence) Order 2020

By Ebube Godwin Onyejekwulum Esq

Introduction

The Finance Act 2019 (The FA) made sweeping amendments to various tax laws in Nigeria including the Companies income Tax Act (CITA) CAP C 21 Laws of the Federation (LFN) 2004. Interestingly, The FA introduced the concept of “significant economic presence” as a basis for determining the profits of Non-Resident Companies (NRCs) providing digital services as well as technical, management, consultancy or professional services in Nigeria. The FA did not provide what constitutes “significant economic presence” but empowers the Minister to make an order which will determine what constitutes significant economic presence of a non-resident company. In exercise of the power conferred by the Law, The Honourable Minister of Finance, Budget and National Planning, Mrs Zainab Shamsuna Ahmed has issued The Companies Income Tax (Significant Economic Presence) Order 2020 (SEP Order). This paper will review the SEP Order which took effect from 3^rd February, 2020 as it relates to the Taxation of NRCs in Nigeria.

Amendment of CITA

Prior to the enactment of the The FA, Non-Resident Companies were only deemed to be liable to Company income tax in Nigeria under Section 13 of the CITA if they: (i) carried on business through a fixed base in Nigeria; (ii) carried on business through an agent in Nigeria; (iii) executed a single contract for surveys, deliveries, installations or construction in Nigeria; or (iv) failed to price their related party transactions at arm’s length. However, Section 4 of The FA amended Section 13 of the CITA by introducing a new Section 13 (2) C which provides as follows:

“ 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 activity”

Also The FA amended the CITA to introduce a new Section 13 2(E) as follows:

“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…”

The SEP Order 2020

Paragraph 1 (1) of the SEP Order specifies the threshold for determining the significant economic presence of a non resident company involved in Digital transactions as follows:

1. it derives gross turnover or income in excess of ₦25,000,000.00 or its equivalent in other currencies in a given accounting year from any of the following activities: a) Streaming or downloading services of digital contents, b) transmission of data collected about Nigerian users which has been generated from users’ activities on a digital interface, c) Provision of goods and services through a digital platform in Nigeria, d) Provision of intermediation services through a digital platform that link suppliers and customers in Nigeria;
2. it uses a Nigerian domain name (.ng) or registers a website in Nigeria; or
3. it has a purposeful and sustained interaction with persons in Nigeria by customising its platform to target persons in Nigeria including reflecting prices of products/services in Naira and providing options for billing or payment in Naira etc.

Paragraph 1(5) of the SEP Order provides that in determining The ₦25million threshold activities carried on by the NRCs “connected persons” during the accounting year will be aggregated.  “Connected persons” are defined as associates who are person(s) that participate directly or indirectly in the management, control or capital of the company.

The effect of the SEP Order is that NRCs that provide digital/online service such as Netflix, Alibaba Express, PayPal, EBay, Amazon, Facebook, YouTube, Twitter and other foreign platforms which are video streaming websites, social media platforms, and NRCs that offer downloads of digital contents may now be required by Law to pay tax in Nigeria. Therefore where a company does not have physical presence in Nigeria but has significant economic presence in Nigeria, it could be liable to pay tax in Nigeria.

Also, the SEP Order has clarified that “ any other electronic and wireless apparatus” referred to in Section 13 2(c) of the CITA include digital or related activities carried on through satellite.

There is no doubt that transactions in the digital economy generate significant revenue for companies. However, in most cases the huge income has not resulted in the expected corresponding increment in tax revenue within the jurisdictions where these transactions occur. The major reason for the mismatch is that a number of service providers within the digital space are not captured within the tax net because they do not have an identifiable physical presence in jurisdictions where these economic activities take place. Hitherto, there was no legal framework for the taxation of the digital economy in Nigeria, but by the amendment of the CITA to introduce the concept of “Significant Economic Presence” and the SEP Order, Nigeria has filled the missing gap. Nigeria joined other countries including Israel and India to recognize and take steps to tackle the issue of tax leakages and revenue loss from the Digital economy by introduction of the SEP as a basis for taxing NRCs.

Paragraph 2 of the SEP Order provides that a NRC that provides technical, professional, management or consulting services shall have a Significant Economic Presence in Nigeria if it earns income or receives payment from:

1. A person resident in Nigeria; or
2. A fixed base or agent of a non-Nigerian company. Under this category, the withholding tax that is deducted by the recipient of the service will be the final tax. It is important to note that payments to employees or for teaching in an educational institution and Payments by a Foreign fixed base of a Nigerian company are exempted.The SEP Order has expanded the meaning of technical services to include service of a specialized nature such as advertising, training services and provision of personnel.

The FA did not address the question of the status to be accorded to existing Double Tax Treaties. Importantly, Paragraph 1 (3) of the SEP Order provides that Where an NRC is covered by any multilateral agreement or consensus arrangement to address the tax challenges arising from the digitalization of the economy, to which Nigeria is a party, the provisions of that agreement or arrangement will apply. It follows that NRCs that operate from a country that has a Double Tax Treaty (DTT) with Nigeria, will not be affected by the SEP Order. This means that the DTT will effectively override the SEP Order and the amended CITA.

Conclusion

The introduction of a framework for Taxation of NRCs that are involved in Digital Transactions as well as technical, professional, management or consulting services is a step in the right direction. However, an area of concern with respect to significant Economic presence is that the meaning and scope is determined solely by the Minister. Although this is a flexible approach and has ease of amendment, it also creates wide room for uncertainty and discretionary expansion of the scope of SEP in Nigeria and may have a negative effect on perception of Nigerian tax law by investors. Also, The SEP Order provided guidelines for determining that a non- resident company has significant economic presence in Nigeria but the next issue is how to determine the profit attributable to that economic activity. This issue was not addressed by the SEP order and will certainly create uncertainties for NRCs who need to comply.Obviously, if the non-resident company operates separate account(s) in Nigeria where payment is received, it will be easy to determine the profit attributable to its SEP activities but will be otherwise difficult. It is therefore recommended that the Federal Inland Revenue Service (FIRS) should provide clear rules and guidance in respect of how the profit attributable can be determined. Furthermore, enforcing the amended CITA and SEP order will require full deployment of state of the art technology/relevant digital tools and IT experts as well as appropriate infrastructure to track the income generated by the NRCs from Nigeria and to ascertain when the revenue threshold is met.

It is recognized that FIRS will struggle with enforcement and compliance as many of the NRCs may be outside its territorial reach, coupled with the fact that some NRCs sell their products and services directly to the final consumers in Nigeria. The FIRS will have to collaborate with tax authorities in other jurisdictions as well as banks, financial technology companies, payment service companies, data management, research and intelligence companies, delivery companies etc. who are involved in the value chain for providing digital services.  It is expected that The Nigerian associates/affiliates of the NRCs will come under close scrutiny by Tax authorities.

On the one hand,NRCs that fall into the category set by the SEP Order are expected to register and file taxes for each accounting year with the FIRS. On the other hand, the FIRS should ensure that the registration process  is  not burdensome to enable ease of compliance by the relevant NRCs.

Ebube Godwin Onyejekwulum is an Associate at Synergy Attornies, Lekki-Lagos and can be contacted via Ebubeonyejekwulum@yahoo.com.