| Taxes & Tariffs |    975 VIEWS  |
| Taxes & Tariffs | |
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Tuesday, March 03, 2020 / 03:33 PM / KPMG
Nigeria / Header Image Credit: NEOIASCAP
The BEPS Project aims to achieve transparency in
the tax practices of MNEs globally and restore trust in domestic and
international tax systems. Since the final reports on the 15 BEPS Action Points
were delivered in 2015, over 135 countries have been collaborating with the
OECD/G20 Inclusive Framework on the implementation of the BEPS Project
recommendations. For the most part, implementation of the BEPS recommendations
requires changes to domestic tax laws of participating nations as well as
amendments to the provisions of existing international agreements.
Notably, Nigeria is a part of the Inclusive Framework and has committed to the
implementation of the recommendations of the BEPS Project. This newsletter
reviews the current state of BEPS implementation in Nigeria with a focus on the
8 Action Points that have been implemented by way of changes to existing
legislation, introduction of new Regulations or issuance of Guidelines and
Information Circulars by the Federal Inland Revenue Service (FIRS).
Action 1 - Addressing the tax challenges of
the digital economy
Most businesses in this era are supported by
digital technologies and there are increasingly more online/web-based transactions. As such, the revenues generated slip through established national
tax systems which were, traditionally, not designed to capture the complexities
of a digital economy. This normally results in little or no tax paid by
such global businesses in their host countries, including Nigeria.
To address the challenges of how taxing rights on
income generated from cross-border activities in the digital age should be
allocated among countries, the OECD Inclusive Framework proposed certain
approaches including Significant Economic Presence (SEP), user contribution,
marketing intangibles, and global minimum tax.
On 13 January 2020, Nigeria's President signed
Finance Bill, 2019 into law. The Finance Act, 2019 ("the Act") amends Section
13 of the Companies Income Tax Act by introducing the concept of SEP. This
Section contains provisions relating to taxation of economic value derived in
Nigeria by nonresident companies (NRCs). The amendments provide that the
profits of a company, other than a Nigerian company, from any trade or business
shall be deemed to be derived from Nigeria if such company has SEP in Nigeria.
The Finance Act does not define what constitutes
SEP but vests the Minister of Finance with the power to issue an Order on the
matter. The interpretation and factors for SEP stated in the OECD BEPS
reports may be adopted to suit the peculiarities of the Nigerian tax landscape.
Action 4 - Limiting base erosion involving
interest deductions and other financial payments
As the use of third party and related party
interest is one of the simplest profit-shifting techniques available in
international tax planning, Action 4 recommends the design of rules that limit
deductibility of interest and other financial payments made to third parties
and related parties.
The Nigeria's Finance Act restricts the interest
deductible on related party loans to 30% of Earnings Before Interest, Tax,
Depreciation and Amortisation in an accounting period and provides for a 5-year
carryover of any excess that cannot be recovered in any tax year. This
provision does not impact foreign companies in the banking and insurance
sectors.
Action Point 6 - Preventing allowance for
treaty benefits in inappropriate circumstances
Tax treaties are intended to prevent harmful double
taxation. However, it has given rise to treaty abuse and "treaty-shopping" arrangements. Action 6 addresses treaty shopping through new treaty provisions
which include specific rules and recommendations to address other forms of
treaty abuse.
Nigeria became a signatory to the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent BEPS
(Multilateral Instrument or MLI) in August 2017. However, the country is
yet to deposit her instrument of acceptance with the OECD.
Meanwhile, the FIRS in December 2019 issued an Information
Circular on claim of tax treaty benefits in Nigeria. The Circular provides
guidance and clarity on the determination of benefits under different tax
treaties, and the requirements and procedure for accessing such benefits.
Action Points 8 to 10 - Aligning Transfer
Pricing (TP) outcomes to value creation
Actions 8 to 10 clarify and strengthen the existing
standards and provides guidance on the application of the arm's length
principle for proper pricing of intragroup support services and
hard-to-value-intangibles based on the arm's length principle.
Nigeria has since revised the TP compliance
requirements relating to intragroup services, intangibles, capital rich, low
function companies, commodities transactions, procurement arrangements etc. The
changes were made in the Income Tax (Transfer Pricing) Regulations 2018 ("the
revised Regulations"). The revised Regulations also imposes stiff
penalties for different types of compliance infringements.
Action 13 - Transfer Pricing documentation
and Country-by-Country (CbC) reporting
The BEPS Action 13 report recommends a three-tier
standardized approach to transfer pricing documentation. The three documents
(master file, local file and CbC Report) will require taxpayers to articulate
consistent TP positions and provide tax administrations with useful information
to assess TP risks as well as ease the process of carrying out tax audits.
To align with the BEPS Action 13 recommendations on
TP documentation and CbC reporting, Nigeria incorporated changes to TP
documentation requirements in the revised Regulations. Paragraph 17 (1) of the
revised TP Regulations requires connected taxable persons to maintain
contemporaneous TP documentation comprising Master and Local files.
In addition, the FIRS published the
Country-by-Country Reporting (CbCR) Regulations 2018 in the same year. The CbCR
Regulations requires Nigerian headquartered MNE Groups with consolidated
revenue of N160 billion or above to file the CbC report with the FIRS. Nigerian
resident members of MNE Groups headquartered outside Nigeria are required to
notify the FIRS of the identity and tax jurisdiction of the entity that will be
responsible for filing the CbC report, where the Group have a consolidated
revenue of EUR750 million or near equivalent in the domestic currency of the
jurisdiction of the ultimate parent entity or surrogate parent entity. Stiff
penalties for defaults are also included in the Regulations.
Action Point 14 - Making dispute resolution
mechanisms more effective
The outcomes and recommendations of the BEPS
Project aims to avoid uncertainties and unintended double taxation. Hence the
need to include work on measures to improve dispute resolution mechanisms in
the BEPS Project. The recommended measure is the Mutual Agreement Procedure
(MAP) which is expected to operate independently from the remedies available
under each jurisdiction's domestic tax laws.
In February 2019, the FIRS published guidelines on
its MAP. This is a demonstration of Nigeria's commitment to implementing the
OECD BEPS minimum standards.
The MAP allows for engagement between the competent
authorities of two countries with a subsisting tax treaty in a bid to resolving
tax disputes arising from inconsistencies in the interpretation or application
of a tax treaty or situation. The adoption of MAP in Nigeria is a welcome
development for taxpayers with treaty-related disputes.
Conclusion
Nigeria is keeping pace with the rest of the world
in adopting global best practices in relation to taxation. The tax landscape in
Nigeria keeps evolving in line with the ongoing global tax reforms. The BEPS
implementation roadmap has serious implications for businesses in terms of
structuring related party transactions, compliance burden, tax deductions, etc.
Businesses should continue to assess the impact of the legislative changes
triggered by the BEPS Project and its recommendations, and proactively prepare
to deal with them.
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