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Saturday, May 30, 2020 / 09:00 AM / By PwC
Nigeria / Header Image Credit: WYZE Associates
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Introduction
The
Minister of Finance, Budget and National Planning (the Minister) has issued the
Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order),
to complement the 2019 Finance Act (FA 2019).
The SEP
Order sets out the conditions under which non-resident companies (NRCs) that
provide digital services; or technical, professional, management, or
consultancy services (TPMC); to Nigerian customers, from outside Nigeria will
be deemed to have a taxable nexus, and therefore be liable to tax, in Nigeria.
Finance Act 2019 and SEP
Prior
to the entry into force of FA 2019, NRCs were only deemed to be liable to tax
in Nigeria on their business income if they: (i) carried on business through a
fixed base in Nigeria; (ii) carried on business through an agent in Nigeria;
(iii) executed a turnkey project in Nigeria; or (iv) failed to price their
related party transactions at arm's length.
FA 2019
expanded the conditions under which the business income of NRCs would be
taxable in Nigeria. Under the new rules, NRCs will be liable to tax in Nigeria
if : (i) they supply digital services or goods; or provide TMPC services; and
(ii) they have a significant economic presence (SEP) in Nigeria; and (iii)
profits can be attributed to the activities.
Although
FA 2019 specified the types of business activities that would be affected by
these new rules, it did not define what would constitute a SEP of an NRC.
Who is Impacted by the SEP Order
The SEP
Order specifies the threshold above which NRCs undertaking the specified
activities would be deemed to be taxable in Nigeria. It also clarifies the
specific activities and persons impacted to include:
SEP Threshold for Digital Service Provider
A
non-resident digital service provider will meet the SEP threshold in Nigeria
if:
SEP Threshold for NRCs
Providing Technical, Professional, Management or Consultancy Services
A NRC
that provides technical, professional, management or consulting services will
have a significant economic presence in Nigeria if it earns any income or
receives payment from:
2) a fixed base or agent of a non-Nigerian company.
For
this category, the withholding tax deducted by the recipient of the service is
the final tax. The SEP Order also includes categories of payments that are
exempt. The SEP order however appears to expand the meaning of technical
services to include advertising services. It is debatable if this is in line
with the provisions of FA 2019.
Impact of International Agreements
The SEP
Order provides that if Nigeria enters into any multilateral agreement or
consensus arrangement to address the tax challenges arising from the
digitalization of the economy, the provisions of that agreement or arrangement
will apply (and effectively override the provisions of the SEP Order) with
respect to any NRC that is covered by that agreement or arrangement.
It also
follows (based on treaty supremacy) that NRCs that operate from a country that
has a Double Tax Treaty (DTT) with Nigeria, will not be affected by the SEP,
Order until changes are made to the DTT.
Implications for Tax Compliance and Administration
Some of
the affected NRCs will be required to register for income taxes in Nigeria and
file annual tax returns even if they do not have a physical presence in
Nigeria.
Nigerian
resident businesses (as well as the fixed bases of non-resident companies) that
have transactions with the affected NRCs will also be required to account for
withholding tax on some of the payments made to these NRCs.
The SEP
Order however raises a number of practical concerns from a compliance and tax
administration perspective.
1)
Profit attribution - The SEP order does not provide any guidance on how the
profits attributable to the Nigerian SEP of affected NRCs will be determined.
This will create uncertainties for NRCs who need to comply.
2)
Enforcement and compliance - The FIRS may struggle to enforce compliance
without international consensus, as a number of the companies affected may be
outside the territorial reach of the FIRS. This problem will also be
exacerbated where the NRCs sell their products and services directly to the
final consumers in Nigeria. NRCs that do not have any form of presence in
Nigeria may also struggle to comply.
Conclusion
Nigeria
has joined other countries that have taken unilateral action to tax the digital
economy. The SEP Order makes it clear that a physical presence will no longer
be required for certain categories of remote services to be taxable.
Non-resident
companies must therefore assess how the rules affect them and take steps to
comply where necessary. This will also apply to Nigerian resident companies
that transact with the affected non-residents.
In
order to improve compliance and reduce uncertainty for taxpayers, the FIRS is
encouraged to introduce simplified registration and compliance processes for
affected NRCs. The FIRS will also need to provide clarity on the basis by which
profits will be attributed to the SEPs of the NRCs
Download Here - Companies Income
Tax (Significant Economic Presence) Order 2020
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