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Monday, June 22 , 2020 / 01:27 PM / by KPMG Nigeria / Header Image Credit: Ministry of Finance, Budget and National Planning
The
Federal Government of Nigeria (FGN) on Friday, 29 May 2020 published the
Companies Income Tax (Significant Economic Presence) Order, 2020 ("the Order")
in its Official Gazette No. 21, Vol 107 of 10 February 2020. The Order, which
was signed by the Honourable Minister of Finance (HMoF), Budget and National
Planning, Mrs. Zainab Shamsuna Ahmed, pursuant to her powers under Section
13(4) of the Companies Income Tax Act, Cap C21, Laws of the Federation of
Nigeria (LFN), 2004 (as amended) [CITA], commenced on 3 February 2020.
The
Finance Act, 2019 ("the Finance Act") introduced the concept of significant
economic presence (SEP) to expand the scope of Nigerian tax on foreign
companies deriving income from their activities in the country which were
hitherto not captured in the tax net. The Order provides clarification on what
would constitute a SEP for foreign companies doing business, or providing
services to customers, in Nigeria, in line with Section 13(2)(c) and (e) of
CITA.
Further
to our Tax Alert Issue No 5.11, we have reviewed the Order and provided our
commentaries thereon below:
The
Order provides that a foreign company shall have a SEP in Nigeria in any
accounting year, where it
a. derives N25 million annual gross turnover or its equivalent in other currencies from any or combination of the following digital activities:
b. uses
a Nigerian domain name (i.e., .ng) or registers a website address in Nigeria;
or
c. has
a purposeful and sustained interaction with persons in Nigeria by customizing
its digital page or platform to target persons in Nigeria, including reflecting
the prices of its products or services in Nigerian currency or providing
options for billing or payment in Nigerian currency.
The
Order provides that the activities carried out by connected persons in any
accounting year shall be aggregated in order to determine whether the N25
million annual gross turnover threshold was met. The Order also defines
connected persons as:
a. persons
that are "associates" as defined in the Companies and Allied Matters Act, Cap
C20, LFN 2004 (as amended) [CAMA]; or
b.
persons that are business associates in any form, such that one person
participates directly or indirectly in the management, control or in the
capital of the other, or the same person or persons participate directly or
indirectly in the management, control or in the capital of both enterprises.
The
Order provides that a foreign company providing technical, professional,
management or consultancy services shall have a SEP in Nigeria in any
accounting year where it earns any income, or receives any payment from a
person resident in Nigeria, or a fixed base or agent of a foreign company in
Nigeria.
The
Order exempts the activities of the following foreign companies from
constituting a SEP in Nigeria:
a. any
foreign company under a multilateral agreement and consensus arrangement to
address tax challenges arising from the digitalization of the economy who will be treated under such agreement
or arrangement.
b. any
foreign company making any payment, where the payment, is made: i. to its
employee under a contract of employment; or ii. for teaching in an educational
institution or for teaching by an educational institution; or iii. by a foreign
fixed base of a Nigerian company.
The
Order provided clarifications on the definition of the following terms
referenced in Section 13(2)(c) and (e) of CITA:
a. "any
other electronic or wireless apparatus" is defined to include digital or
related activities carried on through satellite.
b. "services of a technical nature" means specialised services, such as
advertising, training or provision of personnel other than those involved in
the provision of professional, management and consultancy services.
Commentaries
a.
Through Finance Act 2019, Nigeria has joined countries, such as India and
Israel, that have codified the SEP rule into their income tax laws. The SEP
concept was first documented in the Organisation for Economic Co-operation and
Development (OECD)'s Base Erosion Profit Shifting (BEPS) Action 1 final report
in October 2015. BEPS Action 1 seeks to address tax challenges of the digital
economy. The 2015 report on BEPS Action 1 noted that beyond BEPS,
digitalisation raised a series of broader direct tax challenges. These challenges
mostly relate to the question of how taxing rights on income generated from
cross-border activities in a digital transaction should be allocated among
countries in order to secure and sustain the international income tax system
and increase tax equity amongst traditional and digital businesses. However, as
the world economies are at different stages of digitalization and development,
there has been no consensus on the acceptable method of taxation of the digital
economy. This led to the design of the programme of work to provide a
consensus-based long-term solution that will address the challenges of the
digitalisation of the economy. The BEPS Action 1 work has evolved over the last
5 years into what is now known as Pillars 1 and 2. While Pillar 1 focuses on
the allocation of taxing rights, Pillar 2 deals with global anti-base erosion
mechanism (global minimum tax). It is expected that BEPS Action 1 will be
finalized by the end of this year when a consensus approach will be agreed upon
among the over 130 countries (including Nigeria) involved in the negotiations.
b. One
of the main challenges discussed under Pillar 1 work programme is the
administration of taxing right. The work programme recommended developing a
collection mechanism for withholding tax, new reporting obligations and
information dissemination to the tax authorities, and modalities for addressing
technical and practical issues that may arise in determining and reporting the
location of sales. However, there is no clear provision in the Order that
addresses any of these issues as it affects the implementation of SEP in
Nigeria. It is unclear how the Order is to be administered particularly as
selfassessment may not be the appropriate means of efficient administration for
businesses not used to or not aware of tax obligations in Nigeria.
c.
There are concerns about the interplay between Nigerian Double Tax Treaties
(DTTs) and the Order. Based on international norms, the provisions of the DTT
supersede local tax laws. Hence the Order, being an extension of CITA, should
not apply to companies based in countries with which Nigeria has a DTT. Hence,
the need for revisions to be made to existing treaties to address this new
nexus.
d. The
Order did not give any guidance on whether the CIT returns filed by qualifying
companies will be based on actual or deemed income basis. This is very
important given the recent disputes between the FIRS and non-resident companies
(NRCs) since the FIRS' 2015 directive requiring NRCs to file their CIT on actual
income basis just as Nigerian companies. However, there has been recent cases
where the FIRS has disregarded the actual income-based CIT returns and assessed
the NRCs to CIT on deemed income basis because it yielded a higher tax
collection.
Further,
there is no provision that addresses withholding tax compliance on qualifying
online transactions with corporate customers. It is, therefore, important that
adequate clarifications are provided on the above issues to minimise disputes
by the affected taxpayers with the FIRS.
e. The
Order limited its definition of "connected persons" to only associates as
defined by the CAMA or business associates, i.e., persons controlled by or
under common control. This appears to be at variance with the definition of
connected persons in Paragraph 6(a) of the Seventh Schedule of CITA which is
more expansive, and includes any person under common control, ownership or
management, any person not connected but receives implicit or explicit
guarantee or deposit for a debt and any related party as described in the
Income Tax (Transfer Pricing) Regulations, 2018. Therefore, there is a risk
that the above varying definitions could result in potential disputes between
the taxpayers and the FIRS. In the final analysis, if the definition of the
term in the Order is not revised, the definition in Paragraph 6(a) of the
Seventh Schedule to CITA would prevail to resolve the conflict.
f. The
Order was silent on the ownership or control of the electronic or wireless
apparatus such as satellite or other connected servers, receivers or
transponders used in the provision of digital services. This is a significant
omission given the complexity of the value chain of digital services involving
the use of satellites and associated equipment.
g.
Unlike India that deferred the implementation of its SEP rule until 2021
(pending the outcome of the current round of negotiations at the OECD), the
issuance of the Order signals the operationalisation of the SEP rule in
Nigeria. Interestingly, Paragraph 3 of the Order appears anticipatory of the
future consensus approach on BEPS Action 1 to be adopted by the OECD. This has
not only provided for a seamless transition but potentially eliminates the
administrative process of issuing another Order to implement the consensus in
Nigeria when it is finally announced by OECD. However, until such a time when
the consensus is reached, the SEP rule will hold sway.
h. The
Order has a commencement date of 3 February 2020 whereas it was published on 29
May 2020. Thus, it would be impossible to expect Nigerian companies to
retrospectively account for WHT on payments already made to foreign vendors
subject to the SEP rule. We, therefore, expect that an operational date would
be communicated for effective transition and compliance with the provisions of
the Order. Nonetheless, it is advisable that companies begin to plan and comply
with the provisions of the Order immediately to avoid any potential exposure to
penalty for default.
Conclusion
It is
remarkable that the Federal Government has taken unilateral action to address
the taxation of the digital economy in its quest for widening its tax net.
Paragraph 3 of the Order has also evinced the intention of the Government that
this is an interim measure which will be overridden by a consensus approach to
taxation of the digital economy at the end of the current round of OECD
negotiations. Before then, it is hoped that the FIRS will issue an information
circular that will clarify some of the issues highlighted above. Meanwhile,
taxpayers would need to review their transactions in line with the provisions
of the CITA and the Order and ensure that they discharge their responsibilities
accordingly to avoid unnecessary exposures.
Download Here - Companies Income
Tax (Significant Economic Presence) Order 2020
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