Issues in the Taxation of Non – Resident Companies

INTRODUCTION

Non – Resident Companies (NRCs) refer to companies that are not incorporated in Nigeria. Historically, non-resident companies doing business in Nigeria prepare and pay their income taxes using the deemed profit basis. When filing returns under the deemed profit regime, the non-resident companies only needed to submit the deemed profit tax calculations accompanied with a statement of the turnover derived from Nigeria. A schedule of withholding tax suffered on the income is usually provided to support the claim for tax credit. On 1^st January 2021, the Finance Act 2020 came into force with the objectives to generate increased revenue, provide tax incentives to stimulate economic growth, streamline existing tax incentive regimes and to clarify ambiguities in various tax laws. The Act impacted on the taxation of non-resident companies in the following areas:

Tax returns:

Section 55 of the Companies Income Tax Act (CITA) as amended by Finance Act, 2020 set specific procedure and requirement for foreign companies that derive profit or are otherwise taxable in Nigeria to file tax returns with the Nigerian tax authorities. The FA 2020 amendment also removed the ambiguities in law and emphasized the obligation of NRCs to file tax return in the form and manner prescribed by the Federal Inland Revenue Service. By the provision of the CITA, non-resident companies are required to file their tax returns in Nigeria by submitting the following:

1. The company’s full audited financial statements and the financial statement of the company’s Nigerian operations, attested by an independent Chartered or Certified Accountant in Nigeria;
2. Tax computation schedules based on the profits attributable to the company’s Nigerian operations;
3. A true and correct statement, in writing, containing the amount of profits from each and every source in Nigeria; and
4. Duly completed Companies Income Tax Self-Assessment forms.

However, where Withholding Tax (WHT) is the final tax in respect of all the transactions entered into by a foreign company, the company would not have any obligation to file companies’ income tax return in Nigeria in respect of that year.

Significant Economic Presence (SEP) Rules

Section 13(2) (c), (e) and (4) of the Companies Income Tax Act as amended by Section 4 of the Finance Act provides that the profits of a company other than a Nigerian company from any trade or business shall be deemed to be ‘derived from’ or ‘taxable’ in Nigeria. The FA 2019 expanded the scope of services captured under the SEP to include companies engaged in electronic businesses including online payment platforms; provision of technical, management, consultancy or professional services in Nigeria. These activities shall be subject to tax in Nigeria in line with the SEP rules. The Companies Income Tax (Significant Economic Presence) Order, 2020 sets out, amongst other things, the criteria for determining non-resident companies with significant economic presence. The SEP order states that a non-Nigerian company shall have a significant economic presence in Nigeria where it derives gross turnover or income of more than ₦25 million or its equivalent in other currencies.  

This implies that non-resident companies with SEP are required to register for income taxes, prepare financial statements in respect of the income generated from Nigeria; determine the profits that are attributable to their activities in Nigeria, and file annual tax returns to the Federal Inland Revenue Service as provided by CITA. Also, Nigerian companies that transact with NRCs are required to deduct withholding tax (“WHT”) from payments made for services provided by the non-Nigerian companies and remit same to FIRS. 

IMPLICATION & CHALLENGES

In practical terms, where the NRCs sell their products and services directly to individual consumers in Nigeria, deduction of WHT and application of reverse VAT charge will be an issue. Enforcement of compliance by NRCs and Non-Resident Individuals (NRIs) may be a challenge where there are no international consensus on the application of SEP Provisions on NRCs and NRIs.

Considering that the NRCs and NRIs are not physically present in Nigeria, the burden of the tax will most likely fall on the Nigerian beneficiary of their services which negate the ease of doing business objective of government as the tax costs impact on taxable profits, either as a deduction or as non-allowable deduction (which is debatable).

Conclusion                             

Though, there are still clear evidences of many unresolved challenges surrounding the effective taxation of NRCs in Nigeria, the revenue authorities must continue to engage with stakeholders to jointly provide solution to the challenges that will be acceptable to all parties. Collaboration with International regulatory bodies will be fundamental to compel effective compliance with respect to submission of global financial statements of NRCs.

Secondly, the tax authority must continue to ensure that the cardinal cannons of equity, certainty, economy, simplicity, expedience, productivity and convenience in the administration of taxes remain paramount in tax administration and codifications in tax laws. Therefore, we solicit that the Federal Inland Revenue Service should consider the extension of filing deadline while considerable engagement with the various stakeholders should continue to address obvious challenges.

Taxpayers in this sphere should endeavor to obtain expert tax advice when conducting businesses in Nigeria to determine their tax obligations and exposure. Tax Practitioners should in turn assist clients with professional guide to minimize conflict and exposure to deterrent activities with consequent punishments as enshrined in the tax laws.