Non Resident Companies Taxation in Nigeriaqeeva
NON RESIDENT COMPANIES TAXATION IN NIGERIA
Non-resident companies can be defined as a company or an entity that is not registered or incorporated in Nigeria but which derives income or profits from Nigeria in any kind of business it ventures into. Every company or corporation in Nigeria whether resident or non-resident company is liable to tax in Nigeria if its income is liable to tax under the provisions of the Companies Incomes Tax Act. Take note that the Nigerian tax regulations .do not exempt the income of a branch of an organization or a company from the payment of tax. While a Nigerian company is taxable on its worldwide income, a non-resident entity is liable to tax in Nigeria on its profit attributable to the business or trade carried on in Nigeria. This means that other branches of the company in other countries are not liable to payment of taxation in Nigeria.
Regarding payments, the Nigerian tax laws do not discriminate between residents and non-residents in the allowance of expenses for the purpose of determining the taxable income. All expenses proved to be incurred for the production of the income are allowable as deductions. Rent, interest, royalties, management fees, head office expenses and similar expenses are deductible if proved that they are wholly, exclusively, necessarily and reasonably incurred for the purpose of the trade or business
Section 30 (1) of CITA empowers FIRS to charge tax on turnover of trade or business carried out in Nigeria where FIRS is of the opinion that the profit made by the company is not in line with industry margin or where the profit of the company cannot be easily ascertained. The current practice is for FIRS when it comes to Non-resident companies in Nigeria is to deem 20% of the turnover as profit and subject such profit to income tax at the rate of 30%. The cost incurred is assumed to be 80%. This eventually translates to an effective tax rate of 6%, with most NRCs making a cash payment of 1% of the turnover, since taxes would have been withheld from their invoices at an average rate of 5%.
In summary the FIRS simply applies a flat rate of 6% of turnover (20% assumed profit, taxed at 30%) regardless of the nature of the Non Resident Company business or the sector in which the Non-resident company is operating
COMPANY INCOME TAX
Company income tax is assessed and payable on a preceding year basis, subject to the rule on commencement, cessation of business and change of accounting date. The tax authority responsible for the administration of the Company income tax regime in Nigeria is the Federal Inland Revenue service established pursuant to section 1 of the Federal Inland Revenue service (establishment) act. Where taxable, the applicable rate is 30% of the taxable profit.
Company income tax act contemplates the taxation of resident companies (i.e. Companies incorporated in Nigeria) and non-resident companies (i.e. Companies incorporated outside Nigeria).
According to section 9 of the Company Income Tax Act, the profits of any company accruing, derived from, brought into, or received in Nigeria are taxable in Nigeria. The sources of such profits include’
- Any trade or business
- Rent or premium earned from right granted to any other person for the use or occupation of any property
- Dividends, interest, royalties, discounts, charges or annuities
- Any source of annual profits or gains not falling within any of the afore mentioned category;
- Fees, dues, and allowances (wherever paid) for services rendered
- Any profit or gains arising from acquisition and disposal of short-term money instruments like Federal Government securities, treasury bills etc.
For Nigerian companies, by virtue of section 13(1) of CITA, CIT is chargeable on their global income, whilst for non-resident companies, judicial decisions point to the derivation principle as set out in section 13(2) of CITA as the sole basis for taxation of their income in Nigeria
THE DERIVATION PRINCIPLE
Historically, in Nigeria any non-resident company doing business in Nigeria prepare and pay their income tax using the deemed profit basis. When filing returns under the deemed profit regime, the non-resident tax payer only needs to submit the deemed profit calculations accompanied with a statement of the turnover derived from Nigeria. A schedule of withholding tax is also needed to support this claim
Section 13(2) (a) to (e) provides that for purposes of payment of company income tax by a non-resident company or an incorporation in connection with its trade or business in Nigeria, the element of derivation is established where the non-resident company:
- Has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base. By virtue of Section 13 (3), a facility used solely for the storage, display of goods or collection of information would not qualify as a fixed base for purposes of taxation
- Does not have a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorized to conduct on its behalf or on behalf of some other companies controlled by it or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company
- Derives profits from a contract in relation to the trade or business which involves a single contract for surveys, deliveries, installation or construction
- With respect to trade or business activities between related entities, where their commercial/financial relations are deemed fictitious/artificial by the Federal Inland Revenue Service (FIRS), the profits arising from an adjustment of the transaction at arm’s length.
A non-resident company will be subject to CIT, if it derives income from Nigerian in the manner contemplated under section 13 (2) (a). In recent times, FIRS has been discouraging the filing of returns based on deemed profit as it strives to ensure that all companies doing business in Nigeria including NRCs file annual returns in accordance with the provisions of CITA.
1. FIXED BASE OF A BUSINESS
If a non-resident corporation has a “fixed base” from which it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria. The term “fixed base” implies that the place must be easily identifiable and must possess some degree of permanence. It includes:
- Facilities such as a factory, an office, a branch, a mine, gas or oil well etc.
- Activities such as building, construction, assembly, or installation; and
- Furnishing of services in connection with the activities mentioned above.
However, two cases are specifically exempted and these category above and they include:
- Facilities used solely for storage or display of goods or merchandise
- Facilities used solely for the collection of information.
2. CONCEPT OF RESIDENCE
The concept of residence determines the extent to which the income of a taxpayer is liable to tax .In Nigeria, a resident person (individual or corporate) is assessable on the global income. This means that the taxpayer is liable to tax on the income or profits “accruing in, derived from, brought into, or received in Nigeria.” It also determines the scope of deductions that may be allowed for the purpose of computing an individual’s chargeable income. For instance, only residents may claim children’s allowance, dependents’ allowance and life assurance allowance. For income tax purposes, a person may be resident, non-resident or possess dual residence.
3. BRANCHES AND PARENT COMPANY
The tax laws of some countries regard a branch as resident, for tax purposes, in the same country as the parent company and therefore exempt the income of branches from tax. There is no such provision in the Nigerian tax law. A Nigeria branch of a foreign company is treated as a corporate entity under the law of the land and any income or profit derived by it from Nigeria is taxable here. The only two conditions where a branch may not be so treated are:
- If the branch is used solely for storage or display of goods or merchandise
- If the branch is used solely for the collection of information.
4. SUBSIDIARIES AND PARENT COMPANY
A subsidiary is expected to be incorporated in Nigeria and therefore to operate as a separate legal entity from the parent. The foreign equity-participation may now, in certain circumstances, be 100% but such equity-ownership or the control will not affect the residence status in Nigeria once the company incorporates. However, the claim to the contrary by the other country may raise all the problems of dual residence. Article 4 of the Nigerian Model Double Taxation Agreement spells out the mode of resolving the problem of dual residence between Nigeria and a treaty-country. The Agreement provides for the criterion regarding the place of incorporation as basis of resolving dual residence of companies. Where this fails, the question is to be resolved by “mutual agreement
5. OPERATION OF A DEPENDENT AGENT
A non-resident corporation can have two types of agents in Nigeria – an independent agent or a dependent agent. An agent is regarded as possessing independent status when he acts on behalf of a non-resident corporation in the ordinary course of his business. The status may however change if he devotes his activities wholly or almost wholly on behalf of the corporation.
6. PROFITS ON A TURNKEY PROJECT
A turnkey project is said to be a contract involving survey, deliveries, installation or construction. The profit on a turnkey project is liable to tax in Nigeria. Such a profit should not be split or divided between a Nigerian source and an off-shore profits but taxed wholly in Nigeria alone.
- In the Case of a Nigerian project awarded to a non-resident company but subcontracted in part to a branch, a subsidiary or an associated company
- In the case project Awarded to a Nigeria Company but subcontracted to a non-resident Company If the main contract is awarded to a Nigerian company which subcontracts the supplies aspect to a non-resident company, the contract will be viewed as single contract and the profit on it will be liable to tax in Nigeria but with the expenses of the subcontract allowed at cost of the main contractor.
This is usually a single contract involving survey, supply and construction or installation. The whole profit on the contract will be taxable as a Nigerian profit with the subcontract allowable as an expense but limited to the actual cost to the main contractor.
7. SPLIT CONTRACT
This occurs when there are two distinct contracts of supply and construction or installation. The tax implication will depend on other facts of the case:
- If both contracts are awarded to the same company, the profit on the supply aspect will be subject to Nigerian tax.
- If the company is resident in a treaty country, the liability to tax on the construction, assembly and/or installation aspect will depend on the existence of a permanent establishment in Nigeria for the performance of the activities. The permanent establishment will be determined as follows:
(a) For construction and assembly or building, the existence of a site for more than 3 months or 6 months depending on the DTA
(b) For installation, the charge for the installation relative to the free-on board sale’s price of the machinery or equipment. If the charge exceeds 10 percent of the sales’ price, the installation site could constitute a permanent establishment in Nigeria.
(iii) If the non-resident company sub-contracts the activities in Nigeria (building, assembly, construction or installation)
8. REMITTANCE OF FUNDS OUTSIDE NIGERIA
All non-residents remitting income or profits out of Nigeria are expected to obtain a Tax Clearance Remittance Certificate covering the amount to be remitted. The certificate is to show that relevant tax has been paid on the amount to be remitted or that the amount is liable to Nigerian tax. It is an offence for any remittance to be made without the Revenue clearance.
Withholding tax (WHT) can be defined as an advance and indirect source of taxation deducted at source from the invoices of the tax payer. The main purpose of the withholding tax is to capture as tax payers might have evaded. Withholding tax rate are usually 10% or 15% depending on the type of transaction carried out. Withholding tax can also be said to be an advance payment of income tax. The WHT tax must be remitted to the relevant tax authorities on or before the 21st day of the month following the month in which the deductions were made.
When a business or an individual supplies goods or services to another company, there will be an evidence of payment which is known as an invoice in the course of the transaction. Take for example, the amount paid by the person who is purchasing the goods is N5, 000,000 and the relevant tax rate is 10%, then upon payment the person purchasing the goods will deduct N500, 000 from the invoice of the supplier and then remit it to the relevant tax authority.
The person purchasing the goods is meant to acquire an evidence of remittance of tax payment in the form of a withholding tax credit on behalf of the supplier where he purchased the goods from. The supplier can then use the Withholding tax credit to reduce the income tax payable for the year.
RELEVANT DOCUMENTS NEEDED FOR FILING WITHHOLDING TAX RETURNS
- Evidence of payment from transaction such a bank teller or an electronic receipt
- Schedule of WHT deducted indicating the : Name of the supplier or vendor, Tax Payer Identification Number (TIN) of the company or individual (supplier or vendor ) from which the tax was withheld and the remaining amount
APPLICABLE RATES FOR WITHHOLDING TAXATION IN NIGERIA
- For investment Income (Companies and Individuals)
The applicable rates for the various types of income are:
|Non-Treaty Countries||Treaty Countries|
The withholding tax is a final tax when paid in respect of non-residents.
- For Services
|Types of Payment||Withholding Tax rate for companies||Withholding tax rate for individuals|
|Dividend, Interest and Rent||10%||10%|
|Hire of equipment||10%||10%|
|Commission, Consultancy, Technical and service fees||10%||5%|
|Construction (Roads, Buildings and Bridges)||2.5%||5%|
|Contracts other than sales in the ordinary course of a business||5%||5%|
The payment of withholding tax is in the currency of transaction.
CAPITAL GAINS TAX
When a sole proprietor or partnership business sells an asset and make gain on the sale of the asset, the business must pay 10% of the chargeable gains made from the sale of the asset. The capital gains is the difference between the sales proceeds from the sale of an asset. The taxation of gains accruing from disposal of assets are administered under a separate Act – the Capital Gains Tax Act.
ASSETS CHARGEABLE UNDER CAPITAL GAINS TAX
- Options, debts, and incorporeal property
- Any currency other than the Nigerian currency
- Any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired
- Assets situated outside Nigeria
EXPENDITURES ALLOWABLE FOR DEDUCTION FROM THE SALES CONSIDERATION
- Expenditure wholly, exclusively and necessarily incurred for the acquisition of the asset
- Incidental cost on the acquisition of the assets
- Expenditure wholly, exclusively and necessarily incurred in enhancing the values for the assets of the disposal
- Expenditure incurred on asset for the purpose of establishing, preserving or defending the title or right over an asset
- Incidental cost of making the disposal
GAINS NOT CHARGEABLE UNDER CAPITAL GAINS TAX
Section 26 of the Capital Gains Tax Act in Nigeria exempt some capital gains from taxation. They are:
- Gains of ecclesiastical, charitable or educational institutions, statutory and diplomatic bodies are exempt from such taxation
- Where trustees or nominees transfer assets to beneficiaries they are not considered to be disposing the asset, hence the transaction does not attract Capital gain tax (CGT)
- Gains made upon a disposal of business assets where the proceeds are now spent in acquiring new business assets
VALUE ADDED TAX (VAT)
Value Added Tax (VAT) can be defined as a type of indirect tax that is imposed on the supply of goods and services in a given state. VAT is governed by the Value Added Tax Act Cap V1, LFN 2004 as amended. It is mostly eventually borne by the final consumer of the goods and services. VAT in Nigeria was calculated at a flat rate of 5% before the Finance Bill 2020 that was signed in October 2019 by the President amended the rate to 7.5%. Section 7 of the VAT act grants the power of administration of VAT on the Federal Inland Revenue Service (FIRS) in Nigeria.
Every VAT collected by every business owner must be remitted to the Federal Inland Revenue Service (FIRS) on or before the 21st day of the month following the month the goods and services were sold. That is Value Added Tax (VAT) collected in March must be remitted before the 21st of the following month which is April.
The VAT Act (as amended) provides that a foreign non-resident person or company that carries on economic activity in Nigeria must register for VAT, using the address of the person with whom it has a subsisting economic activity
VAT REGISTRATION FOR NON-RESIDENT COMPANIES
The foreign non-resident person or company is required upon registration for VAT to include in its invoice VAT at 7.5% with instructions to the receiver of the goods or services to remit the 7.5% VAT in the currency of the transaction to the Nigerian government on behalf of the foreign non-resident person.
FINANCE BILL 2020 UPDATE ON NON RESIDENT COMPANIES TAX
Nigeria’s 2019 Finance Bill (the Bill) was passed on 28 November 2019 by the House of Representatives. It has made some amendments to various tax laws in Nigeria. One of them is the taxation of non-resident companies in Nigeria. The changes or additions includes
- Taxable income derived by foreign companies now includes income from digital services, to the extent that such foreign companies have significant economic presence in Nigeria and profit can be attributed to such activities.
- In addition, profits arising from consultancy or professional services including technical and management services in relation to offshore services rendered by a person outside Nigeria to a person resident in Nigeria shall be taxed, to the extent that the company has significant economic presence in Nigeria and profit can be imputed to such activity.
There are still some certain issues regarding the taxation of non-resident companies that the FIRS needs to address such as the reporting frame work, the tax basis for qualifying capital expenditure and the computation of capital allowance. Non-resident individuals willing to start a company or a business in Nigeria must have a Nigerian tax advisor and also be knowledgeable about the regulations guiding non-resident companies.
For more information on the registration, procedures,and other relevant details on the taxation of non resident companies in Nigeria, you can contact us on 08023200801, 08075765799, Email: firstname.lastname@example.org
About the author
Onamakinde Dare Daniel is a highly motivated accountant with knowledge in Accounting, Taxation, Management, Audit, Costing and Research. He is keen on tax matters due to its ever dynamic nature and he’s currently serving as an intern at Matog consulting Ikeja.