An Evaluation of the Taxation of Non-Resident Corporations in Nigeria

By Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)

Introduction

The taxation of non-resident corporations in Nigeria is a complex interplay between domestic fiscal policy and international economic relations. As globalization continues to redefine the contours of commerce and trade, the Nigerian government, like many others, faces the challenge of effectively regulating and taxing multinational entities that conduct business within its jurisdiction. In response to these dynamics, non-resident companies, entities that earn income or profits from activities involving Nigerian residents, are subject to Nigerian tax law if they maintain a fixed base or permanent establishment within the country.[1] A notable shift in the tax environment occurred following the enactment of the Finance Act 2021, as amended. This act introduced the notion of “Significant Economic Presence” (SEP) to evaluate Nonresident Companies (NRCs) having a digitally significant economic presence in Nigeria. Under this provision, such companies are subject to taxation on a fair and equitable proportion of their turnover linked to the SEP. This applies in cases where there is either no assessable profit, the assessable profit is lower than expected for that business type, or it cannot be accurately determined.

This article aims to provide insights into the changes brought about by the Finance Act 2021 as amended, specifically addressing its implications for non-resident companies operating in Nigeria.

What is a Tax and Taxation?

The Black’s Law Dictionary defines tax as a monetary levy imposed by the government on individuals, entities, transactions, or properties to generate public revenue. It further elaborates by encompassing all governmental impositions on individuals, properties, privileges, occupations, and the general enjoyment of the populace, which includes duties, imports, and excise. [2] Taxation is explained as the imposition or assessment of tax, that is the means or process by which the government obtains revenue (tax) for its activities.[3] Despite the clarity of the definition, the question of who bears the burden of taxation remains complex.

While property owners and employees are directly aware of their tax contributions through rates and PAYE deductions, respectively, the true burden of taxation is often obscured.[4] For example, manufacturers technically pay excise duties on products like cigarettes, but they pass on these costs to consumers by adjusting prices without any legal obligation to do so. Consequently, consumers bear the brunt of taxation, even if they don’t perceive themselves as directly paying the tax.[5]

Taxation is indispensable for any country’s economic viability and growth, serving as a crucial fiscal tool to fund government activities, promote development, and address societal issues.[6] However, Nigeria faces significant challenges in tax administration, leading to low government revenue and hindering economic progress. These challenges include multiple taxes imposed by different authorities, administrative opacity and tax evasion, inadequate taxpayer databases, and the prevalence of untrained individuals collecting taxes at the local level. Moreover, Nigeria’s complex tax laws pose comprehension difficulties for both citizens and officials, exacerbating issues like minimum tax requirements and delays in tax refunds.[7]

What is a Non-Resident Company in Nigeria?

A non-resident company in Nigeria refers to a company not registered with the Corporate Affairs Commission but earning profits from individuals residing in the country.[8] Despite not being incorporated locally; such companies are still subject to taxation in Nigeria under the Companies Income Tax Act. This legislation mandates that non-resident companies must pay Companies Income Tax (CIT) on profits generated from activities within Nigeria.[9] Profit attribution occurs under various circumstances, including when the company operates through a fixed base in Nigeria, conducts business via authorized representatives, stores goods in Nigeria for regular deliveries, earns income from turnkey contracts, or engages in artificial transactions with related parties. Meeting any of these criteria obliges the non-resident company to fulfil its tax obligations in Nigeria.[10]

Taxation of Non-Resident Company in Nigeria

Historically, non-resident companies (NRCs) in Nigeria were subject to Company Income Tax (CIT) at a rate of 30% only if they maintained a physical presence in the country, typically through a fixed base,[11] which was defined as a “definite address” in the case of JGC Corporation v Federal Inland Revenue Service.[12] This definition established that a significant territorial connection to Nigeria through a location used for regular business purposes is sufficient to establish a fixed base. In Shell Petroleum International Mattscgappij B.V. v. Federal Inland Revenue Service,[13] the court clarified that a fixed base under the Company Income Tax Act did not equate to residence or ordinary residence, emphasizing that a non-resident company could still have a fixed base in Nigeria.

The court in Offshore International S.A. v. Federal Board of Inland Revenue Services[14] upheld the broad scope of the Company Income Tax Act, highlighting that non-resident companies could be liable for Company Income Tax even without incorporation, residency, or a fixed base in Nigeria, as long as their profits accrued or derived from Nigeria. In Saipem Contracting (Nig) Ltd. v Federal Board of Inland Revenue Services,[15] the court explained that the conditions under which the profits of a non-resident company are deemed to be derived from Nigeria are clearly stated under Section 13(2) of the Company Income Tax Act, which requires a location used for regular business purposes in Nigeria

From the aforementioned judicial authorities, it is evident that non-resident companies with a fixed base in Nigeria were historically liable for Company Income Tax on Nigerian-derived profits.

The introduction of the Finance Act 2021 as amended has significantly altered the taxation landscape of non-resident companies, particularly through the concept of “Significant Economic Presence” (SEP).[16] This concept allows non-resident companies to be subject to Company Income Tax without a physical presence in Nigeria, provided that they generate more than N25 million annually from specified digital activities within the country.[17] This has resulted in a substantial shift in Nigerian tax policy towards non-resident companies, aiming to capture the revenue generated by non-resident companies through digital activities within Nigeria’s borders. This approach aligns with the global trend of taxing digital giants that operate without a physical presence in jurisdictions where they derive economic benefits.[18]

Furthermore, for the enforcement of this law; the Finance Act has granted the Federal Inland Revenue Service the authority to automate tax administration processes by using proprietary or third-party technology, thereby enhancing compliance among non-resident companies engaged in digital transactions with Nigerian residents.[19]

Additionally, the Finance Act 2021, as amended, clarifies that Value Added Tax (VAT) obligations extend to transactions facilitated through satellite transmissions to Nigeria. This means that non-resident companies that transmit signals or data to Nigeria via satellites for digital activities are also subject to VAT regulations. Therefore, the Finance Act has expanded the scope of taxation to ensure that non-resident companies involved in digital transactions also contribute to VAT revenue in Nigeria.[20] In line with these VAT implications, the Finance Act has emphasized the requirement for non-resident companies to register under the Nigerian VAT system. Thus, registered non-resident companies are mandated to charge VAT at the prevailing rate in their invoices for digital transactions conducted with Nigerian residents. This registration requirement ensures compliance with VAT regulations and enables proper collection and remittance of VAT for transactions involving the supply of goods or services through digital platforms to persons residing in Nigeria.[21]

Conclusion

In conclusion, the traditional requirement for non-resident companies to pay Company Income Tax in Nigeria was the presence of a fixed base or permanent establishment within the country. However, the intervention of the Finance Act 2021, as amended, has significantly expanded the scope of taxation for these companies. The Act stipulates that a non-resident company will be deemed to have a significant economic presence if it derives a gross turnover or income exceeding 25 million naira through digital transactions with Nigerian residents. This includes activities such as downloading digital content and providing goods or services through digital platforms, as well as using Nigerian domain names or registering website addresses in Nigeria.

By expanding the scope of taxation for non-resident companies, the new Finance Act 2021, as amended, contributes to revenue generation for the Nigerian government. It also widens the tax net by bringing more non-resident digital taxpayers into compliance. Additionally, this shift towards taxing digital transactions contributes to diversifying the Nigerian economy from its reliance on oil revenue to a more sustainable tax-based economy.

Keywords: Companies, Non-Resident, Taxation, Finance Act, Value Added Tax, Significant Economic Presence, Company Income Tax, Nigeria, Government, Profits.

Snippet: The introduction of the Finance Act 2021, as amended, has brought a significant shift in the taxation landscape for non-resident companies, primarily through the concept of Significant Economic Presence.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)

Mr. Oyetola Muyiwa Atoyebi, SAN, is the Managing Partner of O. M. Atoyebi, S.A.N. & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Tax Law and its Legal Practice, and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng  

CONTRIBUTOR: Cyril Dandison

Cyril is a member of the Corporate and Commercial Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Tax Law and its Legal Practice.

He can be reached at cyril.dandison@omaplex.com.ng

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[1] A. U. MaryJane, “The Intervention of Finance Act on Taxation of Non-Resident Companies in Nigeria: Appraisal” (2022), Vol. 4 (1) Chukwuemeka Odumegwu Ojukwu University Journal of Private and Public Law (COOUJPPL), p. . 117 – 120 Available in Just a moment… (nigerianjournalsonline.com), accessed March 18, 2024.

[2] B. Garner, The Black’s Law Dictionary (8^th edn., St Paul, MN, Thomas West, 2007), 1496.

[3] Ibid

[4] N.M. Dekker, “The History and Development of Tax in Nigeria – An Overview” (University of Pretoria: 2020) Available at The history and development of tax in Nigeria – an overview (up.ac.za) accessed March 20, 2024.

[5] Ibid

[6] Ibid

[7] Ibid

[8] Available @ Non-Resident Companies Taxation in Nigeria (qeeva.com) accessed March 19, 2024.

[9] Section 13 of Company Income Tax Act (CITA) 2007 as Amended.

[10] Ibid

[11] Section 13 of Company Income Tax Act (CITA) 2007 as Amended

[12] TAT/LZ/021/2012

[13] CA/L147/2000

[14] FRC/L/36/175

[15] [2019] 5 NWLR (Pt. 1664) 87

[16] Section 4 of the Finance Act 2023

[17] Companies Income Tax (Significant Economic Presence) Order, 2020

[18] Ibid

[19] Section 18 of the Finance Act 2021 as Amended

[20] Vodacom Businesses Nigeria Ltd v Federal Inland Revenue Service [2019] 44 TLRN 1 VOL 13 ALL NTC

[21] Ibid