Over the years, Company Income Tax has contributed greatly to the overall revenue generated by the Federal Inland Revenue Services (FIRS). A recent study signified that the CIT contributed about 283 billion to the 2020 Q1 revenue generation by the FIRS. Although the focus of the FIRS is shifting to other means of taxation such as the stamp duties, but the importance of Company Income Tax in revenue generation can not be overlooked.
Company Income Tax is therefore one of the categories of tax provided for by the Nigerian Tax Laws by virtue of the Company Income Tax Act. Company Income tax also known as ‘corporate tax’ applies both to local companies as well as foreign companies operating in Nigeria.
Company income tax as it relates to foreign companies is that category of tax that is imposed on any income or profit derived from Nigeria by a foreign based company carrying out businesses in Nigeria. Such foreign companies are generally referred to as Non resident companies and can be defined as companies established under any law in force in any territory outside Nigeria.
Further more, It is clear that a resident company (company incorporated in Nigeria)is deemed liable to tax on it’s worldwide income, however this is not the case with non resident companies (NRC) as they are only liable to tax on their Nigerian sourced income that is, any income derived or sourced from Nigeria.
A foreign company can either derive active income or passive income in Nigeria. In scenarios where a foreign company derives active income in Nigeria it would be mandated to register and file tax returns just as Nigerian companies would do with the Federal Inland Revenue Service. But where a foreign company earns a passive income from Nigeria it need not go through the processes and such taxes would be deducted by way of withholding tax.
Prior to the finance Act, the question as to whether a non resident company would be deemed taxable in Nigeria largely depended on the physical presence of such company in Nigeria. According to the ‘then’ Section 13 of the CITA a non resident company’s income can only be deemed to be derived from Nigeria if the NRC had any of the following :
(a) A fixed base in Nigeria to the extent that the profits are attributed to the fixed base.
(b) A Nigerian dependents agent or company empowered to conclude business or contract on it.
(c) execution of a project in Nigeria or a related party transaction that was not at arm’s length.
So from the forgoing it is crystal clear that prior to the Finance Act some sort of physical presence was required for a foreign company to be subjected to CIT in Nigeria. So by virtue of that any profits derived remotely in Nigeria either through online activities and any related digital activities would not be subject to CIT.
Significant Economic Presence.
But following the introduction of the Finance Act 2019 which signifies a new tax regime.
Taxation of non resident companies became not only limited to physical presence or having a fixed base in Nigeria but also to significant economic presence, which by implication means that non resident companies would now become taxable on income remotely derived from Nigeria.
In this regard the finance Act seeks to establish a nexus for taxing income earned by foreign companies for technical, management or professional services remotely provided to a person resident in Nigeria. And also for digital operations such as advertising,movie streaming and e-commerce operations rendered to a person resident in Nigeria. The implication of this amendment is that affected NRCs in e-commerce, filming, computing, ride-hailing, media, etc., who previously had no fixed base in Nigeria under the conventional rules, and no Nigerian tax obligations, will be liable to Nigerian income tax provided they meet the SEP threshold.
Also, such NRCs may be required to register for taxes and file income tax returns in Nigeria in line with Section 55 of CITA.So companies like spotify, Netflix and Alibaba might be caught in the web of paying CITA in Nigeria.
Although the finance act does not expressly define the concept of significant economic presence but empowers the Minister for finance to define such term.
Recently, the Minister for Finance Budget and National Planning,in the person of Mrs Zainab Ahmed defined this term by issuing an order to clarify the meaning of Significant Economic Presence. Although it is worthy to note that the order was issued on the 29th of May 2019 but as a commencement date of 3rd of February 2020 which by implication would would apply to all businesses carried out within this time frame.
And according to the order which gives clarification to the concept of Significant Economic Presence, thus stated that any foreign company involved in any digital related operations in Nigeria would be deemed to have Significant Economic Presence if it falls under the following category:
(a) If the foreign company derives gross turnover or income of more than N25 million or its equivalent in any currency, from streaming or downloading services of digital contents;transmission of data collected about Nigerian users generated from users’ digital activity;provision of goods or services other than technical, management, consultancy or professional services; or provision of intermediate services through digital platform that links suppliers and customers in Nigeria;
(b) If the foreign company uses a Nigerian domain name (“.ng”) or registers a website address in Nigeria;
(c) If the foreign company has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria, including reflecting prices, billing and payment options in Nigerian currency.
Company Income Tax Rate for Foreign Companies.
Foreign Companies are however exposed to 30% company income tax to the extent that they derive at least 25M about $65,000 in a year from Nigeria, which is the threshold from which they can be taxed. So if Caramile company does not make up to 25M in a year it would not be subject to CIT.
Also double taxation relief would definitely apply if a non resident company resides in a jurisdiction where Nigeria has DTA with. Currently, Nigeria has DTA with about 14 countries
Compliance And Implementation.
It is very much not clear as to how the order would be implemented or as to how the Federal Inland Revenue Service would ensure compliance but it still very clear that passive income earned in Nigeria would be subjected to withholding tax deducted from them at source.
In conclusion, while the introduction of the concept of Significant Economic Presence for the taxation of foreign companies might be a good news to the treasury, there are however doubts as to how it is going to be implemented because too many foreign companies are covered so there may be capacity issues on the part of the revenue authorities. However the smart approach might be to rely on country by country report by the revenue authorities of other foreign countries.