Nigeria clarifies new tax on nonresident digital businesses

By Gabriel Nwodo & Oluwapelumi Omoniyi, AELEX, Nigeria

On 29 May, Nigeria’s Minister of Finance issued an order describing when a digital business operated by a nonresident company is deemed to have a significant economic presence in Nigeria and is thus subject to tax.

New Companies Income Tax Order 2020 implements a digital tax introduced by Nigeria’s Finance Act 2019 on 13 January. The new order’s effective date is 3 February.

The era of ‘digital permanent establishments’

Under prior law, nonresident companies carrying on digital businesses were able to derive profits from transactions involving customers in Nigeria without being liable for companies income tax. These laws were formulated at a time when digital businesses and platforms did not exist.

To address the gap in Nigeria’s Companies Income Tax Act in relation to the taxation of digital businesses operated by nonresident companies, section 13(2)(c) was amended by the Finance Act 2019 to subject a nonresident company to tax on its profits deemed to be derived in Nigeria where it:

“transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on.”

However, this provision will only apply to a nonresident company deemed to have a significant economic presence in Nigeria and in relation to the profits which can be attributable to the activities mentioned above.

In a similar vein, amended section 13(2)(e) of Nigeria’s Companies Income Tax Act provides that the profits of a nonresident company which furnishes technical, professional, management or consultancy services to a person in Nigeria shall be deemed to be derived from Nigeria if it is determined that the company has a significant economic presence in the country.

The withholding tax applicable to the income from providing such technical, professional, management, or consultancy services shall be the final tax.

In effect, the legislative amendments introduced by Finance Act 2019 brings into the companies income tax net all nonresident companies providing services by digital or electronic means if they make a profit from either digital or technical, professional, management or consultancy services consumed in Nigeria and are deemed to have a significant economic presence.

Nigeria’s significant economic presence order

The new significant economic presence order lays down rules that determine significant economic presence for purposes of section 13(2) (c) and (e) of Nigeria’s Companies Income Tax Act.

Paragraph 1(1) of the significant economic presence order states that a nonresident company shall have a significant economic presence in Nigeria for any accounting year where it derives gross turnover or income of more than Naira 25,000,000 (USD 64,548) from streaming or downloading services to persons in Nigeria, transmitting data on Nigerian users which has been generated from activities on a website or mobile application, providing goods or services directly or indirectly through a digital platform to Nigeria, or providing intermediation services through a digital platform linking suppliers and customers in Nigeria.

Also, a nonresident company will be deemed to have a significant economic presence in Nigeria if it uses a local domain name or registers a website address in Nigeria; or has a purposeful and sustained interaction with persons in Nigeria through a digital page or platform that targets persons in Nigeria, including pricing products in Naira or providing billing or payment options in Naira.

Also, a nonresident company will be deemed to have a significant economic presence in Nigeria if it uses a local domain name or registers a website address in Nigeria; or has a purposeful and sustained interaction with persons in Nigeria through a digital page or platform that targets persons in Nigeria, including pricing products in Naira or providing billing or payment options in Naira.

Any multilateral agreements or arrangements to which Nigeria is or becomes a party designed to address the challenges of taxing the digital economy will apply in lieu of the significant economic presence order in relation to nonresident companies to which such multilateral agreements apply.

However, this provision will apply from the date the multilateral arrangement becomes effective in Nigeria.

Paragraph 2(1) of the significant economic presence order provides that a nonresident company providing technical, professional, management, or consultancy services services shall have a significant economic presence in any accounting year where it earns income or receives payment from a person resident in Nigeria, or a fixed base or agent of a nonresident company.

Also, a nonresident company shall not be deemed to have a significant economic presence in Nigeria in relation to payments made to an employee under a contract of employment; as consideration for teaching in or by an educational institution; or by a foreign fixed base of a Nigerian company.

Implications of Nigeria’s significant economic presence order

The significant economic presence order is designed to provide clarity to all concerned nonresident companies on their tax exposure in relation to transactions involving customers or clients in Nigeria.

The significant economic presence order is designed to provide clarity to all concerned nonresident companies on their tax exposure in relation to transactions involving customers or clients in Nigeria.

We note that the significant economic presence order draws heavily on proposals made in the OECD/G20 BEPS project report on addressing the tax challenges of the digital economy.

While the significant economic presence order appears to resolve the challenge of taxable nexus, it throws up other issues, including cost allocation, compliance and enforcement, the adequacy of the threshold amount, and impact of the order on tax treaties.

Cost allocation

The significant economic presence order is silent on the formula for determining the expenses incurred by a nonresident company to produce its Nigerian profits.

In any event, the Nigerian tax authority is empowered by section 30 of Nigeria’s Companies Income Tax Act to assess any company on a fair and reasonable amount of turnover where such company reports zero assessable profits or an amount which the tax authority considers to be less than might be expected from the trade or business carried on.

In practice, the tax authority usually ringfences 20% of turnover, to which it applies the 30% income tax rate—effectively taxing at 6% of turnover.

Consequently, we envisage that the Nigerian tax authority will assess qualifying nonresident companies with income tax on the basis of their turnover from digital services consumed in Nigeria.

Consequently, we envisage that the Nigerian tax authority will assess qualifying nonresident companies with income tax on the basis of their turnover from digital services consumed in Nigeria.

Compliance and enforcement

Another concern with Nigeria’s significant economic presence order is in relation to how the Nigerian tax authority would effectively ensure compliance, given the lack of a physical presence by nonresident companies.

Section 55 of Nigeria’s Companies Income Tax Act requires every company earning an income from Nigeria to file an annual self-assessment return whether or not they are liable to pay tax for a year of assessment.  Consequently, a literal interpretation of the foregoing provision of Nigeria’s Companies Income Tax Act would mean that all nonresident companies to whom the order applies will be required to register and file returns with the Nigerian tax authority. These returns must contain the company’s audited accounts, tax and capital allowances computation, and a duly completed self-assessment form.

Given the practical challenges and difficulty which would arise from a literal application of section 55 of the Companies Income Tax to nonresidents companies, we expect the Nigerian tax authority to provide guidance on compliance in this regard.  

We note that the Nigerian tax authority has established a nonresident persons’ tax office and an integrated tax administration system whereby taxpayers can electronically file tax returns and pay their taxes. Also, the law allows companies to appoint agents to file tax returns and pay taxes on their behalf.

In relation to those transactions which are liable to withholding tax, there is an obligation on the part of the recipient of such services from nonresident companies to deduct the tax at source and remit it to the tax office.

However, where payment for digital services provided by a nonresident company is made online, the tax authority can authorise the relevant financial institutions to deduct income tax at source in relation to all eligible transactions concluded using their payment solutions or online platforms.

Significant economic presence threshold

The Naira 25,000,000 threshold prescribed by the significant economic presence order appears to be low in comparison to other jurisdictions.

For instance, the threshold for entities rendering in-scope services liable to the French digital service tax is an annual turnover received in consideration for taxable services cumulatively exceeding EUR 750 million (USD 844 million) worldwide; and  EUR 25 million (USD$28 million) in France.

 If a company does not exceed this threshold, it is not subject to the French digital services tax. In the UK, the threshold is annual worldwide revenues arising from relevant digital services activity exceeding GBP 500 million, and more than GPB 25 million of these annual digital services revenues attributable to UK users.

Similarly, the determination of the significant economic presence of a nonresident company only on the basis of its registration of a local domain name, or the provision of payment options in Naira, might be counter-productive in relation to a non-compliant qualifying foreign entity with an insignificant volume of transactions attributable to the Nigerian market.

The administrative cost of compliance in such situations might not be justified by the tax payable.

Impact on Nigeria’s tax treaty obligations

In an apparent bid to affirm Nigeria’s commitments as a member of the Inclusive Framework on BEPS whose Task Force on the Digital Economy is yet to conclude its work on a consensus-based approach to the taxation of the digital economy, Nigeria’s significant economic presence order is made subject to any multilateral agreement/arrangement in relation to nonresident companies covered thereunder.

However, pending the entry into force of the proposed multilateral arrangements in Nigeria, the significant economic presence order does not clarify its applicability to foreign entities resident in countries with which Nigeria has concluded double taxation agreements. There are presently 14 of such, namely, Pakistan, Canada, Belgium, Netherlands, Philippines, Slovakia, Czech, Singapore, Italy, South Africa, China, France, Romania and United Kingdom.

Conclusion/tax planning points

Although a member of the Inclusive Framework on BEPS, Nigeria has joined nations that have adopted unilateral legislation to tax the digital space.

As taxpayers and other stakeholders continue to assess the impact of the significant economic presence order, we expect that the Nigerian tax authority will provide clarification on some of the grey areas highlighted in this article.

Meanwhile, with the significant economic presence order now in force, all affected nonresident companies should urgently consult their tax advisors for guidance on compliance, especially in light of the 3 February 2020 commencement date.