A foreign entity, Non Resident Company (NRC), involved in digital transactions will be deemed to have created a significant economic presence (SEP) in Nigeria and therefore liable to tax if it derives income of N25million or equivalent in other currencies from Nigeria, in a year uses Nigerian domain name (.ng) or registers a website address in Nigeria and has a purposeful and sustained interactions with persons in Nigeria.
This is contained in the Order by Mrs. (Dr.) Zainab Ahmed, Honourable Minister of Finance, Budget and National Planning, in exercise of powers on conferred upon her by section 13(4) of the Companies Income Tax Act (CITA) Cap. (21, Laws of the Federation of Nigeria 2004 (as amended), and all other powers enabling her in the behalf, Gazetted as published on 3rd February, 2020
The company could achieve this by customising its digital platform to target persons in the country, for example, by stating the prices of its products or services in Naira for the purposes, with revenue derived from Nigeria including those in respect of: streaming or downloading of digital contents, transmission of data collected about users in Nigeria, provision of goods or services directly or through a digital platform, and intermediation services that link suppliers and customers in Nigeria.
In other words, a foreign entity providing technical (including training, advertising, supply of personnel), professional, management or consultancy services shall have an SEP in Nigeria in any accounting year if it earns any income or receives any payment from a person resident in Nigeria or a fixed base or agent of a foreign entity in Nigeria. Payments to employees of a foreign entity or for teaching in an education institution are exempted.
Aa activities carried out by connected persons shall be aggregated to determine the N25million threshold (where applicable), any company covered under any multilateral agreement to which Nigeria is a party will be treated in accordance with those agreements from the effective date in Nigeria.
The SEP Order expands the meaning of technical services to include advertising and training services as well as the supply of personnel. It is debatable if this is in line with the provisions of Finance Act 2019.
On impact of international agreements, some stakeholders have taken that where an NRC is covered by any multilateral agreement or consensus arrangement to address the tax challenges arising from the digitalisation of the economy, to which Nigeria is a party, the provisions of that agreement or arrangement will apply (and effectively override the SEP Order).
It also follows (based on treaty supremacy) that NRCs that operate from a country that has a Double Tax Treaty (DTT) with Nigeria, should not be affected by the SEP Order until changes are made to the DTT.
Implications for tax compliance and administration? Some of the affected NRCs will be required to register for income taxes in Nigeria and file annual tax returns even if they do not have a physical presence in Nigeria. Nigerian resident businesses (as well as the fixed bases of non-resident companies) that have transactions with the affected NRCs will also be required to account for withholding tax on some of the payments made to these NRCs.
According to some experts, the SEP Order raises a number of practical concerns from a compliance and tax administration perspective. On profit attribution, for example, they say the SEP Order does not provide specific guidance on how the profits attributable to the Nigerian SEP of affected NRCs will be determined. This will create uncertainties for NRCs who need to comply.
On enforcement and compliance, they are of the opinion that the FIRS may struggle to enforce compliance without international consensus, as a number of the companies affected may be outside the territorial reach of the FIRS. “This problem will also be exacerbated where the NRCs sell their products and services directly to individual consumers in Nigeria.”
Despite the inherent challenges, the need to expand the tax net and to increase revenue base and capturing those who hitherto were left out of the tax net. This also brings Nigeria at par with global best practices
By this Order, Nigeria has joined other countries that have taken unilateral action to tax the digital economy. The SEP Order makes it clear that a physical presence will no longer be required for certain categories of remote services to be taxable. Affected NRCs could seek guidance and take steps to comply where necessary. This will also apply to Nigerian customers that transact with the affected non-residents.
“In order to improve compliance and reduce uncertainty for taxpayers, the FIRS needs to introduce simplified online registration and compliance processes for affected NRCs. The FIRS will also need to provide clarity on the basis by which profits will be attributed to the SEPs of the NRCs.”