How foreign companies in Nigeria can reduce negative tax incidence

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How foreign companies in Nigeria can reduce negative tax incidence. The likelihood of getting caught up in negative tax incidences is much higher in foreign markets than in one’s home country where tax laws may be more common knowledge and practice, says Abdulrazaq Olatunji, Director, Tax & Regulatory Services, at Nolands Nigeria Professional Services.

Abdulrazaq said to mitigate tax incidences in other markets, such organizations tend to hire the services of local representatives.

In this, an advisory and implementation personnel or team is typically better than only an implementing one.

While the former is able to interpret, communicate, defend, and execute tax laws as is relevant to the organization, the latter merely implements what the organization deems fit, even if flawed.

“In Nigeria, corporate taxation may be largely understood from two sources. These two sources must be familiar to those representing client organizations – local or foreign”, Abdulrazaq stated.

He stated that the Companies Income Tax Act (CITA) of 2007 is the first; and the Companies and Allied Matters Act (CAMA) of 2004.

“Going by the dictates of these Acts, there are very few scenarios under which any company, local or foreign, may operate from Nigeria without the need to register with the appropriate tax authority – the Federal Inland Revenue Services (FIRS) www.firs.gov.ng .

CITA expressly mandates that any company intending to maintain a significant level of presence in Nigeria is required to register with the FIRS.

CITA treats “significant level of presence” as synonymous with “earning income from Nigeria,” as well as “having a discernable level of presence, directly or indirectly,” and by so doing, mandates all companies operating in Nigeria to register with the FIRS.

In buttressing the point, Abdulrasaq cited cases to explain the required obligations of what is perceived to be a foreign company with very minimal presence in the country.

Case 1

Our company, an international journalism firm, utilizes local personnel living and working in Nigeria to source for news content.

The company refuses to register a subsidiary or legal business entity in Nigeria because it requires local presence only for a predefined length of time.

Also, it only needs local correspondence, nothing more, as most parts of its operations are done from outside the country; and the firm perceives the local socio-political environment to be relatively unstable, and unfit for establishing a long term presence.

As a result of this, the company said it does not see the need to register with the tax authorities.

He said to understand the error made by the above described Client Company, we point out company and tax law requirements for foreign companies.

“First by describing what the term “foreign company” means. In Nigeria, a foreign company refers to any company or corporation (other than that of a sole proprietor) that is established by or under any law in force in any territory or country outside Nigeria.

“In other words, a company operating in Nigeria, not registered as a business entity in Nigeria, though registered as one in another country or sovereign entity, is foreign”, Abdulrazaq said.

He further stated that another term for such companies, and a less ambiguous one, is non-resident company.

Simply put, a foreign or non-resident company is one that is registered elsewhere but not in Nigeria, he added.

“More holistically, regardless of scale of operations, all companies registered in Nigeria are local companies, whereas, all companies not registered but operating in Nigeria are foreign or non-resident”, the Tax expert at Nolands Nigeria Tax Professional Services said.

He said CAMA on the other hand fails to recognize such companies, except in temporary capacities. Its section 54 (1) states that a foreign company with the intent of carrying on business [operations] in Nigeria shall take steps to be registered as a separate entity in the country.

According to him, while CAMA does not expressly declare the activities of non-resident companies as illegal, its spirit requires the residency or localization of all companies, sooner than later.

Also, the provisions of Company Income Tax Act expressly state that profits of non-resident companies are taxable in Nigeria, if it is deemed to have been derived in the country.

The tax expert at Nolands stated that CITA provides four conditions under which this will hold as follows:

  1. A fixed base of business in Nigeria and to the extent that the profit is attributable to the fixed base;
  2. Habitual trading through a Nigerian agent authorised to conclude contracts on its behalf, to the extent that the profit is attributable to the business or trade or activities carried on through that person;
  3. Profit from execution of a turnkey project – a single contract for surveys, deliveries, installations or construction; or 4. Profits adjusted by the Tax Authority to reflect arm’s length transaction in related party arrangements.

“Based on the above, the international journalism firm of our scenario may at first glance, have no need to register with the FIRS except if its activities include income generation within the country.

“However, it will be required by CAMA to establish a legal entity locally, regardless of the scale of operations, and as a consequence, it will be required to register with the Federal Inland Revenue Services.

“Yet, given the absence of income from its operations, it will have no income taxes to remit. Rather, its tax liabilities, if any, will pertain to the Personal Income Taxes (PIT) of its local personnel, payable to the relevant State Inland Revenue Services where the personnel reside.

“In cases where income has or will be earned in Nigeria, it is in the best interest of companies, resident or non-resident, to register as soon as possible with the tax authorities, as CITA empowers the FIRS to base its “best of judgment‟ pre-tax assessment on turnover to estimate total tax liabilities of the company”, Abdulrazaq said.

He stressed that in practice, the FIRS prescribes a deemed profit of 20% of derived turnover (assuming tax deductible expenses and capital allowance of 80%) as may be collated from company’s bank statements, audited financial statements or management accounts.

Speaking further, he said the estimated profit is then taxed at the corporate income tax rate of 30%, resulting in an effective tax of 6% of turnover.

“As Nigeria does not have the branch office tax as a way of addressing tax liabilities of foreign companies, but rather treats all income from the activities of such companies as if they are standalone entities.

“Such companies are often in danger of excessive taxation on their incomes, particularly where significant operational support and costs stem from outside the country and are likely to be unrecognized by the tax authorities.

“In attempting to mitigate this, foreign companies typically pay for operational support from their affiliated companies in other countries by treating them as contractual supply of goods or services”, he noted.

Abdulrazaq said in doing this, such companies are advised to recognize and follow the stringent rules of the FIRS with relation to transfer pricing.

“Given the above, it is assume that where significant business risks are not in question, an alternative to registering a local entity in Nigeria and to avoiding taxation altogether, involves the engagement of local expertise (individuals or resident companies) in contractual capacities as independent agents.

“Here, the services, remuneration, and the manners in which costs are borne and income generated may be agreed by the parties, keeping tax benefits in view.

“Such practices however come with a caveat.

“Where any of such agents devote their activities wholly or almost wholly on behalf of the non-resident company, they will be regarded as affiliates of the company.

“This  may be subjected to the stringent rules of transfer pricing by the FIRS”, Abdulrazaq advised.