WE shall continue our review today on the emerging/current tax issues by focusing on the other aspect of taxation of Non-residents in Nigeria to guide corporate and individual taxpayers of the impacts on their income or businesses.
Branches and the Parent Company
A Nigerian branch of a foreign company is treated as a corporate entity under the Nigerian law and any income or profit derived by it from Nigeria is taxable in Nigeria. The only two conditions where a branch may not be so treated are:
(i) If the branch is used solely for storage or display of goods or merchandise; and
(ii) If the branch is used solely for the collection of information.
-
Subsidiary and the Parent Company
A subsidiary is expected to be incorporated in Nigeria and therefore to operate as a separate legal entity from the parent. Such subsidiary is liable to Nigerian tax on its global profits/income.
-
Profits or Income “Deemed to be derived from Nigeria”.
Under the old law, the liability to the Nigerian tax on the income from a trade or business of a non-resident company or individual in Nigeria was restricted to that portion of the income attributable to the operations performed in Nigeria. This definition has been found to be inadequate in view of the growing complexities in the nature of commercial operations in Nigeria. Subsequent amendments to the law have comprehensively defined what constitutes deemed profit or income from a trade or business carried on in Nigeria.
For corporations, the pertinent questions to ask in line with Section 13 subsection 2 of the Companies Income Tax Act 2004 (as amended) are:
(i) Does the corporation has a “fixed base” in Nigeria?
(ii) Does the corporation operate in Nigeria through a “dependent agent” authorised to conclude contracts or deliver goods or merchandise on its behalf?
(iii) Is the corporation executing a “turnkey project” in Nigeria?
(iv) Is the operation between the corporation and its subsidiary at arm’s length?
(v) Does the corporation has “Significant Economic Presence” in Nigeria (Finance Act 2019)
- Fixed base of business
If a non-resident corporation has a “fixed base” from where it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria. The term “fixed base” implies that the place must be easily identifiable and must possess some degree of permanence. It includes:
(i) Facilities such as factory, an office, a branch, a mine, gas or oil well etc.
(ii) Activities such as building, construction, assembly, or installation; and
(iii) Furnishing of services in connection with the activities mentioned above.
However, the following two cases are specifically exempted from the definition of a “fixed base”:
(i) Facilities used solely for storage or display of goods or merchandise;
(ii) Facilities used solely for the collection of information.
-
Operation of a Dependent Agent
An agent is regarded as possessing independent status when he acts on behalf of a non-resident corporation in the ordinary course of his business. The status may however, change if he devotes his activities wholly or almost wholly on behalf of the corporation.
The word “habitually” as used in the legislation implies that the operation of the non-resident company must be repetitive. An isolated case will therefore not qualify as “habitual”.
Where a dependent agent makes an isolated sale of goods on behalf of a principal, the income from such an operation as not be liable to Nigerian tax.
However, where the facts show that the sale of goods on behalf of the principal or of any company associated to it by the agent is on a regular pattern, this arrangement will conform with the intention of the term “habitually”.
-
Profits on turnkey project
A turnkey project is defined as a “Single Contract” involving survey, deliveries, installation or construction. The profit of a turnkey project is liable to tax in Nigeria. Such a profit should not be split between the so-called “Nigerian Source” and “Offshore” profits but taxed wholly in Nigeria.
-
Transactions not at arm’s length
The tax laws allows the Board to make appropriate adjustment to the profits of Nigerian companies where transactions were carried out between related parties at prices that are not in conformity with the arm’s length principle.
-
Sales outlet
The tax law excludes:
(i) Facilities used solely for storage of goods and merchandise; and
(ii) Facilities used solely for the collection of information from the facilities that would constitute a fixed base. The use of the word “solely” in the law implies that facilities used exclusively as a representative office would be exempted. Where, however, a facility is used for purposes other than the above, the profit arising from such a sales outlet is taxable in Nigeria.
Conclusion
We shall continue with the other aspects of non-resident taxation in the next publication.
CONTACTS:
Lagos Office:
James Oguns
joguns@geosagie.com
+234 8052 090 316 Lateef M. Ayofe
alateef@geosagie.com
+234 8023 002 061 Ayodele Ayoola
aayoola@geosagie.com
+234 8035 808 857
Abuja Office:
Godwin Osagie
gosagie@geosagie.com
+234 8033 005 338 Nkiru Onigbanjo
nonigbanjo@geosagie.com
+234 8055 634 538
Leave a Reply