Taxation of Non-Resident Companies in Nigeria (Part 2)

In our previous post, we shared our view on the taxation of Non-Resident Companies (NRCs) in Nigeria, it is worthy of note that further to the introduction of Significant Economic Presence (SEP) vide the CITA (as amended by the Finance Act 2019), the scope of NRCs has been amended to include digital activities.

SEP put in simple terms means foreign entities which derive revenue especially through digital activities in Nigeria in an accounting year without having a fixed base in Nigeria. The SEP concept was first documented in the final report of Base Erosion Profit Shifting (BEPS) of the Organization for Economic Co-operation and Development (OECD) in October 2015. What SEP seeks to address are the cases where Companies or persons outside the shores of Nigeria transact businesses with Organizations domiciled in Nigeria and as a result of them not having a fixed base in Nigeria end up not being subject to tax. Prior to the amendment of Section 13 of CITA, an NRC was subjected to tax in Nigeria if such NRC had a fixed base in Nigeria and/or the taxable profit is attributable to profits from the fixed base.

However, with the constant growth and utilization of the digital space, businesses such as online advertising, movie streaming, music streaming, cloud payments, online gaming stores, e-commerce et al. were outside the purview of Nigeria’s tax net until the introduction of SEP.

With the introduction of SEP, there is a focal point for taxing profits derived by NRCs and Technical, Professional, Management or Consultancy Services (TMPCs) with respect to digital operation in Nigeria. The SEP order states clearly that “profits from any company other than a Nigerian Company from any trade or business shall be deemed to be derived from Nigeria if it  transmits, emits or receives signals, sounds, messages, images or data of any kind from 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, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity.”

For a foreign revenue-deriving entity to be classified as an SEP, it must meet the following requirements:

1. It derives 25million naira annual gross turnover or its equivalent in foreign currencies through the following digital activities:

  • Streaming or downloading services of digital contents spanning videos, music, applications and so on;
  • Provision of goods and services excluding those under sub-paragraph 5 of the Order, directly or indirectly through a digital interface which includes website or mobile applications;
  • Provision of services such as intermediation via digital platforms, websites et al which seeks to link suppliers with customers in Nigeria; or
  • Provision of services such as intermediation via digital platforms, websites et al which seeks to link suppliers with customers in Nigeria; or
  • Transmission of data collected with Nigerian users as the target sample which has been generated from the activities of such users on a digital interface such as websites or applications.

2. It uses a Nigerian domain name (for example .ng) or has a website registered in Nigeria;

3.  has a sustained interaction with persons resident in Nigeria by customizing its digital platform to target persons in Nigeria. This could either be by reflecting prices in Nigerian naira or providing billing/payment options in Nigerian naira.

Exemptions of SEP

The SEP Order exempts the activities of the following foreign persons from being recognized as a SEP in Nigeria:

  1. any foreign entity who is under a multi-lateral agreement with respect to addressing taxation challenges stemming from digitalization of the economy who would be treated under such an agreement;
  2. any foreign company making any payment:
  • to its employees under contract of employment;
  • for teaching in an educational institution or for teaching by an educational institution (e.g. seminars); or
  • by a foreign fixed base of a Nigerian company.

It is important to note that the Finance Act places the Honorable Minister of Finance with the power to issue an Order on SEP.

For more enquiries, please contact: Abimbola Oyebowale (a.oyebowale@taxaide.com.ng, +234 908 341 1615), Emenike Ugwuanyi (e.ugwuanyi@taxaide.com.ng, +234 806 536 7616), Emmanuel Emereuwa (e.emereuwa@taxaide.com.ng, +234 806 807 1347).

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