Tax Implications of Transactions With Foreign Entities

Tax Implications and Responsibilities

The income of an NRC is subject to tax only on its Nigerian
activities. Where the company has no taxable presence, any
Withholding Tax that may have been charged becomes the final tax.
The Nigerian party is charged with the duty of charging and
remitting reverse VAT. However, where taxable presence is
established, the NRC bears its burden and is required to register
and file its complete income tax returns, including an audited
financial statement in line with S.55 of Companies Income Tax Act
CITA. A deemed assessment was allowed instead of full tax returns
until 2015.

Taxable Presence – Permanent Establishment

In determining taxable presence, reference is made to whether
the entity has a permanent establishment (PE). PE means a fixed
place of business through which the business of an enterprise is
wholly or partly carried out. The governing rules in determining a
PE are spread across:

• CITA S. 9, 13 and 30
• Federal Inland Revenue Service Establishment Act
• Federal Inland Revenue Service FIRS Circulars
• Nigeria Double Tax Treaty
• Influences from Organization for Economic cooperation and
  development OECD Article 5 (Permanent Establishment) and Article 7
  (Business Profit).

While the rules are several and repeated, the key indices have
been summarised into 7 headers:

1. Fixed Base: If the NRC has a physical facility such as
   building, office, or oil mine that can be associated with their
   activity in Nigeria, a PE can be established. This includes hotels
   that is made available for the use of the NRC. There is an
   exemption where the facility is strictly to collate information,
   storage or display of goods and merchandise.
2. Dependent Agent: Where the foreign entity has a dependent agent
   who habitually exercises power to conclude contract on its behalf,
   the transactions create a PE for the foreign entity. An agent will
   be deemed to be independent where he is acting in the ordinary
   course of his business. For instance, if the agent is a registered
   broker or dealer of such items. In other cases, the agent will be
   regarded as dependent.
3. Employees: Taxable presence can be created where the employees
   of an NRC are residing in Nigeria to carry out their employment
   duties.
   Sometimes this takes the form of constant visitation to Nigeria or
   on-going transactions at a Nigerian partners location. Where
   expatriate staff is working in Nigeria, the expatriate quota can be
   used to verify the employer and determine the existence of a
   PE.
4. Transfer Mispricing: Families are a blessing, but for the tax
   authorities, it is a smell of possible foul play. Transactions
   between connected taxable persons do not in itself constitute a PE.
   However, in situations where amounts charged for transactions
   between related parties do not mirror the market prices, the
   transactions may create a PE for the foreign party. In addition,
   FIRS is empowered to adjust the price to reflect the comparable
   price for such transactions.
5. Construction projects: Where a single contract involves survey,
   installation and construction, the profit from the project is
   taxable. These are referred to as turnkey projects. Where any form
   of construction contract is carried out for more than three months,
   PE is deemed on the construction contractor’s activities.
6. Conclusion of contracts: A PE can be created where the material
   terms of the contract are concluded in Nigeria. If a contract is
   concluded, signed, negotiated, decided, or governed by the Nigerian
   law, the transaction can be said to be carried out in Nigeria.
7. Place of Management: This refers to where the key management
   and commercial decisions that are necessary for the conduct of the
   business of an entity are, in substance made. A PE can be
   established if the place of management is in Nigeria in line with
   Article 5 of the OECD Model Tax Convention.

Reverse VAT

Where a foreign company enters into a contract with a Nigerian
company for the supply of goods and services, the Nigerian company
is required to deduct and remit VAT. This is referred to as the
reverse VAT mechanism. Previously, ambiguities and several
conditions were surrounding the application of reverse VAT. Before
reverse VAT could apply, the NRC needed to have a taxable presence
in Nigeria and must have issued a VAT invoice. Where the VAT was
not charged by the NRC, the Nigerian party was also liable to the
unpaid taxes. The Tax Appeal Tribunal TAT judgment in the Vodacom
vs. FIRS clarified the ambiguity and placed the burden on the
Nigerian company to charge the reverse VAT in any of these
cases.

Key Takeaways

Tax Payers

1. FIRS has the right to select the Nigerian party as a tax
   collection agent in line with S.31 of the FIRS Establishment Act.
   This may create a liability for the Nigerian party who is more
   visible to the revenue service. A proactive stance should be taken
   by Nigerian parties on transactions with foreign entities.
   Consultations should be made with tax consultants and the tax
   authorities to understand the implications and potential
   responsibilities.
2. Nigerian companies should ensure that reverse VAT is deducted
   and remitted on its foreign transactions even when a VAT invoice
   was not issued by the foreign entity
3. Where transactions are between related parties, proper transfer
   pricing agreements should be put in place to avoid the
   establishment of a PE. Taxpayers need to be conversant with the
   existing Double Tax Treaties to enjoy the available reliefs

Tax Authorities

1. A substantial amount of revenue from potential taxes on
   International transactions are being lost by the government.
2. There should be massive education on the tax implication of
   transactions with foreign entities to educate the taxpayer and
   promote self-compliance.
3. Local rules on international taxation should be updated to
   align with widely accepted guidelines such as the OECD model tax
   convention.