At Vi-M, we have helped several businesses structure their business interests in Nigeria and/ or other countries in Africa in the most optimal way. We share one of our client service success stories below, on how we helped a foreign client achieve the most optimal tax structure for its business interest in Nigeria.
Facts:
Our Client [one of the world’s leading players providing a full range of HR services (temporary, permanent and Professional Staffing Services, Search & Selection and Executive Search, etc], through one of its foreign subsidiaries (herein after referred as ‘Client Sub’) reached an agreement with its client in Nigeria (herein after referred to as ‘Client’s Client’) for the supply of workforce for the construction of oil pipeline; Client Sub planned to hire staff in its country (different from the client’s group’s HQ country) and to send them to work at the Nigerian site as a trainer of the local workforce as well as to use a local supplier to hire local workers.
The key issue was how to structure the presence of Our client in Nigeria: was it necessary to set up a subsidiary in Nigeria or could the services be rendered directly from the Client Sub’s country?
Option 1 – Nigerian Subsidiary set-up (to be referred to ‘Our client Nigeria’)
- Our Client incorporates a subsidiary in Nigeria
- Our Client Nigeria receives personnel seconded from Client Sub
- Our Client Nigeria receives staff from a local labor supplier
- Our Client Nigeria charges the services rendered to Client’s Client, charging the personnel costs incurred with a mark-up of 6%
Questions/ enquiries dealt with:
- Detailed and exhaustive requirements for setting up a Nigerian subsidiary
- How can staff from Client Sub’s country be “transferred” to Our Client Nigeria? By secondment or service supply contract? Is it possible to charge the service for the secondment of staff with a mark-up?
- Does a visa need to be obtained? What main additional fulfilments are needed?
- At the level of Our Client Nigeria, how is the secondment service of Client Sub’s personnel treated for VAT purposes? Does such secondment have to be registered with the reverse charge mechanism (or is it out of the scope of VAT)? If it is subject to VAT, what VAT rate does it apply? Is the VAT (if any) registered by Our Client Nigeria deductible?
- Is the service invoiced by the local supplier to Our Client Nigeria subject to VAT? If so, at what rate? 7,5%? Is the VAT (if any) registered by Our Client Nigeria deductible for VAT purposes? Any risk that it is not VAT-deductible by thus determining a corresponding cost increase?
- As for the charging of services from Our Client Nigeria to Client’s Client (Nigeria), is it subject to VAT? If so, according to which rate? 7.5%? Is VAT if any deductible by Client’s Client (Nigeria) for VAT purposes? Any risk that it is not VAT-deductible by thus determining a corresponding cost increase?
- As to withholding tax on services, when Our Client Nigeria pays for the seconded personnel to Client Sub, is this subject to WHT? If so, at what rate?
- Is the payment by Our Client Nigeria to the local personnel supplier subject to WHT? if so, at which rate?
- Is Client’s Client (Nigeria)’s payment to Our Client Nigeria subject to WHT? if so, at which rate? Can any WHT deducted at source be offset against Our Client Nigeria’s tax?
Option 2 – Secondment of Personnel to Nigeria
- Client Sub seconds staff directly to Client’s Client in Nigeria which will act as employer of record.
- The local supplier (Nigeria) makes the labor available to Client’s Client (Nigeria) on behalf of Client Sub and invoices the service directly to Client Sub.
- For personnel supply services, Client Sub will process a single invoice to Client’s Client (Nigeria) including the cost of seconded personnel and the cost of local labor supplier (Nigeria).
Questions/ enquiries dealt with:
- Under this scenario, confirm whether Client Sub employees can be seconded directly to Client’s Client (Nigeria), which will act as employer of records, while the payment of their salaries is done directly by Client Sub.
- Does a visa need to be obtained for employees? What main additional fulfillments are needed?
- Is it possible to charge the service for the secondment of staff with a mark-up?
- Since Vi-M provides administrative staff management service? What would be the cost per employee for each month of stay?
- Is there a risk that the Nigerian tax authorities could challenge that Client Sub does have a permanent establishment in Nigeria, or not? With this respect the pipeline construction project should last 2/3 years, and Client Sub staff are therefore expected to stay in Nigeria for a long period.
- When the local supplier (Nigeria) makes the labor available to Client’s Client (Nigeria) on behalf of Client Sub and invoices the service directly to Client Sub, will it invoice with VAT or without?
- When Client Sub invoices Client’s Client (Nigeria), how does this operate for VAT purposes? Is it necessary for Client Sub to register for VAT purposes in Nigeria or does the reverse charge apply? In any case, can Client’s Client (Nigeria) deduct the VAT, if any?
- Regarding the withholding tax aspect, when Client Sub pays the local supplier (Nigeria) the invoices for the labor services, does withholding tax apply? What is the percentage?
- As for the payment from Client’s Client (Nigeria) to Client Sub for the services it provides, is it subject to withholding? What is the applicable percentage?
- To reduce the withholding tax suffered by Client Sub for the payments it receives from Client’s Client (Nigeria), as an alternative hypothesis, can there be a charging mechanism where Client Sub charges Client’s Client (Nigeria) with:- the cost for seconded training personnel plus a 6% mark-up;- the 6% mark-up on the supply of the workforce by the local provider (Nigeria); in this case, the local provider (Nigeria) would invoice its services directly to Client’s Client (Nigeria) while Client Sub would charge Client’s Client (Nigeria) only a 6% mark-up on the price of these services, which is grounded on its organization and coordination of the labor supply service. Is this mechanism feasible?
- Discuss all other tax / regulatory considerations.
- Other follow on questions and calls / discussions/ analyses and permutations to firm up optimal tax effective structure
Do you have similar concerns or challenges about your Nigerian / African business interest? We can assist you, just send us an email via clients@vi-m.com.