The Federal Minister of Finance, Budget and National planning has recently issued “Companies Income Tax (Significant Economic Presence) Order, 2020′.
The Order specifies what “Significant Economic Presence” means for the purpose of taxation of Non-Nigerian companies operating in the digital space in Nigeria in line with section 13(2)(c) of the Companies Income Tax Act (CITA) as amended by the Finance Act, 2019.
It also specifies what “Significant Economic Presence” means for non-Nigerian companies carrying on trade or business comprising in provision of consultancy, management, professional and technical services in Nigeria in line with section 13(2)(e) of the Companies Income Tax Act (CITA) as amended by the Finance Act, 2019.
The Order is effective from 3rd February, 2020 and can be downloaded here.
1. Foreign owned/ controlled digital technology platforms/ tools that will qualify their non-Nigerian owners as having “Significant Economic Presence” (interpreted from the descriptions made by the Executive Order) for Companies Income Tax purposes in Nigeria would include:
a) Platforms selling digital products/ downloads, ecommerce platforms, social media platforms, mobile apps, web applications, app stores, accounting, payroll or ERP software providers, cloud platforms, data/ internet providers, freelance or job websites connecting suppliers with customers in Nigeria, eg. Fiverr.com, solutions such as Google solutions, video and music streaming platforms such as Netflix, YouTube, vimeo etc. as long as the aggregate earnings of those companies in Nigeria from one or combination of their digital solutions/ activities become more than N25 million in any accounting year.
b) Non- Nigerian companies using ‘.ng’ domains or those that register their website addresses in Nigeria. There is no minimum turnover threshold attached to this condition but the provisions of CITA on ‘Small Companies’ would most reasonably apply.
c) Digital platforms targeted to or has a purposeful or sustained interaction with Nigerian buyers, including presenting prices of their products and services in Naira or giving the option to buy in Naira. There is no minimum turnover threshold attached to this condition but the provisions of CITA on ‘Small Companies’ would also most reasonably apply.
2. Non-Nigerian companies falling into the above 3 criteria will create a ‘Significant Economic Presence’ in Nigeria that would make them taxable under the provisions of the Companies Income Tax Act (CITA), just like other ‘Fixed bases’ and ‘Permanent Establishments’ of non-Nigerian companies. Rate of tax according to the provisions of CITA is either nil (for companies making N25million or less in annual gross turnover) or 20% or 30% based on turnover threshold in line with the Finance Act, 2019.
3. Nigerian businesses using these digital solutions for their businesses would need to withhold tax from payments made to these foreign companies. Rate of withholding tax is not specified. However, it should be 5% when the transaction is treated like a general contract of supply, but given that digital technology is specialised, a more appropriate rate may be 10%.
4. Some practical tax implications for Nigerian businesses using these digital platforms include:
a) Most of these foreign companies are yet unaware of the changes in the Nigerian tax laws as it applies to them (even if they do, they may care less until strict measures are applied to them) and this means that they will not allow any withholding tax deductions from their payments. This will imply that Nigerian businesses may be mandated to bear the withholding tax burden on these transactions.
b). Where withholding tax is borne by a Nigerian company on behalf of another person, this amount will also be taxable (for the Nigerian company) under CITA as it will NOT be allowed as a deductible business expense for tax purposes.
c). App developers (businesses hosting apps on app stores) and partners (such as accounting software partners) may, by virtue of their agreements with the platform owners, be required to bear the tax applicable on the portion of the shared revenues attributable to the foreign platform owners. In this case, nos. (a) and (b) above would also apply to them.
d). The practicable alternative for Nigerian businesses would be to ONLY use digital solutions offered by these non-resident companies for free.
e). The second practicable alternative for Nigerian businesses is to buy off-the-shelf, one-time-payment digital solutions.
f). Digital technology and platforms are being embraced by Nigerian businesses to make business easier and more effective. These new provisions and the practical tax implications places additional burdens which negates the purpose of embracing digital technology.
g). The ramifications of digital technology are so broad that neither the tax authorities nor the Nigerian businesses using these digital solutions can fully articulate them in order to determine the appropriate taxes that may apply.
h). Technology is a specialised field and lack of proper understanding of what it all entails may lead both taxpayers and tax authorities to making incorrect tax assessments and engaging in long drawn tax disputes eventually.
5. The second part of the Executive Order describes what “Significant Economic Presence” means for non-resident companies carrying on trade or business comprising in provision of technical services (which includes training, advertising services or provision of personnel), consultancy, management and professional services in Nigeria.
These non-Nigerian companies will be taxable at the rate of 10% (withholding tax), which will become the final Nigerian tax in the case of payments received for the aforementioned services:
i. From a Nigerian resident, or
ii. From a fixed base of a non-Nigerian company
Payments relating to the following are excluded from creating “Significant Economic Presence”:
a). Payments made to employees in an employment contract.
b). Payments for these services made for teaching in or by educational institutions.
c). Payments for such services made by the foreign fixed bases of Nigerian companies.
6. In this regard, Nigerian businesses (and fixed bases or agents of non-Nigerian companies) paying for these services would be required to withhold tax at 10% from the payments made to these foreign companies on these services. Such withholding tax would be the final Nigerian tax.