June 7, 2020
The Honourable Minister of Finance, Budget and National Planning recently issued the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”). The Order, which is effective 3rd February, 2020, defines the concept of “Significant Economic Presence” as it relates to the taxation of non-resident companies under the Companies Income Tax Act (CITA) as amended by the Finance Act, 2019.
The Finance Act, 2019 had amended the CITA in relation to the determination of the profits of non-resident companies derived from Nigeria and introduced the concept of Significant Economic Presence (SEP) as a basis for determining the profits of non-resident companies providing digital services and technical, management, consultancy or professional services in Nigeria. The Finance Act, 2019 thereafter empowered the Minister of Finance to determine what constitutes SEP in Nigeria in order to give effect to the amendment. In this regard, the Order was issued to define what constitutes SEP in Nigeria as provided under Section 13 (2)(c) & (e) of the CITA. We have summarized the provisions of the Order below:
Section 13(2)(c) of the CITA: This Section provides that companies that transmit, emit or receive signal, sounds, messages, images or data of any kind by any electronic or wireless apparatus to Nigeria in respect of any activity are liable to pay tax in Nigeria to the extent that the company has SEP and profit is attributable. The Order has clarified that “electronic and wireless apparatus” include digital or related activities carried on through satellite and that foreign companies involved in these activities have SEP in Nigeria if they fall under any of these three categories:
The Order further provides that to determine if a company meets the
N25 million threshold in a year, the activities carried out by Connected Persons in that year will be aggregated. The Order defines “Connected Persons” as associates or business associates where one person is involved in the management or control of the other or where both people are involved in the management or control of both enterprises.
The Order also states that any foreign company covered under a multilateral agreement or consensus arrangement to address the tax challenges arising from the digitalization of the economy that includes Nigeria will be treated according to such agreement from the date such becomes effective in Nigeria.
Section 13(2)(e) of the CITA: This Section provides that foreign companies with a trade or business relating to technical, professional or consultancy services are liable to CIT in Nigeria if such company has SEP in Nigeria.
The Order clarifies that a foreign company under Section 13(2)(e) of the CITA will be deemed to have SEP in Nigeria in an accounting year if it earns any income or receives payment from a person resident in Nigeria, a fixed base or an agent of a foreign company. The Order also clarifies that Technical Services relate to any service of a specialized nature including advertising services, training or the provision of personnel.
Notwithstanding the foregoing, a foreign company will not have SEP in relation to any payment made:
This Order provides clarification on the concept of Significant Economic Presence introduced in the Finance Act, 2019. Thus, foreign companies doing business in Nigeria have to take particular note of the low threshold of
N25million in turnover as well as the other criteria which effectively trigger CIT liability in Nigeria.
However, the modality for implementation of the Order and deduction/collection of the required taxes remains unclear. To this end, we still expect the Ministry of Finance and the Federal Inland Revenue Service to issue Regulations to provide additional clarifications in this regard.
We will continue to monitor any further administrative guidelines and directives in this regard and highlight any significant developments.