February 6, 2018
Investments in infrastructural projects usually involve different phases from project initialisation, design, supply, construction to ultimate handover (Turnkey Project). In most cases, these projects are executed by a consortium based in different locations-some outside Nigeria. A Non-Resident Company (NRC) involved in a Turnkey Project executed as a single contract for survey, deliveries, installation or construction is taxed under Section 13 (2) (c) of Companies Income Tax Act (CITA). The question that readily comes to mind is what constitutes a Single Contract within the context of Section 13 (2) (c) of CITA and how can it be distinguished from a split contract or tripartite contract.
In this piece, we examine the issues surrounding the taxation of NRCs involved in Turnkey Projects and we provide useful tax planning insights for taxpayers seeking to engage in Turnkey Projects.
Under the CITA, tax is payable on the profits of any company accruing in, derived from, brought into, or received in Nigeria in respect of any trade or business for whatever period of time such trade or business may have been carried on. In Taoufic Karan v. Commissioner for Income Tax (WACA 25 May 1948), the Court held that the words “accruing in” and “received in” import a clear territorial limitation to Nigeria. The Court further stated that the words “derived from” appear to be designed to meet amongst other things, cases where profits arise from transactions carried out in Nigeria by a non-resident tax payer.
Some of the critical conditions for taxation of a NRC under Section 13 (2) of the CITA is that such NRC has a Fixed Base in Nigeria or operates through a Dependent Agent or it is involved in a turnkey contract or it is involved in a related party transaction deemed to be artificial. Thus, the underlying consideration for the taxation of a NRC in Nigeria under Section 13 (2) of the CITA, as stated in the Taoufic Karan case, is whether the NRC derives profit from a trade or business carried on within the territory of Nigeria.
The CITA does not define the term single contract. Assuming that Company A (a manufacturer of drinks and spirits) plans to build a state-of-the art manufacturing plant in Lagos, Nigeria (the Project) under two possible scenarios. Under Scenario 1, Company A contracts with Company B (a foreign engineering and construction company based in Germany) where Company B is expected to be involved in the design, supply of equipment, local installation as
well as the construction of the manufacturing plant in Lagos until completion and ultimate handover of the manufacturing plant to Company A. Under Scenario 2, Company A contracts with Company B (based in Germany) for the design and supply aspect of the Project and contracts with Company C (a Nigerian engineering and construction company) for the local installation and construction aspect of the Project. Scenario 2 could either be under a Tripartite Contract or two separate contracts with B and C.