Nigeria’s tax system is undergoing major changes with the introduction of four new tax bills: the Nigeria Tax Bill (NTB), Nigeria Tax Administration Bill (NTAB), Joint Revenue Board (Establishment) Bill (JRBEB), and Nigeria Revenue Service (Establishment) Bill (NRSEB). These reforms aim to simplify tax administration, eliminate ambiguities, consolidate existing laws, expand the tax base, and reduce the number of taxes to a single-digit structure. The use of technology for fiscalization and automation of tax processes will ensure greater compliance for both residents and non-residents, including individuals, corporate entities, and trustees.
A Non-Resident Company (NRC) refers to any business incorporated outside Nigeria but earning income from activities conducted within the country. Such companies are subject to taxation if they have a Permanent Establishment (PE) or Significant Economic Presence (SEP) in Nigeria, as per existing double taxation agreements (DTA) between Nigeria and other treaty countries.
Before 2020, taxing NRCs operating in Nigeria was difficult unless they had a PE. However, the introduction of the Significant Economic Presence Order 2020 (SEP Order) allowed Nigeria to tax digital services provided by foreign companies, even if they lacked a physical presence in the country. The new tax bills, particularly the NTB, have expanded taxation rules for NRCs engaged in digital services, shipping, air transport, and other cross-border transactions, reinforcing compliance measures and defining tax obligations more clearly.
How Non-Resident Companies Are Taxed in Nigeria
The NTB has widened the tax net to cover income, profits, and gains derived from Nigeria, including:
- Profits from selling chargeable assets located in Nigeria.
- Profits from businesses operating in Nigeria.
- Income from trade, services, or professional activities where an NRC has a PE or SEP.
- Payments made by Nigerian residents or NRC subsidiaries for services performed outside Nigeria.
- Insurance payments made by Nigerians to NRCs.
A Permanent Establishment (PE) is established when an NRC:
- Has a physical business location in Nigeria.
- Operates through an authorized agent in Nigeria.
- Stores goods or merchandise within Nigeria for distribution.
- Provides services through employees or representatives.
- Engages in projects such as surveys, construction, installation, or commissioning, whether fully or partially executed within Nigeria.
A Significant Economic Presence (SEP) applies when an NRC earns revenue from digital services in Nigeria, including online education (excluding accredited institutions). However, employing a Nigerian for duties primarily conducted outside Nigeria does not create a PE or SEP.
Determining Profits Attributable to a Permanent Establishment
Under Section 17(5) of the NTB, taxable income for NRCs will be based on profits earned from sales of goods or services in Nigeria, minus allowable expenses related to their Nigerian operations.
However, certain expenses such as royalties for intellectual property between NRCs and their Nigerian branches are now limited to 5% of EBITDAC (Earnings Before Interest, Tax, Depreciation, Amortization, and Consideration). Additionally, related-party payments will no longer be tax-deductible except for reimbursements of actual expenses.
Minimum Tax Rules for NRCs
If an NRC’s total profit from Nigeria cannot be accurately determined or is lower than expected, a minimum tax will be applied. The tax base will be calculated using the profit margin of the NRC’s Audited Financial Statements (AFS). If AFS is unavailable, a comparable company’s profit margin will be used.
Key points:
- The minimum tax payable cannot be less than the withholding tax (WHT) already deducted from the NRC’s invoices.
- If the income is not subject to WHT, the minimum tax is 4% of total Nigerian revenue.
- This 4% minimum tax is lower than the 6% deemed profit rule previously applied by the Federal Inland Revenue Service (FIRS), potentially affecting tax revenue.
- NRCs that are part of multinational enterprises (MNEs) must meet a 15% effective tax rate.
- Payments for professional, technical, management, or consultancy services remain subject only to WHT, unless the NRC has a PE or SEP in Nigeria.
Value-Added Tax (VAT) Responsibilities
NRCs supplying taxable goods or services to Nigeria must:
- Register for VAT and obtain a Tax Identification Number (TIN).
- Charge VAT on invoices for services provided to Nigerian entities.
- Follow Nigeria’s self-charge system, where Nigerian recipients account for VAT if the NRC is not a collection agent.
Though existing VAT regulations remain largely unchanged, Nigeria’s electronic fiscalization system (EFS)—which mandates digital invoicing—may soon be extended to NRCs.
Key Considerations for Businesses
One area of concern is the revenue threshold for digital services taxation. The SEP Order 2020 sets the threshold at ₦25 million, whereas the NTB’s small business threshold is ₦50 million, potentially causing confusion. However, Section 17(9b) of the NTB allows the Minister of Finance to issue new regulations clarifying the revenue threshold for NRCs offering digital services.
In addition:
- NRCs must now pay at least 4% minimum tax, regardless of revenue threshold.
- If an NRC is part of a multinational group, it must comply with a 15% effective tax rate.
- Professional, management, technical, and consultancy services may no longer create SEP for NRCs.
- FIRS may expand its list of approved VAT collection agents to include all NRCs.
Conclusion
Nigeria’s tax reforms are a significant step toward a more structured, transparent, and efficient tax system. By streamlining tax laws, enhancing compliance, and leveraging technology, the government aims to increase revenue and improve Nigeria’s business environment.
However, while the reforms simplify taxation, certain provisions—such as profit attribution rules and expense deductibility restrictions—may raise tax liabilities for NRCs. Businesses operating in Nigeria must stay informed, seek expert guidance, and ensure compliance to avoid penalties and minimize tax risks.
This article provides general information and does not constitute legal or tax advice. For specific tax concerns, consult a qualified expert.
