Introduction
In recent time, digitalisation has led to increased economic growth due to rise in new businesses. It has eradicated geographical barriers in trade across jurisdictions as commerce is now being carried out remotely across jurisdictions without having a physical nexus. This development has obviously negated the classical rule of taxation which has been based on physical presence. This development has created controversy and confusion on the taxing right of market jurisdictions and many have reacted by coming up with rules to enable them get a share of the taxes due to their respective market.
Nigeria, rather than creating a special tax on digital businesses, expanded the profit attribution rule for non-resident companies by introducing the “Significant Economic Presence (SEP)” rule.
What is SEP?
SEP is an acronym for Significant Economic Presence. This is a concept introduced into Nigerian fiscal legislation by the Finance Act, 2019. The concept was introduced following the amendment to Section 13(2) of the Companies Income Tax Act (CITA), CAP C21, LFN. 2004 (as amended).
Section 13(2) of CITA is the Nigerian companies’ income tax legislation that provides the basis for which a non-resident company will be liable to tax in Nigeria. The section provides nexus and profit attribution rules.
The section states that:
(2) The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria-
(a) if that company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base;
(b) if it does not have such a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorised to conduct on its behalf or on behalf of some other companies controlled by it or which have a controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company, to the extent that the profit is attributable to the business or trade or activities carried on through that person;
(c) if that trade or business or activities involves a single contract for surveys, deliveries, installations or construction, the profit from that contract; and
(d) where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and conditions are made or imposed between the company and such person in their commercial or financial relations which in the opinion of the Board is deemed to be artificial or fictitious, so much of the profit adjusted by the Board to reflect arm‘s length transaction.
However, globally, businesses have evolved beyond all the parameters of physical presence stated above, and this has been exacerbated with the transformations the employment of digital technology has on business processes and value chains. Consequently, in a bid to expand the scope of criteria setup above ‘beyond physical presence’ basis for taxing non-resident companies deriving income in Nigeria, the Finance Act 2019 amends Section 13(2) of CITA as follows:
The old section 13 was amended by introducing a new subsection 2(c) and renumbering the old (c) as (d) and also introducing a new (e) as follows:
“(c) if it transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity.
(e) If the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria
Provided that the withholding tax applicable to income under subsection 2(e) shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of this subsection 2 (a)-(e) of this section;
The provision above seems expansive enough to bring all forms of businesses being carried on remotely without a physical presence to tax in Nigeria.
Furthermore, in the case where the provisions above are not sufficient to capture new innovation or dynamism in business, the Minister responsible for Finance is empowered to determine such conditions that will constitute a Significant Economic Presence in the new sub-section 4 as follows: (4) For the purpose of subsection (2)(c) of this Section, the Minister may by Order determine what constitutes the significant economic presence of a company other than a Nigerian company.
Pursuant to powers conferred on the Minister of Finance under section 13(4) of the Companies Income Tax Act[1] (“CITA”), as amended by the Finance Act (2019), the Minister of Finance, on February 3, 2020, issued the “Companies Income Tax (Significant Economic Presence) Order, 2020” (the “Order”), which became effective on the date the Order was issued.
Further to the above, the Nigerian income tax shall apply to profits that may accrue and or be attributable to the economic activities of any foreign entity in Nigeria; to the extent that such an entity has a significant economic presence in Nigeria as described by the Order. Such an entity aside from paying income tax has the obligation to file tax returns like any other resident taxpayer in Nigeria subject to the provisions of Section 55 of CITA, except if such transaction is limited to the furnishing of technical, management, consultancy or professional services where the Withholding tax would be treated as a final tax.
In conclusion, the introduction of the SEP is a laudable concept in Nigeria’s tax legislation as it will go a long way in expanding the tax base and ensure that Nigeria gets its fair share of tax revenues from the remote exploitation of the Nigerian markets.
This article is original and written by:
OLARINDE, Michael Olufemi.
Technical Assistant (Tax Policy)
Office of the Executive Chairman
Federal Inland Revenue Service (FIRS), Nigeria
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