It is common practice for some Nigerian companies to request certain services from their foreign related or third parties, to leverage technology and expertise, with the intention to drive efficiency in their operations. These services include management services which involves the outsourcing of certain processes and functions or technical services that requires the transfer of technology. The applicability of withholding tax (WHT) on the fees for these services as provided in the Companies Income Tax Act (CITA) is sometimes inconsistent with the requirement to show evidence of tax payment contained in the Central Bank of Nigeria Foreign Exchange Manual, 2018 (the CBN Manual).
Based on the principles of taxation, a good tax system should be equitable and certain. Therefore, a situation where the requirement to deduct tax on technical and management service (TMS) fee is dependent on the mode of payment or source of foreign exchange (i.e. from the bank or the parallel market) and not the relevant provisions of the tax laws is inconsistent with these principles.
The payment for TMS rendered to a Nigerian entity by companies other than Nigerian companies (foreign companies), exclusively offshore, should ordinarily not be liable to WHT in Nigeria. This is based on a combined reading of Section 13(2) of the CITA, which provides the basis for taxation of foreign companies and Section 81 of the CITA, which stipulates that the income has to be assessable to tax, before WHT will apply.
However, where the Nigerian company requires foreign exchange (forex) from an authorized dealer (e.g. a commercial bank), in making payment for TMS, it will be required to provide an evidence of tax deduction from the fee, irrespective of the taxability of the income based on the CITA. In contrast, where in paying for the TMS rendered by the foreign company, the Nigerian company sources for forex from the parallel market or utilizes an asset it has in the foreign company (such as a loan receivable) to offset the fee for the TMS, the Nigerian company will not be required to deduct WHT on such payments.
It therefore begs the question whether the evidence of tax deduction requested by the banks by virtue of the CBN Manual in order to provide forex is really a tax, or in substance, a fee to the government for the provision of forex, in instances where the fee for the TMS is not taxable in Nigeria.
Basis of Taxation of Foreign Companies in Nigeria
Prior to the passage of the Finance Act, 2019, the profits of a foreign company will be taxable in Nigeria, if that company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base, based on the provisions of Section 13(2) of the CITA.
Based on the foregoing, where a foreign company renders TMS completely outside Nigeria to a person resident in Nigeria, it would not have created a fixed base or met any of the other conditions for taxability in Nigeria. Consequently, WHT would also not apply on the profits from such activity.
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