Background
In a study conducted by the Organization for Economic Cooperation and Development (OECD) in 2019, it was established that Nigeria has the lowest tax to Gross Domestic Product ratio among the 30 African countries covered https://www.oecd.org/countries/nigeria/revenue-statistics-africa-nigeria.pdf. It is less than 7% in all the years covered (2010 - 2019) compared to average of 17% for other African countries.
On the other hand, based on the Federal Government budget estimates for 2021, Nigeria's debt-to-income ratio is at an all-time high such that the expected revenue from oil and non-oil sector can barely service debt obligations. This is in spite of the fact that Nigeria plays host to most modern technological developments such that the economy runs on innovations provided by players in the digital economy space. For instance, the traditional media houses are struggling for space in news dissemination given the unprecedented impact of the social media network.
There is therefore an urgent need for the government to come up with a form of taxation that is simple and non-complicated for all non-resident companies that are deriving income from Nigeria. Our focus, as had been explained in the earlier series of these articles, is on those operating within the digital economy. We have therefore reviewed the current enabling income tax legislation to identify options that are available to the government to solve this problem. The options considered do not require a drastic change in tax legislation, but a simple modification that will accommodate the players in the digital economy, similar to what has been done in most other countries. These are as follows:
- Federal tax authority's power to assess and charge tax on turnover of trade or business
Generally, all companies are liable to income tax on accounting profits adjusted for tax purpose. However, in some instances, the Nigeria's Companies Income Tax Act empowers the Federal Inland Revenue Service (FIRS) to assess companies to tax based on the turnover or gross income realized from Nigeria during an accounting period. This power is encapsulated in section 30 of CITA which provides that:
"Where in respect of any trade or business carried on in Nigeria by any company (whether or not part of the operations of the business are carried on outside Nigeria) it appears to the Board that for any year of assessment, the trade or business produces either no assessable profits or assessable profits which in the opinion of the Board are less than might be expected to arise from that trade or business or, as the case may be, the true amount of the assessable profits of the company cannot be ascertained, the Board may, in respect of that trade or business, and notwithstanding any other provisions of this Act if the company is a Nigerian company1, assess and charge that company for that year of assessment on such fair and reasonable percentage of the turnover of the trade or business as the Board may determine"
Based on the above, FIRS used the turnover basis to assess non-resident companies to tax from 1993 to around 2014. The companies simply filed summary of income earned during this period for each tax reporting period and paid tax at 30% on statutory deemed income rate of 20% (increment from initial rate of 10% in 1996). This was very simple and hassle-free form of taxation that also ensured certainty.
- Companies engaged in shipping or air transport
Similar to the foregoing, Non-Resident Companies (NRCs) engaged in shipping and air transportation are liable to tax on turnover basis in Nigeria. The turnover being limited to revenue accruing from loading into the ship or aircraft in Nigeria. Section 14 of the Act provides as follows:
- Where a company other than a Nigerian company carries on the business of transport by sea or air, and any ship or aircraft owned or chartered by it calls at any port or airport in Nigeria, its profits or loss to be deemed to be derived from Nigeria shall be the full profits or loss arising from the carriage of passengers, malls, livestock or goods shipped, or loaded into an aircraft, in Nigeria:
- For the purposes of this section, the tax payable by any company for any year of assessment shall not be less than two per cent of the full sum receivable in respect of the carriage of passengers. mails, livestock or goods shipped or loaded into an aircraft in Nigeria.
Based on the above, most NRCs operating in the marine and aviation industries in Nigeria simply file tax returns by applying the minimum rate of 2% to the 'turnover' derived from Nigeria. In most instances, FIRS accept the returns and issued tax clearance certificates to the companies.
- Taxation of interest, rental and dividend income
Sections 78, 79 and 80 of CITA require companies operating in Nigeria to deduct withholding tax (WHT) when making payment for interest, rent and dividends (in that order). The rate is currently 10% to all beneficiaries except those resident in countries that have double taxation agreement with Nigeria. In the latter case, the applicable rate is reduced to 7.5%.
Subsection 4 of each of these three sections however provide that "the tax, when paid over to the Board, shall be the final tax due from a non-resident recipient of the payment."
In practice, once service beneficiaries account for the WHT to the FIRS, the non-resident companies do not file any other form of tax returns to the tax authority. Most do not even file monthly valued added tax returns as required by the law. The tax authority accepts the WHT and VAT remitted (applicable to rental income in some instance) on behalf of the companies by service beneficiaries as full and final settlement of the tax liability and consequently discharge the NRCs from statutory obligations to file any form of further tax return.
- Taxation of income from technical, management, consultancy or professional services
In 2020, the Nigeria government amended section 13(2) of CITA. It inserted a provision to cover NRCs that are providing technical, management, consultancy or professional services in Nigeria. The amendment provides that affected companies shall be liable to withholding tax (WHT) at 10% on the income derived from these services and the tax shall be the final tax. The new subsection 13(2)(e) provides as follows:
'If the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has a significant economic presence in Nigeria:
Provided that the withholding tax applicable to income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection 2 (a) - (e).'
Concluding remarks
Some of the questions that bother any discerning mind then are as follows -
- Why did the Nigeria government jettison a simple way of tax compliance for a sector globally agreed and accepted to be extremely and uniquely complicated to track their income and expenditure and therefore profit?
- What makes Nigeria government think it is wiser and smarter than more advanced and generally more tax compliant economies such as France, United Kingdom, South Africa, India, Turkey, amongst others, in designing a complex tax compliance system for this sector?
- Why did Nigeria government fail to extend one of the existing simplified tax compliance system for other sector or sources of income to this sector?
The current tax system promulgated for the players in the digital economy as available in Finance Act 2021 is a recipe for disaster. It will surely create more problems than one can ever imagine. The interesting thing is that some economies have suffered the consequence of tax regime that is difficult to comply with or has abundant loopholes that permit lax tax avoidance schemes. The consequence is that such regime makes tax payers appear non-compliant in the eyes of the public especially where their effective tax rate is far below less-prosperous companies that are operating within the same economy.
For instance, in 2012, when the British lawmakers conducted an investigation into the level of tax payment by Starbucks, the legislator could not establish any form of infringement against the mega company. The lawmakers therefore resulted to alleging unethical practices against the company, which for all intents and purpose, is not a punishable offence under the law. Nevertheless, in response, the company stated that "we seek to be good taxpayers and to pay our fair share of taxes ... We don't write this tax code; we are obligated to comply with it. And we do." (https://www.reuters.com/article/us-britain-starbucks-tax-idUKBRE89E0EX20121015).
Based on the foregoing, it is our view that the Federal Government of Nigeria and the FIRS in particular should revisit both the Income Tax (Significant Economic Presence) Regulations 2020 and Finance Act 2021. The government should at the minimum adopt one of the simplified turnover bases of assessment available in the companies income tax act for the players in the digital economy. It will guarantee high level of compliance, generate adequate and proportionate revenue for government and increase level of certainty for the operators. The players will also be able to plan their financial affairs with greater degree of certainty and determine the appropriate prices to charge for the various services they provide in the country.
Tayo Ogungbenro and Akinwale Alao are Partner and Associate Director in the Tax, Regulatory & People Services division of KPMG Advisory Services in Nigeria. Their area of specialization includes taxation of players in the digital economy. The opinion expressed in this article however remains that of the author(s).
Footnote
1. Similar provision is available to non-resident companies in appropriate circumstances in the same section of the tax law.
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