Tax issues are always at the core of an international investor’s plan to enter a new market. This is simply due to the fact that the profitability of the investment will be determined by the nature of the tax laws in the jurisdiction where the investors are seeking to invest and do business. The tax concerns that investors, multinational businesses and national governments deal with as well as the strategies that have been adopted to optimally manage the tax concerns have evolved into a discipline which is referred to as international tax law and policy. International tax law and policy deals with the tax concerns of businesses and investors operating across jurisdictions.

At the heart of this discipline, from an investor’s perspective, are the tax planning strategies which can be deployed to optimally manage tax liabilities. It is also important to note that when multinational corporations carefully plan their taxes (i.e. tax planning), this activity is referred to as tax avoidance and it is not unlawful. This principle is a trite principle of tax law and was elucidated by the Nigerian Supreme Court in Federal Board of Inland Revenue v American International Insurance Company Nigeria Plc:

Tax is an obligation, not a duty. One is not a bad citizen if one can organise his business or trade in a legal manner to minimise his tax liability. He could and he should resist within legal means any unduly wide interpretation or unconventional implication of legislative intent of a tax law that might increase that burden. He can do so without being ashamed of walking in the street as a patriotic citizen. A shrewd business acumenship and a legitimate protection of sweat of labour are not a dishonest act or an act having any moral turpitude. It is being pragmatic and practical. Being capitalistic might leave much to be desired but among what is left is not illegality.

among what is left is not illegality.
Thus, while the tax avoidance strategy is not illegal, it is important to distinguish this from tax evasion which is illegal. Thus, a multinational corporation and international should adopt an effective tax planning strategy to ensure that it maximises the benefits in the tax regime or the loopholes that exist in the tax regime.

Internationally, this situation relating to the multinationals planning their taxes to avoid tax liability has caused a public uproar as members of the public have criticized multinationals for refusing to pay their fair share of taxes. A typical example of this situation can be seen with Margaret Hodge, a British MP, who when questioning the tax-paying morale of some multinationals (Starbucks, Amazon, and Google). She said; “Yeah, we’re not accusing you of being illegal; we’re accusing you of being immoral.”

The statement was made in response to Matt Brittin’s (Vice President, Google UK) defence that their tax planning activities in the UK were legal and in compliance with the relevant UK tax laws. This harsh criticism from the public influenced the intervention of the Organisation for Economic Co-operation and Development (hereinafter referred to as ‘OECD’) to start its now-famous BEPS Project. This also reflects the position internationally as Governments and regional organisations are now being forced to design rules that seek to prevent these tax avoidance strategies of multinational corporations.

This article shall address the tax liability for companies operating in Nigeria and the rules designed by the Nigerian Government to prevent the tax avoidance activities of multinational corporations operating in Nigeria.

Taxing Liability For Companies Operating In Nigeria

This section analyses the major tax laws in Nigeria in the bid to briefly state the tax liability prescribed by these tax legislation for businesses operating in Nigeria.

Companies Income Tax

The Companies Income Tax Act provides for the regime for administering companies’ income tax in Nigeria. Recently, the provisions of the Companies Income Tax Act were amended by the Finance Act which was signed into law in January 2020. Many have argued that the amendments contained in the Finance Act effectively created a new companies’ income tax regime in Nigeria.

Prior to the enactment of the Finance Act, the generally applicable tax rate for companies’ income tax in Nigeria was 30% irrespective of the nature of the company’s revenue. Under the Finance Act, this position has been amended to reflect the taxation of companies’ income tax on a progressive basis.

Companies (start-ups and small and medium scale enterprises) with not more than an annual gross turnover of 25 million naira would be completely exempted from pay companies’ income tax subject to timely filing of companies’ income tax returns. Companies whose annual turnover exceeds 25 million naira but is less than 100 million naira will be required to pay companies’ income tax at the rate of 20%.

Furthermore, where the company in question has an annual turnover above 100 million naira, the company will be required to pay companies’ income tax at the rate of 30%.

Capital Gains Tax

The capital gains tax is usually chargeable on the gains made after the disposal of an asset. The asset could be; buildings, goodwill, copyrights, chattels, etc. The Capital Gains Tax Act. Under the Capital Gains Tax Act, the taxpayer is required to pay 10% of the gains made on the disposal of an asset. Some of the deductions made by the tax authorities in the administration of the capital gains tax are as follows; the initial cost of the asset, stamp duties, cost of enhancing the value of the asset, expenditure incurred in establishing, preserving or defending the title to, or right over the asset, etc.

Technology Tax

The information technology tax is payable by specified companies operating and doing business in Nigeria. The rate of the tax is 1 percent of profit before tax and operates as a tax deductible for company income tax purposes. The companies liable to pay this tax include; GSM service providers and all telecommunications companies, Cyber companies and internet providers, Pension managers and pension-related companies, Banks and other financial institutions, Insurance companies, etc. This tax is administered by the Federal Inland Revenue Service (FIRS).

Education Tax

The tertiary education tax is the tax payable by all companies doing business in Nigeria. The tax was established by the Tertiary Education Trust Fund (Establishment etc.) Act 2011. The tax is paid at the rate of 2% of the company’s assessable profit by all companies registered in Nigeria. For this tax, the FIRS may raise additional assessment within six years from the year of assessment in question. The exception to the statute of limitation will be where there has been a case of fraud, neglect or willful default by the company.

Withholding Tax

The withholding tax is an advance payment of income tax which is deductible at source on transactions which have been specified in the relevant statute. The withholding tax paid can be applied as a tax credit against the income tax liability of the company in question. The relevant provisions for the withholding tax can be found in the various income tax legislations, vis; Personal Income Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, Withholding Tax Regulations, etc. All companies registered in Nigeria, as well as organisations or establishments that operate the pay-as-you-earn scheme, are required to deduct withholding tax.

Value Added Tax

The value-added tax is chargeable on the supply of goods and services which are taxable under the Value Added Tax Act. With the exception of goods which are listed as zero-rated or exempted under the Value Added Tax Act, the value-added tax is payable on other types of goods and services. The Finance Act, 2019 amended the rate for the value added tax from 5% which was previously obtained to the current rate of 7.5%. The Value Added Tax Act defines what kinds of goods and services will qualify for the value added tax and by virtue of the amendments in the Finance Act, the definition of ‘goods’ and ‘services’ has been redefined to include intangible goods and services to cater to the taxation of the digital economy.

Stamp Duties Tax

The stamp duties tax is provided for under the Stamp Duties Act, and this tax is either charged at a fixed rate or depending on the value of the consideration involved in the transaction, i.e. ad valorem. This tax applies to all classes of instruments for transactions to be performed in Nigeria except the instrument in question is specifically exempted from the transaction by the Stamp Duties Act.

Petroleum Profit Tax

This tax is regulated by the Petroleum Profit Tax Act which provides that 85% for petroleum operations carried out under a Joint Venture (JV) arrangement with the Nigerian National Petroleum Corporation (NNPC) or any traditional oil concession after a period of five years. The petroleum profits tax is levied on the income derived from the petroleum operations of upstream companies. It is charged at the rate of 65.75% for non-Production Sharing Contract operation in its first 5 years during which the company has not fully amortized all pre-production capitalized expenditure.

Tax Obligations/ Incentives For International Businesses Operating In Nigeria

In the bid to stay ahead of the sophisticated tax planning strategies deployed by various multinationals, the Organisation for Economic Cooperation and Development (OECD) began its base erosion and profit shifting (BEPS) project with the goal of developing rules which can be adopted by countries to prevent this activity by multinationals. The result of this project saw the emergence of various rules aimed at preventing harmful corporate avoidance techniques of multinationals.

These rules have been adopted by various countries in various ways some of which include; transfer pricing rules, controlled foreign company rules, country by country reporting rules, etc. In relation to the Nigerian corporate tax regime, two rules have been adopted by the Nigerian government to prevent corporate tax avoidance techniques of multinationals operating within the country and they include the transfer pricing regulations and the country by country regulations. In this section, we shall analyse these regulations as well as the incentives for doing business in Nigeria as a foreign investor under the following heads:

• The Income Tax (Transfer Pricing) Regulations, 2018
• The Income Tax (Country by Country) Regulations, 2018; and
• Tax Incentives for Doing Business in Nigeria.

The Income Tax (Transfer Pricing) Regulations, 2018

The Income Tax (Transfer Pricing) Regulations, 2018 (hereinafter referred to as ‘‘Nigerian Transfer Pricing Regulations’’) was issued in 2018 to replace the earlier Regulations which was issued in 2012. As is the case with all transfer pricing regulations, the world over, the aim of the Nigerian Transfer Pricing Regulations is to ensure that transactions entered into between a Nigerian company and a foreign-related party is conducted at arm’s length, i.e. as the transaction would have been executed if the parties were not related.

The Nigerian Transfer Pricing Regulations is made to apply for accounting periods commencing after March 12, 2018 by all companies registered in Nigeria in their dealings with foreign related parties. When filing income tax returns with the FIRS, these companies are required to file Transfer Pricing Disclosure Forms and Transfer Pricing Declaration Forms annually.

However, companies with an annual related party transaction below the value of 300 Million Naira are exempted from filing these forms with their corporate tax returns at the FIRS. Failure to comply with the provisions of the Nigerian Transfer Pricing Regulations attracts penalties. In applying the Nigerian Transfer Pricing Regulations, the stakeholders involved are to ensure that it is in compliance with the Transfer Pricing Guidelines issued by the United Nations and the OECD.

In 2020, in its first transfer pricing judgment in Nigeria in Prime Plastichem Nigeria Limited v Federal Inland Revenue Service, the Tax Appeal Tribunal (‘TAT’) ruled that the transfer pricing method applied by a corporate taxpayer over the years must be consistent and that the taxpayer has the burden of proving that it has applied the most appropriate transfer pricing method where the transfer pricing method applied by it is being challenged by the FIRS.

In relation to the application of the transactional net margin method as a way of proving that the transaction between the related parties was conducted at arm’s length, the TAT ruled that the taxpayer is to ensure that it uses the gross profit margin method (GPMM) as the profit level indicator when applying the transactional net margin method.

As per the facts of the case, Prime Plastichem Nigeria Limited (PPNL), the Appellant, is a Nigerian company that imports plastics and petrochemicals from a related party (Vinmar Overseas Limited ‘VOL’) into Nigeria for resel products to its (PPN) customers in Nigeria. The Federal Inland Revenue Service (FIRS), the Respondent, conducted a transfer pricing (TP) audit on the Appellant for the 2013 and 2014 financial years.

When the FIRS challenged the arm’s length nature of the transaction, the Appellant attempted to justify the nature of its related party transactions with VOL using the Comparable Uncontrolled Price (CUP) method for the 2013 financial year. The Appellant adopted the Transactional Net Margin Method (TNMM) to justify the arm’s length nature of its transactions in 2014.

Interestingly, while the FIRS agreed that the TNMM was the appropriate method in 2014, it argued that the appropriate method that the Appellant should have adopted in 2013 was the TNMM and not the CUP.

To justify its adoption of the CUP method for the financial year 2013, the Appellant argued that its internal data was reliable to test the controlled transaction. It stated that VOL had sold the same products to independent parties and as such the price can be compared to the price VOL sold to the Appellant.

It also stated that it could not apply this same method in the 2014 financial year due to the unavailability of data therefore justifying its adoption of the TNMM method and that the said method was contained in the Nigerian Transfer Pricing Regulations, the United Nations Transfer Pricing Manual and the Organisation for Economic Cooperation and Development (OECD) Guidelines. The Appellant approached the Tax Appeal Tribunal (TAT) for relief following the additional assessment of NGN1.7 billion for its TP audit of the appellant’s related party transaction with VOL.

The Income Tax (Country by Country) Regulations, 2018

The Income Tax (Country by Country) Regulations, 2018 (hereinafter referred to as ‘CbC Regulations’) was issued in June, 2018. The CbC Regulations is to apply to all companies registered in Nigeria with a consolidated group revenue of above 160 Billion naira and it is to commence on January 1, 2018. The CbC reports are to be prepared by multinational corporations which are headquartered in Nigeria not later than a twelve-month period following the end of the multinational corporation’s accounting year.

Prior to the end of the accounting period, the multinational corporation headquartered in Nigeria has the duty to notify the FIRS in a pre-approved format that it has the duty to file the requisite CbC Report for the multinational group. It is worthy of note that the CbC Regulations only applies to multinational groups i.e. groups that operate within and outside the country and not groups that operate solely within Nigeria. As is the case with most tax legislation, the CbC Regulations similarly provides for penalties where a company fails to comply with its tax obligations under the regulations.

Tax Incentives for Doing Business in Nigeria

The Nigerian tax regime provides tax incentives for businesses operating in Nigeria within certain specified sectors. The sectors and the nature of the incentives provided for can be found in the Industrial Development (Income Tax Relief) Act, (hereinafter referred to as ‘IDITRA’).

There are three categories of businesses that qualify for the pioneer status incentives under the IDITRA, vis; businesses that are not being carried on in Nigeria or at a scale that is suitable to the economic requirements of the country; have favourable prospects of further development in Nigeria; and the business (es) are deemed to be beneficial for public interest in the country.

The incentives which are granted by the IDITRA are as follows:

• Exemption from companies’ income tax during pioneer period. The tax free period is for three years initially and can be extended for another two years subject to satisfactory performance of the business;
• Exemption of dividend distributed from pioneer profits from withholding tax;
• Company must be engaged in an activity listed as a pioneer industry or product;
• Application for an extension must be within the first year of production/service;
• Non-current tangible asset of the company must be over N100 million;
• Make full payment of fees when due;
• All required legal and regulatory compliance documentation must be provided, etc.

The pioneer status granted to companies in Nigeria for operating in these sectors is in addition to other tax incentives provided for in the various tax legislations in Nigeria.

Conclusion

The Nigerian tax regime comprehensively provides not just for the tax obligations of international businesses operating within its jurisdiction but also measures to prevent harmful tax avoidance techniques of multinational corporations operating within the country. It is therefore important for international investors and international businesses to ensure that they seek the advice of tax professionals, lawyers and/ or accountants before commencing operations within the country.

The importance of this is twofold; first, it prevents the business or investor from incurring huge penalties and/ or interests for failure to comply with its tax obligations. Second, it helps the business or investor to ensure that it carries out its business by employing the most tax efficient structure to ensure that it can maximise profit while complying fully with all of its tax obligations within the country.

As has been noted earlier, the Nigerian Supreme Court has stated that a taxpayer who plans his taxes to ensure that he minimises his tax liability has done nothing which is illegal under Nigerian law but is merely showcasing a shrewd business acumenship and a legitimate protection of sweat of labour.