Significant Economic Presence in Nigeria – The Minister of Finance Issues Clarification Order

June 2, 2020

The recently enacted Finance Act (“the Act”) which amends amongst other tax statutes, the Companies Income Tax Act (CITA), introduced a new clause in Section 13 of CITA on taxation of Non-resident Companies (NRCs) with a Significant Economic Presence (SEP) in Nigeria. The Act however did not clarify what constitutes a SEP but rather gave the Minister of Finance the power to determine what constitutes the SEP of a company other than a Nigerian company.

Accordingly, in exercise of the powers conferred on the Minister, the Companies Income Tax (Significant Economic Presence) Order 2020 (“the Order”) was issued clarifying what constitutes a SEP of a company other than a Nigerian company under Section 13(2)© of CITA.

Highlights of the Order

The Minister through the Order states that a company other than a Nigerian company shall be deemed to have SEP in Nigeria in any accounting year where it:

  1. Derives gross turnover or income of more than N25 million or its equivalent in other currencies, in that year from any or a combination of the following:
  • Streaming or downloading services of digital content, including but not limited to movies, videos, music, applications, games, and e-books to any person in Nigeria.
  • Transmission of data collected about Nigerian users which have been generated from such users’ activities on a digital interface including websites or mobile applications.
  • The threshold of ₦25 million gross revenue also aligns with the exemption of companies with turnover of less from income tax.
  • Provision of intermediation services through a digital platform; website or other online application that links suppliers and customers in Nigeria.
  • Using a Nigerian domain name (.ng) or registers a website address in Nigeria.
  • Has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency.

2. Activities of connected persons of the NRC in the accounting year shall be aggregated in determining the ₦25 million threshold.

3. A non-resident company covered under a multilateral agreement or consensus arrangement which addresses the tax challenges arising from digitalization of the economy to which Nigeria is a party shall be treated in accordance with the provisions of such document(s) from the effective date in Nigeria.

4. A business comprising the furnishing of technical, professional, management or consultancy services is deemed to have SEP in Nigeria in any accounting year where it earns any income or receives any payment from a person resident in Nigeria or a fixed base or agent of a company other than a Nigerian company in Nigeria. Services of a technical nature mean any service of a specialized nature that is not professional, management, or consultancy, such as advertising, training, or the provision of personnel.

5. Payments made to an employee under a contract of employment, relating to educational activities and payments made by a foreign fixed base of a Nigerian company will not form part of the basis for determination of a SEP in Nigeria.

Our Comments

The Order has resolved the ambiguities surrounding the definition and interpretation of what constitutes SEP. The decision by the Minister to provide clarifications in this regard is therefore commendable.

The Organisation for Economic Cooperation and Development (OECD) remarks that a non-resident company has significant economic presence in a jurisdiction where it has a purposeful and sustained interaction via digital technology and other automated means. Other factors for determining what constitutes a SEP were also considered in the Order.

The threshold of ₦25 million gross revenue also aligns with the exemption of companies with turnover of less from income tax. This provides for fairness in the taxation of non-resident companies. Non-resident companies (NRCs) with SEP in Nigeria and with gross turnover above the threshold are now required to file income tax returns on the income generated from its operations in Nigeria. In the same vein, Nigerian companies dealing with such NRCs are also required to withhold tax on payments to those entities in line with relevant statutory provisions. The NRC can use such deducted WHT as credit against the income tax due at the time of filing the tax returns. It is pertinent to note that Section 13(2(e) exempts NRCs from further tax obligations other than the WHT suffered, where the transactions relate to the payment of technical, professional, management or consultancy fees.

Finally, the Order has provided further clarity on the tax obligations of NRCs which operate internationally particularly in this era of digital economy by ensuring that Nigeria earns her fair share of the profits generated from activities in Nigeria.