ATAX – May 2021 – L3 – Q4 – Taxation of Non-Resident Companies and Individuals

Circumstances under which non-resident companies are taxed in Nigeria and computation of Gen Power Incorporated's tax liabilities.

Question

“The concept of residence determines the extent to which the income of a taxpayer is liable to tax under a tax jurisdiction.”

Background:
Gen Power Incorporated, an international power plant company based in New York, USA, has subsidiary outlets in many parts of the world, including Kem Limited in Lagos, Nigeria. In 2018, Gen Power Incorporated was awarded a contract for US $3 million by the Nigerian government to construct a power plant. The project was executed by Kem Limited, and the following expenses were incurred:

Expense Description	Amount (₦’000)
Materials and other direct inputs	320,800
Hire of special equipment	31,500
Foreign experts cost and emoluments	65,300
Personnel costs	110,400
Administrative expenses	52,000
Depreciation of assets	60,700
Repairs and maintenance	7,200
Fuel and oil	8,200
Miscellaneous expenses	27,100

Other Relevant Information:

The exchange rate is ₦362 to US $1.
A similar special equipment could be hired for ₦25 million.
Administrative expenses include ₦12 million transferred to revenue reserve.
Breakdown of repairs and maintenance:

Repairs and Maintenance Breakdown	Amount (₦’000)
Maintenance of vehicles	2,000
Improvement to the office building	1,700
Repairs of equipment	2,100
Renewals of tools and implements	1,400
Total	7,200

Miscellaneous expenses include ₦4 million as loss on exchange for imported materials.
Capital allowances agreed with the tax authorities: ₦57 million.

Required:

a. Describe FIVE circumstances under which a non-resident company will be assessable to tax in Nigeria. (5 Marks)

b. Compute the tax liabilities of Gen Power Incorporated for the relevant year of assessment. (15 Marks)

Answer

(a) Circumstances under which a non-resident company will be assessable to tax in Nigeria
The circumstances include:

Income derived through a fixed base or permanent establishment.
Income derived in Nigeria through a dependent agent.
Income derived from supervisory activity that lasts more than three months.
Income derived in Nigeria from a turnkey project.
Income derived from professional consultancy, management, and technical services rendered in Nigeria.
Income derived from investment such as dividends, interest, rent, and royalties (with withholding tax deducted as final tax).
Income derived from a contract awarded to a Nigerian company but subcontracted to a non-resident company.
Where the non-resident company has a significant economic presence in Nigeriab) Computation of Tax Liabilities for Gen Power Incorporated

(b) Gen Power Incorporated
Computation of tax liabilities
For 2019 year of assessment