- 15 Marks
Question
The rapid growth in information and communication technology in Nigeria has brought with it boundless opportunities and changes in the way business activities are conducted. A significant number of transactions in Nigeria, in recent times, are consummated using mobile devices and online payments. In the same vein, the online platforms (mostly operated by international private entities) are perceived by various governments in developing countries (Nigeria inclusive) as undermining the economic interests of their host countries through non-payment of taxes, despite their significant economic presence.
In light of the above, the Finance Act 2019 provides for the treatment of digital and other service providers concerning the significant economic presence of a foreign entity. This provision was followed up with the issuance of Companies Income Tax (Significant Economic Presence) Order 2020 by the Federal Government of Nigeria.
You have been contacted by a foreign online outfit with interest in mobile networking and consultancy, TWITTY Incorporation, California, USA, through its official partner in Nigeria, MAAbioro Partners, to explain issues on the significant economic presence of a foreign entity, deemed to be operating in Nigeria.
Required:
As a tax consultant to TWITTY Incorporation, draft a report explaining the following areas:
a. The objectives of the relevant provisions of Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020 concerning the significant economic presence of a foreign entity. (3 Marks)
b. Conditions for the determination of significant economic presence for digital activities. (5 Marks)
c. Determination of significant economic presence for technical and consultancy services. (2 Marks)
d. Activities exempted from significant economic presence in Nigeria. (3 Marks)
e. The tax implications of the Order 2020 on the activities of TWITTY Incorporation. (2 Marks)
Answer
Zigzag Tax Consultants
Aseye Road, Benin City
August 29, 2021
To: TWITTY Incorporation
California, USA
Attention: The Principal Partner, MAAbioro Partners, Sabon-Yewa Avenue, Kano
Subject: Significant Economic Presence of a Foreign Entity
We refer to our discussion on August 22, 2021, regarding the above subject and our engagement as a tax consultant to TWITTY Incorporation. We are pleased to present our findings for management’s consideration.
a. Objectives of Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020
- Expansion of Tax Scope: The Finance Act 2019 introduced the concept of significant economic presence to broaden Nigerian tax coverage on foreign companies earning income in Nigeria.
- Clarification for Digital Transactions: The Companies Income Tax (Significant Economic Presence) Order 2020 defines the criteria for determining significant economic presence, helping Nigerian tax authorities capture revenues from foreign digital service providers.
- Legal Framework: The Order provides a legal basis for taxing foreign digital and service companies with Nigerian customers, under Section 13(2)(c) and (e) of the Companies Income Tax Act 2004 (as amended).
b. Conditions for Determining Significant Economic Presence for Digital Activities
A foreign company is considered to have a significant economic presence in Nigeria if it meets any of the following criteria:
- Annual gross turnover exceeds ₦25 million from digital services to Nigerian customers.
- Services include streaming or downloading digital content (e.g., movies, music, e-books).
- Transmission of data on Nigerian users generated from digital platforms.
- Provision of digital intermediation services connecting Nigerian suppliers and customers.
- Use of a Nigerian domain name (.ng) or localized billing options.
- Interaction with Nigerian users through customizations targeted at Nigeria, including local currency pricing.
c. Determination of Significant Economic Presence for Technical and Consultancy Services
For technical, management, or consultancy services, a foreign company has significant economic presence in Nigeria if:
- It earns any income or receives payments from Nigerian residents.
- It operates through a fixed base or agent in Nigeria.
d. Activities Exempted from Significant Economic Presence
Exemptions under the Order include:
- Companies under a multilateral tax arrangement addressing digital economy challenges.
- Payments for employee services, educational teaching, or payments from a foreign base of a Nigerian company.
e. Tax Implications of Order 2020 for TWITTY Incorporation
- Taxable Status: TWITTY Incorporation falls under the Order 2020 provisions, making Nigerian-derived profits taxable in Nigeria.
- Record-Keeping: The company must maintain proper records for Nigerian tax assessment.
- Incorporation Advantage: Incorporating in Nigeria may allow TWITTY to access Nigerian tax incentives.
- Non-Compliance Risks: Failure to comply with the Order could lead to severe penalties, impacting operations in Nigeria.
For further clarifications, please feel free to contact us.
Yours faithfully,
Otigba Suru
Senior Partner
For: Zigzag Tax Consultants
- Topic: International taxation
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