In February 2018, Nigeria’s President signed the Presidential Executive Order for Planning and Execution of Projects, Promotion of Nigerian Content in Contracts and Science, Engineering and Technology (“Presidential Order 5”). The primary objective of Presidential Order 5 is to develop local technical capacity generally and more specifically, in the areas of science, technology and engineering.
One of the approaches taken by Presidential Order 5 is to mandate all Ministries, Departments and Agencies of Government (“Procuring Entities”) to give preference to Nigerian companies in the award of contracts. In this context, Nigerian companies are defined as companies with no less than 51% equity shares owned by Nigerians. Presidential Order 5 allows Procuring Entities to award government contracts to Foreign Entities only where local expertise is lacking and where that Foreign Entity puts forward a demonstrable and verifiable plan for indigenous capacity development. Another approach taken by Presidential Order 5 is its mandate that all consultancy services (i.e. law, engineering, ICT, Architecture, etc) using a joint venture structure to bid for government consulting contracts must be led by the Nigerian JV partner.
Expectedly, Presidential Order 5 has thrown up an array of contracting structures between local promoters and foreign OEMs and partners looking to bid for government contracts. These contractual arrangements are increasingly subject of litigation both from a taxation point of view and from the standpoint of counterparty liability and risk. Nigeria wholly consumes foreign technology and as such it is expected that such collaborations will continue. However, these cases highlight the need for foreign OEMs and partners to give more consideration to taxation issues at the outset as well as well as make provisions for adequate contractual protections in view of the risks presented by local factors.
In one of such cases, a non-resident foreign company based in Netherlands, which engaged in the business of distributing satellite signals across the world (the “Foreign Partner”) had entered into a Service Contract with the Nigerian Broadcasting Corporation (the “NBC”). Following the request of the NBC and in order to comply with the local content requirements of Presidential Order 5, the Foreign Partner contracted a local entity in its Service Contract with the NBC (the “Local Partner”). When the foreign entity attempted to claim some tax relief under the Double Taxation Agreement (DTA) between Nigeria and the Netherlands, Nigeria’s tax regulator, the FIRS, had challenged this application, and declared that (a) the Foreign Partner was not entitled to any tax concessions under the DTA; and (b) the Local Partner functioned as dependent agents thereby constituting a permanent establishment for the Foreign Partner in Nigeria.
The Tax Appeal Tribunal (“TAT”) agreed with the position of the FIRS and held that the Local Partner must be taken to be dependent agents for the Foreign Partner. The Foreign Partner had argued that the Local Partner was not its dependent agent because (a) the incorporation of the Local Partner was not for the purpose of the Service Contract; (b) the Local Partner did not serve or carry out any functions as dependent agents; (c) the Local Partner did not have or habitually exercise an authority to conclude contracts in Nigeria on behalf of the Foreign Partner; (d) the Local Partner did not secure orders for goods or merchandise for the Foreign Partner in Nigeria; and (e) the Foreign Partner did not utilize the offices of the Local Partner or any of the resources of the local partner to undertake its obligations under the Service Contract.
In its decision, the TAT affirmed the position that the Local Partner ought to be taken to be dependent agents for the Foreign Partner. In reaching its decision, the TAT noted that (a) the Local Partner was set up for the purpose of meeting local content requirements of the Service Contract; (b) Payments under the Service Contract was to be settled in Nigerian currency and into the account of the Local Partner;(c) The NBC would not have been able to continue with the Service Contract without the introduction of a Nigerian Company and that based on Presidential Order 5, the Foreign Partner would not have been able to secure the Service Contract without the participation of the Local Partner ; (d) the intention of Presidential Order 5 was not for Foreign Partners to have a dummy local partner but a participating partner in the real sense of the word; (e) The fact that, the Local Partner was expressed to be representing the interests of the Foreign Partner in the Service Contract suggests that the Local Partner had the authority to the conclude contracts on behalf of the Foreign Partner in a habitual sense.
Implication for Foreign Technology Companies & OEMs
The direct implication of this new decision is that non-resident foreign technology companies and OEMs with technology supply/service contracts with government agencies will now be subject to income tax in Nigeria where they choose to comply with local content requirements by contracting a local company for that purpose. It would be prudent for foreign technology companies/OEMs to now conduct a legal assessment of their existing contractual arrangements in order to determine their exposure to income tax in Nigeria and contractual options for mitigating any tax leakages. It would also be prudent for foreign technology companies/OEMs to consider other routes to fulfilling local content requirements other than with contracting a local partner.
Our Comments
The decision is generally sound in our view. However, the decision ought to be taken as a general rule for which exceptions would arise depending on the parties’ transaction and contracting structure. Accordingly, it is not in all cases where a Foreign Partner uses a Local Partner that a finding of dependent agency must be reached as each case ought to be determined on its own merits. The case highlights the need for foreign technology OEMs and partners to give more consideration to taxation issues at the outset as well as make provisions for adequate contractual protection in view of risks presented by local peculiarities.
This legal update is not intended to be taken as legal advice. Please seek professional legal advice specific to your situation. For more information, legal opinions on biddings/public procurement, company formations, tax liability, or market entry inquiries, please reach out to the undersigned or to your usual Balogun Harold.
