February 19, 2020
Facebook, Twitter, Amazon, Alibaba, Netflix, Tencent and other global technology companies will now be subject to income tax in Nigeria. In its 2019 Finance Act, which came into force on Monday 13, 2020, Nigeria established a new legal framework that will allow her to levy a tax on the income of non-resident technology or technology-driven companies, (NRTC) whose business activities constitute Significant Economic Presence in Nigeria, to the extent that these companies do not already have a separate local entity incorporated.
- Why is this Important?
A number of reasons:
- Additional taxes would generally increase the cost of doing business
- It is foreseeable that other African countries will implement a similar income tax framework. African countries are looking for cheaper ways to finance their budget. This would be a primary motivation for African countries that decide to follow this regulatory trend. Kenya passed a Finance Act imposing digital taxes on NRTCs in Q4 2019.
- The notion of Significant Economic Presence as a regulatory tool is antithetical to the revenue and growth strategy of venture-backed tech companies. Significant digital presenceis a fundamental revenue assumption in technology investing. Scaling back digital presence is hardly an option for venture backed tech companies. For this reason, regulatory actions directed at digital presence should rightly be of concern to shareholders and other investor communities.
- Regulatory action from local authorities will have a direct impact on the availability of the services in the country
- The new income tax framework may drive an NRTC decision to register a separate local subsidiary, in which case it would be important for NRTCs to fully evaluate the regulatory and political considerations for market entry in each relevant African jurisdiction.
2. What Kinds of Technology Companies Would Be Deemed to Have Economic Presence in Nigeria?
The approach of the drafters of the Finance Act appears to suggest that Nigeria wants to levy income tax, in all circumstances, where the services of an NRTC are available in Nigeria through the internet, cable, radio or other electric and electromagnetic or wireless apparatus, if such services available locally are “economically significant”. In our view, the language of the Finance Act captures NRTCs in the broadest sense. These would include owners of E-commerce platforms like Amazon or Ebay, Alibaba, Taobao; social media platforms, like Facebook, Instagram, WeChat, Snapchat. Also included are, application stores, advertising platforms, internet media companies, cloud service providers, web hosting companies, domain registrars, global payment companies and also mobility and transportation network companies.
3.Which other Non-Resident Companies Can Be Potentially Caught by the New Income Tax Framework?
These would include:
- Foreign businesses that provide technical, management, consulting or professional services outside of Nigeria to a person resident in Nigeria, to the extent that such enterprises have significant economic presence in Nigeria
- Non-resident technology companies who have entered into strategic partnerships with a Nigerian tech companies. Companies like Worldpay & Alipay have recently announced partnerships with Nigeria’s Flutterwave
- In What Currency Will Income Tax Be Remitted?
Under Nigerian tax laws, this will be the currency of the transaction. Buyers of technology services typically pay in US dollars
5. What Legal Standards Need to be Satisfied for a Legitimate Exercise of the Taxing Powers of the Revenue Authority in Nigeria?
An NRTC (a) must have Significant Economic Presence in Nigeria (b) profit must be attributable to an NRTC’s activity in Nigeria. Once these thresholds are met, Nigeria would assert its rights to tax the income of an NRTC. It is important to note that the new tax is based on profit [1] and not revenue.
- How Does the Finance Act Define Significant Economic Presence? What Are the Parameters?
The term “Significant Economic Presence” is not defined in the new Finance Act. Based on its provisions, the Minister of Finance has a legal obligation and powers to issue an administrative guidance (Guidance) on the parameters to be used in defining Significant Economic Presence. The Minister is yet to issue the Guidance. Generally, we expect that the Guidance to follow global regulatory trends in this area, in which case, Significant Economic Presence may be defined in terms of, the number of users and amount of revenue generated by NRTCs locally. A number of some other parameters have been used in other jurisdictions. These include high web traffic by local users, amount of contracts for internet services locally, close correlation between the consideration paid to a foreign company and the level of internet usage of local users.
7. What Percentage of the Profits of an NRTC Will Be Subject to Income Tax?
We expect that the relevant percentage of an NRTC’s profit (and the formula for calculating such percentages) would rightly be a subject matter for the Guidance to be issued by the Minister. In practice, Nigeria’s Revenue Authority can generally levy income taxes on a non-resident company on a Deemed Profit Basis or an Actual Profit Basis. Using the Deemed Profit approach, the practice is for the Revenue Authority to deem 20% of an NRC’s turnover as “profit” and to then subject that profit to a rate of 30%, translating to an effective tax rate of 6%. The 20% is applied irrespective of industry or type/nature of business. In filing returns on a Deemed Basis, an NRTC would typically be required to submit deemed profit tax calculations, and a statement of the turnover derived from Nigeria, with a schedule of withholding tax suffered. Using an Actual Profit basis, NRTCs would be required to file returns and to submit audited financial statements, capital allowance computations and tax computations based on actual profits. In 2015, the FIRS, which is Nigeria’s federal Revenue Authority, had issued a notice to non-resident companies to file tax returns on An actual Profit basis.
8. What are Some of the Key Distinctions Between a Non-Resident Company (NRC) and a Resident Company from a Tax Liability Perspective?
A key distinction between NRCs and Resident Companies from a tax perspective is that resident companies are liable to tax on their worldwide income being that company’s profits accruing in, derived from, brought into, and received in Nigeria. On the other hand, an NRC is liable to tax on its income derived from Nigeria, that is, income attributable to its Nigerian operations. With exception to small and medium scale businesses, the Companies Income Tax Act in force in Nigeria, imposes corporate income tax on the profits of a company at the rate of 30%.
See also the answer to question 10 below.
9. Any trade disputes between Nigeria and the United States as a Result of the New Income Tax Law on Global Tech Companies?
No. However, less than 3 weeks after the Finance Act was signed into law, the, Trump administration announced an immigration ban on Nigeria. It is not immediately clear whether there is a connection.
10. What are Some of Key Market Entry Considerations for Global Technology Companies in Nigeria?
- Nigeria guarantees repatriation of capital and proceeds, in any convertible currency. Investment laws allow unrestricted transferability of dividends or profits (net of taxes) attributable to foreign investment in Nigeria, and also, capital repatriation in the event of liquidation
- Importation of technology is regulated under as a separate legal framework
- Software development/publishing and E-commerce services are eligible for pioneer industry incentives (Pioneer Incentives). The Pioneer Incentives are Nigeria’s primary investment incentive framework for foreign direct investors and business promoters. Beneficiary companies can enjoy income tax holidays of up to 5 years. Also, capital expenditures incurred during the pioneer period are generally deductible from taxable profits generated after expiration of the tax relief period. In addition, dividends distributed by pioneer companies during the tax relief period are exempt from withholding tax.
- Minimum share capital regulations exist for foreign-owned businesses
- Sector based licensing may be required based on a company’s scope of operation.
- Employment, information technology and standard payroll taxes applicable
- Permits, expatriate quota and Immigration considerations are applicable
- As part of enhanced tax disclosure requirements set out by Action 13 of the Base Erosion and Profit Shifting (BEPS) project, Nigeria issued the Income Tax ( Country by Country Reporting) Regulations in 2018, which took effect from 1 January 2018, and pursuant to which an Ultimate Parent Entity (UPE) or a Constituent Entity (CE) of a Multinational Enterprise Group (MNE Group), which is is tax resident in Nigeria, is required to file a Country-by-Country Report (CbC Report) with Federal Inland Revenue Service for an accounting year where the Group has a total consolidated revenue of ₦160,000,000,000 or more in the immediate preceding accounting year.
- Research and Development activities for commercialization qualify for up to 20% investment tax credit on qualifying expenditure for that purpose.
- Nigeria issued the Income Tax (Transfer Pricing) Regulations, 2018 (“TP Regulations”) in August 2018 pursuant to which companies are required to to file TP declaration and TP disclosure forms along with the income tax returns every year. As part of standard TP declarations, companies are required to provide information about their business, a parent company, its directors and its related parties. Amongst other, companies are required companies to report the values of related party transactions engaged in during the reporting period.
Important Notice
Balogun Harold will be following regulatory developments around the definition of Significant Economic Presence and also submitting a position paper to the Ministry of Finance relating to the definition of Significant Economic Presence. For contributions, please reach out to your Balogun Harold contact or via olu@balogunharold.com
[1] The digital tax applicable in France is based on sales generated in France
