NEWSLETTER

June 2014

Update on the Taxation of Non-resident Companies

in Nigeria
The Federal High Court (FHC or ‘the Court’) the proposed operations. The FIRS confirmed
sitting in Lagos has recently ruled in the case that the non-resident companies would not be
between a Nigerian company (NigerianCo) and liable to CIT, WHT and VAT on the supplies
two of its non-resident related parties (the and engineering services to be provided by
Plaintiffs) on one hand, and the Federal Inland them. The FIRS also confirmed that
Revenue (FIRS), an international oil company NigerianCo would not be liable to WHT on its
(IOC) and the Attorney General of the Federation fabrication activities, being manufacturing
(the Defendants) on the other hand. activities in Nigeria. However, the FIRS
subsequently reversed its position and raised
The Court held that the income derived by the tax assessments on the non-resident
non-resident companies from a consortium companies.
contract signed by the Plaintiffs and the IOC is
subject to companies income tax (CIT) and The companies, being dissatisfied with the
withholding tax (WHT) in Nigeria, notwithstanding FIRS’s actions and tax assessments, brought
the fact that the non-resident companies executed the following issues before the FHC for
their scope of work under the contract outside determination:
Nigeria. The Court’s judgement was based on the
premise that the income was derived from a single (i) Whether the deduction and/or payment of
contract signed with a Nigerian company. VAT, WHT and CIT are applicable to and
chargeable on non-resident companies like
Facts and Judgement FrenchCo and PortugueseCo, based on
relevant tax law provisions, considering
NigerianCo and the non-resident companies are that: The Court held that
members of an international group of companies
engaged in the provision of engineering, • the work executed by the non-resident that the income derived
procurement, project management, construction companies was performed outside by the non-resident
and drilling services in the oil and gas industry. Nigeria,
The three companies signed a consortium companies from a
• the income earned by the non-resident
contract with the IOC under which they were companies was not received in or consortium contract
required to carry out separate and distinct scopes
of the work. The non-resident companies were
brought into Nigeria, and signed by the Plaintiffs
responsible for the portion of the contract to be • FrenchCo is tax-resident in a DTT State. and the IOC is subject
executed outside Nigeria (offshore portion) while
their Nigerian affiliate was responsible for the in- (ii) Whether the FIRS is allowed to reverse its to companies income
country work (onshore portion). Even though the written representation to the companies on tax and withholding tax
contract specified a lump sum, it also split the the taxability of their operations in Nigeria.
amount into offshore and onshore portions. The in Nigeria,
non-resident companies (hereinafter referred to as On the other hand, the FIRS raised two major notwithstanding the
‘PortugueseCo and ‘FrenchCo’) carried out their issues for determination:
responsibilities under the contract in Portugal and fact that the non-
France, respectively. France has a double tax (i) Whether the contractual relationship resident companies
treaty (DTT) with Nigeria. between the non-resident companies and
the IOC should be subjected to tax in executed their scope of
In order to get sufficient comfort on the taxability Nigeria. work under the
or otherwise of the offshore portion of the work
under the contract, the Plaintiffs had approached (ii) Whether the DTT between Nigeria and contract outside
the FIRS for a written representation on the CIT, France will reduce or eliminate the tax Nigeria.
WHT and value added tax (VAT) implications of liabilities of the Plaintiffs.

Update on the Taxation of Non-resident Companies in Nigeria | 1

© 2014 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of
the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Nigeria.
The FIRS argued that the consortium contract Plaintiffs are not liable to pay VAT, ‘single contract’ under
between the Plaintiffs and the IOC was a ‘single since they did not consume any goods Sections 13(2)(c) and
contract’, and that the non-resident companies and services under the contract. This 30(1)(b) of the CIT Act. In
were therefore liable to pay Nigerian CIT under is notwithstanding the fact that the essence, the Court ruled that
the ‘single contract’ based on Sections 13(2) contract provides that the Plaintiffs the FIRS was right to have
and 30(1)(b) of the CIT Act. The FIRS further “shall be responsible for payment of all deemed the income derived
argued that any non-resident company doing taxes … that the authorities may by the non-resident
business in Nigeria is liable to pay Nigerian tax impose on the work executed on the companies from activities
if it has a fixed base in Nigeria. Therefore, on contract.” carried on in Portugal and
the premise that NigerianCo constituted a fixed France under the consortium
base for the non-resident companies, the FIRS On the WHT and CIT aspects of the contract, as having been
concluded that the non-resident companies are issue, the FHC upheld the FIRS’s derived from a trade or
liable to Nigerian tax. It also argued that the arguments and therefore ruled in their business or activities
income of the non-resident companies is favour. involving “a single contract
subject to WHT under Section 81 of the CIT for surveys, deliveries,
Act, since the income is liable to CIT. What does this all mean? installations or
construction…” pertaining to
On the impact of the DTT on the taxation of the (i) Relevance of FIRS’s Nigeria.
Plaintiffs, the FIRS stated that DTTs are not representations
meant to “give the tax which is due to one The FHC appears to have
country to another but to ensure that the same One key takeaway from the FHC ignored the fact that, even
income is not taxed twice.” The FIRS argued judgement is the fact that FIRS though the contract was
that the income in question was derived from representations, rulings or publica- single, it involved multiple
Nigeria, and should be taxed in Nigeria, tions do not have the force of law; parties with clearly defined
because it was in respect of a Nigerian contract. which supports the decision in the scopes of work and fees. It
The FIRS suggested that the DTT between FHC case between Halliburton West should also be noted that the
Nigeria and France would only apply to the Africa Limited and the Federal Board non-resident companies
global income of FrenchCo, and not the income of Inland Revenue. Thus, the FIRS is were not responsible for
it allegedly derived from Nigeria under a not barred from subsequently executing both the offshore
Nigerian contract. reversing its position, where it is of the and onshore portions as
view that its initial position on an issue Sections 13(2) and
In deciding the case, the judge raised two does not conform to the law. 30(1)(b)(iii) of the CIT Act
issues for determination: seem to imply. It is unclear
In essence, whilst the FIRS can make why the FHC did not rule that
(i) Whether the FIRS is barred from reversing representations and issue circulars, the entire profit from the
its earlier written representation to the rules and regulations that are contract should be taxed on a
Plaintiffs’ consultants regarding the necessary or expedient for giving full consolidated basis if it
companies’ exemption from certain taxes. effect to tax law provisions, such deemed the contract as a
representations or publications will be ‘single contract’. In such a
On this issue, the Court ruled that the of no consequence, if they are situation, the tax could be
FIRS’s representations cannot override tax subsequently determined to contradict apportioned using the income
law provisions. As such, the FIRS is not the provisions of the law. derivable by the Plaintiffs
barred from reversing its position on an under the contract.
issue, where such position contradicts the This calls to question, the value of
law. companies approaching the FIRS for As things stand, one can
advance ruling on proposed business only hope that the Court of
(ii) Whether the Plaintiffs are liable to VAT, arrangements. Appeal will provide the much
WHT and CIT in respect of their contract needed clarification on the
with the IOC. (ii) Taxability of single contracts taxation of ‘single contracts’
when the Plaintiffs appeal
On the VAT aspect of this issue, the FHC The FIRS’s argument, which the FHC the FHC judgement.
stated that VAT is a consumption tax upheld, was based on the premise that Otherwise, taxpayers may
payable by the consumer of taxable goods the consortium contract between the have to assume that the view
and services. It therefore ruled that the Plaintiffs and the IOC qualified as a of the Nigerian courts is that

Update on the Taxation of Non-resident Companies in Nigeria | 2

© 2014 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of
the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Nigeria.
 all incomes derived by a non-resident
company from a Nigerian contract are
liable to Nigerian tax, regardless of
the place of execution of the different
activities covered by the contract, and
the contracting party responsible for
such activities.
(iii) Applicability of DTT provisions
The decision of the FHC on the
taxation of FrenchCo in Nigeria raises
serious questions about the
applicability of DTT provisions to
income derived from Nigeria by
foreign companies that are tax-
resident in treaty countries.
Based on the provisions of Section 45
of the CIT Act and similar sections of
other relevant tax legislation, it is
generally agreed that the provisions of
a DTT supersede those of domestic
law to the extent of any inconsistency.
Consequently, the general
expectation was that the FHC would
have reached its decision on the
taxation of FrenchCo after carefully
reviewing the provisions of Article 5
on ‘permanent establishment’ and the
taxing right conferred on Treaty
States by Article 7(1) of the DTT.
Based on the provisions of the DTT,
only the French Tax authority should
have the right to tax the income
derived by FrenchCo from the
contract as the company does not
have a permanent establishment in
Nigeria. However, it is difficult to say
whether or not the FHC would have
reached the same conclusion after
such rigorous examination.
(iv) Applicability of WHT to fabrication
activities
Whilst reference was made to Section
81 of the CIT Act, no reference was
made to the WHT Regulations
made pursuant to the Section.
Under the Schedule to the WHT
Regulations, “sales in the ordinary
course of business ” are exempt from
Update on the Taxation of Non-resident Companies in Nigeria | 3
© 2014 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of
the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Nigeria.
WHT. Unfortunately, the phrase is not
defined by the Regulations. This has
been a source of conflict between
taxpayers and the FIRS over the
years.
It would have been interesting to see
how the learned judge of the FHC
would have decided on whether the
fabrication activities carried on by
NigerianCo qualified as “sales in the
ordinary course of business”. Perhaps,
the Court would have added to the
body of knowledge by defining the
phrase. Unfortunately, the issue was
not specifically submitted for
determination by either the Plaintiffs or
the Defendants, and the Judge did not
address it in his ruling on the WHT
issue.
Conclusion
The FHC judgement has clearly raised
more questions than answers. For
example, the judgement did not
satisfactorily address issues such as what
constitutes a ‘fixed base’, ‘single contract’,
or “sales in the ordinary course of
business.” It also did not address the basis
for taxing business profits under a DTT. If
these issues had been addressed by the
Court, the judgement would have helped,
in no small measure, to resolve some of
the controversial issues in the Nigerian tax
system.
In the light of this judgement, taxpayers
having similar issues may need to start
reviewing their contractual agreements
that may be deemed as ‘single contracts’
to manage any potential tax exposure that
may arise therefrom. That is, until the
decision is reversed by a higher court.
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