MODULE III- Double taxation arrangement

3.1 Introduction
Any Nigerian who earns his income from abroad would be taxed in the country where the
income originates and at the same time such income would also be taxed in Nigeria where the
recipient resides. This means that the income earned is being taxed twice. To lesson the burden
imposed by the double taxation on the recipient, various countries have therefore, made
provisions for double taxation relief.
3.2 Definition of residency
Resident individual: An individual is said to be resident in a particular year of assessment if he
- Is domiciled in Nigeria
- Sojourns in Nigeria for a period in all amounting to 183days or more in a 12
month period.
- Serve as a diplomat or diplomatic agent of Nigeria in a country other than
Nigeria.
Non-resident Individual: Is one who is not domiciled in Nigeria or who stays in Nigeria for less
than 183days or more in a 12-month period but derives income from Nigeria.
Resident Company: A company is said to be resident if it is incorporated in Nigeria.
Non-resident Company: This is a company that is not registered or incorporated in Nigeria but
derives income from Nigeria.

3.3 Types of double taxation relief

Two major types of double taxation relief can be distinguished. These are:
(i) The Commonwealth Income Tax Relief; and
(ii) The Double Taxation Agreement.

3.3.1 Commonwealth Income Tax Relief

Conditions for the granting of this relief are:
(i) The income of the foreigner must be taxable in Nigeria. That is, a foreigner tax payer
or any tax payer must be resident in that year of assessment.
(ii) The income must have also been subjected to tax in another country.
(iii) There must be no double taxation agreement between Nigerian and the other country.
That is, the double taxation relief and the double taxation agreement (or arrangement)
cannot be negotiated by one country with Nigeria simultaneously.
(iv) The concession must be mutual as between the two countries.

Determination of the Commonwealth Relief

(i) Nigerian Company or Resident individuals
(a) If commonwealth rate (CR) of tax does not exceed one-half of the Nigerian rate
of tax (NR), the rate at which relief is to be given shall be the commonwealth
rate of tax.
CR  1/2NR Relief = CR
 (b) If the commonwealth rate of tax exceeds one-half of the Nigerian rate, the rate
of relief shall be one-half of the Nigerian rate.
CR > 1/2NR Relief = 1/2NR
(ii) Non-Nigeria Company or Non-resident individuals.
(a) If the Commonwealth rate does not exceed the Nigerian rate, relief shall be one-
half of the commonwealth rate.
CR NR Relief = 1/2CR
(b) If the commonwealth rate exceeds the Nigerian rate, relief shall be equal to the
difference between the Nigerian rate and one-half of the commonwealth rate.
CR >NR Relief = NR-1/2CR
Any claim for relief must be made not later than 6 years after the end of the tax year.
Note:
(1) Nigerian Tax Rate = Tax paid or payable X 100
Total profit or Taxable profit 1

(2) Commonwealth Rate = Tax paid or payable abroad X 100

Total profit or Taxable profit 1

3.3.2 Double Taxation Agreement

Where there is a taxation agreement between Nigeria and the home country of the non-resident
tax payer, the amount of relief available shall be determined by the provisions of the agreement.
The following key information should be noted.
(i) The amount of foreign tax payable is allowed as a credit against the tax payable in
Nigeria.
(ii) Only a Nigerian resident is entitled to claim the credits, the total of which must not
exceed the total tax payable by the tax payer in that year of assessment. The implication
of this is that no refund is available against a foreign tax.
(iii) Where a taxpayer is not desirous of taking the relief by way of the credit, such a taxpayer
may elect accordingly.
(iv) Any claim for credit shall be made not later than two years after the end of the relevant
year of assessment.
(v) Any dispute concerning the amount of credit allowance shall be the subject of the
objection and appeal procedures.
3.4 Benefits of double taxation agreement
(i) Avoidance of double taxation
(ii) Clarification of taxing rights of each contracting state.
(iii) Encouragement of economic cooperation between states.
(iv) Prevention of fiscal evasion with anti-avoidance provision.
(v) Lowering of compliance cost.
3.5 Resolution of conflicts between double taxation agreements and Nigerian tax law
(a) Where a resident of a contracting state considers that the action of one or both of the
contracting states result or will result from him in taxation not in accordance with the
agreement, with the competent of the contracting state of which he is resident.
(b) The competent authority shall endeavour, if the objection appears to it to be justified and
if it is not itself able to resolve the case by mutual agreement with the competent
authority of the other contracting state, with a view to the avoidance of taxation not in
accordance with the agreement.
(c) The competent authorities of the contracting state shall endeavour to resolve by mutual
agreement any difficulties or doubt arising as to the interpretation or application of the
agreement.
(d) The competent authorities of the contracting state may communicate with each other
directly for the purpose of reaching an agreement in the sense of the preceding
paragraphs.

3.6 Features of a Double Taxation Relief

(i) The names of the two countries involved in the agreement would be stated together
with the definition of residence and person affected.
(ii) The rate of tax applicable in the countries would be stated with a caveat that the rates
may be changed without notice.
(iii) The transactions in which double taxation relief is applicable. This will usually
include business profit, fees, capital gains tax, e.t.c.
(iv) The arrangement for the exchange of information between the two tax authorities so
as to minimise the incidences of tax evasion.
(v) The appeal procedure in the event of a dispute.
(vi) The available diplomatic privileges for the tax payers.
(vii) The date of coming into force of the agreement and the possible termination date.
(viii) Connected business including enterprises in the two countries under common control
or where one has control over the other.
(ix) The distinction between industrial and commercial profits especially for enterprises
engaged in business partly in Nigeria and partly in other countries.
(x) The profit exempted from tax.
(xi) The methods by which the effect of double taxation is eliminated.

3.7 Exemption from Double Taxation Relief

The following incomes are usually exempted from Double Taxation Relief.
(i) The remuneration of a Professor or a Teacher who is resident for not more than
2years in the other country for the purpose of teaching.
(ii) Government pensions, except the recipient is ordinarily resident in Nigeria.
(iii) Aircraft and shipping profits.
(iv) Dividends paid by a UK company to a Nigerian resident who has no permanent
establishment in the UK.
(v) Payment to a student or apprentice during his full time education or training in
Nigeria.
(vi) The income is derived by a resident in UK provided he is not in Nigeria for at least
183days and the services are rendered for a UK employer.
3.8 Illustrations
Question 1
Mr. Abraham is an employee of a Canadian Company based in Toronto. In an attempt to widen
its market scope, the company decided to second Mr. Abraham to Nigeria in January 2018 to
open the Lagos office on the following terms:
(i) He is entitled to receive an equivalent amount of N2,800,000 in Canada and this is
to be paid net of tax.
(ii) He is to be paid N4750,000 and this is subject to Nigerian income tax.
(iii) The tax paid on his income in Canada amounted to the equivalent of N600,000;
(iv) He has four children and two dependants staying with him in Nigeria.

Compute the credit to be given to Mr. Abraham on his income made in Canada, in accordance
with Commonwealth Income Tax Relief.

Question 2
Alhaji Alex Tekoye, a Nigerian was a Senior Consultant in one of the big internationally
affiliated firms of Chartered Accountants with a branch in Lagos. Throughout 2017, he was
resident in London on secondment from his office in Lagos on a technical exchange programme
with the foreign firm.
Alhaji Tekoye was married with three children who were still schooling. He also had an
unemployed aged mother of about 70 years.
In 2018 when he returned to Nigeria, he was challenged by the tax authority to account for tax on
his income earned in London in 2017. He argued that he had paid an equivalent of N1,200,000
on his earned income of N10,510,000 in London to the British Government in that year because
he was not resident in Nigeria in that year.
You are required to compute Alhaji Tekoye’s tax liabilities to the Nigerian Government if the
Nigerian Tax authority did not agree that the foreign tax should be his final tax on the income
earned in London.

Question 3
Adeola International Limited is into manufacturing of plastic materials has outlet in Ikeja,
Nigeria and Accra, Ghana. The company’s operating results for the year ended 31 st December,
2018 are as follows:

N
Income from Nigeria 50,000,000
Income from Ghana 22,000,000
Total income 72,000,000
Less: Overheads 40,000,000
Net profit 32,000,000

Included in the overheads were:

N
Depreciation- Nigeria business 4,500,000
Depreciation- Ghana business 750,000
Donations to clubs in Nigeria 250,000
Foreign tax suffered 4,200,000
Profit attributable to Ghana business 5,150,000
Capital allowances for Nigeria and Ghana businesses were N3,540,000 and N1,450,000,
respectively.
Assume the company is a wholly owned Nigerian company.
Required:
Compute the tax liabilities on the Total Profit, stating clearly the double taxation relief applicable
to the company.

Question 4
(a) Explain the concept of Double Taxation Relief
(b) State the objectives of Double Taxation Relief with another country.
(c) Describe the two types of Double Taxation Relief in place in the Nigerian tax system.