Nigerian court clarifies rules on foreign company taxation Tax Insights

Tax Insights
from International Tax Services
Nigerian court clarifies rules on
foreign company taxation
January 14, 2016
In brief
The Nigerian Federal High Court, in a decision issued September 18, 2015, has clarified the tax rules for
foreign companies operating through a fixed base or permanent establishment (PE) in Nigeria (JGC
Corporation v. Federal Inland Revenue Service). The Nigerian Federal Inland Revenue Service (FIRS)
had ruled that business profits of some foreign companies are derived from, and therefore taxable in,
Nigeria, even if the foreign company did not have a fixed base in Nigeria. The FIRS concluded that a fixed
base existed in certain other instances, and taxed all of the foreign company’s profits from the executed
contracts, rather than only the profits attributable to the fixed base.
The Nigerian court determined that payments sourced from Nigeria without a tax presence in the country
are not subject to Nigerian income tax. To be taxable, said the court, the foreign company must have a
fixed base in Nigeria, and the profits to be taxed should be attributable to the fixed base.
In detail
Background
The Nigerian Companies
Income Tax Act (CITA) taxes the
profits of all companies
conducting business in Nigeria.
The act taxes all profits
‘accruing in, derived from,
brought into or received’ in
Nigeria.
Section 13 of CITA specifically
mandates that Nigerian
companies are subject to tax on
their worldwide income, which
is deemed to accrue in Nigeria,
while foreign companies are
subject to tax if they meet
certain conditions.
A foreign company must meet
one of the criteria below to
derive taxable income in
Nigeria:
 have a fixed base in Nigeria
 have an agent in Nigeria that
is authorized to conduct
business on its behalf or
habitually has stock
(inventory) from which
deliveries are made on its
behalf
 enter into a turnkey contract
or
 conduct a business with a
related party under
conditions that are not at
arm’s length.
In the earlier case of Saipem
Contracting Nigeria Ltd &
Others v FIRS & Others, the
FIRS argued that foreign
company profits, once derived
in Nigeria, are subject to tax
regardless of whether any of the
conditions in Section 13 are
satisfied.
Facts
The appellant, JGC Corporation
(JGC), a foreign company,
entered into a contract with a
Nigerian company, Mobil
Producing Nigeria Unlimited
(MPN), to provide engineering
and procurement services in an
offshore contract. Concurrently,
JGC’s Nigerian subsidiary and a
third party also entered into a
construction contract with MPN
in an onshore contract. Both
contracts related to the same
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project. The offshore contract
provided that none of the activities
pursuant to the contract would be
carried out in Nigeria.
The FIRS assessed tax on JGC since
JGC was a party to the onshore
contract and had a fixed base in
Nigeria through its Nigerian
subsidiary. JGC appealed the
assessment at the Tax Appeal Tribunal
in Lagos (TAT), which dismissed the
appeal and upheld the assessments.
The TAT proceedings
The TAT did not evaluate material
facts presented by JGC such as
payment schedules showing amounts
the Nigerian subsidiary received, the
Department of Petroleum Resources
(DPR) permit for the onshore project,
and the admission by the FIRS on
cross-examination that it incorrectly
assumed that JGC was a party to the
onshore contract.
The TAT did not rule on many of the
other arguments submitted for review.
Furthermore, the TAT relied on
limited aspects of the contract instead
of interpreting each contract as a
whole.
JGC appealed to the Federal High
Court.
Issues
The issues for the court to determine
were:
 whether the TAT’s judgement
should be disregarded since the
TAT did not consider and evaluate
material pieces of evidence
 whether the TAT correctly
concluded that JGC had a fixed
base in Nigeria and would be liable
to tax based on the evidence
presented to the TAT and
 whether the TAT correctly accepted
the FIRS’s tax assessment based on
the entire profit from the offshore
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contract, instead of the portion
attributable to the fixed base after
incorrectly determining that JGC
had a fixed base in Nigeria.
JGC’s position
JGC asserted:
 The TAT failed to consider material
evidence before arriving at its
decision.
 The TAT incorrectly concluded that
JGC had a fixed base in Nigeria.
 The FIRS imposed tax on the entire
profit from the contract without
first apportioning profit to the
fixed base.
The FIRS’s position
 The TAT incorrectly upheld the
FIRS’s assessment even if there
was a fixed base, because only the
profits attributable to the fixed
base are taxable under Section
30(1).
Observation: While interpreting
section 13 of CITA, the court
determined that not all profits of a
foreign company are subject to tax.
Regardless of the provisions of Section
9 of CITA (which addresses categories
of taxable income), a foreign company
receiving payment from a Nigerian
company does not automatically
become subject to tax in Nigeria,
unless the conditions in Section 13 are
satisfied. Therefore, JGC is not taxable
in Nigeria.
The FIRS asserted:
The takeaway
 The TAT did not need to consider
all of the evidence before arriving
at its decision, nor did the TAT
need to determine treatment of
every issue brought before it.
The decision clarifies that a foreign
company will be subject to tax on
profits only if it has a fixed base in
Nigeria. The court addressed the
confusion created by the Saipem case.
 The TAT could accept the FIRS
assessment on the contract profits
since the TAT had established the
existence of a fixed base.
For taxpayers, contract structuring
(whether consortium or split) can
create or negate a taxable presence.
The court relied heavily on the Indian
case of Ishikawajma Harima Heavy
Industries v Director of Income Tax.
In Ishikawajma, the profits of a
foreign company from a single
consortium contract were clearly
divided between onshore and offshore
activities, and were determined not to
be taxable in India.
The decision
The court ruled in favor of JGC on all
issues, concluding that:
 The TAT breached JGC’s right to a
fair hearing by not considering all
material facts and evidence.
 The existence of a fixed base is an
issue of fact. The court held that
JGC did not have a fixed base in
Nigeria based on the facts. The
court also recognized a taxpayer’s
right to plan its activities in the
most tax efficient manner,
provided the taxpayer’s activities
remain within the scope of the law.
Because the existence of a fixed base is
an issue of fact, a taxpayer’s activities
must be consistent with the terms of
its contract. The substance of the
contract and activities must follow the
contractual form.
Note that requiring alignment of
substance with form is consistent with
the final recommendations of the
OECD’s Base Erosion and Profit
Shifting (BEPS) project.
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Let’s talk
For a deeper discussion of how this may affect your business, please contact:
International Tax Services, United States
Omoike W Obawaeki
+1 (713) 356 6046
[email protected]
Gilles de Vignemont
+1 (646) 471 1301
[email protected]
International Tax Services, Nigeria
Taiwo Oyedele
+234 1 271 1700 Ext 6103
[email protected]
Kenneth Erikume
+234 1 271 1700 Ext 6110
[email protected]
Esiri Agbeyi
+234 1 271 1700 Ext 6274
[email protected]
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