Global Tax Alert (News from Transfer Pricing) | 5 August 2014

Nigeria requires nonresident companies to file tax returns with audited financial statements and tax computations on actual profits

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Executive summary

Nigeria's Federal Inland Revenue Service Transfer Pricing Division (FIRS TP Division) has requested nonresident companies (NRCs) operating through Permanent Establishments (PEs) in Nigeria to include audited financial statements, tax computations and other relevant information specified in section 55 of the Companies Income Tax Act (CITA) in their filings for the 2014 tax year of assessment rather than merely including a schedule of turnover that is used as a basis for computing the deemed basis tax for such entities.

The FIRS TP Division issued this notification via a letter dated 24 July 2014 to EY, as tax consultants to various NRCs (presumably similar letters were issued to other local tax consultants). In its letter, the FIRS TP Division referred to the provisions of section 55 of the CITA, which outline the necessary information that must be included in all income tax return filings (i.e., including those by NRCs).

Furthermore, taxpayers are informed that failure to comply with the provisions of section 55 will result in the imposition of penalties and (presumably) interest as prescribed within the law.

Detailed discussion

Tax assessment on deemed/actual basis

Generally, pursuant to section 55 of CITA, all companies, including NRCs, are required to file and remit taxes on an actual basis. However, for NRCs, section 30 of CITA, provides the FIRS discretionary powers, in certain instances, to apply other basis of taxation, including the deemed basis.

Currently, the FIRS exercises its discretionary power under section 30 in allowing NRCs to file and remit income taxes under the deemed basis of taxation. Specifically, 20% of the turnover of NRCs is deemed to be taxable profits and subject to tax at the corporate income tax rate of 30% (i.e., resulting in an effective tax rate of 6% of turnover).

Based on this assessment method, NRCs are only required to submit the schedule of turnover for their income tax filing. Accordingly it could be assumed that PEs of NRCs are deemed to be excluded from the recently passed Transfer Pricing Regulations (TP Regulations) with the deemed basis of taxation in effect acting as a form of safe harbor for such entities.

The letter issued by the FIRS does not appear to constitute a directive to apply the actual profits tax assessment basis to NRCs with PEs. Rather, it appears they are simply seeking to enforce the information required for filing under section 55 of CITA, one implication of which is that PEs of NRCs are within the scope of the recently enacted TP Regulations.

However, in requiring NRCs to furnish information on an actual basis for their PE, the FIRS may effectively be ensuring that taxes are also remitted based on an actual basis.

This is because it is very likely that taxpayers will choose to remit taxes on an actual basis if such basis, upon determination, results in a lower taxable profit than would arise

under the deemed basis and on the flip side, FIRS could choose to mandate actual basis if such basis is higher than the deemed basis.

In effect, even though the FIRS has not explicitly mandated the payment of taxes on an actual basis, the mandate to furnish information on an actual profits basis, may result in the elimination of the deemed basis currently in practice.

However, under certain conditions, the FIRS retains the right under section 30 to challenge the actual basis provided, and requires taxes to be remitted under the deemed basis of taxation.

Accordingly, by issuing the new mandate, the FIRS has created uncertainty in an area of tax treatment previously considered unambiguous. It is hoped that subsequent publications from the FIRS will shed some clarity on this matter.

Timing for implementation

The letter states that NRCs should comply from 2014 tax returns. This may lead to significant delays in tax filings as NRCs may need to carry out several adjustments in their accounts in order to comply.

Based on earlier FIRS practice, NRCs have an expectation that returns for the 2014 tax year would be filed on a deemed income tax basis. It therefore appears that the FIRS have a duty to provide sufficient notice to taxpayers before changing an accepted practice they had introduced in exercise of their discretion under section 30 of the CITA.

Imposing penalties for late filing of 2014 tax returns in the manner prescribed may amount to a retrospective application of the FIRS' discretionary powers and could also mean taxpayers may be liable to penalties for late filing of tax returns. Such penalties would be retrospective and may be challenged.

It is expected the FIRS will revisit the timing of the introduction of this filing procedure to allow for sufficient time for compliance.

Compliance with the TP Regulations

In view of the requirement for NRCs to file tax returns in line with section 55 of CITA, NRCs operating through PEs in Nigeria should be aware of the inherent TP risks in the apportionment of costs or income jointly incurred or earned respectively by the head office, a PE and other affiliates. To alleviate this risk, NRCs should consider having an empirical basis and allocation keys, which may be requested by the FIRS, for costs or income allocated to Nigeria.

The request from the FIRS indicates that it does not consider that the deemed profit basis constitutes a safe harbor under the TP Regulations. Hence, NRCs are subject to the TP Regulations and the requirement to show that transactions are at arm's length. Under the Nigerian TP Regulations, PEs are treated as separate entities and transactions between a PE and its head office or other connected taxable persons are controlled transactions subject to the arm's length principle.

In any event, it is imperative for NRCs to assess their compliance level for TP purposes, with respect to TP documentation, TP policy and TP compliance forms as mandated under the TP Regulations.

Cost of tax compliance and tax administration

Requesting NRCs to submit tax returns with audited financial statements and tax computations may also increase the cost of tax compliance for the NRCs as well as tax administration. The cost benefit analysis of applying this procedure to all NRCs should be considered given that tax compliance in Nigeria is largely a manual process. It may be beneficial to use a turnover threshold to determine which NRCs would be required to file tax returns in line with section 55 of CITA.

Tax deduction of expenses and capital allowances

Filing tax returns on actual profits in line with section 55 of CITA allows for the tax deduction of expenses that satisfy the deductibility tests. The downside is the difficulty in apportioning or estimating expenses attributable to the PEs in Nigeria.

Capital allowances may also be available but only after all relevant conditions regarding the claim to capital allowances as provided in the relevant tax laws have been satisfied.


Affected taxpayers should consider seeking an extension of time for filing in order to comply with the new directive.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Nigeria, Lagos
  • Abass Adeniji
    +234 802 301 3597
  • Akinbiyi Abudu
    +234 806 240 4902
  • Patrick Oparah
    +234 8113190129
  • Chinyere Ike
    +234 803 571 7211
  • Ogochukwu Isiadinso
    +234 802 712 5450
  • Olakunle Adigun
    +234 806 628 7680

EYG no. CM4634