By Confidence Atuegbu

Introduction
The Minister of Finance, Budget and National Planning (the Minister) has issued the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order), to fill in gaps in the 2019 Finance Act (FA 2019).

The SEP Order sets out the conditions under which non-resident companies (NRCs) that provide digital services; or technical, professional, management, or consultancy services (TPMC); to Nigerian customers, from outside Nigeria will be liable to tax, in Nigeria.[1]

Before the advent of the Nigerian Finance Act 2019, only companies resident in Nigeria were liable to tax as non-resident companies (NSCs) were only taxable if they had a base in Nigeria or carried on business in Nigeria through an agent.

Following the coming into force of the Finance Act 2019, the conditions for the taxing of Non-Resident Companies were expanded. Hence, under the new regime, a non-resident company would be taxable if: (i) they supply digital services or goods and profits can be attributable to the activities; or they provide Technical, Management, Professional and Consultancy services; and (ii) they have a significant economic presence (SEP) in Nigeria.[2] The Finance Act however failed to define what is meant by significant economic presence even though it called out the kind of businesses that would be affected.

Who is affected by the SEP Order?

The SEP order specified activities and persons affected to include:

Digital service providers –that is, Non-Resident Companies whose activities involve: streaming or downloading services of digital contents (e.g. movies, videos, music, applications, games and e-books); transmission of data collected about Nigerian users generated from users’ activities on websites or mobile applications; provision of goods or services through digital platform; or provision of inter-mediation services through digital platforms, website or other online applications that link suppliers and customers in Nigeria;[3] and
Non-Resident Companies that provide technical (including advertising services, training, or the provision of personnel), professional, management, or consultancy services to Nigerian customers[4].
What is the SEP Order threshold for Non-resident Companies?

The SEP order threshold is divided into two; for those providing digital services and those providing technical, professional, management and consultancy services.

SEP threshold for Digital Service Providers.
A non-resident digital service provider will be said to have SEP in Nigeria if:

It derives gross turnover or income in excess of ₦ 25million or its equivalent in other currencies in a given year from any or a combination of the activities listed in the SEP Order. Note that the ₦ 25million threshold will also take into account activities carried on by the NRC’s connected persons during the accounting year;[5] or
It uses a Nigerian domain name (.ng) or registers a website in Nigeria;[6] or
It has a purposeful and sustained interaction with persons in Nigeria by customizing its platform to target persons in Nigeria (e.g. by reflecting prices of products/services in Naira, providing options for billing or payment in Naira etc.)[7].
SEP threshold for Technical, professional, management and consultancy service providers
A Non-Resident Company that provides technical, professional, management or consulting services will have a SEP in Nigeria if it earns income or receives payment from:

A person resident in Nigeria;[8] or
A fixed base or agent of a non-Nigerian company.[9]
It must be noted that for this category, the withholding tax deducted by the recipient of the service is the final tax.[10] There are however payments that are exempted.

We have also noted that the SEP order appears to have expanded the meaning of technical services to include advertising and training services as well as the supply of personnel. It is arguable if this is in line with the provisions of the Finance Act 2019.

Exemptions for Digital Service providers

Under this category, if a non-resident company has its base in a country that has a multilateral treaty or a consensus agreement that seeks to address the challenges of the digitalization of the economy and Nigeria is a party to the treaty, such treaty or agreement will override the provisions of the SEP order in relation to that non-resident company.[11]

Exemptions for Technical Service Providers

A non-resident company will not be said to have SEP in relation to payment if such payment was made:

To an employee of the person making the payment under a contract of employment;[12]or
For teaching in an educational institution;[13] or
For teaching by an educational institution;[14] or
By a foreign fixed base of a Nigerian company[15].
What the SEP Order holds for Tax Administration and Compliance

The affected non-resident companies will be required to register for income taxes in Nigeria and file annual tax returns even if they do not have a physical presence in Nigeria.

Nigerian resident businesses (as well as the fixed bases of non-resident companies) that have transactions with the affected non-resident companies will also be required to account for withholding tax on some of the payments made to these non-resident companies.

Challenges of the SEP Order 2020

The SEP Order also raises a number of practical concerns from a compliance and tax administration perspective:

Profit attribution: The SEP order does not provide any guidance on how the profits attributable to the Nigerian SEP of affected non-resident companies will be determined. This will create uncertainties for those who need to comply.
Enforcement and compliance: The Federal Inland Revenue Service (FIRS) may struggle to enforce compliance without international collaboration, as a number of the companies affected may be outside the territorial reach of the FIRS. This problem will further heighten where the non-resident companies sell their products and services directly to the final consumers in Nigeria. Non-resident companies that do not have any form of presence in Nigeria may also struggle to comply.
Conclusion

Nigeria has joined the league of other countries that have taken steps to tax the digital economy.

It is now clear by the SEP Order that physical presence will no longer be the only condition for the taxation of companies that offer remote services.

It is advised that non-resident companies assess how the rules affect them and take steps to comply where necessary. Nigerian resident companies that transact with the affected non-residents companies are also not left out in the compliance.

More-so, in order to improve compliance and reduce uncertainty for taxpayers, the FIRS is encouraged to introduce simplified registration and compliance processes for affected Non-Resident Companies. The FIRS will also need to provide clarity on the basis for which profits will be attributed to the SEPs of the Non-Resident Companies.

[1] The SEP Order is available here

[2] Section 3 of the Finance Act 2019 which amended Section 13 of the Companies income tax Act Cap C21 Laws of the Federation of Nigeria 2004

[3] The Companies Income Tax (significant economic presence) Order 2020 (the SEP Order), Section 1(1)(a)(i)-(iv)

[4] S.2(1) SEP Order

[5] S.1(1)(a) SEP Order

[6] S.1(1)(b) SEP Order

[7] S.1(1)(C) SEP Order

[8] S.2(1)(a) SEP Order

[9] S.2(1)(b) SEP Order

[10] S.4(b) of the Finance Act.

[11] S.1(3) SEP Order

[12] S.2(3)(a) SEP Order

[13] S.2(3)(b) SEP Order

[14] ibid

[15] S.2(3)(c) SEP Order