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18 July 2023 Nigeria | Current development on taxation of nonresident companies engaged in shipping business
In 2021, the Federal Inland Revenue Service (FIRS) issued a public notice titled "Tax Compliance of International Shipping Lines Deriving Income from Nigeria" to international shipping companies ("ISC" individually or "ISCs" collectively) operating in Nigeria to regularize their tax compliance status on or before 28 February 2022. This followed an initial information circular titled "Taxation of Companies Engaged in Shipping, Air Transport and Cable Undertakings," released in June 2021, which provided guidelines on the taxation of companies engaged in shipping business. Based on a perception of low compliance from the ISCs, the FIRS began in 2023 to institute tax investigations into ISCs with operations in Nigeria and, as a result, has started issuing intent notices to raise tax assessment to such companies. The notices communicate to the ISCs income tax liabilities at the rate of 6% of their perceived freight income in Nigeria, plus penalties and interest at 10% and 19% respectively. The Companies Income Tax Act (CITA) forms the basis for the taxation of companies in Nigeria and stipulates that taxable companies (including those registered in or outside Nigeria) must prepare and file annual income tax returns. However, where (i) there are no assessable profits, (ii) the assessable profits are lower than expected or (iii) the assessable profits are difficult to determine, the law empowers the FIRS to assess and charge tax on a fair and reasonable percentage of the turnover of companies. Furthermore, with respect to nonresident shipping companies, Section 14 of the CITA stipulates that the profits of nonresident companies engaged in international shipping business derived by virtue of carrying or loading passengers, mail, livestock or goods from Nigeria (i.e., outbound freight) is derived in and taxable in Nigeria. If the FIRS is satisfied that the tax authority of the country in which the ISC is resident computes and assesses tax for its residents on a basis similar to Nigeria's, then the taxable profits of the ISC in Nigeria can be determined by calculating and apportioning the relevant ratios stipulated in Section 14 of CITA. If the condition above cannot be met or the ratios cannot be certified by the foreign tax authority, the FIRS may assess the ISC to tax on a fair and reasonable percentage of the outbound freight turnover, in practice, 6%. Notwithstanding the above provisions, the minimum tax to be paid by any ISC on the outbound freight turnover cannot be less than 2%. It is worth noting that the double-tax treaties (DTTs) executed between Nigeria and its treaty partners provide some form of relief in this regard. Some DTTs provide full exemption from tax for residents of the treaty countries. Others prescribe reciprocity as a condition for full exemption or, where reciprocity is not met, provide partial relief in the form of a reduced tax rate. This relief is not granted automatically; rather, a company would have to apply to the FIRS for the treaty benefit to enjoy it. Amendments to the CITA and relevant judgments of the Tax Appeal Tribunal (TAT) have clarified that non-freight income should be taxed under Section 9 instead of Section 14. Similarly, the TAT in 2020 ruled that demurrage expense should be an allowable expense to the extent that it is wholly, reasonably, exclusively and necessarily incurred by the business to generate taxable income. Despite this clarity, it is important to consider taxation of non-freight income from the perspectives of ISCs that are resident in treaty countries and those that are resident in non-treaty countries. The Finance Act 2023 signed into law on 28 May 2022 updated Section 14 of the CITA to allow ISCs to file income tax returns with a certified statement of gross revenue in lieu of audited financial statements. Furthermore, regulatory agencies in the shipping industry are now empowered to request from companies seeking approvals and permits to provide their Tax Clearance Certificates and evidence of income tax filing for three preceding tax years. ISCs that fail to comply with these requirements could experience constraints in obtaining relevant permits and approvals to operate within the shore of Nigeria. The FIRS historically has not paid much attention to ISCs and other nonresident companies. However, with the introduction of the Finance Acts, the drive to generate more revenue, and the creation of a specialized tax office for nonresidents, there has been a momentum shift in the taxation of these nonresident companies doing business in Nigeria. Clearly, outbound freight income is taxable in Nigeria. As such, the intent notices being issued by the FIRS are in line with the law to the extent that the ISCs carry out shipping business in Nigeria. However, for many ISCs, clarity is lacking on how the FIRS arrived at the freight income amount that formed the basis of the notices issued. There may also be some question regarding the rates that the FIRS applied, given that most ISCs, including ISCs resident in treaty countries, received letters indicating a tax rate of 6% of gross income. ISCs earning outbound freight income in Nigeria have obligations to register for taxes in Nigeria and comply with the provisions of the CITA. Such companies are required to file annual tax returns in line with Section 14 and Section 55 of CITA. Also, it is important for ISCs that are resident in treaty countries to consider the applicable treaty benefits in line with the FIRS's information circular and administrative guideline to enjoy the treaty benefits in Nigeria.
Document ID: 2023-1262 | |
