PRESENTED AT INSTITUTE OF CHARTERED ACCOUNATNTS OF NIGERIA (ICAN), ABUJA DISTRICT TECHNICAL SESSION.
ON 12TH SEPTEMBER 2023
TABLE OF CONTENTS PAGE
- Learning objectives 3
- The concept of tax treaty 4-8
- Nigerians double tax treaties (Legal Framework) 9-15
- Computation of foreign tax credit claims 16-27
- Commonwealth Tax Relief and other multilateral treaties 28-31
At the end of this technical session, participants will know the following: –
- Understandthe concept of tax treaty and its benefits
- To have an overview of Nigeria tax treaties with other countries
- To know the legal framework guiding Nigeria’s tax treaties
- To understand the computation of foreign tax credit claims
- To understand the Commonwealth Income Tax Relief
- To have knowledge of existing multilateral treaties
- THE CONCEPT OF TAX TREATIES
Tax treaties are formal bilateral agreements between two jurisdictions.
A tax treaty is also referred to as a tax convention or double tax agreement (DTA). They prevent double taxation and fiscal evasion, and foster cooperation
What tax treaties do
Generally, tax treaties operate to:
Reduce or eliminate double taxation caused by overlapping tax jurisdictions
- Provide a level of security about the tax rules that will apply to particular international transactions by:
- allocating taxing rights between the jurisdictions over different categories of income
- specifying rules to resolve dual claims in relation to the residential status of a taxpayer and the source of income
- providing an avenue to present a case for determination by the relevant taxation authorities where a taxpayer considers there has been taxation treatment contrary to the terms of a tax treaty.
- Prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners by:
- providing for the allocation of profits between related parties on an arm’s length basis
- generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices
- providing for exchanges of information between the respective taxation authorities
- facilitating investment, trade, movement of technology and movement of personnel between jurisdictions – for example, by reducing rates of withholding tax.
How tax treaties work
Outlined below are some basic principles that apply to all of tax treaties. They relate to a person’s residency status and how tax applies to income and business profits they earn, or tax relief they receive in the other jurisdiction.
Residency versus source
Tax treaties give the source jurisdiction a taxing right over selected types of income, profits or gains, sometimes at limited rates.
Each jurisdiction has the right to tax the income of its own residents under their own domestic laws, so the tax treaty will not always restate this rule.
If the jurisdiction of residence has the sole taxing right over certain types of income, profits or gains, this is usually expressed as ‘shall be taxable only in that country’.
Where the jurisdiction of source imposes a limited rate of tax on selected types of income, profits or gains, for example, a withholding tax, this is usually expressed as ‘may be taxed in that other state’.
The principal factor considered in relation to the taxation of business profits is the presence of a ‘permanent establishment’. This refers to a fixed place of business through which the taxpayer either fully or partly carries on their business enterprise.
Under the business profits article of most tax treaties, the profits of an enterprise in one jurisdiction may be taxed in the other jurisdiction only under both of the following circumstances:
if the enterprise carries on business in that other jurisdiction through a permanent establishment, and to the extent that the profits are attributable to the permanent establishment.
The tax treaty also allows the jurisdiction of residence to provide tax relief against its own tax if the income has been taxed in the jurisdiction of source. In general, foreign tax credit provisions of our domestic law or specific exemption provisions where applicable.
2.0 Nigerians Double Tax Treaties Legal Framework
On 11th May 2022 FIRS issued pursuant to Sections 45 and 46 of the Companies Income Tax Act (CITA) Cap. C21 LFN 2004 (as amended), Sections 38 and 39 of the Personal Income Tax Act (PITA) Cap. P8 LFN 2004 (as amended), Sections 61 and 62 of the Petroleum Profits Tax Act (PPTA) Cap. P13 LFN 2004 and Section 41 of the Capital Gains Tax Act (CGTA) Cap. C1 LFN 2004, to provide a general description of the application of the DTAs between Nigeria and other countries, especially on the treaty benefits that can be accessed by residents of either contracting countries by way of relief from double taxation, treaty tax rates on income from source countries, dispute resolution mechanisms and others.
2.1 Nigeria’s DTA’s with other countries
Nigeria currently has operational DTAs with sixteen (16) countries, as detailed below:
|S/N||Country||Type||Date of entry into force||Effective date|
|1||Italy||Air and Shipping
|22nd February 1977||1st January 1968|
|2||United Kingdom||Full DTA||1st January 1988||1st January 1989|
|3||Belgium||Full DTA||1st January 1990||1st January 1991|
|4||Pakistan||Full DTA||7th March 1990||1st January 1991|
|5||Czech||Full DTA||2nd December 1990||1st January 1991|
|6||Slovakia||Full DTA||2nd December, 1990||1st January, 1991|
|7||France||Full DTA||2nd May, 1991||1st January, 1992|
|8||Netherlands||Full DTA||9th December, 1992||1st January, 1993|
|9||Romania||Full DTA||18th April, 1993||1st January, 1994|
|10||Canada||Full DTA||16th November, 1999.||1st January, 2000|
|11||South Africa||Full DTA||5th July, 2008||1st January, 2009|
|12||China||Full DTA||21st March, 2009||1st January, 2010|
|13||Philippines||Full DTA||18th August 2013||1st January, 2014|
|14||Sweden||Full DTA||7th December, 2014||1st January, 2015|
|15||Spain||Full DTA||5th June, 2015||1st January, 2016|
|16||Singapore||Full DTA||1st November, 2018||1st January, 2019|
Nigeria has pending double tax treaties with Mauritius, Kenya, Kuwait, South Korea, Poland, Qatar and the UAE which are yet to be ratified.
2.1 Nigeria’s DTA’s with other countries
Applicable WHT Rates (effective from 1st July 2022)
Those Entitled to Treaty Benefits in Nigeria?
To be entitled to the benefits under a tax treaty between Nigeria and another
country, a taxpayer must be:
- a resident of Nigeria;
- a resident of Nigeria’s treaty partner; or
- a resident of both Nigeria and her treaty partner
It should be noted that a resident of a country is not entitled to any benefit under a tax treaty of which its country is not a party.
Relief from Double Taxation (Tax Credit):
Where a resident of Nigeria has paid foreign tax on an income derived from a treaty partner of Nigeria, the Article on Elimination of Double Taxation in the tax treaty and Section 46 of CITA, Section 39 of PITA, Section 62 of PTA or Section 41 of CGTA, as the case may be, allows for a credit relief against similar tax payable in Nigeria by that resident. The amount of foreign tax paid is deductible from the tax payable in Nigeria on same income.
Computation of Tax Credit that is Claimable:
the following conditions must be fulfilled in computing the amount of tax credit allowed for deduction from tax payable in Nigeria:
- The foreign income has been included in the global income of the company in line with section 13(1) of CITA or relevant provisions of the other laws, chargeable to tax in Nigeria and constitute part of the assessable profit of the company in Nigeria for the relevant year of assessment.
- The income is not exempt from tax in Nigeria. As such, the company cannot be granted relief on an income exempt from tax e.g. passive income brought in through Government approved channels [S.23(1)(k) of CITA].
- Where the foreign tax paid is on gross basis (e.g. withholding tax), the credit relief can only be granted in Nigeria on a net basis i.e. based on the total profits of the company.
- By reason of the limitation provided in section 46(4) of CITA, section 39(4) of PITA and section 62(4) of PPTA, the tax credit allowable is restricted to an amount not exceeding the total tax payable in Nigeria for that year of assessment on that same income for that entity. As such, the rate of tax credit claimable cannot exceed Nigerian tax rate applicable to the income.
- Consequently, a Nigerian taxpayer that is charged to tax in a country with a higher tax rate than that of Nigeria or charged to tax on gross basis will be entitled to only partial relief of an amount equivalent to the amount that is produced using the Nigerian tax rate on the income, while those from a lower tax rate may be able to claim full relief of the foreign tax paid.
- The procedure for determining the amount of credit relief claimable shall be as follows:
- Determine the total profits of the company and the tax on the total profits
- Determine the effective tax rate of the company i.e., the tax computed divided by the total taxable income.
- Determine the proportion of the tax computed that relates to the foreign income i.e., the foreign income multiplied by the effective tax rate computed.
- The amount so computed is the maximum relief that may be claimed.
COMPUTATION OF FOREIGN TAX CREDIT CLAIMS
Langote Nigeria Limited is a Nigerian Company. The company paid income tax of 25,000 Euros and 70, 000 Euros in Belgium. The company has turnover of 500,000 Euros and 1 million Euros for 2020 and 2021 accounting years.
Its taxable profits are 100,000 Euros and 200,000 Euros for the 2020 and 2021 accounting years respectively.
The company was qualified as a permanent establishment in Belgium. The total profits of the company in Nigeria in those respective accounting years based on its worldwide income are 400 million naira and 800 million naira respectively. Tax rate in Nigeria is 30% on turnover of 100 million and above while tax rate in Belgium is at the rate of 25% turnover below 1 million Euros and 35% on turnover of 1 million Euros and above.
Nigeria and Belgium have a double taxation agreement, with Article 23 of the Agreement providing for credit method of elimination of double taxation. Compute the tax payable in Nigeria by the company for the relevant years of assessment in line with Section 46 of CITA. Assume exchange rate to be N750 to 1 Euro in 2020 and N800 to 1 Euro in 2021
2021 year of assessment
2020 year of accounts
Tax rate on the income in Belgium = 25%
Nigeria tax rate is 30%
Tax paid in Belgium €25,000 (€100,000 x 25%)
Tax payable in Nigeria N
Total profit (based on worldwide income) 400 million
Tax computed = 400 million x 30% = N120, million
Less double tax relief (€25,000 x 750) = N18,750,000
Tax payable = N101,250,000
2022 year of assessment
2021 year of accounts
Tax rate on income in Belgium is 35%
Tax payable in Belgium = €70,000 (€200,000 x 0.35)
Tax payable in Nigeria N
Total profit (Based on worldwide income) 800 million
Nigeria tax rate is 30%
Tax computed = 800 million x 30% = 240 million
Less double tax relief (€200,000 x 0.3 x 800) = 48 million
Tax payable = 192 million
- When tax rate on the income of Belgium is on net basis lower than or equal to that of Nigeria rate of tax, full credit relief is granted
- When tax rate on the income of Belgium is on net basis higher than that of Nigeria rate of tax, maximum credit that may be given will be restricted to the amount which is equivalent to that produced using the Nigeria tax rate on foreign income.
ABC Nigeria Ltd in 2021 accounting year suffered WHT from multiple incomes received from different countries as follows: –
If the worldwide taxable profit of the company is 500 million naira compute the foreign tax credit claimable. Use N750 to 1$. Take 7.5% as Nigeria’s WHT rate on countries that has DTT with her as at 2021.
ABC Nigeria Ltd
Computation of foreign WHT credit claims
Assessment year: 2022
Basis period: 2021
Worldwide taxable profit 500 million
Tax at Nigeria rate @ 30% 150 million
Less Double Taxation Relief
China 300,000 x 750 x 7.5% (fully relieved) (16,878,000)
Ghana 50,000 x 750 x 5% (fully relieved) (1,875,000)
Canada 150,000 x 750 x 7.5% (Partly relieved) (8,437,500)
South Africa 200,000 x 750 x 7.5% (partly relieved) (11,250,000)
USA disallowed –
Total Double Tax Relief (38,440,500)
Tax payable 107,059,200
The United States has no double tax treaty with Nigeria, hence the WHT credit coming from there will be disallowed.
PROCEDURES FOR CLAIMING DOUBLE TAX TREATY BENEFITS
The FIRS has introduced administrative requirements for relevant parties to take advantage of treaty benefits. This generally includes:
- Completion of certificates of residence.
- Submission of a formal application, the completed certificate of residence,
Evidence of foreign tax paid (for Nigerian residents) or evidence of income on which WHT treaty rate is being sought (for non-residents) to the FIRS.
COMMONWEALTH TAX RELIEF
Commonwealth Nations are 56 countries made up of Britain and her former colonies. You can google to get the list of 56 nations that are made up of the Commonwealth countries. The United States of America (USA) is not a member of the Commonwealth.
What is Commonwealth Income Tax Relief?
Commonwealth Income Tax Relief is a double taxation relief available to commonwealth nations for the avoidance of double taxation among the member states. This provides that tax paid on income earned in a commonwealth country may be relieved by another commonwealth country or grants reduced rate of tax on income that is taxable in another commonwealth country.
Legislative Provision in Nigeria
Section 44(1) of the Companies Income Tax Act (CITA) Cap C21 LFN 2004 (as amended) provides relief for a Nigerian company that its income has been taxed or is taxable in another commonwealth country. The section provides that:
- If any Nigerian company which has paid, by deduction or otherwise, or is liable to pay, tax under this Act for any year of assessment on any part of its profits, proves to the satisfaction of the Service that it has paid, by deduction or otherwise, or is liable to pay, Commonwealth income tax for that year in respect of the same part of its profits, it shall be entitled to relief from tax paid or payable by it under this Act on that part of its profits at a rate thereon to be determined as follows:
- If the Commonwealth rate does not exceed one-half of the rate of tax under the Act, the rate at which relief is to be given shall be the Commonwealth rate tax;
- In any other case the rate at which relief is to be given shall be half the rate of tax under this Act.”
In a similar manner, Section 44(2) of CITA provides relief for a company other than Nigerian company (non-resident companies) as follows:
- If any company, other than a Nigerian company which has paid, by deduction or otherwise, or is liable to pay, tax under this Act for any year of assessment on any part of its profits, proves to the satisfaction of the Service that it has paid, by deduction or otherwise, or is liable to pay, Commonwealth income tax for that year of assessment in respect of the same part of its profits, it shall be entitled to relief from tax paid or payable by it under this Act on that part of its profits at a rate thereon to be determined as follows-
- If the Commonwealth rate of tax does not exceed the rate of tax under this Act, the rate at which relief is to be given shall be one half of the Commonwealth rate of tax;
- If the Commonwealth rate of tax exceeds the rate of tax under this Act, the rate at which relief is to be given shall be equal to the amount by which the rate of tax under this Act exceeds one half of the Commonwealth rate of tax.”
In defining the tax that qualifies for the relief, Section 44(3) of CITA provides as follows:
- For the purposes of this section-
“Commonwealth income tax” means any tax on income or profits of companies charged under a law in force in any country within the Commonwealth or in the Republic of Ireland which provides for relief from tax charged both in that country and Nigeria in a manner corresponding to the relief granted by this section
Section 44(1) & (2) of CITA as cited above, provides a Commonwealth Tax Relief for both resident and non-resident companies whose profits have been subjected to a tax in commonwealth member nation or in the Republic of Ireland. Such companies will be entitled to relief from tax paid or payable in Nigeria on the same profit, either in whole or in part, as a means of mitigating double taxation in Nigeria.
Conditions to the Application of Commonwealth Relief
- For Nigerian companies, the applicable rate of tax for relief is the rate of tax paid in the other commonwealth country, subject to a maximum relief of ½ Nigerian tax rate, (i.e., maximum of 10% for medium size companies or 15% for large size companies).
- For a non-resident company from a commonwealth country, where the rate of tax charged in its home commonwealth country does not exceed ½ Nigerian tax rate (i.e., 10% or 15% as the case may be), then the full rate of tax charged or chargeable in the other commonwealth country shall be allowed as a relief against the full Nigerian rate of tax.
- However, for a non-resident company, where the rate of tax charged in its home commonwealth country exceeds the Nigerian tax rate (i.e. more than 20% or 30% as the case may be), the applicable rate of relief will be limited to the amount at which the Nigerian rate of tax exceeds ½ of the rate of tax charged in its home commonwealth country (i.e. relief shall be 20% or 30%, as the case may be, minus ½ of the tax rate in its home country).
- There must be a corresponding relief of the same kind in the other jurisdiction in such a way that provide reciprocity between the two countries, i.e., for a Nigerian company to benefit from the relief in respect of income derived from a commonwealth country, the income must have been subject to commonwealth tax relief in the source commonwealth country. Similarly, for a non-resident company from a commonwealth country to enjoy the relief in Nigeria, similar relief must be available to Nigerian companies that derived income from such commonwealth country.
- The Company that seeks to benefit from the relief in Nigeria must furnish proof of a corresponding tax deduction or payment in the other jurisdiction.
- Claims for relief of commonwealth tax for any year of assessment can be made not later than six years after the end of the year the tax was incurred or paid.
- The tax to be relieved shall be available for set-off against the tax which the company is liable to pay in Nigeria for that year of assessment.
- It should also be noted that the provisions will not be applicable in respect of any commonwealth country with which Nigeria has a Double Taxation Agreement (DTA), as Sections 45 and 46 of CITA, which provides for the application of DTA, has overriding effect on other relevant provisions of the Act.
Nigeria is a party to the following multilateral treaties:
- Africa Continental Free Trade Area Agreement(AfCFTA) in 2020
- Multilateral Competent Authority Agreement(MCAA) for the automatic exchange of Country-by Country (CbC) Reports in 2016.
- OECD’s Mutual Administrative Assistance in Tax Matters in 2015
- Draft Protocol on the ECOWAS Community Levy (pending) in 1997
- Draft Protocol on the ECOWAS Value Added Tax (pending) in 1997
- Vienna Convention on the Law of Treaties of 1969
- ECOWAS Revised Treaty of 1993
- Andersen (2022) Minister of finance approves increase in WHT rates under double taxation agreements between Nigeria and other countries with effect from 1stJuly 2022. Andersen Publications
- Finance Act 2019 Official Gazette
- Finance Act 2020 Official Gazette
- Finance Act 2021 Official Gazette
- FIRS Various Information/Explanatory Circulars
- Kennedy Iwundu (2022). Contemporary Issues on Taxation in Nigeria
- Oluseye Arowolo & Fatai Folarin (20219) Improve double tax agreement in Nigeria. Deliotte publication.
- PWC (2023) Overview of worldwide tax summaries. PWC Publications
- Resolution Law Firm (2022) Overview of Taxation laws in Nigeria