Nigeria: Avoiding Permanent Establishment Risk – Nigeria's New Dependent Agents Rule

In February 2018, Nigeria's President signed the Presidential Executive Order for Planning and Execution of Projects, Promotion of Nigerian Content in Contracts and Science, Engineering and Technology ("Presidential Order 5"). The primary object of Presidential Order 5 is to develop local technical capacity generally and more specifically, in the areas of science, technology and engineering.

One of the approaches taken by Presidential Order 5 is to mandate all Ministries, Departments and Agencies of Government ("Procuring Entities") to give preference to Nigerian companies in the award of contracts. In this context, Nigerian companies are defined as companies with no less than 51% equity shares owned by Nigerians. Presidential Order 5 allows Procuring Entities to award government contracts to Foreign Entities only where local expertise is lacking and where that Foreign Entity puts forward a demonstrable and verifiable plan for indigenous capacity development. Another approach taken by Presidential Order 5 is its mandate that all consultancy services (i.e. law, engineering, ICT, Architecture, etc) using a joint venture structure to bid for government consulting contracts must be led by the Nigerian JV partner.

Expectedly, Presidential Order 5 has thrown up an array of contracting structures between local promoters and foreign OEMs and partners looking to bid for government contracts. These contractual arrangements are increasingly subject of litigation both from a taxation point of view and from the standpoint of counterparty liability and risk. Nigeria wholly consumes foreign technology and as such it is expected that such collaborations will continue. However, these cases highlight the need for foreign OEMs and partners to give more consideration to taxation issues at the outset as well as well as make provisions for adequate contractual protections in view of the risks presented by local factors.

In one of such cases, a foreign company based in Netherlands, which engaged in the business of distributing satellite signals across the world (the "Foreign Partner") had entered into a Service Contract with the Nigerian Broadcasting Corporation (the "NBC"). Following the request of the NBC and in order to comply with the local content requirements of Presidential Order 5, the Foreign Partner co-opted a local entity in its Service Contract with the NBC (the "Local Partner"). When the foreign entity attempted to claim some tax relief under the Double Taxation Agreement (DTA) between Nigeria and the Netherlands, Nigeria's tax regulator, the FIRS, had challenged this application, declared that the Foreign Partner was not entitled to any tax concessions under the DTA and that the existence of the Local Partner as dependent agents constituted a permanent establishment for the Foreign Partner in Nigeria, with the effect that the income of the Foreign Parter would be subject to income tax in Nigeria to the extent attributable to Nigeria.

The Tax Appeal Tribunal ("TAT") agreed with the position of the FIRS and held that the Local Partner must be taken to be dependent agents for the Foreign Partner. The Foreign Partner had argued that the Local Partner was not its dependent agent because (a) the incorporation of the Local Partner was not for the purpose of the Service Contract; (b) the Local Partner did not serve or carry out any functions as dependent agents; (c) the Local Partner did not have or habitually exercise an authority to conclude contracts in Nigeria on behalf of the Foreign Partner; (d) the Local Partner did not secure orders for goods or merchandise for the Foreign Partner in Nigeria; and (e) the Foreign Partner did not utilize the offices of the Local Partner or any of the resources of the local partner to undertake its obligations under the Service Contract.

In its decision, the TAT affirmed the position that the Local Partner ought to be taken to be dependent agents for the Foreign Partner. In reaching its decision, the TAT noted that (a) the Local Partner was set up for the purpose of meeting local content requirements of the Service Contract; (b) Payment under the Service Contract was to be settled in Nigerian currency and into the account of the Local Partner;(c) The NBC would not have been able to continue with the Service Contract without the introduction of a Nigerian Company and that based on Presidential Order 5, the Foreign Partner would not have been able to secure the Service Contract without the participation of the Local Partner ; (d) the intention of Presidential Order 5 was not for Foreign Partners to have a dummy local partner but a participating partner in the real sense of the word; (e) The fact that, the Local Partner was expressed to be representing the interests of the Foreign Partner in the Service Contract suggests that the Local Partner had the authority to the conclude contracts on behalf of the Foreign Partner in a habitual sense.

Our Comments

The decision is generally sound in our view. However, the decision ought to be taken as a general rule for which exceptions would arise depending on the parties' transaction and contracting structure. Accordingly, it is not in all cases where a Foreign Partner uses a Local Partner that a finding of dependent agency must be reached as each case ought to be determined on its own merits. The case highlights the need for foreign OEMs and partners to give more consideration to taxation issues at the outset as well as make provisions for adequate contractual protection in view of risks presented by local peculiarities.

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