Introduction
The business landscape in Nigeria is shaped by intricate legal frameworks, which includes key legislations: the Companies and Allied Matters Act (CAMA), Companies Income Tax Act (CITA) and Petroleum Profit Tax Act (PPTA). These legislations play pivotal roles in regulating the operations of all companies including foreign companies that are operating in the country. In this article, we delve into the provisions of CAMA, specifically sections 78-83, and examine their implications. Additionally, we explore how foreign companies often turn to section 13 of CITA and section 25 of PPTA as an alternative in navigating their tax obligations.
Legitimacy of a foreign company operating in Nigeria
Chapter 3 of CAMA deals extensively on the legal requirements for a foreign company to exercise the power of a corporation and operate in Nigeria. Section 78 of CAMA specifically mandates every foreign company intending to conduct business in Nigeria to obtain incorporation as a separate entity within the country. Until such incorporation is completed, the foreign company is prohibited from engaging in business activities or exercising registered company powers; and shall not have a place of business or an address for service of documents or processes in Nigeria for any purpose other than the receipt of notices and other documents, as matters preliminary to incorporation under this Act.
However, a foreign company can be exempted from these requirements by the Minister charged with the responsibility of trade under section 80 of CAMA. Also, section 78(3) states that nothing in this section affects the status of any foreign company—
(a) which before the commencement of this Act was granted exemption from compliance under the provisions of any preceding Companies' Acts that had been applicable in Nigeria before the commencement of this Act; and
(b) exempted under any treaty to which Nigeria is a party.
Any act of a foreign company in violation of these provisions is deemed void, and non-compliance can result in penalties specified by the Corporate Affairs Commission (CAC).
Furthermore, section 79 of CAMA imposes penalties on foreign companies failing to comply with the requirements of section 80. Both the company and its officers may be liable to prosecution and penalties, emphasizing the stringent measures in place.
Section 81 provides for the filing of annual report by foreign company in a manner prescribed by CAC in every calendar year.
Section 82, 83 and 84 provide for Exempted foreign company to have status of unregistered company,
Penalties for false information and Application of certain sections to foreign companies respectively.
Taxability of a foreign company in Nigeria
In practice, whilst there are specific provisions for specialized businesses, companies frequently rely on general provisions of Section 13 of CITA to grasp the tax implications of their activities in Nigeria. Section 13(1) delineates that profits earned by a Nigerian company are deemed to accrue/taxable in Nigeria, regardless of their sources; section 13(2) stipulates the circumstances under which profits of non-Nigerian/foreign companies from any trade or business are regarded as derived from or taxable in Nigeria.
It is important to note the specific conditions outlined within this section. Firstly, profits may be considered taxable in Nigeria if a foreign company maintains a fixed base of business within the country. This can include physical office spaces, Equipment or other tangible assets used for conducting business activities. Additionally, habitual operations through an authorized person/company in Nigeria can trigger taxation, signifying a consistent and ongoing business presence within the country.
Furthermore, significant economic presence of any foreign company in Nigeria for certain activities can also render profits from such ventures taxable in-country. This concept of Significant Economic Presence (SEP) encompasses various factors such as the volume of sales, the extent of digital/virtual presence, or the magnitude of transactions conducted within the Nigerian market. It's crucial to highlight that the Minister has the authority to determine what constitutes significant economic presence, providing flexibility in its interpretation and application.
Similarly, section 25 of the PPTA stipulates that "A company not resident in Nigeria which is or has been engaged in petroleum operations (hereinafter in this section referred to as a "non-resident company") shall be assessable and chargeable to tax, either directly or in the name of its manager, or in the name of any other person who is resident in Nigeria, employed in the management of the petroleum operations carried on by such non-resident company, as such non-resident company would be assessed and charged if it were resident in Nigeria". Hence, foreign companies engaged in petroleum operations in Nigeria are subject to taxation either directly or through a designated individual, such as a manager or resident involved in the company's operations in Nigeria. These non-resident companies are evaluated for tax obligations as if they were resident in Nigeria, with the designated individual responsible for fulfilling tax-related requirements and ensuring payment of assessed taxes.
Harmonizing Statutory Frameworks
Foreign companies turn to CITA or PPTA for guidance on taxation. However, it is essential to understand that adherence to Section 13 and section 25 of CITA and PPTA, respectively, or any specific provision therefrom does not in any way preclude compliance with section 78 of CAMA. The administrative framework for the alignment of both legislations is crucial to ensure that foreign companies comply with the legal requirements to validly exercise the power of a corporation and operate a business in Nigeria.
Furthermore, the CAC is encouraged to strengthen its enforcement mechanism to ensure that all companies including nonresident companies comply with the requirement of CAMA irrespective of their tax status. Registration of businesses is deemed a normal/routine requirement in every jurisdiction and would not in any way affect the attractiveness of foreign investors to invest but rather promote a robust database of all companies operating in Nigeria from which the Federal Inland Revenue Service (FIRS) can also leverage on to ensure that companies that are otherwise not captured by FIRS tax net can be extracted through the CAC's database. Through this means the revenue generation of the FIRS can be further strengthened.
Conclusion
This article sheds light on the inconsistency between regulatory compliance and operational realities for foreign companies in Nigeria, drawing from the comprehensive legal frameworks provided by CAMA and CITA/PPTA. It also highlights the significance of harmonizing these frameworks to ensure clarity and consistency in compliance requirements for foreign entities, thereby enhancing the overall business environment in Nigeria. From a regulatory perspective, the alignment of CAMA and CITA/PPTA provisions is essential for promoting compliance and widen the tax database for revenue generation for Nigeria. Simultaneously, foreign companies stand to benefit from a clearer understanding of their obligations and tax implications, fostering greater confidence in navigating the Nigerian market. By emphasizing the value of harmonization and recommending proactive measures to address any discrepancies, this article offers valuable insight for the Minister of Finance to ensure harmonization of the relevant sections of CITA/PPTA to CAMA in the next Finance Act.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
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