Why Nigeria?
Despite the negative publicity from years of bad leadership, Nigeria remains an important destination for business. This is evident from the high number of expatriates to be seen on Nigeria-bound flights and the high profile figures and brands that have been coming into the country in recent times: from Mark Zuckerberg of Facebook, Sundar Pichai of Google, to Kentucky Fried Chicken.
With a population approaching two hundred million people with an 83% youth dependency, the country remains a market that cannot be ignored, especially with oil reserves estimated at 37.2 billion barrels in 2011 and production at 2.28 million barrels a day (ranking 13th in the world), the country remains the largest oil producer in Africa. With a projected annual population growth of 2.43% (as at 2017), the Nigerian Economy is set to be one of the largest economies in the world by the year 2050.
Nigeria also has a liberal immigration policy which helps to assist foreign investors travel into Nigeria, obtain Business permits and expatriate quotas.
Why Now?
The economy’s over-dependence on oil has been long-standing and so it was no surprise that when the price of crude oil fell back in 2015, the country fell into recession. The present administration was forced to intensify its effort to diversify the economy by introducing policies and programmes to encourage the conduct of business in the country.
Historically a major bottleneck for the conduct of business in Nigeria has been the bureaucracies of regulatory authorities (Government ministries, Departments and Agencies, as well as delays occasioned by the obsolete statutory provisions). The Vice-President, Professor Yemi Osinbajo, a former commercial lawyer, took a personal lead to correct this through the Presidential Enabling Business Environment Council, which he created to simplify and fast-track the process of starting and incorporating a company, registering property, obtaining work permits as well as import licences. Thus, in some cases an approval that has been applied for is given by default in cases where the relevant Ministry, department or agency fails to respond to an application within the published time limit.
The Nigerian Investment Promotion Commission also coordinates a one-stop investment centre which serves as a meeting point to several relevant government agencies (presently 27) to simplify the business entry processes for the investors. Nigeria also has a liberal immigration policy which helps to assist foreign investors travel into Nigeria, obtain Business permits and expatriate quotas. The country also has several incentives in the form of tax holidays offered to investments made in qualifying sectors.
General elections this month will determine who will lead this resource-rich country for the next four years. The incumbent, retired Gen. Muhammadu Buhari and his party, the All Progressives Congress (APC) are vying for a second term of four years. They face a stiff challenge from the former ruling-party, the People’s Democratic Party (PDP), who selected the former customs officer and Vice President (1999-2007), Abubakar Atiku as their Presidential candidate. Both parties will be seeking to outbid each other on strategies to boost the economy which will make the investment climate more attractive.
How can you do business in Nigeria?
Foreign persons can now do business in Nigeria through wholly foreign owned companies (WFOC) subject to the requirement for all enterprises with foreign participation to apply to the Nigerian Investment Promotion Commission for business registration before commencing business.
Another favoured model for businesses coming into Nigeria is by way of franchising and licensing agreements. International brands that have entered in this way in the past include Coca Cola and Pepsi. More recent entrants are Krispy Kreme, Kentucky Fried Chicken, Domino's Pizza and it is reported that Burger King is likely to be a new entrant.
In Nigeria, whether a payment will be subject to withholding tax depends on the nature of the payment, while the rate of tax to be withheld depends on the character of the recipient
What are the common withholding tax traps in Nigeria?
As in most countries, withholding tax in Nigeria is a payment on account of the ultimate tax liability of a taxpayer and it is available to be set-off against the taxpayer’s final tax assessment.
In Nigeria, whether a payment will be subject to withholding tax depends on the nature of the payment, while the rate of tax to be withheld depends on the character of the recipient (i.e. whether corporate or individual). Withholding tax is typically levied on income streams (interest, dividends, rents, royalties, directors’ fees) as opposed to one-off payments by way of sale and purchase. However, the recent recession has forced a new level of tax vigilance on the government which has recently extended the list of prescribed payments:
| Nature of payment | Companies (%) | Individuals (%) |
| Interest, dividends and rents (includes payments for hire of equipment) | 10 | 10 |
| Directors fees | 10 | 10 |
| Royalties | 10 | 5 |
| Commission, consultancy, technical, professional, Management service fees | 10 | 5 |
| Construction/building and related services | 5 | 5 |
| All types of contracts and agency arrangement other than outright sale in the ordinary course of business | 5 | 5 |
In most cases it is clear and obvious whether a payment does or does not fall within the prescribed categories, however, the drafting can sometimes leave something to be desired with the possibility of fees falling into more than one category.
In situations that involve the manufacturer delivering its normal products to its distributors and dealers for sale, the monies due to the manufacturer will not be liable to withholding tax, because such payments are regarded as transactions in the ordinary course of business of the manufacturer. On the other hand, the commission earned by the distributors and or dealers are subject to withholding tax.
Does a foreign company have to register for VAT?
The Nigerian VAT Act requires a non-resident company that “carries on business in Nigeria” to register for VAT using the address of the local business with which it is trading as its correspondence address. This requirement has been the subject of recent litigation.
The provision effectively operates by way of a deemed self-supply for VAT purposes by the local business. The non-resident company is required to add VAT (5%) when invoicing the local business who then withholds the VAT element from the amount to be paid to the non-resident company for remittance to the tax authorities.
With the adoption of World Bank indicators and some home-grown initiatives, Nigeria climbed 24 places in the World Bank ease of doing business rankings and it presently occupies number 145
Are there any specific regulations or aspects clients are unaware about, when regarding double tax treaties? What jurisdictional relations are strong with Nigeria in regards to this?
Nigeria has entered Double Taxation Treaties with several countries most of which are formulated in line with the OECD (Organisation for Economic Cooperation and Development) Model Tax Convention.
Specifically, Nigeria has entered into Double tax treaties with several countries including amongst others, Belgium, France, Canada, United Kingdom, Singapore, China, Mauritius, Spain. Nigeria has no Double Tax treaty with the United States of America, despite the cordial relationship between the countries and the fact that many American companies conduct business in Nigeria and the high population of Nigerians resident in the United States.
The taxes typically covered by the Double Tax treaties are the familiar ones of Personal Income Tax, the Companies Income Tax, the Petroleum Profits Tax and the Capital Gains Tax. However, the education tax or Tertiary Education Tax was included in the treaties entered with Spain, China, South Africa, Mauritius, and in the case of Singapore, the information technology levy was also included. However, most of the other countries identify few taxes as their existing taxes. Only the United Kingdom identified taxes similar to that of Nigeria i.e. Income tax, corporation tax, Capital gains tax, Petroleum revenue tax.
Where a Double Tax treaty applies the rate of withholding tax to be charged on incomes derived from dividends, interest and royalties that accrue to persons and companies in counterparty countries, is the reduced rate of 7.5%. However, in some treaties, this reduction might be subject to restrictions. For example, the recipient of a dividend may be required to hold directly at least 10% of the capital of the company paying the dividends in order to qualify for the reduced withholding tax.
To summarise…
The need to reverse decades of infrastructural under-investment and internal governance roadblocks has been identified by the present administration. With the adoption of World Bank indicators and some home-grown initiatives, Nigeria climbed 24 places in the World Bank ease of doing business rankings and it presently occupies number 145. The goal is to reach top 100 status by the year 2020 and top 50 by the year 2025. All of these factors suggest that this is a good time to do business with Nigeria.
Dele Ogun is a Partner, and Idowu Ibrahim is an Associate, at OGUN The Law Firm who are experts in the tax and inward investment laws of Nigeria.
Dele Ogun was called to the Bar in 1985 and has been in practice as a Solicitor since 1995.He obtained his LLB from London Metropolitan University in 1984 and his LL.M in Company and Commercial Law from the London School of Economics in 1987. He attended the Inns of Court School of Law for his call to the English Bar in 1985 and the Chartered Institute of Taxation to become a Chartered Taxation Practitioner.
OGUN The Law Firm
Emmanuel Akinlade Chambers
16A Babatunde Kuboye St
Lekki 1, Lagos
Nigeria
T: +234(0)12931085
M:+234(0)8096669262
