Analysing FIRS circular on accessing Nigeria’s Double Taxation Agreements benefits
There is a need for Nigeria to enter into more DTAs with her trading partners around the world, considering that the current 14 DTAs she has with her trading partners is quite few.
Background
The Federal Inland Revenue Service (FIRS) published a circular, titled “Information Circular on the Claim of Tax Treaties Benefits in Nigeria,” with Information Circular No. 2019/03 and dated 4th December, 2019 (the
Circular). The Circular was issued to provide a general description of the application of the Double Taxation Agreements (DTA) Nigeria entered into with other countries. It includes the treaty benefits that can be accessed by residents of the contracting countries by way of relief from double taxation, treaty tax rates on income from source countries, dispute resolution mechanisms, and other benefits.
International double taxation arises when comparable taxes are imposed in two or more countries on the same taxpayer in respect of the same taxable income or capital (Organisation for Economic Cooperation and Development Glossary of Tax Terms). To eliminate the instances of double taxation, countries enter into DTAs, also called Avoidance of Double Taxation Agreement (ADTA). In Nigeria, these DTAs are limited to taxes on income and capital and do not cover Value Added Tax (VAT) or its equivalent. Nigeria currently has DTAs with fourteen (14) countries, which can be categorised into full DTAs and partial DTAs. Countries with which Nigeria has full DTAs include: Belgium; Canada; China; Czech; France; Netherlands; Pakistan; Philippines; Romania; Singapore; Slovakia; South Africa; and the United Kingdom. On the other hand, Nigeria has a partial DTA (i.e. Air and Shipping Transport DTA only) with Italy.
Highlights of the FIRS Circular
1. Eligibility for Treaty Benefits
To benefit from the DTA provisions, a taxpayer must be a resident of: (a) Nigeria; (b) Nigeria’s treaty partner; or (c) both Nigeria and Nigeria’s treaty partner.
reduced WHT rate, tax credit relief, and airline and shipping DTA rates, the expected timelines for application are not well defined. At what point is a taxpayer expected to start the process for claiming tax credits and how long will the formal application be reviewed before a ruling? Also, with the current trend towards eprocesses, is there the possibility of completing a claim for a treaty benefit online?
4. WHT Rate on Royalties: The domestic WHT rate for royalties with respect to individuals is 5% while that of corporate bodies is 10%. On the other hand, the Circular states that the DTA WHT rate for royalties is 7.5% (apparently with a view to reducing the 10% WHT rate) but without any distinction as to individuals or companies. Therefore, DTA WHT rate has inadvertently increased the WHT rate payable by individuals from DTA countries by 2.5%. There is, therefore, a need for Nigerian authorities to amend/clarify the application of DTA WHT to individuals from DTA countries.
Conclusion
The FIRS has taken a commendable step by seeking to clarify the impact and effect of Nigeria’s DTAs on taxing of residents and non-residents with income generating activities in Treaty Partner States. It is crucial that this Circular should be treated as a work-in-progress requiring adjustment and improvement as questions arise in the course of application of the DTAs.
On another note, there is a need for Nigeria to enter into more DTAs with her trading partners around the world, considering that the current 14 DTAs she has with her trading partners is quite few in number when compared with the United Kingdom, which has over 130 DTAs with her trading partners and the United States that has 58 DTAs with her trading partners. Considering the enormous fiscal benefits and foreign investments such DTAs attract into the country, there is a need for the Nigerian government to make this a top priority in the coming fiscal years.
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