Nigeria tax alert – August 2013 The Tax Ap deductibility companies In brief The Tax Appeal Tribunal (TAT) nonresident companies filing income tax returns under the deemed profit regime before it by Global Marine Baltic I (FIRS). The TAT ruled in favour of the FIRS profits basis, further deductions In detail Background Under certain conditions, the Companies Income Tax Act empowers the FIRS to make a judgment call on what would be a fair profit of a company to be assessed to tax. Section 26 of CITA provides that: “Where… it appears to the FIRS that in any year of assessment, the trade or business produces either no assessable profit or assessable profits which in the opinion of the FIRS are less than might be expected to arise from that trade or business or… the true amount of the assessable profits of the company cannot be readily ascertained, the FIRS may… assess and charge that company for that year of assessment on such a fair and August 2013 ppeal Tribunal’s Judg deductibility of recharges by nonresident ompanies Tax Appeal Tribunal (TAT) on 30 July delivered a judgment on the deductibility of filing income tax returns under the deemed profit regime Global Marine Baltic Incorporation (GMBI) against the Federal Inland Revenue Service the FIRS that where a nonresident company is assessed to tax profits basis, further deductions (outside the deemed cost) cannot be taken for subcontractor charges he Tax Act to make a what would be a fair profit of a company to be of CITA provides FIRS that in any year of assessment, the trade or business produces assessable profit or which in the are less than might be expected to arise business or… company cannot be readily … assessment on such a fair and reasonable percentage of that part of the turnover…” In practice, in assessing nonresident companies to tax, the FIRS deems a profit rate of 20% of turnover derived from Nigeria (implying a cost ratio of 80%). This is then taxed at the corporate tax rate of 30% resulting in an effective tax of 6% of turnover. This is meant to be an alternative basis of assessment. The primary requirement is that nonresident companies file their returns based on actual profits. The deemed profit basis has evolved in practice to be widely adopted and generally accepted, mostly due to its simplicity and the fact that nonresident companies filing returns under the deemed profit basis avoid disputes with FIRS regarding tax deductibility of costs. Overview of the Tribunal Position GMBI registered accordance state of Delaware entered into an agreement to provide drilling services in Nigeria. subsequently engaged the service Drilling Limited Nigerian company execution of services reimbursement of costs plus a mark The issues for determination were: Whether recharges subcontractor included as part of turnover of non compan pwc udgment on nonresident deductibility of recharges by filing income tax returns under the deemed profit regime in a case brought against the Federal Inland Revenue Service company is assessed to tax on deemed subcontractor charges. Overview of the Tax Appeal Tribunal judgment Position of GMBI GMBI, a drilling company registered and incorporated in accordance with the laws of the state of Delaware (USA), entered into an agreement to provide drilling services in Nigeria. The company subsequently engaged the ervices of Global Offshore Drilling Limited (GODL), a Nigerian company in the execution of the contract. For its services, GODL received a reimbursement of its operating costs plus a mark-up of 10%. The issues for determination Whether recharges by a subcontractor should be included as part of the turnover of non-resident companies for the purpose
Posted on: Mon, 19 Aug 2013 15:40:29 +0000
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