Table of Contents
Why Double Taxation in Nigeria?
Double taxation is a byproduct of having an ownership interest, or shares, in a corporation. Employees of a corporation, for example, only pay taxes once. Double taxation is also a product of the way a corporation is incorporated. Limited liability companies, sole proprietorships and S corporations don’t typically pay corporate taxes, and therefore the earnings the owners make aren’t taxed twice.
For large businesses, double taxation depresses the value of dividend paying or high yield stocks. Although this has been catered for in recent years by the qualified dividend provisions that allow many dividend payments to be taxed as capital gains rather than ordinary income, but should that provision lapse growth stocks will again become more favorable from a tax perspective, assuming we also continue to have favorable capital gain tax rates.
In Nigeria, the peculiar business and investment climate has made double taxation an issue and there have been lots and lots of measures to counter and address it. There have been legislations that are ongoing and some already gazetted pertaining to the phenomenon of double taxation in Nigeria.
In Nigeria, the OECD model is the basis on which most of the current double taxation treaties (DTTs) with other countries have been formulated. Nigeria currently has DTTs with the following nations, which are namely: The United Kingdom, The Netherlands, Canada, South Africa, China, Philippines, Pakistan, Romania, Belgium, France, Mauritius, South- Korea, Italy and recently Spain. All the treaties are comprehensive except the treaty with Italy which covers Air and shipping agreement only.
In line with the role of taxation as a tool for wealth and employment creation, the National Tax Policy (NTP) of Nigeria identifies international and regional treaties as one ways of attracting foreign direct investments (FDI) to Nigeria. Because of this, it is important that Nigeria relies on its status as the largest economy in Africa and takes advantages of the benefits DTTs offer.
Meanwhile, it is worthy of note that Nigeria’s double tax treaties is not as much as the number which other developed and developing countries have. For instance, the UK currently has DTTs with 131 countries, Canada has 92 DTTs and Malaysia has 68 DTTs. Figures have shown that there is a positive relationship between DTT and the level of foreign direct investment inflow to Nigeria. Accordingly and to accelerate Nigeria’s growth to being one of the top 20 economies in the world, it is clear that Nigeria needs to widen its current DTT coverage.
While it is public knowledge that the Government through the Federal Inland Revenue Service (FIRS) is developing a new model tax treaty which would make the establishment of new DTTs much easier, the following points need to be appreciated:
Bottlenecks in ratification of the Double Taxation Treaties (DTT)
In Nigeria, when treaties are signed with other countries, they do not automatically have the bite of the law. Section 12 of the 1999 Constitution of the Federal Republic of Nigeria expressly provides that before a treaty between Nigeria and another state shall have the force of law it must be enacted into law by the National Assembly.
Nigeria currently has 2 DTTs that are yet to be ratified – with Mauritius and South Korea. These treaties are long overdue for ratification. For example, the treaty with Mauritius was signed in 2012. A delay in the ratification of any treaty would give room for uncertainty amongst the treaty’s stakeholders. Definitely, it would not be out of place to state that the delays in the ratification of the DTTs with Mauritius and South Korea are currently holding back the flows of certain foreign direct investment into Nigeria.
Mutually beneficial Double Taxation Treaties
Sometimes, double taxation treaties do not favour both countries mutually as planned or expected. Countries enter into DTTs and agreements on the belief that it would ultimately be beneficial to both of their economies. However, this is not always the case as some countries seemed to have benefited more than the other from DTT arrangements.
In this light, the Federal Government ought to also review the tax treaties it currently has with other countries to determine if Nigeria is truly benefiting from these DTTs. Where it is established that Nigeria is not, re-negotiating and amending key clauses of the DTTs should not be out of place.
Picture credit: Templars-law