Double Tax Arrangements in Nigeria: Imperatives for a wider network
THE National Tax Policy (NTP) has identified double taxation as one of the major hindrances to the growth of the Nigerian economy.
Double taxation has become an issue paramount to investors and top executives of multinationals as income is generally taxable both in source and residence countries.
In order to mitigate the harsh effects of double taxation, the Organization for Economic Cooperation and Development (OECD) developed a Model Convention (model double tax treaty) on Income and Capital to provide a uniform basis for reconciling the major hitches that abound in the field of international juridical double taxation. This model provides a basis upon which many countries including Nigeria formulated earlier double taxation treaties (DTTs).
The main purpose of DTTs is to eliminate double taxation. To this end, DTTs define amongst others:
- •the principles of permanent establishment and residency
- •regulations pertaining to exchange of information between contracting countries
- •the allocation of taxing rights to the respective states
- •contrivances to relieve businesses of any double taxation that could otherwise arise as a consequence of doing business in a contracting state.
Presently, Nigeria has DTT with twelve countries. The countries are Canada, Pakistan, Belgium, France, Romania, Netherlands, United Kingdom (UK), China, South Africa, Mauritius, South Korea and Philippines. Are these treaties adequate to propel Nigeria to one of the largest twenty economies in the world, from its current 26th position, as envisaged in the NTP?
The NTP identifies international and regional treaties as one way of attracting foreign investments to Nigeria. This is in furtherance of the role of taxation in the creation of wealth and employment. Available statistics indicate that the top 5 sources of FDI capital invested in Nigeria since 2007 are Canada (31%), Mauritius (8%), UK (7%), South Africa (6%) and others (48%). This implies that four (4) of the countries with whom Nigeria has DTTs have contributed 52% of cumulative inflows of FDI into Nigeria since 2007. This statistics indicate a positive correlation between the existence of a DTT and the level of FDI inflow to Nigeria.
Beyond these statistics however, a major challenge has been the competitiveness of these DTTs with respect to global practices and how much impact the existing DTTs have had on the inflow of trade and investment into Nigeria. Over 90% of FDI inflows as a result of DTTs have been aimed directly at the oil and gas sector. Other sectors have not been able to enjoy substantial investment benefits of the DTTs over the years, when compared with the oil and gas sector.
While the NTP specifies that Nigeria should continue to expand its treaty network in the best interest of the Nigerian state, it is also expected that Nigeria would meet its international obligations under the various tax treaties, protocols and agreements currently in force. The reason for this may not be far-fetched. UK currently has DTT with 131 countries and Canada has 92 DTTs. Even South Africa has 84 DTTs, Malaysia has 68 DTTs and Mauritius has 38 DTTs. These countries have more diversified economies than Nigeria and it can be argued that these countries enjoy the benefits attached to a wider network of DTTs. For instance, there is no reason why Nigeria cannot establish DTTs with all the countries of the Commonwealth as a start.
While it is clear that Nigeria remains one of the best destinations for FDI in Africa, she cannot afford to rely solely on resource endowment and the recent improved status as the largest economy in Africa to attract even more inflows into the country. Consequently, measures which ensure that Nigeria remains competitive globally must be adopted and implemented. In order to achieve this, government through relevant tax authorities must ensure that existing DTTs are adequately enforced. In addition, adequate steps must be taken to widen the existing DTT network to include other countries like United States as well as countries willing to invest capital into sectors such as manufacturing.
As part of steps required for diversifying the economy, as well as reducing the over-reliance on crude oil, government through Federal Inland Revenue Service (FIRS) has developed a new and improved Model Tax Treaty, which would make the establishment of new DTTs much easier. However, time is of essence. FIRS must hasten to finalise the improved model treaty timeously so as to ensure that Nigeria can take advantage of it whilst she still remains a choice destination for foreign direct investment.
