The Federal Inland Revenue Service (FIRS), on 4 December 2019, released a public circular (the Circular) setting out the modalities of claiming DTT benefits by residents and non-residents in Nigeria and outside Nigeria, respectively.
The Circular, made pursuant to relevant provisions of income and capital gains tax legislation in Nigeria, covers treaty tax rates, bases of enjoying treaty benefits and dispute resolution mechanisms, amongst others.
The key highlights from the Circular are set out below:
1. Criteria for assessing DTT benefits
The Circular stipulates that only persons who are residents of Nigeria or residents of the treaty partner or residents of both Nigeria and the treaty partner are eligible to claim treaty benefits under the relevant DTT.
2. Conditions for deriving DTT benefits
In line with the terms of DTTs, the Circular confirms that the following conditions must be met in order to enjoy treaty benefits:
- The taxpayer (beneficial owner of underlying income) meets the criteria in ‘1’ above and is liable to tax in the relevant country
- The income in question is not exempt from tax in Nigeria and must not be connected with a permanent establishment, which the beneficiary has in the paying country
- The specific tax is covered by the treaty and benefit is not specifically excluded under the treaty
- The benefit is claimed within the time stipulated by the treaty or domestic laws (not later than two years after the end of the year of assessment in which the foreign tax was paid)
Notwithstanding the above, the treaty benefits may be denied where residency of claiming entity or the underlying transaction was, principally, to access the benefits.
3. Overview of DTT benefits
The Circular also clarifies that the benefits could be in the form of credits, deductions and reduced rates. Treaty benefits may also involve ease of resolving dispute and non-discrimination.
In this regard, the Circular clarifies the applicable withholding tax rate(s) on rental income from immovable property, royalties and technical service fees earned in Nigeria.
4. Procedural bases for the claim
The Circular introduces a completely new regime around the procedure for claiming DTT benefits as follows:
- Nigerian residents seeking to make claims in a treaty country shall complete the residence certificate and seek endorsement from FIRS before submission such claims to the other country.
- Where the claim includes obtaining relief in Nigeria, the taxpayer shall include evidence of foreign tax paid issued by the DTT country’s revenue authority.
- Non-residents seeking to claim treaty benefits in Nigeria are obliged to complete residence certificate.
A formal application is required to be made to FIRS, supported by residence certificate, duly endorsed (with stamp/seal) by the relevant DTT country’s revenue authority. Upon FIRS’ approval, the non-residents may enjoy the benefits in the manner prescribed, depending on the type of underlying income.
The above certificates could be downloaded from the FIRS website: https://www.firs.gov.ng/TaxResources/TreatyRelatedForms.
5. Issues for consideration
- 2-year restriction: The Circular prescribes a 2-year timeframe within which the claim for treaty benefits is to be made, in line with most tax laws referenced. However, the timeframe in the Petroleum Profit Tax Act is 3 years rather than 2 years.
- The omission of Spain from the list of DTT countries: We are aware that the DTT between Nigeria and the Kingdom of Spain was ratified and assented to, in 2018. However, the Circular omits Spain from the list of countries with whom Nigeria has enforceable DTTs.
It goes without saying that with the release of the Circular, it is no longer business as usual as taxpayers can no longer claim DTT benefits randomly. The new procedure would provide FIRS with the needed tool to curb illicit claims to DTT benefits.
Thus, we urge taxpayers, who intend to claim treaty benefits to begin the process of applying immediately. FIRS should also provide relevant tools which would make the transition to the new regime easy.