DOUBLE TAXATION RELIEF

Part VIl of the CITA 2004 S.44-46 and Part V of PITA 2004 S.38-39 as amended deals with
double taxation relief. Ordinarily, income brought into Nigeria would have been subjected to
tax in the foreign country in accordance with that country’s tax laws since this income is again
subject to tax in Nigeria. It is evident that it is being taxed twice. Also, income accruing in
Nigeria to a non-resident individual or company would have been subjected to Nigeria tax and
will be taxed in the foreign country whenever received by the taxpayer where he resides. The
same income will again be taxed twice. To encourage investment in Nigeria and to lessen the
burden imposed by the double taxation on the recipient, various countries have made
provision for double taxation relief.

DEFINITION OF THE CONCEPT OF DOUBLE TAXATION AGREEMENT

Double taxation is a situation where an income or capital of an individual or company is being
subjected to tax by more than one tax authority in different countries. This usually occurs
where countries insist on their taxing rights to tax any or all the transactions that occur within
their countries. To reduce or eliminate the impact of double tax on income, Double taxation
Agreement or Tax treaties are entered into between countries.

DOUBLE TAXATION RELIEF

Double taxation relief is the relief or credit available from tax payable in Nigeria on an income
which had suffered tax outside Nigeria. The relief or credit to be granted depends on whether
Nigeria has double taxation agreement with the country from which the foreign income was
derived or not.

TAX TREATY

This is the term is used to denote an agreement between two or more Countries for avoidance
of double taxation of income and capital and it is usually aimed at the prevention of fiscal
evasion.

WHERE THERE IS DOUBLE TAXATION AGREEMENT BETWEEN NIGERIA AND OTHER

COUNTRY INVOLVED
Where there is a Double Taxation agreement between two Countries, credit is granted for
foreign tax suffered restricted to tax payable on the Income in Nigeria.

Objectives of Entering into Double Taxation Agreements

Avoidance of Double Taxation of income

Grant of Tax Treaty benefits
Co-operation on tax matters
Exchange of information
Prevention of fiscal evasion and avoidance
Non-discrimination
Mutual agreement procedure with respect to disputes resolution
Forms of double taxation
a) Juridical double taxation: This is a situation where the same income is taxed twice in
the hands of the same Taxpayer. For example, tax on dividend by withholding tax at
the source country and then taxed again in the country of residence of the recipient.

a) Economic double taxation: This is a situation where the same income is tax twice in
the hands of two different taxpayers. For example, taxing profit of the company and
also taxing dividend distributed out of profits in the hands of the recipient
shareholders.
COMMONWEALTH INCOME TAX RELIEF
income tax means any income tax charged under a law in any country within the
commonwealth or in the Republic of Ireland which provides for relief in respect of tax charged
on income both in that country and Nigeria in a manner corresponding to the relief granted
in the Act i. e. if any Nigerian Company which has paid by deduction or otherwise or is liable
to pay tax for any year of assessment on any part of its profits, proves to the satisfaction of
the Board that it has paid by deduction or otherwise, or liable to pay commonwealth income
tax for the year in respect of the same part of its profits, such a company shall be entitled to
relief from tax paid or payable.

TIME LIMIT TO CLAIM COMMONWEALTH INCOME TAX

Any claim for relief from tax for any year of assessment shall not be later than six years after
the end of that year and if the claim is admitted, the amount of tax to be relieved shall be re-
paid out of tax paid for that year of assessment or set off against tax which the company is
liable to pay for the year of assessment.

For individual, any claim for relief from tax for any year of assessment shall not be later than
two years after the end of that year.

CONDITIONS FOR GRANTING COMMONWEALTH RELIEF

i) The income of the foreigner must be taxable in Nigeria
ii) The income must have also been subjected to tax in another country
iii) The concession must be mutual as between the two countries
iv) There must be no double taxation agreement between Nigeria and the other
country.

WHERE THERE IS NO DOUBLE TAXATION AGREEMENT BETWEEN NIGERIA AND THE OTHER
COUNTRY- DOUBLE TAXATION RELIEF SHALL BE AS FOLLOWS:

Resident taxpayer- (Nigerian company)

A resident company is a company incorporated in Nigeria, as such double taxation relief shall
be:
i) If the commonwealth rate is lower than half of the Nigerian rate of tax.
CWR < ½ CITAR = CWR
ii) If the commonwealth rate exceeds half the Nigeria rate of tax under CITA, the
relief shall be at half the CITA rate
CWR > ½ CITAR = ½ CITAR
 This implies that under the two conditions, the double tax relief is the lower of
half NRT and the CWR.

NON-RESIDENT TAXPAYER- (NON-NIGERIAN COMPANIES).

This is a company or corporation that is not registered or incorporated in Nigeria but derives
income or profits from Nigeria. It is to be mentioned that exemption of incorporation does
not confer exemption from payment of tax on any company. Every company, resident, or non-
resident, is liable to tax in Nigeria if its income is liable to tax under the provisions of company
income tax Act. Also, Nigeria tax laws do not exempt any branch from tax.
The relief shall be as follows:

i) If the commonwealth rate of tax is less than the Nigeria rate of tax under CITA, the
relief shall be CWT < CITAR = ½ CWR
ii) If the commonwealth rate of tax exceeds the Nigeria rate of tax under CITA, the
relief shall be equal to the amount by which the CITA rate exceeds half the
commonwealth rate of tax. That is Nigeria rate Of tax Minus ½ common wealth
rate of tax . CWR > CITAR = CITAR – ½ CWR.

Note: the Nigeria rate of tax is derived by dividing the amount of tax imposed for the year by
the amount of total profits of the company for that year and the commonwealth rate of tax
shall be determined in a similar manner ie the foreign tax paid over the foreign income. Total
profit or income in Nigeria will include gross foreign income.

Procedure to arrive at the relief to be claimed

- Determine the global income of the taxpayer by including income from abroad
- Determine the taxable profit of such taxpayers. If it is a business, add or deduct
balancing adjustment and allow capital allowance. If an individual, allow for relief and
allowances.
- Determine the tax payable by applying the applicable rate of tax to the taxable profit
or income determined above. This represents the Nigeria tax.
- Calculate the Nigeria rate of tax by dividing the tax computed by the total taxable
income
- Calculate the commonwealth rate of tax by dividing the tax paid on the foreign income
by gross amount of the foreign income
- Compare the commonwealth rate of tax with either one-half of the Nigeria rate of tax
or with the Nigeria rate of tax depending on the tax position of the taxpayer. Apply
the rules to determine the rate of relief.
- Compute the amount of double taxation relief by multiplying the rate of relief
obtained by the amount of gross foreign income
- The amount of relief obtained is deducted from the tax liability computed to
determine the net tax payable.

Note the following where there is double taxation agreement

- Foreign tax means any tax payable in a country which under the agreement is to be
allowed as a credit against tax payable in respect of those profits in Nigeria
 - The tax payable on the worldwide income will be reduced by the credit admissible
under the terms of the agreement
- The relief is only available to resident individuals and companies
- The total credit to be allowed for foreign tax for any year of assessment, cannot
exceed the total tax payable by the company for that year, in effect, no cash refund
can be made in Nigeria for foreign tax paid.
- A company can elect not to take the benefit of the credit available under the
arrangement in respect of the foreign profit earned by it for the assessment year.
- Any claim for an allowance by way of credit shall be made not later than two years for
individuals and six years for companies after the end of the assessment year.
- In the event of any dispute as to the amount allowable, the claim shall be subject to
objection and appeal in like manner as an assessment.
Where there is double taxation agreement between two countries, credit is granted on the
lower of foreign tax suffered on foreign income, and Nigerian tax payable on the foreign
income i.e lower of Nigerian tax and foreign tax suffered on the foreign income.

MATTERS TO BE DEALT WITH IN A DOUBLE TAXATION AGREEMENT

- Taxes to be covered by the agreement
- Profits of companies that engage in business partly in Nigeria and partly in another
country
- Profit exempted from tax
- Dividends, interests, and royalties to persons resident in the other countries.
- Connected persons/businesses
- Directors’ fees and any other personal or earned income.
- Appeal procedures
- Methods by which the effect of double taxation is eliminated e.g tax credit
- Date of coming into force and termination date
- Diplomatic privileges
- Time limit within which application for relief shall be made
- Exchange of information by the tax authorities for the prevention of fraud and
prevention of legal provision
- Parties and scope, that is, the two countries concerned and definition of residence,
persons affected.
- The names of the companies involved

TESTS TO DETERMINE WHETHER THE PROFITS OF A NON-RESIDENT COMPANY FROM

TRADE OR BUSINESS SHALL BE DEEMED TO BE DERIVED FROM OR ACCRUE IN NIGERIA

- THE FIXED BASED TEST

- THE AGENCY TEST
- THE TURNKEY CONTRACT TEST
THE FIXED BASED TEST
The fixed base of a non-resident company is the place from where it carries on its business or
trade in Nigeria. The fixed base must be easily identifiable and must possess some degree of
permanence. A fixed base shall include:
i) Facilities such as factory, an office, a branch, a mine, or an oil well
ii) Activities such as building construction, assembly, or installation.
iii) Furnishing of services in connection with the activities
It is important to note that the following cannot be considered as a fixed base:
- Facilities used solely for storage or display of goods and merchandise
- Facilities used solely for the collection of information

FOR INDIVIDUAL, the profit of an individual carrying on a trade or business in Nigeria through
a fixed base shall be the profit attributable to that fixed base specifically:
i) If the business is through a dependent agent, the profit attributable to that agent.
ii) If the business involves turnkey projects, the profit from that contract.
iii) If the business is through related parties determined at arm’s length principle by
the relevant tax authority.

AGENCY OPERATION
Where a non-resident does not have a fixed base in Nigeria but habitually operate trade or
business through a person in Nigeria:

a) Authorised to conclude contracts on its behalf or on behalf of some other companies

controlled by it or which has controlling interest in it; or
b) Habitually maintains a stock of goods or merchandise in Nigeria from which deliveries
are regularly made by a person on behalf of the company, then an agency agreement
is deemed to have arisen. The profit deemed to have been derived from Nigeria is the
profit attributable to the business or trade or activities carried on through the agent.

TYPES OF AGENTS
INDEPENDENT AGENT: An agent is regarded as possessing independent status when it deals
on behalf of non-resident company in its ordinary course of its own business. The implication
of this arrangement is that the agent carries on its own business/trade along with its function
as an agent of a non-resident company. Therefore, if non-resident company stops trading in
Nigeria, the independent agent is not materially affected as it will continue its own business.

TURNKEY PROJECTS
This is trade or business or activity which involves single contract for the surveys, deliveries,
installations, or construction. For Nigerian income tax purposes, the profit from such turnkey
project is considered as derived from Nigeria. Consequently, it is fully chargeable to tax in
Nigeria because no allowance would be given for the profit to be divided into Nigeria and
offshore.
TRANSACTIONS NOT AT ARMS LENGTH
The legislation allows the Board to make appropriate adjustment to the profits of Nigerian
companies where the following circumstances prevail:
1. Where there is a controlling interest in the Nigerian company
2. The presence of a control of a Nigerian company may be exercised directly or indirectly
by a parent company or any other company associated with it.
3. The imposition of conditions in financial and commercial relationship by controlling
interest.
4. The conditions imposed must be different from what obtains between independent
parties or in an open market situation.
5. Such relationship and conditions lead to the transfer of goods and services at prices
not at arm’s length; and
6. Consequently, the profits declared for the Nigerian tax are understated.

The implications of the above influences are that profits derived with the presence of such
conditions have to be determined by the Board. The Board shall carry out comparative cost
and price to establish the true market prices and make necessary adjustments to determine
the true profit for tax purposes.

RESIDENCE
The concept of residence determines the extent to which the income of a tax payer is liable
to tax under a tax jurisdiction. In Nigeria, a resident (individual or corpotate) is assessable to
tax on global income. This means that a taxpayer is liable to tax on the income or profits
accruing in, derived from, brought into, or received in Nigeria. I.t also determines the scope
of deductions that may be allowed for tax purposes.

Resident individual
In respect of an individual who is in receipt of income chargeable to tax in Nigeria and some
other country means:
- An individual who is deemed to be resident in Nigeria for the relevant year of
assessment i. e. domiciled in Nigeria
- During the year is in Nigeria for 183 days or more
- Serves as a a diplomatic agent of Nigeria in a country other than Nigeria.

Non-Resident
An individual is said to be non-resident if he does not stay up to 183 days in Nigeria but derives
income from Nigeria. The following are the extent to which a non-resident individual will be
liable to Nigerian tax:

i) In the case of earned income, they will be liable to tax in Nigeria to the extent of
such income derived from Nigeria
ii) In the case of unearned income such as dividend, interest, rent and royalties, the
individual will be liable to tax in Nigeria to the extent of such income received or
brought into Nigeria.
iii) For employment income, it is only liable to tax in Nigeria if the duties of the
employment are exercised or performed in Nigeria. However, where an individual
 is in Nigerian employment and salaries are paid in Nigeria but activities for the
employment are exercised outside Nigeria and tax on such income are not being
paid outside Nigeria, such income shall be liable to tax in Nigeria.

Note: Fees, interest, dividend, rent and royalties derived from outside Nigeria by an
individual and brought into Nigeria in a commonwealth currency through a domiciliary
account in a bank approved by government shall be exempted from tax in Nigeria.

TREATMENT OF DUAL RESIDENCY FOR INDIVIDUALS

In respect of individual, tax liability will arise in the State where he is normally resident, where
he can be deemed to be resident in more than one state, then he is subjected to tax in the
state where he has his principal place of residence. Principal place of residence means:
- His usual residence, where pension is the only source of earned income
- The place nearest to his place of work where the source of earned income is other
than a pension
- His usual residence where he has sources of unearned income

TREATMENT OF DUAL RESIDENCY FOR COMPANIES

For companies, there could be an international dual residency problem arising from
difference in the definition of residency. Under the Nigerian tax provision, a company is
deemed to be resident in Nigeria if it is incorporated in Nigeria. This means that residence is
defined on the place of incorporation. However there a certain countries where residence is
defined based on the place of management or place of residence of the directors.

There are certain countries of the world where residence is defined based on the place of
management or the place of residence of directors.

INCOME EXEMPTED FROM DOUBLE TAXATION

- The remuneration of a Professor or a teacher who is resident for not more than two
years in the other country for the purpose of teaching
- Government pensions except the recipient is ordinarily resident in Nigeria
- Aircrafts and shipping profits
- Dividends paid by the other contracting states to a Nigerian resident who has no
permanent establishment
- Payments to a student or apprentice during his full-time education or training in
Nigeria
- The income of a resident in the contracting state provided.
Questions 1

Mr Waters Cole is in employment of Research Foundation of Nigeria. He arrived Lagos on

January 1, 2014 to assume duties on the following conditions:
i. Mr Waters being a British citizen received $150,000 which is part of his salary in
London less United Kingdom income tax.
ii. The Foundation would pay Mr Waters in Nigeria N56,000,000 and this should be
subjected to Nigeria income tax.
In view of the double taxation agreement between Nigeria ant the United Kingdom, Mr.
Waters will be entitled to the double taxation relief on any part of income assessed in
Nigeria. The United Kingdom tax paid on the $150,000 is $15,000. The rate of exchange is
N235 to $1. Mr Waters is entitled to allowances. Additional information: Mr Waters has two
children and paid Life Assurance premium of N1,000,000. You are required to compute : (i)
His chargeable income (ii) the credit to be given to Mr. Waters on tax paid on his UK income

Solution
Mr Waters
Computation of final tax liability for 2014 year of assessment
N
Earned income
Employment income
Salary in Nigeria 56,000,000
Gross foreign income ($150,000 x N235) 35,250,000
Gross Income 91,250,000

Less reliefs:

CRA- higher of N200,000 or 1% of GI plus 20% of GI (19,162,500)

Life assurance premium (1,000,000)
Chargeable income 71,087,500

Tax rates
1st N300,000 @7% 21,000
Next N300,000 @ 11% 33,000
Next N500,000 @ 15% 75,000
Next N500,000 @ 19% 95,000
Next N1,600,000 @ 21% 336,000
N67,887,500 @24% 16,293,000
Tax payable 16,853,000

Determination of rate of relief

i). Nigerian rate = 16,853,000/91,250,000 X 100% = 18.47%

ii). Foreign rate = $15,000/$150,000 x 100% = 10%

The general rule is that the tax credit to be granted shall be lower of foreign tax suffered on
foreign income and Nigerian tax payable on the foreign income ie lower of Nigerian tax and
foreign tax suffered on the foreign income. In this regard Mr. Waters tax rate payable on
foreign tax shall be the lower of. Foreign tax rate of 10% and Nigerian tax rate of 18.73%

Net Tax payable

N
Nigerian tax computed 16,853,000
Less double taxation relief on foreign income (10% x 35,250,000) (3,525,000)
Net income tax payable 13,568,000

Question 2
Professor Akibola is the Dean of a faculty at university of Ilorin he is married with two
children and a dependent relative. He earns a basic salary of N480,000 per annum in the
University, an allowance of N60,000 per annum on transport and other benefits in kind
worth N100,000. In 2013, he was appointed by the University of Leeds in England as visiting
Professor to Lecture. The Leeds University has agreed to pay his fares to and fro twice per
week when visiting England to give lectures. The gross remuneration as agreed is $480,000
before deducting income tax in England. In 2013 he was paid net income of $360,000 on the
salary payroll of the University of Leeds after income tax has been deducted. Asuming an
exchange rate of N2.5 = $1, you are required to compute his tax liability in Nigeria after
granting him double taxation relief.

Solution

N N
Earned income
Salary in Nigeria 480,000
Transport allowance 60,000
Other benefit in kind 100,000
Gross foreign income ($480,000 x N2.5) 1,200,000
Gross income 1,840,000

Less reliefs
CRA (i) higher of N200,000 or !% GI 200,000.
(ii) plus 20% of GI 368,000 (568,000)

Taxable income 1,272,000

Tax rates

1st N300,000 @ 7% 21,000

Next N300,000 @11% 33,000
Next N500,000 @15% 75,000
Next N172,000 @ 19% 32,680
Tax payable 161,680

Determination of relief
i) Nigerian tax rate = 161,680/1,840,000 x 100% =8.79%
ii) Foreign tax rate = $120,000/$4880,000 x 100% = 25%
Since his foreign tax rate of 25% is more than Nigerian tax rate of 8.79%, then the rae of
relief shall be the Nigerian rate which is 8.79%

Net Tax payable computation

N
Nigerian tax 161,680
Less double taxation relief (8.79% x N1,200,000) (105,480)
Net tax payable 56,200

Question 3
David international engineering corporation was incorporated in England as a limited
company and has a subsidiary, Danny Ventures Nigeria Ltd located in lagos, Nigeria. Golden
Touch Nigeria PLC awarded a contract to David Int’l Corporation to renovate a cement
milling factory in Abeokuta ogun state and another one in Calabar, cross River state.
The contract value for Abeokuta factory is $12,000,450 and $8,765,155 for calabar. David
corporation later sub-contracted the two jobs to its subsidiary in Nigeria. The renovation is
expected to be completed in 6 months. The following information was submitted to the
federal Inland Revenue service by Danny Ventures Nigeria Limited for the year ended
December 31 2023
N
Scaffolding 235,125,457
Administrative expenses 45,126,135
Personel (local) 38,125,265
Personel (international) 17,255,367
Direct material 1,089,254,051
Attributable operational cost 8,245,789
Rentals on equipment 23,544,789
Maintenance of equipment 10,255,456
Engineering fees 15,245,445

The following additional information is provided:

 i. Capital allowance agreed by Danny Ventures Nigeria Ltd with FIRS in the year
was N154,154,125
ii. 55% of the total contract sum was made available to Danny Ventures Nig. Ltd.
iii. Depreciation amounted to N75,124,654 was excluded from attributable cost
iv. 70% of the total contract sum was paid at the beginning of the job while the
balance was paid in September of the same year
v. Exchange rate at the time of signing the contract was N185 to $1. The rate
changed in September to N198 to $1.
Withholding tax provisions were fully complied with the two companies and remitted to the
relevant tax authority as and when due. As a local firm resident in Nigeria, you are required
to: Provide advice to the management of the two companies on the tax implications of the
contracts for the relevant year of assessment clearly showing their tax liabilities.

Solution
The entire project is a turnkey project to David Corporation. Turnkey project is a single or
one off project involving survey, deliveries, installation or construction. Profit of a turnkey
project is liable to tax in Nigeria and such a project. Should bnot be split between so called
Nigeria sources and offshore but taxed wholly in Nigeria. Where a Nigerian project awarded
to a Non-resdient company but subcontracted to a branch, a subsidiary or an associate in
Nigeria, the whole profit on the contract will be taxable as a Nigerian profit with the
subcontract allowable as an expense but limited to the cost of the main contractor.
Therefore, the tax liabilities of the single contract of David corporation awarded to its
subsidiary, Danny Ventures Nigeria Limited will be computed as follows:

N N
Taxable income 3,922,622,785.51
Allowable expenses is lower of:
I)sub-contract value to Danny ventures 2,157,442,531.48

ii)actual cost incurred by Danny Ventures

scaffolding 235,125,457
administrative expenses 45,126,135
personnel (local) 17,255,367
Personnel (international) 1,089,254,051
Direct material 8,245,789
Attributable operational cost 23,544,789
Rentals on equipment 10,225,456
Engineering cost 15,245,445
1,482,147,754 (1,482,147,754)
ADJUSTED PROFITS 2,440,475,031
capital allowance claimed (154,154,125)
TOTAL PROFITS 2,286,320,906
INCOME TAX @30% 685,896,272
LESS WT (Worked) (196,131,139.3)
Income tax payable 489,765,132.7
Education tax @2.5% AP 61,011,876

Taxable income- Danny Ventures

Danny Ventures Contract value WT 5%
Abeokuta $12,000,450 x 55% x 70% x N185 854,732,051.25 42,736,602.56
Abeokuta $12,000,450 x 55% x 30% x N198 392,054,701.5 19,602,735.08
Calabar $8,765,155 x 55% x 70% x N185 624,298,164.88 31,214,908.24
Calabar $8,765,155 x 55% x 30% x N198 286,357,613.85 14,317,880.69

David Corporation
Abeokuta $12,000,450 x 45% x 70% x N185 699,326,223.75 34,966,311.19
Abeokuta $12,000,450 x 45% x 30% x N198 320,772,028.50 16,038,601.43
Calabar $8,765,155 x 45% x 70% x N185 510,789,407.63 25,539,470.38
Calabar $8,765,155 x 45% x 30% x N198 234,292,593.15 11,714,629.66
3,922,622,785.51 196,131,139.3
Question 4
Robertson Company incorporated in New Jersey has R&A Nigeria Limited as its subsidiary in
Nigeria. In 2007, the Federal Government of Nigeria awarded a contract to the foreign
company for the construction od an export processing zone located in the South East of
Nigeria for the sum of $12million. It decided for the sake of convenience to execute the
contract through R&A Nigeria limited. The following are the expenses incurred for the
execution of the contract
Materials and other inputs N334,957,750
Hire of dredger N186,553,750
Foreign experts costs N156,785,500
Personnel costs N157,689,250
Other administrative costs N115,546,750

Additional information:
a) a similar dredger is available for hire at N178Million at Bomil Ltd.
b). The cost of foreign experts in carrying out similar assignments in the other zones have
been established to be an average of N120.50million
c). included in other administrative costs are management fees of N45million. It was proved
to have been wholly, exclusively, reasonably and necessarily incurred for the Nigerian
contract
d). capital allowance was agreed at N74,221,750.
Assume an exchange rate of N90 to $1.
Required: i) compute the tax payable by the company for the relevant tax year

Solution
Robertson Company
N N
Turnover ($12million x N90) 1,080,000,000
Deduct:
Materials and other inputs 334,957,750
Hired dredger 178,000,000 (512,957,750)
567,042,250
Personnel cost 157,689,250
Foreign experts costs 120,500,000
Other admin costs 115,546,750 `
Assessable profit 174,221,750

Capital allowance 74,221,750

Relieved (74,221,750) (74,221,750)
c/f Nil
Chargeable profits 100,000,000
Tax payable @ 30% N30,000,000
Education tax 2% AP N3,484,435
Withholding tax on hire of dredger @10% N17,800,000