INSIGHT: Impact of Covid-19 on Permanent Establishments in Nigeria

The outbreak of Covid-19 has led to unprecedented times globally. In a bid to flatten the curve and avoid overburdening healthcare infrastructure, many countries adopted measures such as mandatory lockdown, restriction of international travel and strict quarantine requirements.

Nigeria joined the rest of the world in adopting measures such as full lockdown of some states for an initial period of five–six weeks, interstate travel restrictions and partial lockdown. However, these measures have made it difficult for some foreign companies to adhere to frameworks intended to prevent the creation of a permanent establishment (PE) in Nigeria. Thus, foreign companies may now face unintended tax consequences in Nigeria.

This article seeks to evaluate the implication of Covid-19 measures on PE in Nigeria.

Taxation of Foreign Companies in Nigeria

In general terms, the profits or income of a nonresident company (NRC) from any trade or business becomes taxable in Nigeria if that income/profit is sourced from Nigeria. “Source,” simply put, refers to the place of the income-generating activity and economic connection, with the country seeking to impose taxation on such income/profits. For instance, business profits will be deemed to be sourced from Nigeria if the activities giving rise to the profits were physically conducted in Nigeria; investment income may be deemed to be sourced from Nigeria if the person making the payment is (tax) resident in Nigeria or the underlying asset giving rise to the income is domiciled in Nigeria, etc. This principle accords with domestic and international rules of taxation.

There are also globally accepted principles and standards for applying the source rule of taxation in international transactions. These rules will typically be codified in double taxation agreements (DTAs) entered into by two contracting states. According to the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital 2017, and the United Nations Model Double Taxation Convention 2017, business profits should only be taxed in the source country if the activities giving rise to said profits were undertaken in the source country through a PE and the profits thereof can be attributed to the activities of the PE. By virtue of such agreement, profits will not always be taxable in the source jurisdiction. There will be instances where the source country will forgo its right to tax and others where it will exercise its rights to tax.

Nigeria has entered into DTAs with countries such as Italy, the U.K., Belgium, Pakistan, Czechia, Slovakia, France, Netherlands, Romania, Canada, South Africa, China, the Philippines and Singapore. These DTAs are modeled after the OECD or UN model tax conventions and confirm that Nigeria will only seek to tax business profits of an NRC if such profits are attributable to the activities of a PE operating in Nigeria.

Specifically, a PE is defined in Nigeria’s existing treaties as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” A fixed place of business is one that is established at a distinct place with a certain degree of permanence and is at the disposal of the enterprise.

PEs may be broadly categorized into three types: fixed place PE, service PE and agent PE. This article will evaluate fixed place PEs and service PEs that are determined by reference to a timeframe of operation and may be impacted by the Covid-19 pandemic. Per Article 5 of the current DTAs in Nigeria, examples of fixed place PE and service PE include:

• a building site or construction or assembly or installation project which exists for more than three months or six months, depending on the country;
• supervisory activities for more than three months or six months, depending on the country, on a building site or construction or assembly or installation project;
• in the case of installation activities which are incidental to the sale of machinery and which are necessary to complete the sale of that machinery or equipment, installation activities spanning, or longer than, six months;
• any place used for any activity relating to the exploration of natural resources provided that such activity exists for a period or periods aggregating more than 60 days in any 12-month period;
• services including consultancy services through employees or other personnel engaged by the enterprise for such purpose, but only if these activities continue for a period of more than three months or six months in any 12-month period, depending on the country.

The conditions clarify that timeframe is a strict and important factor in determining whether the source jurisdiction, in this case Nigeria, will impose tax on the profits of an NRC operating in-country. For NRCs, as little as one day beyond the agreed “tax-free” period may give rise to a series of complicated tax events such as understanding Nigerian tax rules, fulfilling frequent compliance obligations and obtaining documentation from the Nigerian tax authorities required to make a claim for double taxation relief in the home country.

Pre-pandemic, NRCs simply needed to keep abreast of these rules and make a business decision accordingly. Most businesses at the time of making a commercial decision, at the beginning of the tax year, could hardly have anticipated the impact that Covid-19 has had on their domestic and international operations. In fact, it is probable that companies that had formulated business strategies leveraging the tax concessions in a DTA may have to proactively revisit those strategies and their tax status in Nigeria, considering unforeseen business disruptions.

Unfortunately, DTA concessions were not designed with a global pandemic giving rise to a restriction on movement, travel and the continuation of business activities in mind. Therefore, there is a need for the tax authorities to provide clarity on the application of DTA rules as they relate to fixed place and service PEs.

Determination of Fixed Place or Service PE in Light of Covid-19

How should NRCs in treaty countries evaluate whether they have created a fixed place or service PE in these times? Can the NRCs view that the period will continue to run, or can they apply a “stop-the-clock rule” and exclude the Covid-19 period in determining the time threshold for a fixed place or service PE?

Paragraph 11 of the OECD/UN commentaries provides that “a site should not be regarded as ceasing to exist when work is temporarily discontinued. Seasonal interruptions (due to bad weather) or other temporary interruptions (shortage of material or labour difficulties) should be included in determining the life of a site.”

Further, the OECD on April 3, 2020 released a publication titled “OECD Secretariat Analysis of Tax Treaties and the Impact of COVID-19 Crisis” which expresses its views on the application of tax treaty provisions in the context of the Covid-19 pandemic. The OECD recognizes that activities on construction sites may be temporarily interrupted due to the Covid-19 crisis. Notwithstanding, the OECD recommends that such interruptions to construction sites should be included in determining the life of a site and should affect the determination of whether a construction site creates a PE. This suggests that a no “stop-the-clock” rule should be applied in respect of the time threshold to trigger a construction site PE, despite the inevitable delays due to the Covid-19 crisis. By extension, NRCs may be exposed to new filing requirements and tax obligations.

In respect of employees, who must now discharge their employment obligations remotely (i.e. teleworking from home) and in another country owing to travel restrictions, the OECD advises that such working arrangements should not lead to the conclusion that the employee’s home/home office constitutes a PE for the employer, provided this arrangement does not become the new norm over time.

The OECD explained that “the carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. Also, for a home office to be a PE for an enterprise, it must be used on a continuous basis for carrying on business of an enterprise and the enterprise generally has to require the individual to use that location to carry on the enterprise’s business. During the COVID-19 crisis, individuals who stay at home to work remotely are typically doing so as a result of government directives: it is force majeure not an enterprise’s requirement.”

Beyond making recommendations, the OECD has encouraged tax administrations to provide guidance on the application of the domestic law threshold requirements and has used the Ireland Revenue as an example. The Ireland Revenue clarified that “for Corporation Tax purposes (for a company in relation to which the individual is an employee, director, service provider or agent), the presence of the individual in Ireland or another jurisdiction shall be disregarded where such presence is shown to result from travel restrictions related to COVID-19. However, the individual and the company should maintain a record of the facts and circumstances of the bona fide relevant presence in the State, or outside the State, for production to Revenue if evidence that such presence resulted from COVID-related travel restrictions is requested.”

Accordingly, it is expected that each country would take its view on how these time-bound PEs should be determined and provide clear guidance to taxpayers.

Where Does this Leave the Nonresident Company in Treaty Countries?

A clarification on the constitution of a fixed place or service PE from the Nigerian tax authorities would be beneficial to foreign companies in tax treaty countries. However, in the absence of judicial precedents and any clarification on the subject by the tax authorities, it stands to reason that the tax authorities may want to leverage the approach suggested by the OECD, especially as some articles in Nigeria’s DTA with other countries are based on the OECD model convention.

NRCs in treaty countries should maintain oversight of the compliance process and review their activities in Nigeria to ensure that they do not have any tax registration or reporting obligations in Nigeria.

Olatoyosi Lawal is a Senior Tax Adviser and Tozaye Balogun is a Manager with KPMG Advisory Services, Nigeria.

The authors may be contacted at: olatoyosi.lawal@ng.kpmg.com; tozaye.balogun@ng.kpmg.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.