We understand that the Court of Appeal has reversed the long standing decision of the Federal High Court (FHC) regarding the treatment of sub-contracting expenses in the determination of deemed profit of a non resident company.
The FHC had ruled in a case between the FIRS and Haliburton to the effect that payments by the foreign entity to a Nigerian subcontractor should not be included in the turnover of the foreign entity used in calculating deemed profit tax. This was on the basis that doing so will amount to double taxation since the income will also be taxed as income in the hands of the local entity. Under the deemed profit basis, 20% of the turnover of a foreign company is deemed to be profit taxable at the corporate income tax rate of 30% resulting in an effective rate of 6% on turnover.
This new judgement will have implications for foreign companies with subcontracting arrangements in Nigeria especially if the judgement is applied retrospectively. It is important to note that the FIRS now requires that tax returns be filed based on actual profits.
Watch this space for further updates on this new development.