Doing Business Simplified: Significant Economic Presence and the Taxation of Non-Resident Companies in Nigeria

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On the 3rd of February 2020, the Minister of Finance, Budget and National Planning issued the Companies Income Tax (Significant Economic Presence) Order 2020 (the “Order”). The Order was published on the 29th of May 2020 in furtherance of the powers conferred upon the Minister by Section 13(4) of the Companies Income Tax Act (CITA), Cap C21 Laws of the Federation of Nigeria, 2004 (as amended).

The Finance Act, 2020 (“the Finance Act”) expanded the scope for taxation of Non-Resident Companies (NRCs) in Nigeria by amending certain sections of the CITA. Prior to the Finance Act, NRCs were taxed if they could be seen as having a fixed base (having facilities, carrying out business activities, or providing services in connection with business activities) in Nigeria; carrying out business through an agent who executes transactions on their behalf; executing a turnkey project; or engaging in transactions with affiliated companies in a manner not being one that is at arms-length.

The Finance Act included the concept of Significant Economic Presence (SEP) by which NRCs would be assessed for tax purposes. If found to have SEP in Nigeria, NRCs would be liable to pay tax in Nigeria. At the time the Finance Act came into force, the criteria for determining what constitutes SEP had not been established. The Order now states the various ways NRCs would be deemed to have SEP in Nigeria.

What Constitutes Significant Economic Presence in Nigeria?
The Order targets two broad categories of NRCs. These are companies carrying out digital services and companies involved in technical, professional, management, or consultancy services.

1. NRCs involved in digital services would have SEP in Nigeria if:
i. they derive a gross turnover of more than ₦25,000,000 (Twenty Five Million) or its equivalent in other currencies in a financial year from digital activities in Nigeria;
ii. they use a Nigerian domain name (.ng) or register a website in Nigeria; or
iii. have a purposeful and sustained interaction with persons in Nigeria by customizing their digital pages or platforms to target persons in Nigeria, including reflecting the prices of their products or services in Naira or charging fees for their products/services in Naira.

In addition, the Order identifies the nature of digital services which would be assessed for SEP. These services include streaming or downloading services, provision of goods and services through digital platforms, and services which link suppliers and buyers through a digital platform, amongst others.

The application of SEP to digital services is broad and captures a wide array of digital services that cater to Nigerians.

2. NRCs which provide technical, professional, management, or consulting services would be deemed to have SEP in Nigeria if they earn income or receive payment from:
i. a person resident in Nigeria; or
ii. a fixed base or agent of an NRC.

The Order defines a technical service as services of a specialized nature including advertising, training, and the provision of personnel (but not including professional, management, or consulting services. What constitutes these services was however not defined).

Conclusion
Including the digital economy in the now expanded tax net is the main thrust of the Order. It is evident that the government appreciates the economic value of taxing the digital economy which would result in a much-needed rise in its income.

It however remains to be seen how the Federal Inland Revenue Service (FIRS) will give effect to the Order by levying taxes against NRCs which have no physical presence in Nigeria coupled with the fact that transactions are performed digitally and may not be easily monitored by the tax authorities.

Six Important Clauses to consider before Signing a Music Record Contract

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According to a Goldman Sachs report, global music revenues have been projected to rise to $131 billion by 2030. This is an indication that the music industry has great growth potential. In particular, the Nigerian music industry, which has been forecasted to reach $44 million by 2023, has also experienced significant growth, particularly in view of international collaborations and recognition. The growth of the industry has however led to an increase in disputes, specifically amongst artistes in the music industry, who have resorted to social media to air their grievances over the failed contracts between themselves and their record labels or distribution platforms. To guide future negotiations, below are six important clauses artistes should consider before signing a music record contract.

  1. Term – This clause defines the length of the recording commitment and may also stipulate the number of tracks/albums the artiste is required to deliver within a specific time frame. It would usually consist of an “Initial Period”; and an “Option Period” which grants the label the right to renew the term, based on the performance of the artiste. It is especially important for artistes to pay attention to the term and ensure it is not excessive e.g 10 years.
  2. Exclusivity – An exclusivity clause, which restricts the artiste’s engagement during the Term to the record label, is often found in most contracts. Record labels would typically push for exclusive deals on the basis that it is required to enable them properly promote the artiste and recoup on costs. A way to manage an exclusive commitment as an artist is to limit the duration of the contract and include a right to terminate the contract where the record label is not able to effectively promote the artiste within a stated period of time. The deal could also be limited to a particular collection of songs (EP) so that the artiste is free to record another collection with other labels. The artiste may also consider including a “Sideman clause” in the contract, giving he or she the right to do some studio work on the side or collaborate with other artistes.
  3. Territory – It is more likely that a label would request for a worldwide deal especially in today’s digital age where music is promoted through online platforms. Artistes who are uncertain whether the record label they are negotiating with can adequately promote their music may want to restrict the Territory or at least the works which the label is permitted to deal in for a certain duration, to enable them test the relationship.
  4. Assignment of rights – For a record label to properly distribute and market the content of an artiste, it would require the artiste to assign the intellectual property rights in the content to it ( as the intellectual property rights originally belong to the artiste under Nigerian law). Artistes should be careful to ensure that such an assignment of rights do not subsist unnecessarily longer after the termination of the contract and that such rights are reassigned to the artist at the end of the Term.
  5. Royalties – Royalties are essentially the payments made to the artistes by the label or other relevant parties for using the copyright of the artiste. This includes any profit made from streaming, merchandise, performances, record sales, synchronisation amongst many other revenue streams. It is important for artistes to remember that royalties will be paid after deductions of expenses which the label has incurred on behalf of the artiste. While there is no fixed ratio, artistes can protect themselves by engaging a professional with industry knowledge during the negotiation phase.
  6.  Marketing and Distribution Budget – Artistes should request for a healthy marketing budget to be included in the contract. This usually binds the label to ensure that a certain amount of effort is expended in promoting the content of the artiste.

Conclusion

As much as the music business can be a lucrative business for talented artistes, where the record label contract or other similar music contracts are not well negotiated, the artiste can feel trapped in an extortionate deal. This is why it is important that artistes engage the services of an experienced legal practitioner to ensure that his or her rights are properly protected and that clauses are not overly tilted in favour of the record label. This will go a long way in minimizing the disputes that arise from music record contracts.

Doing Business Simplified: Regulatory Requirements For Operating A Restaurant in Nigeria.

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With a growing population of over 200 million, food production is one of the most lucrative businesses in Nigeria. In 2016, the Association of Fast Food and Confectioners of Nigeria (AFFCON) estimated the food industry to be worth over a trillion naira. In April 2020, Euromonitor International reported that demand for restaurants in Nigeria will continue to grow due to expansion of the mid-income group, growing urbanization and busy lifestyle of Nigerians. To operate a restaurant business in Nigeria, there are a number of regulatory requirements which Restaurant Operators (ROs) must comply with, some of which are discussed below.

Environmental Regulations

The Minister of Environment is empowered under the Environmental Health Officers (Registration, Etc) Act of 2002, to issue regulations and directions for Health Officers Registration Council of Nigeria (EHORECON). In several states, the state Ministry of Environment issues guidelines to relevant regulatory agencies to ensure compliance with environmental laws. Consequently, by law, all food outlets, including ROs, must apply and obtain a permit to ensure compliance with basic health and safety guidelines within their immediate environment. The premises of the restaurant will be inspected to ensure that the facilities are well ventilated, with regular disinfection, accessible water supply, disposable towels, rest room facilities, self-closing doors, medical certificate of fitness and training of the food handlers, amongst others.

Local Government licenses

In Lagos State for instance, ROs are required to apply for a food permit within the Local Government where the restaurant is located prior to commencement of operations. In addition, where the alcohol will be sold by an RO, a liquor permit is a requirement. Other relevant licenses issued by the local government are Television License (to use a television or radio), Private Entertainment and Merriment Permit (to run loud entertainment ventures) and Private Car Park Permit (to own a car park). The applicable fees for obtaining these licenses are subject to assessment of the local government officials.

National Agency for Food and Drug Administration and Control (NAFDAC)

NAFDAC, a federal government agency which regulates the production, manufacturing of food and drugs in Nigeria created under National Agency for Food and Drug Administration and Control Act of 1993. Generally, restaurants which process and sell food products in commercial quantity may be required to obtain a Good Hygiene Practice (GHP) license from NAFDAC prior to commencement of operations. A GHP license is usually issued upon satisfaction that the equipment of the food processor meets certain standards and that the food handlers possess the required certification.

Signage/Advertising

In operating a restaurant, it is typical to place a signage outside the premises for the purpose of advertising. To achieve this, Lagos State signage laws require all businesses, including ROs, with outdoor advertising to obtain a signage permit with the Lagos State Signage and Advertisement Agency.

Conclusion

There are other regulators such as the Federal Competition and Consumer Protection Commission, states’ ministry of health and the relevant federal and state tax regulatory bodies, who are in charge of ensuring compliance with applicable laws and regulation. Whilst there may be an overlap in their functions, the common goal of the regulators is to ensure the general welfare and safety of consumers.

Doing Business Simplified: Employment Issues Arising From COVID-19

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The COVID-19 pandemic has had a significant impact on employer-employee relations worldwide. Due to the slowdown of economies around the world, businesses have been impacted a great deal which has led to the review of business policies, operating procedures, employment contracts and inevitably, job cuts. For employers and employees in Nigeria looking for guidance on navigating the employment landscape, below are answers to pertinent questions.

 

  1. Can an employee’s contract be terminated due to business losses from COVID-19?

Under Nigerian law, employers may terminate the employment of an employee with reason or without reason. What is important is that the termination is carried out in accordance with the terms of the employment agreement. Where it provides for notice or salary in lieu of notice to be given, either of these options should be followed otherwise it would constitute a breach of the employment agreement.

 

  1. Can an employer decide to not pay employees due to unavailability of work?

Under the Labour Act, employers have a duty to provide work. Therefore, where employees are able and available to work, it is the responsibility of an employer to ensure work is provided. If work is not provided or unavailable, the employer is still required to pay wages to its employees. However, the Labour Act only applies to staff in lower cadre roles (drivers, clerks, etc). All other employees are governed according to the terms of their contracts which ordinarily provide for remuneration regardless of the availability of work. Employers unable to provide work and thereby unable to pay salaries due to the effect of COVID-19 are advised to discuss with their employees  and agree on an arrangement that is fair to both parties.

 

  1. Can employees be asked to proceed on indefinite leave or have their employment agreements suspended?

Nigerian law does not provide for indefinite leave or the suspension of employment agreements. If an employer seeks to suspend the employment of its employees or ask that they proceed on indefinite leave pending when operations return to normal, it would have to be in line with the terms of the agreement. Where the contract is silent on this, the employer is advised to consult with employees and agree on the terms of the suspension or the indefinite leave as this cannot be done unilaterally. This also applies to situations where employers request that employees proceed on their annual leave without pay

 

  1. Are employers allowed to cut salaries due to the business impact of Covid-19?

Employment agreements typically include the remuneration of employees. If there is to be a variation of the remuneration, it must be agreed to by parties to the agreement. If a business is unable to pay salaries, this should be made known to the employees beforehand and a fair arrangement reached.

 

  1. Can an employer be exposed to a claim for wrongful termination?

If the manner of termination of employment is not in accordance with the Labour Act or the terms of the employment agreement, employers will be liable for wrongful termination. For example, where the employment contract provides for notice to be given before termination, an employer must ensure the applicable notice as stated in the agreement is given.

The Effect of the Nigerian Content Development and Enforcement Bill on Foreign Participation in the Nigerian Oil and Gas Industry

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According to a report issued by the Nigerian Stock Exchange in September 2019 , there was a 47.81 % increase in transactions by foreign investors in the Nigerian equity market and a total of $308.2 million, which was significantly higher than the transactions of local investors by 44.00%. Foreign participation has continuously brought about an increase in the investment portfolio of the Nigerian economy and cuts across several industries. The oil and gas industry in particular, continues to record a steady inflow of non-Nigerian entities, who significantly contribute to the development of the sector. In order to encourage more local participation however, several legislative measures have been put in place over the years. More recently, the Nigerian Content Development and Enforcement Bill (“the Bill”) was sponsored by 7 members of the House of Representatives for legislative consideration. Although the Bill is currently in the 2nd reading stage, it is crucial for stakeholders to follow its development given the recent downward spiralling of the petroleum industry and its effect on the economy.

Brief Overview

The Bill, which seeks to repeal the Nigerian Oil and Gas Industry Content Development Act 2010 (“the Act”), proposes additional requirements and guidelines to encourage indigenous participation in the petroleum sector. It also seeks to broaden the scope of its application to cover industries such as power, construction, mining, and ICT. Below, we have highlighted some salient provisions of the Bill in its current form and what they mean for future foreign participation in the oil and gas industry.

Labour Clause

This provision under the Act required any contract exceeding $100 million to include a labour clause which mandated the use of a minimum percentage of Nigerian Labour in specific cadres. The Bill however proposes to reduce the budget requirement to $1 million in order to encourage indigenous participation in sector activities.

Compulsory Dispute Resolution

Another proposition the Bill brings is the requirement of any dispute that arises from any contract regulated by the Bill to be compulsorily resolved by an Arbitral panel whose composition is determined by the Chief Judge of the Federal High Court and is made up of a minimum of three members who shall be Judges of the Federal High Court . Although this provision may seek to encourage arbitration as a faster means of dispute resolution, it may place some restriction on the freedom of parties to decide the method and jurisdiction of settling contractual dispute.

Increased Penalties

Under the Act, the penalty for carrying out a project not compliant with the provisions of the Act is a fine of 5% of the value of the project. The Bill introduces a higher penalty for non-compliance of its provisions by increasing the fine to 15% and including a 5-year imprisonment term.

Impact on Foreign Participation in the Nigerian Oil and Gas Industry

It is hoped that while the Bill is under consideration at the House of Representatives, legislators will consider including more incentives to encourage foreign participation in the oil and gas industry in Nigeria.