THE LEGAL FRAMEWORK FOR DOUBLE TAXATION IN NIGERIA

GENERAL INTRODUCTION

Taxation is a significant consideration for foreign investors that seek to do business in Nigeria, in addition to other factors such as security, rule of law, access to appropriate infrastructure (e.g. electric power), etc. Strategically leveraging Nigeria’s status as the 26th largest economy in the world, and the biggest in Africa , through beneficial economic partnerships in the form of tax treaties within Africa and on a global level may help to increase foreign direct investment in the country.

Investors continue to search for new markets offering the best margins for return on investment, which leads multinationals to continue to invest in various economies outside their home countries/markets. One inevitable risk for multinational companies with cross-border investments and/or operations is double taxation due to differences between residence-based and source-based taxation – two principles that drive the taxation of corporate players in international markets/economies. Double taxation typically arises where both the country in which a taxpayer is resident and the country in which income is sourced claim taxing rights. Developed and developing countries worldwide use tax treaties as a means to reduce tax impediments to cross-border trade and investment and to mitigate the risk of double taxation. 

Tax treaties typically also allocate taxing rights between the treaty partners, reduce withholding tax on cross-border investments, exempt certain short-term activities in the source state from income tax provide a basis for information sharing and dispute resolution and prevent tax evasion.

In the current era of cross -border transactions across the world, due to unique growth in international trade and commerce and increasing interaction among the nations, residents of one country extend their sphere of business operations to other countries where income is earned. One of the most significant results of globalization is the noticeable impact of one country’s domestic tax policies on the economy of another country. This has led to the need for incessantly assessing the tax regimes of various countries and bringing about indispensable reforms. International double taxation has adverse effects on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the tax-payer. 

In a developing country , nobody would propose unrestricted grants in aid from his country to a developed one. And yet, the practical effect of the present network of double taxation agreements between developed and developing countries is to shift substantial amounts of income tax revenues to which developing countries have a strong legitimate and equitable claim from their treasuries to those of developed countries. Concomitantly, these double taxation agreements result in a very considerable and unnecessary loss of badly needed foreign exchange reserves for developing countries. In other words, the present system of tax agreements creates the anomaly of aid in reverse-from poor to rich countries.

The reason for this anomaly is that the tax agreements currently in force generally give the country of a taxpayer's residence either the exclusive or more substantial right to tax income as against the country in which the income arose (the "source country") and in income generating transactions between developed and developing countries the former is invariably the country of residence and the latter the country of source.