Analysing FIRS circular on accessing Nigeria’s double taxation agreements benefits

15 Jan 2020, 12:00 am
Detail Commercial Solicitors
Analysing FIRS circular on accessing Nigeria’s double taxation agreements benefits

Feature Highlight

There is a need for Nigeria to enter into more DTAs with her trading partners around the world, considering that the current 14 DTAs she has with her trading partners is quite few.


The Federal Inland Revenue Service (FIRS) published a circular, titled “Information Circular on the Claim of Tax Treaties Benefits in Nigeria,” with Information Circular No. 2019/03 and dated 4th December, 2019 (the Circular). The Circular was issued to provide a general description of the application of the Double Taxation Agreements (DTA) Nigeria entered into with other countries. It includes the treaty benefits that can be accessed by residents of the contracting countries by way of relief from double taxation, treaty tax rates on income from source countries, dispute resolution mechanisms, and other benefits.
International double taxation arises when comparable taxes are imposed in two or more countries on the same taxpayer in respect of the same taxable income or capital (Organisation for Economic Co-operation and Development Glossary of Tax Terms). To eliminate the instances of double taxation, countries enter into DTAs, also called Avoidance of Double Taxation Agreement (ADTA). In Nigeria, these DTAs are limited to taxes on income and capital and do not cover Value Added Tax (VAT) or its equivalent. Nigeria currently has DTAs with fourteen (14) countries, which can be categorised into full DTAs and partial DTAs. Countries with which Nigeria has full DTAs include: Belgium; Canada; China; Czech; France; Netherlands; Pakistan; Philippines; Romania; Singapore; Slovakia; South Africa; and the United Kingdom. On the other hand, Nigeria has a partial DTA (i.e. Air and Shipping Transport DTA only) with Italy.

Highlights of the FIRS Circular

1.    Eligibility for Treaty Benefits

To benefit from the DTA provisions, a taxpayer must be a resident of: (a) Nigeria; (b) Nigeria’s treaty partner; or (c) both Nigeria and Nigeria’s treaty partner.

2.    Benefits Available under Nigeria’s DTAs

3.    Qualification for Treaty Benefits

To qualify for the benefits above in Nigeria, the following conditions must be fulfilled:
i.    The taxpayer must be liable to tax in the treaty country of which he is a resident;
ii.    The income in question is not exempted from tax in Nigeria;
iii.    The tax for which that individual is seeking benefit is covered by the treaty;
iv.    The benefit is not specifically excluded under the treaty; and
v.    The benefit is claimed within the time stipulated by the treaty or domestic laws.
Notwithstanding the above conditions, a taxpayer may be denied the benefits set out in item 4 above where it is discovered that:
i.    its residency of one of the treaty countries was principally for the purpose of accessing that treaty benefit (treaty shopping); or
ii.    that one of the principal purposes of the arrangement of a transaction or business is to take advantage of the treaty or abuse its provisions (Principal Purpose Test “PPT”).

4.    Process for claiming Treaty Benefits

Step 1: Completion of Certificate of Residence: Two types of Certificate of Residence exist:
a.    Certificate of Residence for Nigerian residents: The certificate is to be endorsed by the FIRS on behalf of the Competent Authority (CA) before it is submitted to the tax authority of the country where the claim is to be made.
b.    Certificate of Residence for non-residents: The certificate is to be duly endorsed by the tax authority of the country of residence of the non-resident taxpayer.
    Step 2: Submission of Formal Application to the Relevant Tax Authority
    Step 3: Submission of Claim for Tax Credit

Salient Issues in FIRS Circular on Enjoyment of DTA Benefits

1.    Denial of Treaty Benefits: In line with global conversation around profit shifting and base erosion, the Circular emphasizes the possibility of denial of DTA benefits in cases of treaty shopping or when the principal purpose of the arrangement of a transaction or business is to take advantage of the treaty or abuse its provisions. The question then is how treaty shopping will be determined and how the FIRS will ensure that legitimate claims for the DTA benefits will not be thwarted.  

2.    Applicability of DTA WHT to Non-Residents with Permanent Establishment: Paragraph of the Circular states that for the DTA WHT rate to apply, the income must not relate to a PE, which the non-resident beneficiary has in Nigeria. However, considering that the basis for the exposure of the non-resident to Nigerian tax, in many instances, will arise when the non-resident has created a PE in Nigeria (without which no tax liability should arise), it follows that WHT/DTA WHT (being an advance payment of income tax) should become applicable at that point when a PE was established. Therefore, there is a need for FIRS to clarify what it intends to achieve with this provision.  

3.    Procedure for Claiming Tax Credit: While the FIRS sets out the procedure for claiming the treaty benefits such as reduced WHT rate, tax credit relief, and airline and shipping DTA rates, the expected timelines for application are not well defined. At what point is a taxpayer expected to start the process for claiming tax credits and how long will the formal application be reviewed before a ruling? Also, with the current trend towards e-processes, is there the possibility of completing a claim for a treaty benefit online?

4.    WHT Rate on Royalties: The domestic WHT rate for royalties with respect to individuals is 5% while that of corporate bodies is 10%. On the other hand, the Circular states that the DTA WHT rate for royalties is 7.5% (apparently with a view to reducing the 10% WHT rate) but without any distinction as to individuals or companies. Therefore, DTA WHT rate has inadvertently increased the WHT rate payable by individuals from DTA countries by 2.5%. There is, therefore, a need for Nigerian authorities to amend/clarify the application of DTA WHT to individuals from DTA countries.


The FIRS has taken a commendable step by seeking to clarify the impact and effect of Nigeria’s DTAs on taxing of residents and non-residents with income generating activities in Treaty Partner States. It is crucial that this Circular should be treated as a work-in-progress requiring adjustment and improvement as questions arise in the course of application of the DTAs.

On another note, there is a need for Nigeria to enter into more DTAs with her trading partners around the world, considering that the current 14 DTAs she has with her trading partners is quite few in number when compared with the United Kingdom, which has over 130 DTAs with her trading partners and the United States that has 58 DTAs with her trading partners. Considering the enormous fiscal benefits and foreign investments such DTAs attract into the country, there is a need for the Nigerian government to make this a top priority in the coming fiscal years.

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