Finance Act 2020 and Tax Treaty Implications for Multinational Corporations.

Introduction:

Multinational corporations (MNCs) operate across borders, engaging in international business transactions that often give rise to complex tax implications. To address these complexities and promote cooperation between nations, countries enter into tax treaties, also known as double taxation treaties (DTTs). In Nigeria, the Finance Act 2020 brought significant changes that affect the tax treaty landscape for MNCs. In this article, we will explore the implications of the Finance Act 2020 on tax treaties and how these changes impact multinational corporations.

Key Tax Treaty Implications of the Finance Act 2020:

• Dividend Withholding Tax (WHT): The Finance Act 2020 increased the withholding tax rate on dividends distributed to non-residents from 5% to 10%.

Implication: MNCs relying on reduced withholding tax rates provided by tax treaties should review the impact of this change on their cash flows and overall tax positions.

• Interest and Royalty Payments: The act introduces provisions allowing Nigeria to tax interest and royalty payments made to non-residents in line with tax treaty provisions.

Implication: MNCs need to assess the impact of this change on their financing and intellectual property arrangements.

• Mutual Agreement Procedure (MAP): The Finance Act 2020 aligns Nigeria’s MAP framework with international best practices. MAP provides a mechanism for resolving disputes arising from tax treaty interpretations.

Implication: MNCs can benefit from an improved dispute resolution process, potentially reducing the risk of double taxation.

• Principal Purpose Test (PPT): The act introduces a PPT rule in line with the Base Erosion and Profit Shifting (BEPS) recommendations. This rule allows Nigeria to deny treaty benefits if the main purpose of an arrangement is to obtain such benefits.

Implication: MNCs should ensure that their business structures and transactions comply with the PPT rule to access tax treaty benefits.

• General Anti-Abuse Rule (GAAR): The Finance Act 2020 includes a GAAR, empowering tax authorities to disregard arrangements entered into with the primary purpose of obtaining tax benefits contrary to the object and purpose of tax treaties.

Implication: MNCs must carefully assess their tax planning strategies to ensure they do not run afoul of the GAAR provisions.

Navigating the Tax Treaty Landscape:

1. Review Existing Structures: MNCs should review their existing corporate structures and transactions to assess the impact of the Finance Act 2020’s changes on their tax treaty benefits.
2. Documentation: Maintain comprehensive documentation of transactions to support claims for tax treaty benefits and compliance with the PPT and GAAR rules.
3. MAP and Dispute Resolution: Familiarize yourself with the revised MAP procedures to expedite dispute resolution in case of tax treaty disputes.
4. Tax Advisors: Engage experienced tax advisors who understand the implications of the Finance Act 2020 on tax treaties and can provide guidance on tax-efficient strategies.

Benefits of Compliance:

1. Risk Mitigation: Compliance with the Finance Act 2020’s provisions reduces the risk of disputes and double taxation.
2. Tax Efficiency: Proper planning and compliance enable MNCs to optimize their tax positions while maintaining legal adherence.
3. Improved Relationships: Effective compliance with tax treaties fosters positive relationships with tax authorities and other treaty partner countries.

Conclusion:

The Finance Act 2020’s impact on tax treaties has significant implications for multinational corporations operating in Nigeria. Understanding these changes, complying with the new provisions, and conducting comprehensive reviews of existing structures and transactions are essential steps for MNCs to navigate the evolving tax treaty landscape. By doing so, MNCs can mitigate risks, optimize tax positions, and ensure compliance with Nigerian tax laws and international treaty obligations.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.