NIGERIA INTRODUCES LEGISLATION TO COUNTER PROFIT SHIFTING THROUGH EXCESSIVE INTEREST PAYMENTS

Most countries treat tax debt and equity differently for the purposes of their domestic law. Interest on debt is generally a tax-deductible expense for the payer and taxed in the hands of the payee. Dividends, or other equity returns, on the other hand, are generally not tax deductible and are typically subject to some form of tax relief (an exemption, exclusion, credit, etc.) in the hands of the payee. While, in a purely domestic context, these differences in treatment may result in debt and equity being subject to a similar overall tax burden, the difference in the treatment of the payer creates a tax-induced bias, in the cross-border context, towards debt financing. 

In the cross-border context, subsidiary entities may be heavily debt financed, using excessive deductions on intragroup loans to shelter local profits from tax. The interest receipts often arise in jurisdictions where they are subject to low or no tax. 

Most African countries are capital importers and will be net borrowers rather than net lenders. Taxpayers in African countries are usually the subsidiaries referred to above and will usually be net payers of interest rather than net payees. The tax deductibility of interest payments and potential profit shifting through excessive interest payments is therefore of high priority to most African countries 

With the assistance of the ATAF International Taxation team, Nigeria has in its Finance Act 2019 enacted interest deductibility legislation that uses a fixed ratio test based on an entity’s interest/earnings ratio, which provides an effective tool to combat base erosion and profit shifting. 

• If you are an ATAF member and your country faces tax loss risks from excessive interest payments being made from your country our International Taxation team is here to help you introduce new effective rules based on our Suggested Approach to Drafting Interest Deductibility Legislation 

Please feel free to contact the ATAF team on Telephone: +27 12 451 8800

E-Mail: info@ataftax.org