Nigeria: Tax issues affecting payment for imported equipment by renewable energy companies
Corporate tax and regulatory issues in the power sector
Corporate tax and regulatory issues in the power sector
Nigeria’s power sector has continued to grow, at least, in the number of participants, even if there are still concerns around the consistency and efficiency of grid power. Most of the new participants are renewable energy companies (RECs), that with the available grants and concessionary funding from the government continues to drive growth in the sector. Beyond access to capital, another issue affecting desired growth in the sector is tax.
Payment for imported equipment
A significant number of RECs purchase equipment from original equipment manufacturers (OEMs) offshore.
These OEMs are meant to be paid in foreign currency, which is not always readily accessible through the official channels (i.e., the banking system). The RECs earn all their revenue in naira and so would have to source for foreign exchange in order to settle their obligations to the OEMs that typically have a specified time within which they would expect to receive payment, otherwise they may be unwilling to continue to do business with the RECs. Most RECs have, therefore, had to seek alternative sources of the foreign exchange.
The most popular source has been getting a related party offshore with access to foreign exchange to pay the OEM. A receivable is then recognised, most times in the form of a loan, to the related party. This has led to several corporate tax and regulatory issues, some of which include:
- Tax deductibility of the interest expense
- Remittance of withholding tax on interest expense
- Regulatory considerations
- Transfer pricing compliance considerations
Read a March 2023 report [PDF 7.4 MB] prepared by the KPMG member firm in Nigeria
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