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

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.