Double taxation avoidance agreements play a crucial role in promoting foreign investment by eliminating the double taxation of income earned in one country by a resident of another.

Double taxation avoidance agreements are agreements between two countries to avoid or mitigate double taxation. These agreements cover a range of taxes, including income taxes, inheritance taxes, and value-added taxes[1]. The main objectives of Double Taxation avoidance agreements are to avoid double taxation and prevent tax evasion. The agreements are often bilateral but they may exist under compliance of a group or organization.

Double taxation treaties/agreements set rules for the collection of taxes from citizens and residents of both countries working across the borders. Double taxation avoidance agreements also define the tax rates for income tax, capital tax, estate, wealth, and other tax types. Double taxation agreements are applicable for individuals as well as for the corporate sector. However, rules to define an individual resident and a resident business can differ drastically, although the working mechanism and the idea remain the same for both.

This article exposits how double taxation avoidance agreements affects foreigners willing to invest in the oil and gas sector in Nigeria.

UNDERSTANDING THE MECHANISM AND APPLICATION OF DOUBLE TAXATION AVOIDANCE AGREEMENTS

Individuals and businesses frequently engage in cross-border activities, involving at least two jurisdictions in the tax collection process. The country where the income or transaction originates is referred to as the source country (foreign), while the country where the taxpayer resides is known as the residence country (home). These jurisdictions may have differing tax regulations and varying tax rates. Consequently, taxpayers often seek to minimize their tax liabilities by utilizing the country with more favorable tax rates. To address these complexities, countries may enter into bilateral agreements, commonly known as tax treaties, which establish mutually agreed-upon rules governing tax collection. Such treaties typically include provisions on residency determination, allocation of taxing rights, applicable tax rates, and mechanisms for avoiding double taxation, including tie-breaker rules and guidelines on the repatriation of wealth.

Both countries can develop a mutual tax treaty or agreement. Most countries either follow the United Nation’s double taxation models. Both of these taxation models provide certain benefits to the tax importing and exporting countries. Double Taxation avoidance agreements can help avoid double taxation costs and tax evasion problems for both sides. These arrangement also helps the government attract more foreign investors when they are protected against double taxation costs.

AN ILLUSTRATIVE EXAMPLE TO ELUCIDATE THE OPERATIONAL FRAMEWORK OF DOUBLE TAXATION AVOIDANCE AGREEMENTS

For instance, if an individual, Mr. A, is a citizen of Nigeria and he works in the United Kingdom and earns taxable income, and both countries have a double tax treaty. The following shows Mr. A’s taxable income and his income tax rates in both Countries.

Taxable Annual Income = $ 10,000
Tax rate in Nigeria per annum = 20% Tax rate in the UK per annum = 15%

Details
In Nigeria – Home country
Income 10,000
Tax @ 20% 2,000
DTA relief (1,500)

Net Payable 500
In UK– Source Country
Income 10,000
Tax @ 15% 1,500
Total Tax Payable by Mr. A 2,000

THE IMPACT OF DOUBLE TAXATION AVOIDANCE AGREEMENTS ON FOREIGN INVESTMENT IN NIGERIA’S OIL AND GAS SECTOR

One of the primary concerns for international investors is the risk of double taxation— being taxed on the same income in both their home country and the country where the investment is made. To address this issue, many countries, including Nigeria, have established Double Taxation Avoidance Agreements (DTAs). These agreements are designed to prevent the same income from being taxed twice, thereby promoting cross-border investment and economic cooperation. These agreements clearly define which country has the right to collect specific tax income. They help investors by either exempting them from tax in one country or granting them a tax credit in the other, thereby avoiding double taxation. Nigeria has signed agreements with multiple countries to protect foreign investors from double taxation. As at this year, Nigeria has signed double taxation avoidance agreements with the following countries:

– The United Kingdom
– Canada
– The Netherlands
– China
– France
– Belgium
– South Africa
– Pakistan
– The Philippines
– Italy
– Singapore
– Spain

These agreements are a strategic advantage for foreign investors, especially those in capital-heavy sectors like oil and gas. They also reflect Nigeria’s commitment to being a competitive and tax-transparent business environment.

Double taxation typically reduces investors net profits but through the double tax avoidance agreements, these risks are mitigated in Nigeria and Nigeria can be seen as a more attractive environment by foreign investors. A UK-based oil company operating in Nigeria can avoid double taxation under the Nigeria-UK DTA by ensuring that the company isn’t taxed twice on its profits, dividends, or royalties. This gives investors peace of mind and improves Nigeria’s competitiveness as an oil-producing nation.

BENEFITS OF DTA’S TO FOREIGN OIL INVESTORS EXPLORING NIGERIA’S OIL AND GAS INDUSTRY

1. Fiscal Incentives Double Taxation Relief: Investors are prevented from being taxed twice on the same income in Countries that Nigeria has signed DTA’s with.

Reduced Tax Rates:
> Deep offshore and inland basin operations benefit from a reduced tax rate of 50%.
> Gas production profits are taxed at 30%, aligning with corporate tax rates

Investment Allowances:
> Capital allowance: 20% for 4 years, 19% in the 5th year, 1% thereafter.
> Investment tax credit of 5% for qualifying gas production investments.
Pioneer Status Incentive: Tax holiday of up to 5 years (extendable by 2 years) for eligible companies.

2. Legal Protections and Investment Security
Investment Promotion and Protection Agreements (IPPAs): Protects against expropriation and guarantees fair compensation.

Repatriation of Profits: Guarantees transferability of funds (profits, dividends, capital) in convertible currencies.

Dispute Resolution Mechanisms: Access to international arbitration under ICSID rules.

3. Strategic and Operational Advantages
Access to Free Trade Zones (FTZs): Exempt from all taxes, duty-free importation, 100% repatriation of capital and profits.

Abundant Natural Resources: Nigeria holds Africa’s largest natural gas reserves and is a leading oil producer Large Domestic Market: Over 200 million population and access to West African regional markets.

CONCLUSION

Navigating Nigeria’s tax laws and Double Taxation Agreements (DTAs) can be challenging for investors. BFA & Co Legal offers trusted legal guidance to help simplify this process. With in-depth knowledge of Nigeria’s regulatory landscape—including tax treaties and oil & gas regulations—our team assists investors in structuring their businesses for optimal tax efficiency while ensuring full legal compliance.

For investors considering entering the Nigerian oil and gas market, DTAs offer essential protection and financial benefits. Nigeria’s growing list of treaties shows its openness to foreign investment and its willingness to align with global standards. Whether you’re expanding operations, signing a joint venture, or opening a subsidiary, partnering with experienced legal experts like BFA and Co Legal can make all the difference.