Nigeria's Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, last month signed a Double Taxation Agreement with the Hong Kong Special Administrative Region of China.
According to media reports, the agreement or treaty is to boost trade, investment and "expected to eliminate double taxation on income earned in both jurisdictions, strengthen tax cooperation and encourage greater cross-border investment."
The agreement which was signed virtually will also curb tax evasion and avoidance, and create a more predictable tax environment for businesses and investors operating across both economies.
Speaking during the ceremony, Oyedele described the agreement as a significant milestone in the growing economic relationship between Nigeria and Hong Kong.
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He said the treaty demonstrates Nigeria's commitment to building a transparent, predictable and investor-friendly tax system capable of supporting trade, investment and long-term economic growth.
He noted that the agreement comes at a time when Nigeria is expanding its economic partnerships across Asia and seeking greater integration into global value chains.
Oyedele described Hong Kong as one of the world's leading international financial and commercial centres, expressing confidence that the treaty would encourage stronger private-sector collaboration and create new investment opportunities for businesses in both jurisdictions.
What are double taxation treaties?
The presence of raw materials in a particular country or market for a product has attracted foreign companies to establish subsidiaries. In turn, the subsidiaries are expected to pay taxes to the source or local country before remitting any funds in forms of royalty, dividends or other management fees to the parent company.
But before the transfer, the source country has the right to tax these funds under the Withholding tax arrangement. This where a country tax a certain percentage of a profit before it gets to the beneficiary.
The withholding tax is deducted by the subsidiary on behalf of the government before the remaining is sent to the owners abroad and since the money or profit will cross two international jurisdictions the need for a double taxation treaty needs to be in place for the fund not to be taxed twice.
According to the European Union Commission, Double Taxation treaties are bilateral agreements signed between two states to avoid taxing an income twice.
It added that the treaty helps to promote "cross-border trade and investment and combat tax evasion and avoidance."
As such, residents of a country with Double taxation with Nigeria will pay reduced tax compared with a resident that does not have one.
From the viewpoint of economists, the lower tax on this income to be repatriated after investments will make more foreigners invest in the country.
For instance, a company based in the US that seeks to invest in Abuja can be made to pay 10 per cent as withholding tax from its distributed income in Nigeria due to lack of taxation agreement with Nigeria.
The income that has already been taxed in Nigeria can still be subjected to another tax in the US depending on tax laws there.
Another company based in the Netherlands that invested in Nigeria, is asked to pay 7.5 per cent as withholding tax before it is distributed to the home company due to a double taxation treaty with Nigeria.
When the income arrives in the Netherlands, the tax authority, when calculating the tax on the income, will deduct the 7.5 per cent tax removed in Nigeria from its own percentage, that means if withholding tax is 20 percent, the government will tax such income at the rate of 12.5 per cent.
Thus, the 12.5 per cent and 7.5 per cent indicates that the income was taxed.
Some treaties also see some countries giving up rights to tax some corporate incomes all in the name of courting investors from the potential capital exporting country.
How treaty is abused
Now if the company in the US state has a subsidiary or Shell Company in the Netherlands, the company can route the income to the Netherlands, so instead of paying the 10 percent withholding tax, it pays 7.5 percent, thereby shortchanging Nigeria
This is what is known as profit shifting, a case where multinational companies use loopholes in tax policies in a jurisdiction to engage in tax avoidance.
For those with zero tax treaties where the income was not taxed in both countries, it gives room for treaty shopping which results in loss of taxes in both the country where the company is resided and the country it sourced the income from, aggravating tax avoidance.
While tax avoidance is not a criminal offence, development experts have said this deprives developing countries critical revenue for social and infrastructural development.
According to a 2020 report by the UN Conference on Trade and Development's (UNCTAD) an estimated $88.6 billion, equivalent to 3.7% of Africa's GDP, leaves the continent as illicit capital flight.
It identified the outflows to include illicit capital flight, tax and commercial practices like mis-invoicing of trade shipments and criminal activities such as illegal markets, corruption or theft.
Also, the Tax Justice Network (TJNA) estimated that $483 billion is lost globally to corporations and the wealthy using tax havens to underpay tax globally and in Africa.
While a research by the Centre for Research on Multinational Corporations (SOMO) revealed that 28 countries lost €771 million on dividend and interest tax income alone every year through double taxation treaties with the Netherlands.
The research pointed out that revenue loss resulting from such treaties will be much higher because "tax avoidance through profit shifting with the use of royalties and capital gains are not included in the calculations."
In Nigeria, it is estimated that $18 billion is lost annually to profit shifting, aggressive tax avoidance, and other sharp practices by some multinational corporations transacting in the country.
Ways to tackle it
An International Tax & Transfer Pricing Expert, Olatunji Abdulrazaq, explained that to effectively combat tax avoidance and evasion in Nigeria, several strategic approaches can be considered, including regular review and update of tax laws to close loopholes and minimize opportunities for aggressive tax planning.
"We also need to strengthen the capacity and resources of tax authorities to effectively enforce tax compliance and address evasion practices as well as implementing measures to enhance transparency in financial reporting and tax disclosures, particularly for multinational corporations operating in Nigeria."
He called for the need to develop robust monitoring systems to track financial transactions and ensure adherence to tax regulations while educating and creating awareness among taxpayers about the benefits of fulfilling their tax obligations and the consequences of non-compliance."
In the global arena, the realization that 40-50 percent of profits made by multinational corporations are moved to jurisdictions with low or no taxes led to the Organisation for Economic Co-operation and Development (OECD) to launch the Base Erosion and Profit Shifting (BEPS) initiative in 2013 and championed by the G20.
The BESP framework seeks to reduce profit shifting and allow profits and taxes to be earned in the location where value is created, and the package includes guidelines on transfer pricing, among others of its 15 action plans.
However, the framework has been criticized for benefiting developed countries and it did little to allow developing countries to maximize taxes from economic activity done in the country.
On the other hand, there is the United Nation Model on Double Taxation which was last revised in 2011 which gives greater taxing rights to the source country, investment or other activities taking place.
Even though the OECD model is the most widely adopted due to the greater rights it gives to the developed countries or residence countries where investment comes from, there have been renewed efforts to strengthen the UN model through the UN Framework Convention on International Tax Cooperation (UN Tax Convention).
The convention wants to achieve an inclusive and fair global tax rights that allow equal distribution of developing nations in driving their sustainable goals.
The convention meets three times in a year from 2025 to 2027 and its fifth negotiating session took place August 3-13, 2026 in New York where agreements are being fine-tuned to chart a united front on tax treaties that capture the needs of developing countries.
Executive Director of Tax Justice Network Africa (TJNA), Chenai Mukumba said the process is fundamentally about reclaiming [African countries] economic sovereignty.
She noted that Africa's labour, natural resources, and markets have generated enormous wealth yet the international tax rules have often denied African countries their fair share of their taxing rights over the income that arises from these activities.
"For African countries what is at stake isn't merely a reform of international tax rules but an important step towards finally completing the journey from political independence to full economic sovereignty," she added.
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Speaking at the end of the session, Executive Coordinator of Global Alliance for Tax Justice (GATJ), Dr. Dereje Alemayehu, said the session demonstrated growing support for a global tax system that promotes a fair distribution of taxing rights among countries, ensures that wealthy individuals and corporations are effectively taxed, and strengthens transparency in international taxation.
How tax relief leads to loss of tax revenue in Nigeria
In Nigeria, another research by SOMO established that $3.3m was lost by granting a 10-year tax break to investors under the Nigerian Liquefied Natural Gas, NLNG, project.
The report which was published in 2016 argued that extending the 10-year tax holiday (as established by the NLNG Act) against the usual five-year tax holiday which all other companies in Nigeria qualify for under the Industrial Development (Income Tax Relief) Act 1971 led to the loss.
The report indicated that factoring in a further two years of applying other legal provisions, for example, the carrying forward of deferred tax assets, means the company actually enjoyed a 12- year tax holiday between 1999 and 2011, reducing its tax bill to almost zero during the period.
It maintained that based on a calculation of the potential amount of tax that would have been payable by NLNG in case of the normal tax relief period in Nigeria of five years, the total potential in lost tax to the Nigerian government amounts to a staggering $3.3bn between 2005-2013 - an average tax loss of around $367m per year.
Also, Nigeria has tax treaties with 13 countries of Belgium, Canada, China, Czech Republic, France, Netherlands, Pakistan, Philippines, Romania, Slovakia, South Africa, Spain and the United Kingdom with none adjudged to be in the interest of Nigeria, according to Action Aid Nigeria.
Four countries of Kuwait (2011), Mauritius (2012) and Sweden (2004) and Hong Kong (2026)- have had their tax treaties signed and awaiting ratification from the National Assembly.
While Nigeria is renegotiating Netherland's treaty as the old one is not favourable to the country, experts have called for renegotiation with other countries to ensure it has fair and equitable treaties.
