AN APPRAISAL OF TAXATION AND ITS LEGAL EFFECTS ON FOREIGN DIRECT INVESTMENT IN NIGERIA

CHAPTER ONE

1.1         GENERAL INTRODUCTION/BACKGROUND TO THE STUDY

Generally, countries of the world interact with each other and engage in activities across their borders for social, economic, cultural, religious, political or any other reasons. These transactions sometimes have tax implications in the source state, (that is, where the income is derived), as well as in the state of residence, (that is, where the income earner resides).

Incidentally, there is no tax statute known as International Tax Law, which the use of the term `International Taxation` may seem to suggest. In other words, even though taxation is based only on statutes, (as there is no common law of taxation), there is no statute anywhere in the world regulating international taxation. In fact, according to Yariv Brauner¹, the idea of a single worldwide tax system that would eliminate all international inefficiencies and assist all the nations in maximizing their relative advantages is not only an illusion but utopian. Brauner however advocates the possibility of worldwide adoption of a single set of international tax rules that would entail a gradual, partial harmonization effort aimed at eventual unification of all international tax rules.

However, there are treaties, which deal mainly with Double Taxation Agreements, (DTAs), that are applicable to the taxation of cross-border or international economic activities.

Thus, tax experts refer to international taxation to mean the relevant provisions and agreements of the domestic or municipal tax laws of a country dealing with territorial, (for source), system of taxation and world-wide, (or residence), system of taxation. In other words, international taxation generally refers to the tax treatment of cross-national transactions. Since each nation has its own rules of taxation, and one rule is hardly the same as another, it is possible, or even likely, that income will be taxed more than once, (double taxation), or that it will go untaxed at all by any jurisdiction, (tax evasion). To avoid this, countries of the world have evolved two principal methods of international taxation, namely: territorial (or source system), and residence, (or worldwide), system.

To illustrate this print, a taxpayer, (whether Nigerian or foreigner), may be liable to Nigerian taxation either because he is resident in Nigeria, or because the source of his income is located in Nigeria. A Nigerian resident is liable to tax in his world-wide, or global income, whereas a non-resident will only be liable to tax on his Nigerian source of income.

For example, Roy Rohatgi in his book, “Basic Principles of International Taxation”² defines international taxation as “the global tax rules that apply to the transactions between two or more countries, (also called states), in the world”. The author went on to say that international taxation encompasses all tax issues arising under a country‟s income tax laws that include some foreign element.

Taxes are not, per se, international. As we observed earlier, there is no separate global tax law or statute that governs cross-border transactions. And unlike in the area of criminal law, there is no international tax court, tribunal or even administrative body for the enforcement of international tax issues. All taxes are levied or imposed underdomestic laws by the federal, state or local governments. However, these taxes have an impact on cross-border transactions. International taxation then governs these domestic tax laws under the principles of customary international law and treaties or conventions