Nigeria has an opportunity to unlock a new revenue stream that could mitigate the shocks to its economy as a result of the COVID-19 pandemic by leveraging digital taxes efficiently. But its path to enforcement is littered with diplomatic pebbles the country must cross.
The digital tax regime is contained in Nigeria’s Finance Bill which was signed into law by President Muhammad Buhari in January 2020. According to the bill, digital businesses will be taxed if they have a “significant economic presence in Nigeria”. The provision relating to the taxation of economic value derived in Nigeria by non-resident companies (NRCs) is made in Section 13 of the Company Income Tax Act (CITA).
An NRC is said to have derived taxable economic value in Nigeria only if such company has a fixed base of business in Nigeria as long as it has a dependent agent who habitually executes contracts on its behalf in the country; it maintains a stock of goods or merchandise in Nigeria which supplies are made; it executes a single contract for surveys, deliveries, installations or construction in Nigeria; and it is deemed to have carried out an artificial or fictitious transaction with related parties in Nigeria.
Digital taxes – which include policies that specifically target businesses that provide products or services through digital means using a special tax rate or tax base – are a growing trend in the world. There are over 31 countries that have implemented digital taxation in some form.
For Nigeria, the digital tax represents part of its efforts to drive non-oil tax revenue. Growth in mobile and internet penetration has seen the proliferation of digital services in the country. Today, a significant number of transactions in Nigeria (sale and purchase of goods and services) are consummated using mobile devices and online payment platforms.
According to a 2018 report by Picodi, a Polish e-Commerce platform, the average order made by Nigerians using mobile devices to shop on e-sCommerce platforms was N14,100, about N3,500 less than when using desktops (N17,600) and N5,000 less than when using tablets (N19,100). iOS users spend more than Android users – N16,600 vs N13,400 on average.
The growth in digital commerce has seen increased investments from big technology companies like Google, Facebook, Twitter, Amazon, Microsoft, to mention a few. All these companies including digital advertisers and platforms designed to allow users to connect with one another and trade in goods and services are within the scope of the proposed taxation in Nigeria.
According to the Finance Act, NRC’s profits will be subject to company income tax where “it transmits, emits, or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce; application store; high-frequency trading; electronic data storage; online adverts; participative network platform; online payments and so on, to the extent that the company has a significant economic presence (SEP) in Nigeria and profit can be attributable to such activity”. The companies must also be deriving an income of N25 million or its equivalent in other currencies from Nigeria in a year.
Nigeria’s digital tax is similar to that of Kenya passed into law in November 2019 but is yet to be gazetted. “There must be an international consensus for this to work really. But the good news is so many countries are enacting the same laws and providing similar guidelines. Maybe the country-by-country reporting (CbCR) regulations will help,” said @ooyeboade, a financial expert.
Aside from being a major revenue earner particularly for countries undergoing economic instability in this period of COVID-19, digital taxation is also a subject of a diplomatic dispute. Since the last decade, some countries have been working through the OECD to develop policies to raise more revenues by reducing corporate tax planning and, more recently, through targeted taxes aimed at digital companies. The OECD has had to work on a proposal every member can agree on. Nigeria is one of the 129 countries under the Organisation for Economic Cooperation and Development (OECD) that is yet to conclude an international agreement on digital taxation.
Lack of international agreement has seen the European Union at odds with the United States lately. The US had withdrawn from talks with the EU aimed at finding common ground on global tax rules. The parties were unable to agree on the best way to tax revenue from digital companies like Facebook, Alphabet, and Google. Part of the disagreements borders on which country has the right to tax the digital companies whose operations span many countries and continents.
The US also believes digital taxes unfairly discriminate against US businesses. Hence, the North American nation has threatened retaliatory tariffs that could exacerbate the worst global economic downturn since the Great Depression. In a response, France and the UK have offered to limit the scope of the digital tax plan to accommodate US sensibilities.
Going forward with the plan would put Nigeria in the company of African countries like South Africa which was one of the first countries to introduce tax measures to generate revenue from the consumption of activities in the digital economy since 2014. Nevertheless, the southern African nation still does not have specific tax measures that enable taxes to be imposed on income raised by digitalised economic activities. Like Nigeria, the country now has a revised Special Adjustment Budget that captures its new digital tax plan. Despite the diplomatic row it might face, Nigeria, like South Africa, is not backing down.
Zainab Ahmed, Nigeria’s Minister of Finance, had in June 2020 issued an order called the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order) aimed at defining what constitutes SEP for non-resident digital service providers and non-resident technical, professional, management, or consultancy (TPMC) service providers. A non-resident digital service provider will have a SEP in Nigeria and be taxable in Nigeria if it earns a gross turnover of more than N25 million in a calendar year; if it uses a Nigerian domain name or registers a website in Nigeria; or if the NRC purposefully targets contents for Nigerians, e.g., by reflecting prices in naira or providing options for payments to be made in Nigeria.
“The FIRS may struggle to enforce compliance without international consensus as a number of the affected companies may be outside the FIRS reach,” said tax experts at PwC. “In addition, some of the products and services are sold directly to the final consumers in Nigeria by the affected NRCs and the tax authority may find it difficult to track such sales. The tax authorities will have to issue further guidance to assist these NRCs to comply.”