July 24, 2018
The digitalization of the world’s economy is considered to be a major stimulant to growth, development and innovation. Online and cross-border transactions requiring little or no physical presence have transformed world trade, as we knew it. This increased digitalization of the economy has created a big challenge for taxation as most local laws are not robust enough to address the complexities created by the digital economy.
Given the above, it is not surprising that the Organization for Economic Cooperation and Development (OECD) and G-20 countries issued a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS), which provides key recommendations to deal with the challenges posed by digital economy under Action 1. As noted by the OECD, “because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purpose”. As regional boundaries become more blurred due to ill-defined boundaries created by digital transactions, the need to continually re-evaluate local and international tax rules cannot be over-emphasized.
This article seeks to highlight the challenges of taxing digital economy in Nigeria and the options that can be explored in ensuring appropriate taxation of the industry.
There is no clear consensus on the most effective way of taxing digital transactions. Traditionally, the major principle considered in determining the taxability of income earned by foreign entities is physical presence or permanent establishment. Specifically, Section 13(2a) of the Companies Income Tax Act (CITA) provides that “the profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria if that company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base”.
The implication of the above principle and Section 13(2a) of the CITA is that a non-resident company that is able to provide services to Nigerians and earns fees for these services, but has no fixed based or permanent establishment in Nigeria, may not be deemed to have derived income from Nigeria for tax purposes.
A major challenge is therefore, determining at what point such non-resident company will be seen to have conducted business in Nigeria, since it does not require a physical presence in Nigeria to conduct its business transactions. This is particularly so as even the customers that complete transactions on online platforms may not be aware of the exact location of the digital goods and services they are consuming. In some instances, the jurisdiction with the taxing right may be in dispute as the location of the seller can be different from the location of the goods being sold.