May 28, 2019
The digital economy is fast becoming the most innovative and widest reaching economy in the world. In 2018, the Nigerian Investment Promotion Commission explained that the Nigerian digital economy is expected to generate $88 billion and create three million new jobs by the end of 2021.
However, Nigeria may find that it is unable to tax the huge income that the digital economy would generate unless it amends its laws to adapt to changing technological advancement.
Typically, the general rule under Nigeria tax laws for taxing income of foreign enterprises in a given jurisdiction is by establishing that the entity has a taxable presence or has a permanent establishment (PE) in Nigeria. Given that digital transactions require little or no physical presence of the transacting parties, the income from the transaction may not be captured in the jurisdiction where the income is derived.
Whilst the Nigerian tax authorities are working towards ensuring digitalisation of the tax collection process, it is unfortunate that this digitalisation has not been extended to cover effective monitoring and collection of taxes from digital transactions. However, the Chairman of the Federal Inland Revenue Service (FIRS), Mr. Babatunde Fowler, recently disclosed that the FIRS would soon begin collection of Value Added Tax (VAT) on online transactions. According to the Chairman, the FIRS plans to start directing banks in Nigeria to be the collecting agents for VAT on online transactions for purchase of goods and services. As innovative as this move may sound, it may give rise to a number of undesirable consequences given that no clear legal framework exists for this move.
This Article discusses some of the challenges and prospects of taxing the digital economy in Nigeria and examines some developments in other jurisdictions with respect to taxation of the digital economy.
Challenges of Taxing the Digital Economy in Nigeria
The applicable rules for corporate taxation in Nigeria do not effectively capture the realities of a modern economy in our world of fast-paced digital transactions. Given that non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to income tax in Nigeria is usually controversial. Section 13 of Companies Income Tax Act (CITA) implies that a non-resident company must have physically performed activities in Nigeria, directly or indirectly, before such a company can be liable to income tax in Nigeria. Thus, where a software company provides online data to users in Nigeria without being physically present in Nigeria in any form, it may be difficult to conclude that such a company is liable to CIT in Nigeria, although the company could have derived income from Nigeria. A major challenge is therefore determining at what point such non-resident would be deemed to have carried on business in Nigeria and thus liable to income tax in Nigeria. This is because the absence of the required fixed base or physical operations in Nigeria under Section 13 of CITA has made it difficult for the FIRS to establish liability of such foreign companies to Nigerian tax.
To ensure that digital companies do not escape tax in Nigeria, the FIRS has often required Nigerian companies to withhold tax on all payments made to non-resident persons regardless of the non-establishment of the tax presence specified under Section 13 of CITA. This requirement has encountered resistance from taxpayers given that such non-resident persons may not be liable to tax under Nigerian laws.