Introduction
In recent years, the digital economy has usually been credited with contributing to sustainable economic growth. Definitely, the digitalization of the economy is expected to aid economic growth. The global economy is developing rapidly, including in Nigeria. The rise of online services, e-commerce, streaming platforms, and other digital service providers has transformed how businesses operate.
Digital Services are services delivered over the internet or an electronic network, the nature of which renders their supply essentially automated involving, and impossible to ensure in the absence of information technology. It includes services such as e-commerce, cloud computing, e-books, music, online advertising, streaming platforms, etc.
Background on Digital Service Taxation
Digital taxation appears to be a commonly used term by countries against various tech giants, digital goods, and service providers. Digital Service Taxation (DST) can be defined as the tax policy put in place by various countries designed to be levied on digital companies like Facebook, Twitter, and YouTube, amongst others, which may not be physically resident in their country. With many global tech giants earning substantial revenue from Nigerian users without a physical presence in the country, the Nigerian government seeks to increase tax revenue from this growing sector as other members of the Organisation for Economic Co-operation and Development (OECD) have begun venturing into DST.
Nigeria’s Legal Framework
Laws will continue to be enacted to match with human evolution and development. Nigeria had no Laws regulating digital service taxation but as the need arose efforts were geared towards the implementation of the Finance Act 2020. The Finance Act 2020 introduced the taxation of digital services in Nigeria, legalizing the collection of taxes from non-resident companies making money from Nigerian customers.
By Section 4 Part II of the Finance Act 2021 (amending Section 13 of the Company Income Tax Act), digital companies such as Google, Meta, X (formerly Twitter), Amazon, Apple, Zoom, Netflix, Spotify, etc., rendering different types of paid borderless digital online services to residents of Nigerian and have a significant economic presence in Nigeria are bound to comply with Nigerian tax laws. Local tax laws mandate them to remit 6% of their annual turnover (generated from business activities transacted online within Nigeria’s digital space) as income tax to the Federal Inland Revenue Service (FIRS).
Also, by Section 30 Part VIII of the Finance Act 2021 which substitutes for Section 10 of the Value Added Tax Act, they are to charge and collect Value Added Tax (VAT) on all their offered paid online services enjoyed by their Nigerian customers and subsequently remit same accordingly to the FIRS, consequently beginning the era of taxation of digital online services and digital companies, otherwise known as “Non-Resident Companies (NRC)” in Nigeria.
Key Provisions of Nigeria’s Digital Service Tax
Resident companies are liable to Corporate Income Tax (CIT) on their worldwide income while non-residents are subject to CIT on their Nigeria-source income. The CIT rate is 30% for large companies (that is, companies with gross turnover greater than 100 million Nigerian naira (NGN), assessed on a preceding year basis.
With respect to business profits, a non-resident company that has a fixed base or a permanent establishment in Nigeria is taxable on the profits attributable to that fixed base. Non-resident digital companies that have a Significant Economic Presence (SEP) will be subject to income tax in Nigeria on profit attributable to the taxable presence in Nigeria. SEP can be determined by:
- Revenue exceeding a specific threshold from Nigerian users.
- Sustained interactions with Nigerian users.
Examples of services with SEP include:
- Streaming services (Netflix, Spotify)
- E-commerce platforms (Amazon, Alibaba)
- Social media ads and digital advertising (Facebook, Google)
- Freelancing Companies (Upwork, Fiverr)
- Payment Platforms (Payoneer, PayPal)
A foreign entity involved in digital transactions will be deemed to have created a SEP in Nigeria and is therefore liable to tax if it:
- Derives income of NGN 25 million or equivalent in other currencies from Nigeria in a year from business activities contained in the Order
- Uses a Nigerian domain name (.ng) or registers a website address in Nigeria, or
- Has purposeful and sustained interactions with persons in Nigeria by customizing its digital platform to target persons in Nigeria (e.g. by stating the prices of its products or services in naira).
Any company covered under any multilateral agreement to which Nigeria is a party will be treated per those agreements from the effective date in Nigeria.
Non-resident companies providing professional, consultancy, management, and technical services to Nigerian residents will be subject to tax at 10% final tax where such a company has an SEP in Nigeria.
A foreign entity providing technical (including training, advertising, supply of personnel), professional, management, or consultancy services shall have a SEP in Nigeria in any accounting year if it earns any income or receives any payment from a person resident in Nigeria or a fixed base or agent of a foreign entity in Nigeria.
As such, it is required to register for Companies Income Tax (CIT) and file its tax returns. Any Withholding Tax deducted at source from its Nigeria-source income is available as offset against the CIT liability save for non-resident companies carrying out Professional Consultancy Management and Technical services where the Withholding Taxes paid at 10% are deemed to be final tax.
The CIT rate is 0% for companies with gross turnover of NGN 25 million or less while the CIT rate is 20% for companies with gross turnover greater than NGN 25 million and less than NGN 100 million.
In a final move by former President Mohammadu Buhari, the Finance Act 2023 (the “Act”) was signed into law on May 28, 2023, just before his last day in office. By the Act, digital assest has been included as one of the business activities susceptible to Capital Gains Tax. The implication therefore is that disposal of digital assets such as cryptocurrency will now be subject to a Capital Gains Tax (“CGT”) rate of 10%. This move aims to capture the growing digital asset market and ensure that taxes are appropriately levied on gains derived from these transactions. It is expected that further directives and guidelines on compliance by individuals and companies will be issued by the relevant authorities.
Also, taxable goods purchased online from non-resident suppliers that have been appointed as agents of the FIRS will not be further subjected to Value Added Tax (VAT), where the importer provides proof of appointment and registration with the FIRS, before clearing by the Nigerian Customs Service. This change helps address the challenges of taxing digital transactions and ensures that VAT is properly collected.
Challenges Of Implementing Digital Services Taxation in Nigeria
- Double Taxation and International Tax Treaties:
The number of bilateral treaties has been on the increase over many years. The United Nations Model Double Taxation Convention between developed and developing countries (UN Model Convention) and the Organization for Economic Co-operation and Development Model Tax Convention on Income and Capital (OECD Model Convention) serves as a structural example for countries that adopt their provisions in negotiating the terms of their treaties. Tax treaties are closely related to international law and the legal status of tax treaties in a country is subject to the relationship between international and municipal law. Therefore, the status of treaties in a country’s legal system may adversely affect how the bilateral tax treaties are applied which in turn affects the taxation of NRCs. Nigeria could face diplomatic challenges as some of these tech giants may already be taxed in their home countries.
- Computation and Assessment of Payable Taxes
One major legal issue in Nigeria’s Taxation regime is the mode of computation and assessment. The collecting agencies- FIRS, LSIRS, and so on- are fond of levying huge amounts of companies which makes for the larger percentage of tax cases in courts. This issue will be even more pronounced with digital services taxation as it may not be easy to collect the necessary data to compute the payable taxes.
- Tax Administration and Compliance
As a result of digitalization, many businesses engage in their business activities without following the required procedures. The Companies Income Tax (Significant Economic Presence) Order, 2020 provides that a company other than a Nigerian company shall have a SEP in Nigeria where it derives gross turnover or income of more than 25 million naira or its equivalent in other currencies through these digital activities it shall be deemed that the company has a significant economic presence in Nigeria and such income and profit made will be subjected to tax in Nigeria.
It, therefore, follows that non-resident companies do not need to establish a permanent establishment in Nigeria before doing business in Nigeria. Digital economic activities need not be accompanied by a physical presence. This is because these online activities and businesses are done with intangible assets and these intangible assets are easily moved around the world through digital technologies including the satellite. This makes it increasingly difficult for the tax-collecting authorities to identify income generated through these intangible assets.
- Technological and Infrastructure Gaps
Nigeria lacks sufficient technology and infrastructure to effectively enforce the taxation of digital services. The fact that businesses are being digitalized can give them a platform to thrive without following the set guidelines of being registered. A technologically advanced country will be able to enforce the taxation of digital services and ensure that these taxes are remitted transparently and fairly from all digital service providers, including smaller platforms.
Prospects and Opportunities
- Increased Government Revenue
Nigeria’s main source of revenue is its mineral resources. The imposition of tax payments on SEP businesses will increase both the State and Federal generated revenue. Digital Services Taxation provides a significant source of revenue for Nigeria, especially as the number of digital service consumers is always on the increase. This revenue can help improve the finances of Nigeria.
- Fairer Taxation System
Digital Services Taxation gives every non-resident company a plain ground to pay the required amount of tax. It ensures that every company benefitting from Nigerian users contributes their quota to the Nigerian economy thereby striking a balance between local and foreign companies.
- Encouragement of Local Tech Innovation
The taxation of foreign digital companies can give the Nigerian government a platform to grant incentives to local digital companies so they will compete with foreign digital companies.
- Harmonization with Global Trends
The Organisation for Economic Co-operation and Development (OECD) is a major organization that is targeted at encouraging the implementation of digital services taxation. Nigeria being a member of OECD aligns them to address the taxation of the digital economy. The OECD and the G20 have been discussing similar measures under the Base Erosion and Profit Shifting (BEPS) initiative.
Recommendations for Effective Implementation
- Strengthen Legal Frameworks
Nigeria needs a comprehensive and clear regulatory framework that aligns with global standards to ensure non-resident companies comply with the tax laws and the steps that will be taken to punish those who do not comply with the laid down rules. The Finance Act can be amended to cover any loophole that might be present to be efficient.
- Technological Investment
Digital Service Taxation will push Nigeria to invest in digital tax monitoring systems that will aid in tracking transactions and tax obligations in the digital space. The monitoring systems will make open every digital transaction to the government.
- Engage in International Tax Cooperation
Organizations like the OECD and other foreign countries that discuss Data Services Taxation and other related matters could help Nigeria avoid potential conflicts arising from double taxation and align with global tax laws.
Conclusion
The implementation of digital services taxation in the Nigerian public service offers the promise of addressing persistent challenges and capitalizing on new opportunities. The challenges can not be denied but the advantages cannot be overlooked. It opens the country to great opportunities. For example, Nigeria will have access to organizations like the OECD amongst others, since they are pursuing the same goal, the organization can assist in many ways, generation of revenue, technology advancement, etc. Tackling the issues that will most probably be present requires investing in infrastructure, providing training, fostering strong leadership, crafting effective policies, and combating theft. Commitment to digital transformation can lead to an efficient, transparent public service, setting an example for the region. By embracing digital opportunities, Nigeria’s public service can overcome challenges, contributing to the nation’s progress in the digital era. It will encourage reforms and collaboration between stakeholders to improve the administration and effectiveness of Digital Services Taxation in Nigeria.