Taxation Of Digital Activities: An Evaluation Of The Nigerian Approach In A Global Context

Taxation is system that encapsulates the imposition of a compulsory financial charge at specified rates on individuals and corporate entities by the government or its agency in a bid to generate revenue to fund public expenditure. The different tax bases include; personal income tax, companies income tax, sales tax, property tax etc. The Federal Inland Revenue Service is the body responsible for collection of taxes at the federal level, while the State Internal Revenue Service is responsible for collection of taxes at the state level in Nigeria.


In Nigeria, two fundamental principles that govern taxation are derivability of income and residency of the tax payer (individuals or corporations). As such, the law specifies the rudiments for taxation of resident and non-resident entities on income derived from Nigeria. Since the bane of this topic concerns non-resident companies, Paragraph 2.3.2 of the FIRS information circular on taxation of non-residents 1993 defines a non-resident corporation as a company or corporation that is not registered in Nigeria but which derives income and profits from Nigeria and provides that these companies will be subject to companies income tax on the income derived from Nigeria.



However, prior to the amendment of the Companies Income Tax Act 2011, Cap 21, LFN 2004 (hereafter Companies Income Tax Act or CITA 2011) corporations or companies that offer online and digital services where not subject to the mandatory company income tax. The position of the law on this matter has now changed following the recent amendment of the CITA 2011 by the Finance Act 2019 to the effect that companies with a significant economic presence in Nigeria, offering online and digital services will now be subject to taxation. The motive behind this move by the government is not far-fetched seeing the rising profile of digital businesses globally with accelerated expansion and huge capitalization, revenues and profits that have reason up to about $11.5 trillion globally as at 2016.


This essay seeks to proffer an overview of this development and evaluate the Nigerian approach in a global context.
Pursuant to Section 4 of the Finance Act 2019 which amended section 13 of the CITA 2011 a non-resident company will be deemed to derive income from Nigeria (thus subject to Companies Income Tax) ;
13(c) if 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 usage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity.



Section 4(4) of the Finance Act 2019 inserted a new subsection 4 to section 13 of the CITA 2011 which provides:
For the purpose of subsection 2 (c) and (e), the Minister may by order, determine what constitutes the significant economic presence of a company other than a Nigerian company. On this authority, the Minister of Finance, Zainab Ahmed in 2020 made the Companies Income Tax (significant Economic Presence) Executive Order 2020 which in its section 1 defined a non-resident company with significant economic presence for the purposes of section 13(2) of the CITA (as amended) to be a company other than a Nigerian company which derives gross turnover or income of more than N25 million or its equivalent in other currencies from any of the combinations of the activities in section 13 (2) of the CITA. Payment of made to employees or for teaching in educational institutions is exempted.


This novel approach will be evaluated in a multi-faceted global context. It is important to note that Nigeria will not be the first country to introduce this provision in their law, so the issue is not on the face of things a new one globally. Similar to what is now applicable in Nigeria; Israel introduced a significant economic test which is applicable only to foreign enterprises that are resident in countries that have no double-tax agreement with Israel. Countries that have taken similar approaches include; India, U.K, Austria, France, Italy, South-Africa, Kenya etc, in a bid to not only obtain some revenue from digital operations going on or affiliated with their states but also reduce the gap of unfair competition between these companies and the resident companies in the same line of business who are subject to tax.


On the global plane, a predominant area of concern arising from this move is the question of double taxation of the companies involved, that is, incidence of taxation both in their countries of incorporation and the countries they operate in. The out-door for countries have been double tax treaties which in itself is not a stable bed the existing double tax treaties with Nigeria do not specifically provide a nexus for the taxation of digital and technical, professional, management or consultancy services by such companies in Nigeria. However, it could be arguably hinged on since double tax treaties define permanent establishment differently. For instance, the avoidance of double taxation treaty between Nigeria and Singapore in 2019 define permanent establishment among other physical establishments to include furnishing of services, including consultancy services if they continue for a period aggregating more than 163 days in a 12 month period.


This leaves the open question of whether digital services where envisaged in this clause. However, if double taxation treaties suffice, it will only protect the fourteen countries with which Nigeria has entered the agreement with from the significant Economic Presence (hereinafter SEP) Order.
Another subject of global debate is that of ascertaining profit attribution.

Countries generally are finding it difficult to ascertain the profit multinational enterprises get from their economic activities which is even more difficult in the context of digital services. This is largely due to the lack of a universal formula to define what it should be. How is the profit of companies like Amazon, Netflix etc to be ascertained? Under the Nigerian approach, the SEP order sets a minimum threshold of N25 million annual turnover, nonetheless there is no defined formula for profit attribution. India which has a similar policy uses a formula that combines sales, assets and payroll of the multinational companies to attribute profit. Luckily, Nigeria has a country-by-country regulation (2018) that places the onus on multi-national enterprises to file this information to the FIRS. More so, the provision of section 55 of the CITA 2011 requires every company earning income from Nigeria to file an annual self-assessment return to the FIRS.


Conclusively, as countries increasingly adopt taxation of the digital economy, it must be in perspective that the whole economy is going digital to a certain extent. Tax laws and treaties will need reforms to incorporate that perspective. In doing so, countries will have to clearly define the method of profit attribution and tax collection and resolve the problem of physical establishment. Generally, a coordinated approach will be needed to avoid any tax avoidance tactic of subject incorporations.



About the Author

Kalu Rejoice Chioma is a law student of the University of Nigeria. She has interests in corporate law, human rights, intellectual property law, public speaking, research and advocacy, and a strong desire to rise to the best of her abilities in the legal world and beyond.



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