Introduction
The digital economy is defined as the aggregate of economic activities derived solely or primarily from digital technologies (ICT) with a business model based on digital goods or services.
The invention of digital technologies has changed the nature of international trade in goods and services. On the flip side, local tax laws in various countries as well as the international tax rules are yet to adequately address the taxation of international trade and digitization.
During the global financial crisis in 2008, governments all over the world began pushing for increased tax remittances from multinational enterprises (MNEs). The G20 countries charged the Organization for Economic Co-operation and Development (OECD) to review existing international tax rules and prepare new rules that were fit for purpose. This birthed the OECD’s Base Erosion & Profit Shifting (BEPS) initiative.
Nigeria Digital Economy
With about 200 million people, Nigeria accounts for about 47% of West Africa’s population and has one of the largest populations of youth (below 30) in the world. Nigeria has the largest mobile market in Sub-Saharan Africa, supported by strong mobile broadband infrastructure and international connectivity (World Bank Nigeria Digital Economy Diagnostic Report, 2019). With Africa currently accounting for only about 1% of the global digital economy, our reality is a stark contrast when compared to 68% in the United States, 22% in China, and 27% in Asia.
At the 2023 BusinessDay CEO Forum, MTN CEO made a call to action a blueprint for developing a digital economy that could propel Nigeria to the world’s 5th largest economy. He highlighted the vast untapped potential in the digital economy, with Nigeria’s Internet Gross Domestic Product (iGDP) currently at 6% and expected to double by 2050 to reach 145 billion USD.
In response to the call, the Federal Ministry of Communications, Innovation, and Digital Economy unveiled its eight (8) Pillars roadmap to accelerate the development of the Nigerian digital economy. The 8 pillars are developmental regulation, digital literacy & skills, solid infrastructure, soft infrastructure, digital service development & promotion, digital society & emerging technologies and indigenous content promotion & adoption.
It is worthy of note that Nigeria has witnessed a remarkable increase in internet penetration in recent years. With a growing number of internet users, the digital economy has gained momentum, offering opportunities for businesses and individuals to connect, engage, and transact online.
OECD’s Approach at Addressing the Taxation of Digital Economy
In 2021, 137 out of the 141 countries via the OECD/G20 Inclusive Framework on BEPS reached a landmark agreement on a 2-pillar solution to reform the international tax framework in response to the challenges relating to taxation of the digital economy.
Pillar One
- Ensure a fairer distribution of profits and taxing rights among countries by re-allocating some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether the MNE concerned has a physical presence in the market.
- MNEs covered are those with global sales exceeding EUR 20 billion and profitability above 10%, with 25% of the profits exceeding the 10% threshold reallocated to market jurisdictions.
Pillar Two
- Introduction of the Global Anti-Base Erosion (GLoBE) rules to ensure MNEs with consolidated annual revenues exceeding EUR 750 million pay a global minimum tax at 15%.
- Where the ETR of an MNE is below 15%, it will pay a “top-up” tax to the jurisdiction of the MNE’s ultimate parent. There is a back-stop rule that gives taxing rights to the jurisdictions in which the constituent entities of the MNE group operate.
- Pillar Two provides for a Subject to Tax Rule that could override existing tax treaty rules benefiting payments that are not subject to a minimum level of tax in the recipient’s jurisdiction.
Nigeria’s Approach – Home-grown
Finance Act 2019 – Digital Services Tax
The Finance Act 2019 introduced the concept of Significant Economic Presence (SEP). This was followed by the issuance of the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order). This birthed Nigeria’s Digital Services Tax, which was later incorporated in the Finance Act 2021.
Based on the SEP Order, an NRC providing digital services will be deemed to have a SEP if;
- derives from Nigeria, a gross turnover or income exceeding N25 million or its equivalent from any or a combination of digital services provided
- uses a Nigerian domain name (.ng) or registers a website address in Nigeria; or
- has a purposeful and sustained interaction with persons in Nigeria, by customizing its digital platform to target the Nigerian market, including reflecting its product or service price in Nigerian currency or providing options for billing or payment in Nigerian currency.
However, where an NRC is covered under a multilateral agreement or consensus arrangement, such as a double tax treaty, such agreement with take precedence. Hence, SEP rules will not apply where DTT covers digital services.
The digital services covered under the SEP Order include:
- streaming or downloading services of digital contents (such as movies, videos, music, applications, games, e-books, etc.) to a person in Nigeria
- transmission of data collected about Nigerian users generated from such users' activities on websites or mobile applications
- provision of goods or services (including intermediation services) through a digital platform, website or other online applications that link suppliers and customers in Nigeria. etc.
Finance Act 2020 – Digital Services Tax
The FA 2020 amended Section 55 of the Companies Income Tax Act (CITA) by inserting a new subsection (1A). This requires NRCs that have PE or SEP based on section 13(2) to submit tax returns.
The FA 2020 also amended Section 10 of the Value Added Tax (VAT) Act and it mandates an NRC making taxable supply of goods or services to Nigeria to register for tax with the FIRS and obtain a Tax Identification Number (TIN). Previously, NRCs were required to register for VAT only if they were carrying on business in Nigeria. The phrase “carries on business in Nigeria” has now been replaced with “makes a taxable supply of goods or services to Nigeria”.
Based on the FA 2020, taxable goods are those physically present in Nigeria at the time of supply, imported into Nigeria, assembled or installed in Nigeria, or the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right is situated, registered or exercisable in Nigeria. On the other hand, taxable services are services rendered in Nigeria by a person physically present in Nigeria at the time of providing the service or the service is provided to and consumed by a person in Nigeria, regardless of whether the service is rendered within or outside Nigeria or whether or not the legal or contractual obligation to render such service rests on a person within or outside Nigeria, or the service is connected with existing immovable property (including the services of agents, experts, engineers, architects, valuers, etc.), where the property is located in Nigeria.
The FA 2020 introduced the use of e-filing system and allows FIRS to deploy any proprietary or third-party payment platform to collect and remit taxes due on digital transactions with a Nigerian resident. To give effect to the FA 2020 changes, the FIRS issued a circular to provide guidance on simplified VAT regime for Non-Resident Suppliers. It is effective from January 2022 for the supply of services and intangibles by NRSs, and January 2024 for the supply of goods.
The circular introduced a new VAT threshold of $25,000 (or its equivalent) for NRSs. NRSs are only required to register if they expect to make total annual supplies of at least $25,000. NRSs that do not meet the $25,000 VAT threshold for 3 consecutive years should write to the FIRS to be deregistered from the regime. Further, the FIRS stated that the guidelines cover services delivered via electronic or digital means. It excludes professional and consultancy services that are not automated (but may be delivered via email), broadcasting services, telecommunication services and services exempt from tax based on the first schedule of the VAT Act.
Finance Act 2021 – Digital Services Tax
Based on FA 2021, NRCs with SEP may be assessed to tax on a fair and reasonable percentage of their turnover, if there is no assessable profit or the assessable profit is less than what is obtainable in the industry the NRC operates (Section 30 (1)(b)(iia) of CITA. This was followed by an announcement by the Minister of Finance, Budget and National Planning that the applicable rate would be 6%.
The FA 2021 also amended Section 10 of the VAT Act and it mandates NRCs or any other person appointed by the FIRS to collect VAT under the VAT Act have the statutory obligation to collect and remit the tax.
Finance Act 2023 – Digital Services Tax
The FA 2023 eliminated the risk of double VAT charge on digital transactions. Where a Nigerian customer purchases goods from an online electronic or digital platform operated by a NRS that has been appointed as VAT collection agent by the FIRS, the Nigerian customer/ importer will not pay additional VAT at the port at the point of clearing the goods as long as he presents proof of registration or appointment of the NRS by the FIRS as an agent of VAT collection and such other documents as may be required by the FIRS.
FA 2023 also amended Section 3(a) of the Capital Gains Tax (CGT) Act by subjecting income from the disposal of digital assets (e.g. Cryptocurrency) to CGT at 10%.
Conclusion
The Nigerian government has demonstrated its dedication to fostering the growth of the digital economy by implementing various initiatives. One notable effort is the Nigeria Startup Act 2022, which seeks to establish a legal and institutional framework to support the development and functioning of startups in the country, mostly tech startups. There also exist various tax incentives and government programs directed at fostering and growing the digital economy. The big question is whether Nigeria will eventually succumb to the calls being made by the OECD to accent the pillar one and two solutions.
