By Kate Ehizogie
On the 10th of June, 2021, the Federal Government of Nigeria placed a ban on Twitter platform and subsequently ordered that all operators of digital platforms be licensed by registering with the Corporate Affairs Commission and other regulatory bodies in order for these operators to be brought within the tax net. The Minister of Information, Lai Mohammed reiterated that all Over The Top companies (OTT) otherwise known as ‘‘Digital Companies’’ be licensed going forward and brought with in the tax bracket and regulatory laws.
Earlier on, the Federal Government had enacted the Finance Act 2020 on 13 January, 2020 introducing various changes to principal tax legislations in Nigeria, among which are the commencement of a new regime of Companies Income Tax for non-resident companies (“NRCs”) providing digital services and products to persons in Nigeria, and the imposition of Value Added Tax (“VAT”) on intangible supplies.
LEGAL BASIS FOR DIGITAL TAXATION UNDER THE FINANCE ACT
Under Nigerian law, the income of companies are subject to the Companies Income Tax Act (“CITA”) where such income accrues in, is derived from, brought into,or is received in Nigeria .Section13(2) of the Act provides the basis for assessing the element of derivation for corporate income tax on the profits of an NRC in Nigeria.Prior to the enactment of the Finance Act, the profits of an NRC from any trade or businness were only deemed to be derived from Nigeria and assessable to company income tax as follows :
- if the company has a fixed base in Nigeria to the extent that the profit is attributable to the fixed base ; or
- if it does not have a fixed base in Nigeria but habitually operate a trade or business through a person in Nigeria authorized to conclude contracts on its behalf or on behalf of some other companies controlled by it or which have controlling interest in it or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company to the extent that the profit is attributable to business or trade or activities carried on through that person; or
- Derives profits from that trade or business or activities which involves a single contract for surveys, deliveries, installations
- or construction; or
- Where the trade or business or activities is between the company and another person controlled by it or which has a controlling interest in it and
- conditions are made or imposed between that company and such persons in their commercial or financial relations which in the opinion of the FIRS is deemed to be artificial or fictitious, so much of the profit adjusted by the Board to reflect arm’s length transaction.
The above provisions of the CITA limited the taxation of business profits of NRCs to only occasions where the NRC:
- has a fixed base in Nigeria(which requires some element of physical presence); or
- concludes contracts through a dependent agent in Nigeria; or
- engage in turn-key projects in Nigeria; or
- carries on trade or business with persons who have controlling interests in the NRC, and the conditions made or imposed between the NRC and such persons in their commercial or financial relations are deemed to be artificial or fictitious by the FIRS.
This regime did not contemplate the taxation of income derived by NRCs from digital services or products offered to persons resident in Nigeria. As you can see, an interpretation of the above does not include foreign companies operating in the Nigerian digital space in the tax bracket but this has now been provided for by the Finance Act of 2019
Thus, Section 4 of the Finance Act, amended the provisions of Section 13 of CITA by providing that companies involved in digital, electronic or online business in Nigeria, and having significant economic presence in Nigeria is liable to tax. Currently, the power to determine what constitutes significant economic presence in Nigeria under the Act lies with the Minister of Finance as provided in the Act.
INTRODUCTION OF SIGNIFICANT ECONOMIC PRESENCE (SEP)
The amendment of Section 13(2) of CITA introduced the principle of international digital taxation “Significant Economic Presence” (“SEP”).
Firstly, pursuant to the Act, an NRC’s profits would now be subject to company income tax in Nigeria where : “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 storage, 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 “
Secondly, If the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria:
Provided that the withholding tax applicable to income under this paragraph shall be the final tax on the income of a non- resident recipient who does not otherwise fall within the scope of subsection 2 (a-e)’’
Flowing from the above, the Order provided the matters that would constitute a SEP for foreign companies doing business, or providing services to customers in Nigeria as a foreign company shall have a SEP in Nigeria in any accounting year, where it
- derives N25 million annual gross turnover or its equivalent in other currencies from any or combination of the following digital activities:
- streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games and e-books to any person in Nigeria; or
- transmission of data collected about Nigerian users which has been generated from such users’ activities on a digital interface including website or mobile applications; or
- provision of goods or services other than those under sub-paragraph 5 of the Order, directly or indirectly through a digital platform to Nigeria; or iv. provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria.
However, an NRC is not considered to have significant economic presence where it makes payment to employees, under an employment contract; for teaching in an education institution or for teaching by an educational institution; by a foreign fixed base of a Nigerian company.
SEP as an emerging principle in international tax law was formulated by the Organisation for Economic Cooperation and Development (“OECD”) Base Erosion and Profit Shifting (“BEPS”) Action Plan as part of its attempts to bring the rapidly multiplying digital businesses of multinationals within the jurisdiction of EU country tax nets.
A definition of SEP and characteristics of the principle were outlined in the OECD Action 1 – 2015 Final Report on Addressing the Tax Challenges of the Digital Economy (the “OECD Report”). SEP was proposed as an option to create a “taxable presence in a country when a non-resident enterprise has a significant economic presence in a country on the basis of factors that evidence a purposeful and sustained interaction with the economy of that country via technology and other tools. These factors would be combined with a factor based on the revenue derived from remote transactions into the country, in order to ensure that only cases of significant economic presence are covered, limit compliance costs of the taxpayers, and provide certainty for cross border activities.”
The implementation of SEP would thus depend on key factor(s) as the basis for assessing the minimum requirements for an NRC to have SEP in Nigeria. The OECD Report offers different possible factors, including a revenue-based factor, digital-based factors, user-based factors, or combinations of the three. For example:
- Revenue-based factor: A revenue-based factor for SEP would be predicated on using the revenues generated from customers in Nigeria to establish the nexus for SEP. Revenue on its own is not a sufficient factor but can be used as the basic factor in combination with other factors. Thus, collecting bodies and tax administrating bodies will need to collaborate with users through technological tools in ascertaining the numerous transactions on digital platforms so as to ascertain the revenue generated and means of exchange of data or payment.
- Digital-based factor: A digital-based factor for SEP involves using a company’s digital presence as a means of determining SEP. This entails using characteristics such as a local domain name in that country (i.e. www.company.ng), a local digital platform (local websites, websites translated to the language of that country, local terms of service for customers, etc.) and local payment options (i.e. prices calculated in Nigerian Naira with relevant local taxes inclusive), which indicate an NRC having a digital basis for seamless transactions with local consumers.
- User-based factor: A user-based factor for SEP entails using an enterprise’s user base and related data as indicators of sustained economic interaction. This could be calculated through using indicators such as monthly active users (calculated on a 30-day basis), regular online contract executions (i.e. customers agreeing to online Terms of Service), amount of data collected, etc.
The above factors notwithstanding, certain difficulties may arise in implementing them or any combination of them in Nigeria. For instance, revenue-based factors require the tax authority to have specific information on the computation of the NRC’s profits. It may be difficult for the Federal Inland Revenue Service (“FIRS”) to have access to the financial statements of an NRC in order to ascertain the extent of profits attributable to digital transactions in Nigeria.
Digital or user-based factors offer similar challenges and may depend on the NRC submitting user data or other relevant information to the tax authority. Further, jurisdictional questions may arise (i.e. does SEP apply to digital consumers in Nigeria or Nigerian consumers regardless of location? How would such consumers be traced or tracked by the tax authority?).
VALUE ADDED TAX
The Finance Act expands the scope of VAT to capture supplies of goods and services in the digital economy. Furthermore, the Finance Act provides that supply of goods anywhere would be subject to VAT in Nigeria, provided that the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right thereof is situated, registered or exercisable in Nigeria. The implication of the above is to the effect that where an NRC supplies digital goods to or for the benefit of persons in Nigeria, such transactions would be subject to VAT.
There have also been amendments to VAT provisions in order to ensure registration by NRCs for VAT in Nigeria, as well as for accounting of VAT on invoices issued by NRCs to Nigerian consumers. Based on the provisions of the Finance Act, NRCs will be required to register for VAT purposes and include the VAT tax payable on its invoices to Nigerian consumers. Where an NRC fails to remit the applicable VAT, the Finance Act requires the recipient of the invoice in Nigeria to self-account for VAT and remit the tax. It is important to note that failure to comply with the new provisions may subject offenders to increased penalties for non-registration and non-remittance of VAT.
THE FOLLOWING ARE THUS RECOMMENDED IN ORDER TO TACKLE THE ABOVE CHALLENGES:
- information technology expertise would be needed for successful adoption of any these factors.The collecting agents of FIRS would need to collaborate with the digital payment platforms in order to ascertain the quantum of revenue generated;or
- deduction, witholding of a percentage of tax (WHT) at source which shall be borne by the user upon various payments, purchases, products or services advertised, streamed or sold online by these companies who would other wise not provide their financial information; or
- the application of an equalization levy as a direct tax which is withheld at the time of payment by the service recipient on digital transactions; or
- income made from the Nigerian digital economy by an NRC operating from a country that has Double Taxation Treaty (DTT) will be taxed in accordance with the provisions of the DTT. This means that by virtue of the DTT the income made by an NRC would ordinarily be subject to tax based on the arrangement in the DTT if it were a permanent establishment in Nigeria.
- where further complexities arise as to the effective administration of these guides, the Order provides that the Minister of Finance shall make further guidelines by way of intervention in that regard.
However, it is worthy of note that regardless of the challenges that may be associated with defining and adopting a SEP principle in Nigeria tax legislation, the EU, UK, France, Italy and a host of other countries have successfully introduced Digital Services Tax as a flat rate on digital businesses depending on the activities and revenue threshold generated.
CONCLUSION Going by the amendments of the Finance Act, digital companies (NRCs) operating in the Nigerian digital economy are now captured within the income tax bracket and particularly multinationals (such as Google, Amazon or Apple) which offer various digital goods and products to persons in Nigeria are now to have companies income tax obligations in Nigeria under the new regime. This means where an NRC’s profits are derived from digital transmissions, ecommerce, app stores, trading, storage, ads, network platforms, etc. to the extent that such NRC has a SEP in Nigeria and attributes profits to such activities, then the NRC would be liable to pay company income tax in Nigeria on the part of its profits attributable to Nigeria.
Correspondingly, the FIRS would need to deploy every innovation and technological tool in tackling the seeming challenges, and as well consider how it can leverage the OECD’s work on model rules for reporting by operators in the digital economy with a view to having access to high quality data on the digital economy as it relates to Nigeria.
Kate is a Senior Associate in the firm of E.A. Otokhina & Co. firstname.lastname@example.org
 1 Section 9 of Companies Income Tax Act (CITA), Cap C21, LFN 2004 (as amended).
 Section 13 (2) of CITA.
 Shell Int’l Petroleum B.V v. F.B.I.R (2004) 3 NWLR (Pt. 859) p. 46 at 63, paras E-H wherein it was held that a”fixed base” implies that the place must be easily identifiable and must possess some degree of permanence. It includes: (i) facilities such as a factory, an office, a branch, a mine, gas or oil well etc; (ii) activities such as building, construction, assembly, or installation; and (iii) furnishing of services in connection with the activities mentioned above; the case of Addax Petroleum Services Ltd v Federal Inland Revenue Service (2013) 9 TLRN 126 is also notable in this regard.
 4 .Finance Act 2019 Official Gazzete_20200205121125-Nigeria.
 Section 4(a)(ii) of the Finance Act (amendment of section 13).
 Chapter VII, OECD Action 1, 2015 Final Report on Addressing the Tax Challenges of the Digital Economy, para. 277, p. 107. Available at: https://www.oecd.org/tax/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-finalreport9789264241046-en.htm
 The federal agency saddled with the responsibility for accessing, collecting and accounting for company income tax and other revenues accruing to the Federal Government of Nigeria.
 .Dipo Komolafe and Okabonye Chukwuanyi -The Impact of Finance Act on Digital Taxation in Nigeria.Available at: https://www.mondaq.com/nigeria/tax-authorities/903148/the-impact-of-the-finance-act-on-digital-taxation-innigeria
 Section 46 of the Finance Act.
 .Section 33 of the Finance Act..
 Olayemi Anyanechi and Victor Oluwajobi-Taxing the Nigerian Digital Economy.Available at: https://seftonfross.com/wp-content/uploads/2020/11/TAXING-THE-NIGERIAN-DIGITAL-ECONOMY.pdf
 Section 37 of the Finance Act.
 Section 35 of the Finance Act
 Section 40 of the Finance Act
 15 .Bird & Bird LLP. Digital Services Tax: Overview of the progress of implementation by EU Member States.Available at: https://www.lexology.com/library/detail.aspx?g=b2f512f2-3244- 4a4f-880e-1bae4ff85ed9