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An Assessment of the Impact of the Finance Act 2019 on The Nigerian Digital Economy – Philips Akintola



The Finance Bill, 2019 received presidential assent on 13th January, 2020; which transformed the bill into what is now known as the Finance Act 2019. This Act brought subtle changes to the Nigerian tax system and laid a number of controversies to rest. One is the issue of taxability of franked investment income and excess dividend tax (EDT). Both issues were mostly popularised by the dispute in Oando Nig. PLC v FIRS(Oando IV) (2014) 16 TLRN 99, which was decided in favour of FIRS by the Tax Appeal Tribunal on 18th July, 2014, and later by the Federal High Court, Lagos on 29th September, 2016.

Asides the above, the Finance Act amends some key provisions of the Companies Income Tax Act (CITA), Value Added Tax Act (VATA), Personal Income Tax Act (PITA), Petroleum Profit Tax Act (PPT), Stamp Duties Act and the Customs, Excise Tariff Etc (Consolidation) Act. The Act also brought new innovations one of which affects the Nigerian Digital Economy.

This article seeks to assess the potential impacts of the Finance Act 2019 on the Nigerian Digital Economy.


Digital economy refers to all economic transactions that takes place on the internet or via internet. Digital economy is defined as an economy that focuses on digital technologies, i.e. it is based on digital and computing technologies. It essentially covers all business, economic, social, cultural etc. activities that are supported by the web and other digital communication technologies.

Nigeria, being one of the most populous countries in the world with a teeming youth population and a significant tech savvy populace, is no doubt a hotspot for digital economic activities in Africa.

The daily improvement of technology in Nigeria has boosted the growing number of start-ups in the West-African Country, many of which are tech reliant for their daily activities ranging from customer service, problem solving, finance, logistics, advertisement and many more.

According to the World Bank’s 2019 Nigeria Digital Economy Diagnostics Report; in 2016, the global digital economy was worth some USD 11.5 trillion, equivalent to 15.5% of the world’s overall GDP. A Huawei funded Global Industry Vision (GIV) 2025 report stated that by the year 2020, there would be 40 billion personal smart devices and 100 billion connections around the world, and the use of Artificial Intelligence (AI) will lead to a fully connected and intelligent world, thereby fostering new business species and driving leapfrog development for industries; Mass innovation, tapping into the opportunities of a digital economy valued at $23 trillion.

Looking at the above figures, Nigeria is strategically positioned to have a huge bite at revenues from the global digital economy now, and in the future. Nigeria’s E-Commerce sector alone was worth an estimated $13 Billion in 2018. This shows that what the future holds for the Digital Economy in Nigeria is certainly not looking gloomy. In the 2020 KPMG Nigeria Banking Industry Customer Experience Survey, First Bank Nigeria Limited alone created over 150,000 indirect jobs and executed 3,000,000 transactions through one of its numerous digital banking offerings (FirstMonie). Also, according to the report, E-transactions for customers earned Guarantee Trust Bank, United Bank for Africa and other eight banks N135.5 billion between January and September, last year. The report stated further that a look at the unaudited 2019 third quarter reports of the banks shows that their revenue from electronic transactions grew by 57 percent as against the first 10 months of 2018.

The various tiers of government and its agencies, the Military, Corporations, Start-up and even entrepreneurs have in one form or another embraced digitalization of business. One common example that ties all together is Remita, which is a digital payment platform.

In its September 2016 Report, McKinsey observed that digital platforms are important to the growth of modern economies. It projects that by 2025, the digital industry will boost the Gross Domestic Product (GDP) of emerging economies by $3.7 trillion.


With regards to how the new act affects the Nigerian Digital Economy, Section 4 of the Finance Act 2019 added new paragraphs c & e to section 13(2) of the Companies Income Tax Act, and also a new paragraph 4 to the Act.

Under the new Section 13(2)(c) of CITA, the profits of a company other than a Nigerian Company from any trade or business shall be deemed to be derived from or taxable in Nigeria if such company 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.

Under the new Section 13(2) (f) of CITA, the profits of a company other than a Nigerian Company from any trade or business shall be deemed to be derived from or taxable in Nigeria 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).

The effect of the proviso here is that the Withholding tax is final income tax of the non-resident provider of the technical, management, consultancy or professional service only if it does not also fall within any of the other categories in subsection (2)(a) – (e). In other words, if a non-resident company falls under the applicability of both Section 13(2) (c) and Section 13 (2) (f), the WHT will not be the final tax. Rather, such a company will be liable to pay Companies Income tax.

The new Section 13(4) states that the Minister may by order, determine what constitutes significant economic presence of a company other than a Nigerian Company.


To interpret the above provisions in simple terms, foreign companies that provide the aforementioned digital services, professional services, consultancy or technical management services in Nigeria without a significant economic presence (SEP) in Nigeria shall be liable to pay withholding tax as the final tax on their earnings. The withholding tax will be surcharged and remitted by the Nigerian company the foreign company is in business with. The Finance Act and CITA has left the determination of what constitutes SEP as it relates to companies under Section 13(2) (c) and (e) of CITA to the Minister.

The Organisation for Economic Cooperation and Development (OECD)’s Action 1 on preventing Base Erosion and Profit Shifting (BEPS), to address the tax challenges of the digital economy, the OECD, proposed SEP as one of the approaches for taxing the digital economy by its members. Taking India as an example, in reaction to the proposed OECD approach, made an amendment to the Income Tax Act of 1961 to cover this area and also defines through S.9 (1) (i), Explanation 2A of the act that a non-resident company will be considered to have an SEP in India if:

  • If the non-resident receives revenue exceeding an amount to be prescribed; for transactions carried on by the non-resident within India,
  • (i) If the non-resident systematically and continuously solicits business in India through digital means;

(ii) If the non-resident engages in interaction with users in India through digital means. The minimum number of users that would attract the provision of SEP will be prescribed by notification.

However, in Nigeria, we await the decision of the Honourable Minister for Finance to give the order on what would constitute SEP for a foreign company in Nigeria. One issue with an arrangement like this is that the threshold for what will constitute SEP might fluctuate based on the policy of the administration in government.

The Vice President, Professor Yemi Osinbajo SAN on January 31, 2020 reaffirmed the commitment of the Federal Government to tax digital and multinational technology companies who in his words, do not have a physical presence in Nigeria, yet make significant income in Nigeria from online activities. He went further to state that “under the new Act, once you have a significant economic presence in Nigeria, you are liable to tax whether you are resident or not”.

Given the fact that Nigerian Digital Economy is dependent on the Western World digital service providers, the consequences of section 4 of the Finance act will be felt by the Nigerian end users and might have over reaching consequences. If some of these companies determine that they are better off not doing business in Nigeria, they might withdraw their services or better still, increase the cost of providing these services in a bit to offset their eventual tax liabilities. The Nigerian final consumer will be left to bear the brunt where any of these happens.

According to the 2016 The Economist Intelligence Unit Report titled “Building a digital Nigeria”; Nigeria is connected to the Internet by 5 submarine cables, all of which land in Lagos, which are the South Atlantic 3-West Africa Submarine Cable (SAT-3/ WASC), the Main One Cable, the Glo-1 Cable, the West Africa Cable System (WACS), and the African Coast to Europe (ACE) cable. These cables originated from foreign countries mostly in Europe and a larger percentage of them owned by foreign entities with the exception of the Glo-1 Cable. One certain implication with regards to this particular sector is, call, texts and internet data will be more expensive. Internet Data is already overpriced in Nigeria with an internet speed 50% slower than the global benchmark of 25.38 mbps (Megabytes per second).

The Support structure of the digital economy in Nigeria which ranges from Cloud service providers like Azure, Amazon web services, Rackspace etc.; Web service providers such as WordPress, blogger etc.; Hosting solutions companies such as Bluehost etc.; Application programming interface (API) providers like Plaid, Visa, MasterCard etc.; Software as a service (SaaS) providers such as Slack, G suite for business, Office 365, Zoom etc.; and a host of many others are digital services providing companies that the Nigerian Digital Economy is heavily reliant on are all foreign owned, controlled, and non resident. The most important of these classes of service providers are the FinTech Companies like PayStack, PayPal, and Wallets Africa etc. Majority of Nigerians transacting out of Nigeria rely on these FinTech service providers to provide a gateway for individuals and corporate organizations to receive foreign payments regardless of the currency.

These companies that provide such digital services, especially those domiciled in the United States have not reacted favourably to digital taxation by foreign companies and have often taken their protests to the President of the United States of America through the office of the US Trade Representative (USTR).

The United States in return have proposed levelling high tariffs on imports from Countries such as France, Spain, Italy, Austria and Britain that have either formalised digital tax or are still contemplating.

According to available data on the website of the office of the US Trade Representative (USTR), Nigeria is currently the 49th largest goods trading partner of the United with $8.3 billion in total (two way) goods trade during 2018. Goods imported from Nigeria to the U.S. totalled $5.6 billion. The U.S. goods trade deficit with Nigeria was $2.9 billion in 2018. This huge trade deficit actually gives the United States room for retaliatory measures in response to the digital tax under Section 4 of the Finance Act 2020; measure such as increase in tariffs on Nigerian goods exported to the United States.

On Wednesday 22nd January, 2020; French Finance Minister Bruno Le Marie confirmed that France will suspend collection of its digital services tax this year to prevent the United States from applying retaliatory tariffs on a range of French goods. This underscores the efficiency of the United States’ bargaining power in matters like this. Considering the state of the Nigerian Economy, a possible economic showdown with the United States is not something the Nation would desire at this moment.

On 23rd of February 2020, Japanese Finance Minister Taro Aso Criticised a U.S. tax reform proposal that he said could undermine global efforts to agree new rules on taxing big tech companies. The proposal is dubbed the “safe harbour proposal”, and it undermines the efforts of the OECD with regards to developing rules for the taxation of digital companies where they do business.


The Finance Act 2019 is a laudable piece of legislation that will no doubt drive economic growth. However, as it relates to the digital economy, the taxman’s foot is still firmly on the brakes since the Minister has not made the order of what will constitute SEP for a non resident foreign company doing business in Nigeria.

With regards to possible trade cum political conflict the taxation of digital companies under the Finance Act might create, Section 23(2) CITA states:

(2) The President may exempt or order

(a) any company or class of companies from all or any of the provisions of this Act; or

(b) from tax all or any profits of any company or class of companies from any source, on any ground which appears to it sufficient.

This allows the President to grant exemption to some digital companies whose home countries might be strongly opposed to the Digital Tax. The discretion as to whether to grant this exemption is solely at the prerogative of the President.

Tax and Dispute Resolution Counsel
Hermon Legal Practitioners
LinkedIn: Michael Akintola Phillips

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