With more businesses digitized, and numerous cross-border transactions conducted daily, the digital economy is increasingly becoming the economy itself. As opposed to businesses in the traditional economy which usually require tangible physical presence to be taxed, businesses in the digital economy are able to remit untaxed profits back to their countries because of the absence of a physical presence in their consumers’ countries. A situation not uncommon to Nigeria, companies with this model are able to cart away large amounts of profits from customers in these countries without being taxed, and this has called for concerns regarding remittance of taxes back to the consumers’ countries, where money was parted with. A key challenge has been whether to tax these businesses based on where value is created, or where value is consumed.
Traditionally, the position on this has been to tax the business with the physical presence or permanent establishment in the consumers’ jurisdiction. However, the shortcoming of this approach is that it leaves non-resident companies out of the tax net as company profits derived in the consumers’ countries may not be taxed in that country where the money was parted with. Internationally, the Organisation for Economic Cooperation and Development (“the OECD”)’s Action 1 on preventing Base Erosion and Profit Shifting (BEPS) seeks to address the following in a bid to address tax challenges in the digital economy:
A company’s ability to own a significant digital presence in another country’s economy without being subject to taxation because of a lack of nexus under current international rules;
the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services;
The application of related source rules, and how to ensure the effective remittance of taxes with respect to cross-border supply of digital goods and services.
These measures cover the commonly faced challenges, and is a laudable step in the right direction to ensure that this ever-growing industry is tax compliant. The OECD has also proposed the “nexus” and “profit allocation” rules in order to determine whether to remit taxes to the producer’s jurisdiction, or the consumer’s jurisdiction. Furthermore, the OECD introduced the digital service tax and the concept of Virtual Permanent Establishment to solve these problems.
Significant Economic Presence (SEP): The basis
In Nigeria, the Finance Act, 2019, takes a progressive leap by expanding the criteria for tax subjectablity of companies in the digital economy. The Act expanded the tax net from “having a physical presence in Nigeria” to having a “Significant Economic Presence (SEP) in Nigeria”. Prior to the Finance Act, 2019, Section 13 of the Companies Income Tax Act (CITA), 2011 subjected non-resident companies to tax only if they had a fixed base in Nigeria, and if the taxable profit was the profit earned in, or attributable to that fixed base. The shortcoming of the previous provision was that it deprived the government of deserved revenue accruing from services provided to its residents. But in the spirit of the new amendment, companies in this category, which mostly fall into technology services industry now have a “Significant Economic Presence (SEP)” in Nigeria and will be taxed based on this principle, thus shutting a hole, which was before now, a source of revenue leakage for the government.
The amendment to the old Section 13 provides a wide range of activities to adequately describe SEP. It states that profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria “if it transmits, emits or receives signals, sounds, messages, images or data of any kind from 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.”
By virtue of this provision, non-resident companies that fall within the SEP threshold will be required to register with the relevant Inland Revenue Service, and file income tax returns. Therefore, the profits of non-resident companies in the digital company, with SEP in Nigeria such as Uber, Bolt, and others, will be subject to tax.
In this wise, it is important to note that the amendment in Section 13 (4) provides that the Minister of Finance, may by order, determine what constitutes the significance economic presence of a company other than a Nigerian company. It is expected that this provision introduced by the Finance Act, 2019, will become effective, only when an order is issued.
On VATability of imported services
The Finance Act, 2019 also reechoes the OECD’s position on Value Added Tax (VAT)/Goods and Services Tax, which provides that where services are rendered to a person resident in the consumers’ country, such services received will be chargeable to VAT, regardless of the location of the supplier. The Nigerian courts aligned with this principle in Vodacom Business Nigeria Limited (VBNL) v Federal Inland Revenue Service (FIRS), the Court of Appeal ruled in favour of the FIRS and held that Vodacom was required to account for the VAT on its importation of bandwidth signals whether or not it performed the services in Nigeria. The court, in reaching its decision, held that bandwidth signals from the NRC (Vodacom), received by its Nigerian outfit (VBNL), was subject to Value Added Tax (VAT) in Nigeria.
Comparison with the EU
In addressing whether taxes should be remitted to where value is created, or where value is consumed, the European Commission (EC) proposed that member states should apply an interim tax known as “Digital Service Tax (DST)”. The interim tax shall be in place till a comprehensive reform is enforced, and shall be 3% on gross revenue of businesses operating in the belowlisted categories:
Placement of online advertisement media;
Sale of data retrieved from users during online activities; and
Provision of an intermediary digital platform to facilitate interactions and trade between users.
It is important to note that the above categories play a major role in value creation, which is key in today’s internet, and are still elusive under tax rules, hence the measure to pull such entities under the tax bracket. As is the case under Nigerian law, company profits in member states of the EC will be taxed in the jurisdiction where businesses have a “taxable digital presence” and will apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million
Conclusion
The amendment of Nigeria’s tax laws came at an ideal time – just when the digital economy gained a wider footing in Nigeria. The emergence of prominent non-resident companies in the Nigerian market in this space from ride hailing, to content platforms, filming/media, computing, saw a rise in profits for these companies. These profits can only translate to revenue for the Nigerian government, upon successful implementation and judicious interpretation of the amended provisions. In addition to boosting the country’s fiscal health, multilateral conventions on tax related treaties should be ratified in order to curb incidences of profit shifting and tax evasion.
