By: Emmanuel Omotayo Johnson
1.0 INTRODUCTION
The term “Digital” means “the display” or “displaying the data electronically on a monitor”.(1) In this sense, all of the electronic activities that are performed in the electronic environment through a computer can be classified as “digital activities”. Therefore, all kinds of goods and services offered via the internet as part of economic activity through mobile devices (mobile phone, tablet, etc.), particularly the computers, are included in the scope of digital activities/economy. The concept of taxation of digital activities has gained a new dimension especially with the upsurge of technological development. While the extent of the trade carried out through internet, amongst others economic activities have reached dramatic levels annually, the problems encountered in taxation of the digital economy manifest themselves both nationally and internationally.(2) This study is an attempt to examine how the digital economy is captured under the Nigerian tax regime, while juxtaposing it with international trends and comparative law.
2.0 A CURSORY LOOK AT OECD’s/G20 “UNIFIED APPROACH” AND SOME SELECTED JURISDICTIONS APPROACH
As part of its ongoing work to address tax challenges arising from the digital economy (i.e. BEPS Project)(3) the Organisation for Economic Cooperation and Development (OECD) to which Nigeria is a member state, released a new outline on the “unified approach” to ensure that certain multinational enterprises pay tax in countries where they have consumer-facing activities but do not have a physical presence in the new outline.(4) According to the OECD, the tax regime would apply to “automated digital businesses” such as: online search engines, social media platforms, online gaming, digital content streaming etc., and “consumer-facing businesses”.(5)
According to the OECD TFDE, in its earlier publication in January 2019; proposed four thresholds to be explored on a “without prejudice” basis one of which is “significant economic presence” (SEP).(6)
In Israel, the Israeli Tax Authority (ITA) has issued a circular that provides that where a company relies significantly on the internet to provide its services, its activities will constitute its fixed base. In Colombia, a 19% VAT is imposed on digital services which are collected by the banks processing payments before sending out the proceeds.(7)
3.0 AN EVALUATION OF THE NIGERIAN APPROACH
Before the Finance Act of 2019
Prior to the advent of the current tax regime, Section 13 of the Company Income Tax Act(8) subjected a Non-resident Company (NRC) to tax liability in Nigeria only if such company had a fixed base in Nigeria and the taxable profit was the profit attributable to that fixed base.(9) Hence, the nexus for taxing profits derived by a foreign company in Nigeria was based on physical presence in Nigeria.(10) In the well celebrated case of Shell International Petroleum BV v. Federal Board of Inland Revenue (FBIR),(11) the Supreme Court of Nigeria defined a “fixed base” to be a place where a company has carried on business for a long time, notwithstanding that it is not the owner of the place.
This obsolete requirement of “fixed base” or “permanent establishment” cost Nigeria to lose billions of tax revenue annually. The biggest beneficiaries of this unintended oversight are digital companies like Facebook, Netflix etc., who do not require a base in Nigeria before carrying out their operations.(12)
Upon the Finance Act of 2019
On 13 January, 2020, His Excellency, President Muhammadu Buhari, GCFR, signed the Finance Bill, 2019 into law to become the Finance Act, 2019; an Act purported to amend and consolidate the Nigerian tax regime.
One of the major novelties introduced by the Act is the idea of “Significant Economic Presence” (SEP) as the yardstick for taxing of the digital economy of Nigeria. By virtue of Section 4(a)(ii) of the Finance Act, 2019, which amended Section 13 of the CITA, a foreign company “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 .”(13) …would be subject to and taxable under the Companies Income Tax Act (CITA).
Under the present tax regime, digital activities in the country are captured using the (SEP) to affix the affected companies with a fixed base in Nigeria. In consequence, the affected NRCs(14) in e-commerce, filming, computing, ride-hailing, media, etc., who previously had no fixed base in Nigeria under the conventional rules, and no Nigerian tax obligations, will be liable to Nigerian company income tax provided they meet the SEP threshold to be set by the Minister of Finance.(15) Also, such NRCs may be required to register for taxes and file income tax returns in Nigeria in line with Section 55 of CITA.(16)
Without much ado, the Federal Government of Nigeria has started to exploit the SEP initiative. In a recent news reported by Punch Nigeria Newspaper, on June 7, 2020 “the Federal Government plans to tax Netflix, Facebook, others”.(17)
With regards to indirect tax, one way digital activities have been captured is the charge of stamp duties on electronic receipts. Section 54 of the Finance Act introduced a new Section 89 to the Stamp Duties Act(18) which revises and replace the erstwhile Section 89. The new section 89 (3) provides that notwithstanding any other provisions of the SDA, electronic receipt for money deposited with any bank (to a third party account) in the sum of N10,000 and upwards will be chargeable with a singular one-off duty of N50.
4.0 CONCLUSION
The trend towards digitalisation has increased the urgency of efforts to remedy the weaknesses of current international tax system.(19) To this end, international community is working on solutions (one of which is the OECD’s/G20 BEPS Project) which are to be presented by the end of year 2020.(20) Although the ‘unified approach” for taxation of the digital economy is still a proposal awaiting the acceptance of the required numbers of member states, it appears that Nigeria had already used it as a template for taxation of activities in her digital economy, as evidenced by some of the provisions of the Finance Act of 2019, particularly, the concept of (SEP) and expansion of the scope of digital activities to include “automated digital businesses” provided in Section 4(a)(ii) of the Act.
Under the regime of “fixed base” the profits derived by non-resident digital businesses from online activities such as, advertising, movie streaming, online gaming stores, e-commerce, etc., from their users/subscribers in Nigeria were outside Nigeria’s tax net. The direct consequence of this was tax revenue leakage for the Nigerian Government.(21) But, with the introduction of (SEP) the leakages are reduced as more activities in the digital economy will be brought into Nigeria tax net.
5.0 RECOMMENDATION
It is recommended that:
There should be imposition of valued added tax (VAT) on digital companies who engage in “customer-facing” businesses which will be collected by the payment services operators such as Interswitch, Paga etc., as practiced in Columbia.
ENDNOTES
(1) See, http://www.tdk.gov.tr. Last accessed 20 of August, 2020.
(2) Ozgur Biyan and Gunes Yilmaz, ‘A Taxation Problem caused by Digital Economy: Definition of Virtual’, Current Perspectives in Public Finance, Peter Lang, © 2018, page.13.
(3) Base Erosion and Profit Shifting.
(4) KPMG, Digital Economy – OECD Clarifies Unified Approach, TaxNewsFlash, Canada, page.1.
(5) Ibid, page.3.
(6) home.kpmg/xx/en/home/insights/2020/01/etf-423-oecd-releases-outline-of-architecture-for-the-unified-approach-and-a-revised-programme-ofwork.html. Last accessed on 20 August, 2020.
(7) See: http://www.ictd.ac/blog/taxation-of-digital-companies-facebook-as-a-casestudy/, Last accessed on 20 August, 2020.
(8) C4. Laws of the Federation (LFN) 2004 (as amended) (Hereinafter referred as the “CITA”).
(9) A fixed base may be created by the physical presence of an NRC’s employees in Nigeria, an arrangement with a dependent agent who executes transactions on behalf of the NRC in Nigeria, the execution of a single contract for surveys, deliveries, installations or construction by the NRC in Nigeria, or existence of an artificial or fictitious transaction involving related parties in Nigeria.
(10) Emanuel Omotayo Johnson, ‘Tax Implications of the Finance Act of 2019’, page.4.
(11) (1996) LPELR-SC.87/1994.
(12) According to Ovum, a UK-based research and analytic firm, from 2012 to 2018, OTT (Over-The Top) service providers; including Facebook would have gained over 109 trillion naira from Nigeria, untaxed
See: http://www.ictd.ac/blog/taxation-of-digital-companies-facebook-as-a-casestudy/, Last accessed on 20 August, 2020.
(13) Section 4(a)(ii) Finance Act, 2019.
(14) Non-Resident Company.
(15) See, Section 4(c), Finance Act, 2019.
(16) Ibid.
(17) See, https://punchng.com/fg-plans-to-tax-netflix-facebook-others/. Last accessed on 20 August, 2020.
(18) S8, LFN 2007.
(19) Dieter Brauninger, “Taxing the Digital Economy: Good Reasons for Scepticism”, Deutsche Bank Research, 2019, page.1.
(20) Ibid
(21) KPMG, ‘Finance Act, 2019 Analysis’, page.26.
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