Taxation of Digital Activities. An Evaluation of the Nigerian Approach in a Global Context

TAXATION OF DIGITAL ACTIVITIES: AN EVALUATION OF THE NIGERIAN APPROACH IN A GLOBAL CONTEXT

^* The digital market, having grown to be one of the most lucrative globally, has prompted the desires of governments across the world to tax the profit that emerges from their territory because of these digital activities. However, due to the lack of physical presence¹ of the Non-Resident Companies² (being the major suppliers of digital services in Nigeria³ ), taxation of the said activities have proven difficult. Being a key factor necessitating the shift from the old regime of taxing NRCs under section 13 of Companies Income Tax Act (“CITA”), to the enactment of the Finance Act 2019⁴ which came into force on 13 January 2020.

Section 13 of CITA did not expressly provide for the physical presence requirement to tax NRCs. However, such an interpretation could be inferred from section 13(2)(a) of CITA requiring a “fixed base”. This argument is supported by the court’s decision in Addax Petroleum Services Ltd v. Federal Inland Revenue Service ⁵ “... any significant territorial connection to Nigeria will suffice if the Nigerian location is a place of regular resort for the foreign company for business purposes...” The NRCs took advantage of this provision by employing digital means to provide digital products and services, hence not requiring an agent to conduct business for them, neither did they require the maintenance of stock from which deliveries are made.

A report released by the Nigerian Investment Promotion Commission in 2018, showed the degree to which the Nigerian government had been robbed of tax in the digital space. It was stated in the report that the digital economy of Nigeria is expected to generate $88 billion and create three million new jobs by the end of 2021⁶. This uncovering led to the introduction of the Significant Economic Presence (“SEP”) principle to tax NRCs under the Finance Act, as opposed to physical presence⁷. The formulation of SEP is attributed to the Organisation for Economic Cooperation and Development (“OECD”) Base Erosion and Profit Shifting (“BEPS”) Action Plan⁸. However, the mode of its application varies from country to country based on the options presented by the OECD⁹. These options include; the revenue-based factor¹⁰, digital-based factor¹¹, user-based factor¹².

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^* Joel Odili, LLB. (Hons.) University of Lagos 2021; Bar II Candidate at the Nigerian Law School 2021/2022.

¹ Physical Presence requirement was the hallmark of the Companies Income Tax Act Cap. C21 L.F.N. 2004 (as amended), s. 13.

² Herein after known as “NRCs”.

³ Such as; Google, Twitter, Netflix, Facebook, Amazon, Asos, among others.

⁴ As an amendment to certain CITA provisions.

⁵ (2013) 9 TLRN 126.

⁶ O. Isiadinso and E. Omoju, ‘Taxation Of Nigeria's Digital Economy: Challenges And Prospects’. (2019). <https://www.mondaq.com/nigeria/tax-authorities/810276/taxation-of-nigeria39s-digital-economy-challenges-and-prospects?type=mondaqai&score=76> accessed 26 August, 2020.

⁷ Finance Act 2019, s. 13(2)(c).

⁸ In a bid to ensure that digital activities are taxed in European Union countries.

⁹ Final Report on Addressing the Tax Challenges of the Digital Economy, Chapter VII, OECD Action 1, 2015 para. 277, p. 107. Available online at: <https://www.oecd.org/tax/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report9789264241046-en.htm>.

¹⁰ SEP determined using the revenue generated by customers in Nigeria.

¹¹ SEP determined based a company’s digital presence.

¹² SEP determined based on the user base of an enterprise and its related data.