Bam Abbey & Co. (Chartered Accountants) Ceremonial Building Road, Abeokuta

November 25, 2024

The Chairman Tax Reform Committee Abuja, FCT

Dear Sir,

Memorandum on Digital Economy in Nigeria I refer to your Committee’s request for memoranda in respect of digital economy in Nigeria. My comments are as follows:

a. Challenges of taxing digital economy in Nigeria

The rapid growth in information and communication technology (ICT) in Nigeria has brought with it boundless opportunities and changes in the way we do business. Today, a significant number of transactions in Nigeria (sale and purchase of goods and services) are transacted using mobile devices and online payment platforms. This is broadly referred to as electronic commerce (e-commerce).

Whilst there are numerous benefits of e-commerce, the paradigm shift from a physical to an „invisible‟ business framework comes with its challenges. Some of these challenges include:

i tracking transactions especially for the purposes of taxation. The drive towards growing non-oil tax revenue (through fiscal optimisation) and eliminating leakages are not mutually exclusive objectives. Thus, the process of diversifying the revenue base of the economy can only be further complemented by the choices the Federation makes to arrest revenue leakages from the digital economy;

ii. the inability to adequately capture the quantum of attendant direct and indirect taxes payable on e-commerce transaction has left leakages in the tax system (that is, loss of tax revenue to the government);

iii. the applicable rules for corporate taxation have failed to effectively capture the realities of a modern economy in our world of fast-paced digital transactions. There are also various profitable business models in digital services that derive income from countries without creating palpable physical presence;

iv. given that non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to pay income tax in Nigeria is usually controversial. Section 13 of the Companies Income Tax Act (CITA) implies that a non-resident company must have physically performed activities in Nigeria before it can be concluded that such a company has income tax liability in Nigeria; and

v. the Federal Inland Revenue Service (FIRS) is, however, making efforts to ensure that income arising from e-commerce is subjected to Nigerian tax. These efforts seem to have yielded some results in the aspect of indirect taxes as opposed to direct tax. In recent times, the FIRS has made attempts to assess some foreign mobile application transport operators to income tax in Nigeria on the basis that the income for services they provide is derived from Nigeria. However, the absence of the required fixed base or physical operations in Nigeria under Section 13 of CITA has made it difficult for the FIRS to establish liability of such foreign companies to Nigerian tax.

b. Ways of tackling the challenges associated with taxing digital economy in Nigeria

Digital economy is growing rapidly in Nigeria just as it is happening all over the world, therefore, there is need for urgent actions in Nigeria to block tax revenue leakages associated with existing gaps in taxing digital economy. Such actions include

i. review of the scope of “fixed base” under section 13 of CITA: Although Nigeria, not a member of the OECD or the EU, it is important that the scope of “fixed base” under Section 13 of the CITA be expanded to ensure that the Nigerian digital economy is effectively captured for tax purposes. The introduction of a digital fixed base in Nigeria will certainly increase the tax base, thereby sharing the collective tax burden of taxpayers while ensuring an increase in government revenue;

ii. adoption of creative approach through innovative tax legislation: It has become expedient for the Nigerian tax authorities to explore a more creative approach to ensure taxation of the digital economy. Nigeria will need to borrow a leaf from other nations who have taken bold steps to tackle the non-taxation of the digital economy to plug revenue leakages through innovative tax legislation rather than seeking to extend the interpretation of obsolete legislations that are not sufficient to bring cross border digital transactions into the tax net. Given the peculiarities and innovations of the digital economy, it will be most appropriate for the Nigerian Government to enact a legislation to adequately cater for the taxation of the digital economy rather than trying to make it fit into existing tax laws;

iii. automated tax administration: The implication of this for the digital economy is two-fold. On one hand, full (or substantial automation) of the tax processes or system increases the degree of exposure of tax officers, administrators, taxpayers and other stakeholders in the use and mastery of those processes. On the other hand, it enhances the prospects of positioning the tax system and its electronic platforms for a robust and seamless interface with diverse payment platforms which can facilitate tracking of electronic transactions liable to tax in Nigeria;

iv. data handling: Another critical success factor in a digital economy is data handling. Elsewhere, data is treated with something akin to reverence but Nigeria‟s data gathering and storage processes are still not fully integrated. This will require huge investments, including for data protection as the recent ransomware “WannaCry” threat showed;

v. strategic partnership with digital economy service providers: The FIRS should form “a strategic partnership with institutions which provide platforms to carry out digital transactions in Nigeria. This would ensure that the objective of minimising and reducing tax leakages especially from the digital economy is achieved at a faster pace;

vi. ratification of multilateral conventions: Ratification of multilateral conventions on tax related treaties to end profit shifting and tax evasion by multinational companies. The benefits are that the convention will swiftly modify existing bilateral tax treaties to implement tax treaty related matters in a cost efficient manner, instead of individual negotiations and amendment of the treaty. The treaty will address abuse of tax laws, raise government tax revenue, promote transparency and check illicit financial flows; and

vii. capacity development: There is need for capacity development for tax administrators so they can implement a seamless interface with the different payment systems available in Nigeria.

c. The provisions of the Finance Act, 2019 on digital and other services in relation to significant economic presence (SEP) of a foreign entity

The Finance Act. 2019 introduced the concept of significant economic presence (SEP) to expand the scope of Nigerian tax on foreign companies deriving income from their activities in Nigeria which were hitherto not captured in the tax net. Consequently, the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”) was issued by the Federal Government of Nigeria.

The Order provides clarification on what constitute a SEP for foreign companies doing business, or providing services to customers, in Nigeria, in line with Section 13(2)(c) and (e) of CITA.

The Order provides that a foreign company shall have a SEP in Nigeria in any accounting year, where it:

i. 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

 provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria;

ii. uses a Nigerian domain name (i.e., .ng) or registers a website address in Nigeria: or

iii. has a purposeful and sustained interaction with persons in Nigeria by customising its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency.

Please do not hesitate to contact me if your Committee needs any further clarification on the above subject.

Yours faithfully,

Bolaji Abbey Principal Partner BAM Abbey & Co (Chartered Accountants)