September 29, 2021
The internet has made significant impact on all aspects of human lives. As the world becomes more and more comfortable with virtual interactions, a huge value chain of businesses that transcend continents, borders and geographical locations has been created to cater to the ever expanding human needs. Several studies have confirmed positive correlation between access to the internet and growth in the Gross Domestic Products (GDP) of a nation. This is generally because the internet platform in itself has the capacity to increase efficiency of businesses, growth in market share, enhanced opportunity to reach more people and increased employment opportunities.
Unlike businesses without digital footprints, companies that harness the opportunities provided by the internet have the capacity to earn huge revenue from non-resident jurisdictions, without any physical presence in such countries. For example, Facebook, a giant tech company incorporated in the United State of America (U.S.A) reported a general revenue of $47.5 Billion from the rest of the world, apart from the U.S.A and Canada in 2020, out of the global revenue of $84.16 Billion.1 Further, in Q1 2021, about 55% of the total revenue recorded by Google was generated outside the USA.2 This explains the significant revenue generated by companies that are part of the digital economy.
In Nigeria, both local and foreign businesses have recorded huge participation on the different social media platforms, thereby creating the much needed opportunities for suppliers and consumers to freely interact. Undoubtedly, these interactions have greatly impacted business activities positively and brought the consumers of goods and services closer to suppliers. Meanwhile, tax administrators across the globe have been experiencing difficulties in taxing the enormous wealth generated by businesses operating within the digital economy space, the absence of a physical office in these different tax jurisdictions being the biggest factor.
This article analyses the issues associated with taxing social media and other online activities in Nigeria, and the existing legislative framework available to administer the applicable taxes.
In recent times, there has been increased focus from the Nigerian government to ensure online businesses pay their fair share of taxes, in line with the extant provisions of the applicable tax laws. Given its population of over 200 million citizens, with about 62% of this population under the age of 25, Nigeria is uniquely positioned to benefit enormously from the world’s digital economy. This population notwithstanding, the Nigerian tax to GDP ratio has stood at 6% (which is considerably low when compared to what obtains in other African countries) over the years. This anomaly has forced critical reasoning on the part of the government and several efforts are being made to shore up the contribution of tax to the GDP. In fact, efforts have been geared towards initiatives that would widen the tax net, in order to generate more revenue to finance government activities. Some of these initiatives have focused on both local and non-resident companies that provide digital/online services to Nigerian residents.
Prior to 2020, taxing non-resident companies was hinged on having physical presence in Nigeria or a fixed base. However, the Finance Act, 2019 ushered in the concept of Significant Economic Presence (SEP) which seeks to give consideration to the extent of a company’s economic activities in Nigeria, in order to determine its taxable presence. Pursuant to this concept, the Minister of Finance, Budget and National Planning issued the SEP Order (“the Order”), in order to complement the extant provisions of the Companies Income Tax Act (CITA), as amended by the Finance Act, 2019. The SEP stipulates the conditions precedent and the threshold to be considered, in determining whether a non-resident company could be liable to income tax in Nigeria or not.
The Order provides that any foreign entity that carries out digital transactions with a Nigerian resident would be deemed to have created a SEP in Nigeria, where it derives a turnover or income that is more than ₦25 million or its equivalent in other currencies from streaming or downloading of digital contents, the transmission of data collected about users in Nigeria, providing intermediary services through a digital platform, uses a Nigerian domain name (.ng) or registers a website address in Nigeria and has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria.
Given the introduction of the SEP concept, the Nigerian government seeks to widen the tax net, align with global best practices and make tax compliance easier for multinationals with digital participation in the country. Section 55 (as amended by the Finance Act, 2020) requires such companies to submit tax returns for the relevant period, containing a full audited financial statements and the financial statements of the Nigerian operations certified by an independent accountant in Nigeria, tax computations for its Nigerian operations, a written statement containing the profits from all sources in Nigeria and duly completed CIT self-assessment forms. However, where the non-resident company has only earned income on which Withholding Tax (WHT) is the final tax, the obligation to file tax returns in the prescribed manner shall not apply.