The digital economy is reshaping business landscapes globally, and Nigeria is experiencing a similar transformation. As the digital ecosystem expands, it becomes increasingly important for Nigeria to effectively tax this sector. Basically, this article delves into the taxation of the digital economy in Nigeria, covering definitions, enabling acts, the Significant Economic Presence (SEP) regulation of 2020, tax implications of digital services, and possible tax exposures for digital services.
What is the Digital Economy?
The digital economy encompasses all economic activities that rely on digital technologies and the Internet. That is, services such as: e-commerce, digital advertising, fintech, and online marketplaces. Ultimately, it is characterized by borderless transactions, virtual services, and the absence of physical presence as seen in traditional brick-and-mortar businesses.
Enabling Act: The Finance Act 2023 and Digital Economy
To address the challenges posed by the digital economy, Nigeria enacted the Finance Act. The Finance Act is a critical piece of legislation that outlines the tax measures and reforms on digital activities. As a result, the act introduced various provisions to tax digital transactions and services.
Nigeria’s Federal Government in the year 2022 disclosed that henceforth, it would charge offshore companies providing digital services to local customers in Nigeria a six percent tax on turnover as provided in the 2021 Finance Act. “Section 30 of the Finance Act designed to amend Sections 10, 31, and 14 of VAT is about VAT obligations for non-resident digital companies and the mechanism that will be used is to restrict VAT obligations mainly to digital non-resident companies who supply individuals in Nigeria who can’t themselves self-account for VAT. This means that, if an individual visits Amazon, the Law expects Amazon to add a VAT charge to whatever transaction is being paid for. According to the Minister of Finance, the new law applies to foreign companies that provide digital services such as apps, high-frequency trading, electronic data storage, online and advertising, among others.
Significant Economic Presence (SEP) Regulation 2020
The SEP regulation, which was introduced in 2020, plays a pivotal role in taxing the digital economy. It defines the criteria for determining whether a non-resident entity has a significant economic presence in Nigeria. This evaluation, therefore, subjects the entity to Nigerian taxation. Factors considered include revenue thresholds, user participation, and the availability of a Nigerian domain name.
Tax Implications of Digital Services
- Digital Services Tax (DST): The DST, introduced under the Finance Act, imposes a 7.5% levy on digital services provided by foreign companies with a significant economic presence in Nigeria. These services include online advertising, subscription-based platforms, and the transmission of data collected about users.
- Value-Added Tax (VAT): The extension of VAT to digital goods and services is a key revenue generation strategy. Foreign digital service providers are required to register for VAT and charge it on transactions with Nigerian customers. See how VAT impacts traders in Nigeria, in this post.
Possible Tax Exposure for Digital Services
- Corporate Income Tax: Companies with a significant economic presence in Nigeria are subject to corporate income tax on their Nigerian-sourced income. Consequently, this includes income generated from the provision of digital services.
- Withholding Tax: Nigerian tax law mandates the withholding of tax on payments to non-resident digital service providers. This ensures that taxes are collected at the source before funds are remitted abroad.
- Transfer Pricing: Multinational tech companies operating in Nigeria should adhere to transfer pricing regulations. Up to the present time, tax authorities closely scrutinize intra-group transactions to prevent profit shifting to low-tax jurisdictions.
- Penalties and Interest: Non-compliance with tax regulations in the digital economy can lead to penalties and interest charges. Therefore, digital businesses need to maintain accurate records and meet their tax obligations.
