The concept of digital services taxation is fast becoming a global trend and has been a subject of discussion, by the OECD through its Base Erosion and Profit Shifting (BEPS) Project, with several ongoing proposal talks with member countries.
Nigeria like some countries has taken steps ahead of the OECD in taxing its digital economy. Nigeria’s approach to this has been to first amend its Companies Income Tax Act by expanding the tax base for non-resident entities to include companies carrying on digital activities in Nigeria, and tax liability for these companies is dependent on a minimum derived turnover of 25 Million Naira (64,320 USD). This is described in the Companies Income Tax Act as Significant Economic Presence (SEP), and outlines the framework for digital services taxation in Nigeria.
Regardless, it is expected that companies captured by the expansion of the tax base, that is, companies carrying out digital activities in Nigeria, are to file their tax returns with the Federal Inland Revenue Service (FIRS) annually, and to also indicate the income derived from Nigeria in their financial statement. Where they have met the minimum threshold of 25 Million Naira or its equivalent, these companies are expected to pay tax in accordance with the tax rate provided by the Companies Income Tax Act (as amended by the Finance Act), that is, 20% of income derived where taxable income is between 25,000,000 Naira and 100,000,000 Naira, and 30 % tax rate where above 100,000,000 Naira.
Positively, this introduction is likely to increase revenue for the Nigerian government with little impact on indigenous businesses since the focus is on non-resident companies without a fixed base in Nigeria. Additionally, it is envisaged that non-resident digital services companies will establish a fixed base in Nigeria to ensure proper accountability and to avoid the rigors of complying with the new tax requirements.
It is worth mentioning that there are currently no anti-double taxation treaties with respect to digital taxation in Nigeria. Hopefully, countries of non-resident companies with significant economic presence in Nigeria will someday commence negotiations for tax relief treaties on digital activities in Nigeria. In light of the foregoing, the Minister of Finance, by the powers vested on the office, has passed the Companies Income Tax (Significant Economic Presence) Order 2020 (“the Order), which provides in details Nigeria’s approach to digital services taxation.
This article shall therefore focus on the following:
- The principle of significant economic presence as contained in the Order,
- Application of the Order including the exemptions,
- Our commentaries on the implementation of the Order.
See full WTS Update for the Digital Economy here.
