As Nigeria enters a new republic, one of the biggest challenges facing Nigeria is infrastructure deficit. The country is reeling from inadequate investments in Energy, Roads, Rails, Housing, Mechanized Agriculture, Hospitals and Education among other challenges. These challenges are attributed to the slowdown in economy, occasioned by the drag in oil price – the nation’s top export earner. The slow down has made the government to come up with different policies to beef up the revenue accruing from the traditional non-oil sector. The traditional businesses like trades, manufacturing, services, FMCG, Financial services, Logistics and others have borne the burden of taxation in government’s drive towards ramping up non-oil revenue.
However, there are sector that have not received the attention required to tap the maximum tax returns and improve tax revenue. That sector is the digital business sector. This sector controls data, a major intangible asset with potential for taxable profit. The sector controls transactions that frequently escapes the taxman’s hammer. Most tech companies strongly believe that their greatest asset, though intangible, is the users’ data that they have which is utilized to sell products and services to the users at no cost to the business.
Today, the top five companies in the world based on market capitalization are all tech companies, with many of them in custody of users’ data. These companies could be made to pay taxes based on the information and people’s data that they have acquired over the years. Global bodies like OECD and World Bank should come up with an acceptable model on how to make these big tech giants pay their fair share of tax in the jurisdiction that they operate or where their users reside. If there is a unanimous decision to levy tax on data, then the big tech and other tech companies need to provide the regulators with country- by- country information concerning the number of users in their platform and their respective country or place of residence. The tax should be levied at the global level and paid to the respective sovereign governments based on the percentage of the citizens that are in the tech’s data base or based on sort of agreed sharing formula.
The European Commission is currently working out a modality on how to bring the tech giants into the tax net based on the data they hold on their users and to equally tax digital transactions that have remained untaxed because of the Permanent Establishment (PE) rules. According to EU, digital businesses and big data companies have an effective tax rate of 9.5% compared to 23.2% for traditional businesses with permanent establishment. There must be a global rally on how to tax these big tech companies and the profits shared equally among nations where value seems to have been created. A global tax model system for big data companies is urgently needed at this time as digital transactions are shaping businesses in a radical way that we are only just beginning to understand.
The OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) haven’t been quite successful in ensuring full taxation of digital transactions. Billions of dollars’ worth of transactions goes on everyday without being tax due to lack of legal framework to tax digital transactions. The OECD plan of ensuring full taxation of digital transaction by 2020 is commendable as some countries, in the absence of uniform legal framework for taxing digital transactions, are adopting unilateral measures to tax digitalized businesses and digitized services, says a report published by KPMG international. The rule that taxes should be paid in the jurisdiction where value is created should be upheld in all cross-border transactions irrespective of where the company providing the services is located.
In Nigeria, there is no legal framework yet in place to tax digital transactions. What FIRS have been doing over the past months have been to issue statements on how to tax digital transactions without any operational legal framework. The operational legal framework must be worked out first among parties to the digital business – the regulators, parliament, banks, fintech, agents, sellers, card providers and the platform through which merchandize are sold and bought.
Section 13 of company income tax act need to be modified in the face of new digital realities. The section requires that nonresident companies have a physical presence in Nigeria before their income could be taxed. The current online business models have made this section of the act inadequate and outdated, and requires immediate modification to accommodate the online businesses that have enabled some non-resident companies to rake in millions of Naira every year without commensurate tax paid, thus putting traditional businesses with physical presence at a disadvantaged position. This digital tax should also be extended to the local online business owners that have some how “evaded” council taxes, business development levy and other taxes that ought to have been paid by virtue of their business activities.
Emeka Ogbachalu
Ogbachalu, a Tax Consultant, lives in Lagos
