Digital taxation seems to be the new buzz word, pitching sovereign nations against various tech giants, digital goods, and service providers. Digital taxation simply put is the tax policy put in place by various countries designed to be levied on digital companies like Facebook, Twitter, YouTube, and others, which may not have physical presence in their country.
Today, most disruptions that have promised to take humanity into the future, have been conceptualized and effected by various digital companies or otherwise put, technology companies. Today’s digital companies are fast changing the economic landscape with companies like Apple declaring its revenue in 2021 at about 118 billion dollars.
It is with the above in view that countries are assessing how much money is made from their country and how much of it is paid as taxes to the countries where these digital companies are generating their revenue. In times past, the rules of taxing multinational companies have been largely dependent on whether there is a physical presence or permanent establishment in a country. These digital companies have now demonstrated that significant revenue can be generated from a country, without having physical presence in such country. As a result of this, there is a disconnect or ‘mismatch’ between where value is created and where taxes are being paid. The fact that big tech giants generate huge profits online from millions of users worldwide, allegedly paying little or no taxes just because they are not physically resident in most of these countries has become a subject of huge debate and controversy
In 2019, Minister for finance in France, Bruno Le Maire approved digital services tax to serve as a form of revenue collection. Digital platforms like Facebook and Amazon upon receiving the tax bill ensured that it would comply with all tax laws in the jurisdiction. However, France had subsequently suspended this tax system to avoid trade war disputes and non-uniformity in the global tax system whilst negotiations were underway at the Organization for Economic Cooperation and Development (OECD) on an overhaul of international tax rules.
Nevertheless, many countries have begun implementation of their digital taxation policies. For example, the United Kingdom has imposed digital service tax (DST) which is about 2% on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces to the extent that their revenues are linked to the participation of UK users. Mexico imposed a 16% VAT on foreign business-supplied digital services and as a result, foreign businesses operating in Mexico must register for VAT in Mexico and remit taxes monthly. Chile also imposed 19% VAT on digital services from foreign suppliers. In Kenya, there is a 16% VAT on non-resident businesses via digital marketplaces and websites.
Meanwhile, Ecuador enacted its 12% VAT on all electronic and digital services on September 16, 2020.
The overall result of these changes is that there has been significant increase in the revenue of these countries after imposing digital taxation. For example, Mexico, which began taxing digital services in 2020, increased its tax revenues by $304 million. Chile is also generating over 194 million on digital tax.
In terms of ensuring compliance, some countries have mandated the telecommunication companies to suspend any electronic transmission coming from the servers of those foreign suppliers of digital services that do not register and comply with the tax obligations in their country. These policies have appeared to promote tax compliance within these countries.
However, the United States Trade Representative (USTR) has opposed these digital service taxes as being discriminatory and unduly targeted towards the American tech giants. This led groups and organizations such as The Organization for Economic Cooperation and Development and the European Union to make concerted efforts in accommodating digital taxes globally. The goal is simple; “prevent potential trade war disputes, non-uniformity of tax rate globally and double taxation”.
Currently, only the 136 member countries are signatory to the OECD agreement which stipulates that all members reallocate some taxing rights from a multinational’s home country to market jurisdictions where it has business activities and profits, regardless of whether the firm has a physical presence in those jurisdictions. The agreement further stipulates that OECD countries impose a 15% minimum tax rate policy on digital companies making roughly 750million dollars annually. The OECD countries (which includes France but excludes Nigeria) can enjoy the benefits of the uniformed tax rate envisaged in the agreement.
It has been said that Nigeria isn’t a signatory to the OECD agreement because when it comes to complex issues like this, compliance would be difficult to attain and where compliance is difficult, there would be high cost of implementation for the country.
In another breath, the government of Nigeria through the new Finance Act 2021, has required that companies who provide digital services and have a significant economic presence in Nigeria would be subject to tax assessed on basis of a fair and reasonable percentage of which is usually interpreted in most cases to be (6%) six percent. Digital services in this context, include apps, high-frequency trading, electronic data storage, online advertising and several others which can now be taxed to serve as another form of revenue collection.
A foreign company will be deemed to have a significant economic presence (SEP) in Nigeria in any accounting year, where it derives N25 million Naira annual gross turnover or its equivalent in other currencies from digital activities ranging from 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 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.
In order to determine the gross turnover or income of a Non Resident Company (NRC) in any particular year, the business activities carried on by the NRCs with its related parties would be considered. However, where an NRC is covered under a multilateral agreement or consensus arrangement that addresses the tax challenges arising from the digitization of the economy, the basis of taxation of the NRC will be determined based on the agreement. By implication, the significant economic presence conditions will not apply to any NRC covered by a Double Tax Treaty (DTT) which takes into consideration the tax challenges arising from the digitization of the economy.
The enactment of the Finance Act 2020 on 13 January 2020 introduced various changes to principal tax legislations in Nigeria, among which are the commencement of a new regime of exposure to Nigerian companies’ income tax for non-resident companies (“NRCs”) providing digital services and products to persons in Nigeria, and the imposition of Value Added Tax (“VAT”) on intangible supplies. Section 13(2) of Company Income Tax Act (CITA) now recognizes the developing international digital taxation principle of “significant economic presence” (SEP). An NRC’S profits would now be subject to CIT in Nigeria where it “transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity”.
The important question to ask at this point is, what constitutes SEP under the Nigerian law for the purposes of tax liability of an NRC? The Act did not define SEP, Section 3(d) of the Act only states that Minister of Finance may by an order determine what constitutes SEP of an NRC in Nigeria. The absence of a specific definition of SEP can be a deliberate strategy for flexibility in the characterization of what constitutes SEP.
The Nigerian Minister of Finance, Budget and National Planning, Zainab Ahmed further explained that the digital tax framework which took into consideration the Finance Act, requires digital Non-Resident Companies to collect VAT from their Nigerian customers and remit to the Federal Inland Revenue Service (FIRS) thereby restricting VAT obligations mainly to digital non-resident companies who supply individuals in Nigeria, who may not self-account for VAT. To break it down in simple terms, if a Nigerian customer visits Alibaba to purchase goods, Alibaba can be expected to add a VAT charge to whatever transaction is being paid for and upon agreement to be registered as a tax agent for the FIRS, Alibaba will now collect this payment and remit to FIRS, and this is in line with global best practice to generate revenue. This just goes to say that the government is ready to put efforts in place towards the successful implementation of the digital service tax.
The implementation of SEP in Nigeria will depend on the basis for assessing the minimum requirements for an NRC to have SEP in Nigeria. The OECD Report provides different possible factors, including a revenue-based factor, digital-based factors, user-based factors, or combinations of the three. These factors provided by OECD are difficult to implement in Nigeria.
The challenge arises where there is the need to devise a perfect mechanism for revenue determination that accrue from business activities within Nigeria. The effect is that disclosures by these digital companies are what would most likely be relied upon. Also, another challenge as enumerated earlier is that the significant economic presence conditions may shield any NRC covered by a Double Tax Treaty (DTT).
It is noteworthy that the essential goal remains to ensure that a physical, local based business in Nigeria pays the same fair share of taxes with digital companies that operate digitally and generate revenue from the country. The Finance Act clearly shows Nigeria’s intention to bring digital transactions within the ambit of Nigeria’s tax laws and the economic impact in terms of revenue generation for the government, appears to be quite significant.
Mobolaji Oriola, a Harvard Business School Alumnus is a Senior Partner at Allen & Brooks, a full-service Law firm in the heart of Victoria Island, Lagos.