New Digital Tax: Protecting the Nigerian dataspace (II)

In contrast to the belief that the government may be considering a general tax rate hike, the Buhari administration has, under the Finance Act (2019), lessened taxes for smaller sized companies whose annual turnover is less than N25 million. For companies under this turnover range, zero Company Income Taxes (CIT) are required from them.

Medium-sized companies whose annual turnovers range between N25 million and N100 million have had their CIT levy lessened to 20 percent from the initial 30 percent. It should be noted that minimum wage earners are exempted from these taxes as well.

A 50 percent minimum tax reduction from 0.5 percent to 0.25 percent has also been made to take effect for gross turnovers for financial years from January 1, 2020, up till December 31, 2021. Also, the government has embarked on the formalisation of 250,000 businesses under the Nigerian Economic Sustainability Plan (NESP).

Therefore, the respective tax reduction policies and efforts signal the government’s non-readiness for a tax jerk up, as reflected in the VP’s statement.

Digital companies whose business activities in the country yield untold profits are now required to declare their books to the Federal Inland Revenue Service (FIRS) accordingly. These companies with significant economic presence are, by the Finance Act 2019, needed to pay taxes to the Nigerian government in exchange for permission to retain their business interests in the country.

According to the Act, “If 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 storage, online adverts, participative network platform, online payments and so on, to the extent that the company has a significant economic presence in Nigeria and profit can be attributable to such activity.”

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However, concerns arise with the ability of the government to enforce compliance with this new policy.

Before taxes can be levied against any entity, the tax jurisdiction must be certain. Also, the levying authority must be able to correctly identify the taxpayer and be certain that he is within the ambit of the law before enforcement can be efficiently carried out.

On this note, it is expected that the government must commit to the development of a solid database platform together with an efficient information gathering system. This is needed to track all digital businesses in Nigeria, especially in the situation where most online business operators have no physical operating offices in the country.

Furthermore, it is necessary for the government to efficiently use the range of information it can gather to rightly uncover business’ numbers – revenue, losses, profits, cash flows, number of on-site or off-site staff, and other relevant historical records. This is to help moderate the chances of being cheated through unreported or under-reported profits by the respective companies.

Another point of concern raised by many on this new tax policy is the additional cost implication implied by the programme.

Many believe that the new levy will increase the cost of doing business. The affected companies may be forced to cut back on the supply of the services they offer. For instance, digital streaming services may cut back on the number of streams available, and advertising costs on other social media platforms may rise accordingly.

With the increased cost of doing business, users may enjoy less range of services than they currently do, which could affect the country’s fluidity. Also, few individuals fear that some of these businesses may choose to focus on other countries where tax laws exclude non-resident foreign companies from paying taxes.

Undoubtedly, the principle of more being preferred to less is universal, and governments will choose to earn more revenue than maintain a sub-optimal revenue collection status. Hence, it may not be surprising to find other governments of surrounding nations towing the same path of introducing tax levies to digital companies for operating their businesses in the respective countries.

In 2019, for instance, Kenya passed a similar Act that ensured that digital firms whose businesses had significant economic presence but was not resident paid taxes.

Hence, Nigeria would not be the first African nation to impose this directive. Other African countries may soon follow the same sequence.