The proposed plan by the Federal Inland Revenue Service (FIRS) to begin collecting 5 per cent Value Added Tax (VAT) on online transactions from customers using bank cards continue to draw the ire of many Nigerians.
While some see it as undermining efforts to deepen a cashless culture in Nigeria, others say it amounts to double taxation giving that online transactions attract some charges from shipping, processing to bank charges. There are those who also believe it could lead to increase in prices of online goods.
“There shouldn’t be any implications,” says Adedeji Olowe, CEO of Trium Networks. “VAT of 5 percent is assumed to be part of what people pay for digital transactions. We get charged N2.50 for interbank transfers.”
BusinessDay findings show that the proposed 5 percent VAT is not new as many would want to believe but it goes back to 2007. Specifically, the Value Added Tax (VAT) Act 2007 governs the administration of VAT in Nigeria. The VAT is levied at each stage of the production chain at 5 percent of the value of the taxable good or service supplied, but it is eventually borne by the final consumer, being a consumption tax.
The VAT collection is also not exclusive to Nigeria. There are several countries with different approach to taxing online purchases. Here, we have selected five states in the world with taxes imposed on online transactions.
It is not clear which country started the practice of taxing online transaction or internet sales tax as it is known in the US. however we know that consideration for taxation of internet sales goes as far back as 1998 when the US government imposed a 3 year moratorium on any new internet taxes, leading experts to speculate that the internet’s days as a no-tax zone were numbered.
Although the US government shied away – still does – from imposing a national tax on online transactions, states however took the initiative. The US Supreme Court ruled in 2018 that internet sales tax was a state problem. By December 2018, 24 states were collecting taxes on internet transactions. Most states in the US only collect taxes on sellers who have 200 or more transactions or $100,000 in sales during a year. States like Delaware, Montana, New Hampshire, Alaska, and Oregon still have no internet sales tax.
FIRS could do well to get the buy-in of the states if the proposal is going to be successful. States need to be educated, guided and probably giving the latitude to decide whether to tax directly or use a no-tax environment to create other revenue sources, like attracting investors.
If the US is too far from Nigeria, South Africa, which has vied with Nigeria for the seat of the largest economy and is the most innovative country on the continent, should be closer to relate with.
Unlike the US, South Africa has a national tax law which was updated in July 1, 2014 to capture online transactions and compel foreign merchants to pay a 14 percent VAT. As a result of the amendment, a foreign ecommerce site that provides electronic services to South African consumers or receives payment from a local bank with revenue exceeding R50,000 a year, must be registered with SARS.
However, unlike other countries, South Africa does not separate B2C (Business-to-Consumer) and B2B (Business-to-Business) sales – all are subject to a 14 percent charge.
This is where it could become necessary for FIRS to consult with local industry players to know which model works best. Perhaps a breakdown of the VAT into chinkc could fast track the buy-in of small businesses.
Nigeria’s kin in terms of oil economy dependency, Angola charges a 14 percent VAT on all sales like South Africa. Unlike South Africa, however, Angola does not have a threshold for foreign providers of digital services. Inasmuch as you are a business with a single customer, you must register for VAT.
The home of the famous MPesa began to collect taxes on mobile phone airtime and related financial services from 2003 and 2013 and later increased it in 2018. The Kenyan VAT Act became effective in September, 2013. The tax however did not capture foreign providers of digital services. In May 2019, the Kenyan Revenue Authority (KRA) publicly acknowledged that some taxpayers engage in online business and they do not file returns or pay taxes on the transactions. The agency mandated that unless income or supply is expressly exempt in the law, appropriate taxes should be paid.
Currently, a foreign supplier who provides electronic services to VAT non-registered customers in Kenya would attract a 16 percent VAT.
Online businesses in European Union member states have been paying EU VAT since January 2015. In fact, the Union requires digital businesses who sell to European consumers to apply, collect, and remit VAT against all customer invoices.
However there is no national VAT rate. The rate a business charges is the rate of the country in which the customer resides. This means you need to be set up to apply the correct VAT rate to the right country.
While it should be acknowledged that the internet has brought about vast opportunities for businesses and entrepreneurs, it has also raised new tax headaches for authorities. The FIRS in moving to address this headache may have to engage stakeholders every step of the way.
“Some of the attendant challenges that need to be addressed before the implementation will include how to differentiate trade and non-trade transactions, handling of refunds when a purchased item is returned by the customer, how to drive card payments among customers who might prefer cash on delivery to avoid paying the VAT, and how to prevent double taxation,” said a spokesperson for Jumia in an interview with BusinessDay.