“The world’s largest taxi firm, Uber, owns no cars. The world’s most popular media company, Facebook, creates no content. The world’s most valuable retailer, Alibaba, carries no stock. And the world’s largest accommodation provider, Airbnb, owns no property. Something big is going on,” says Tom Goodwin.

Interestingly, the lacuna created by the outdated tax law had served as a gateway for digital companies to escape without paying tax from countries they get their revenues from.

In dealing with this, the Organization for Economic Cooperation and Development (OECD), which Nigeria is a member, and the G20 seek to provide a measure to tax these companies. The aim of this paper is to state the approach employed by Nigeria and other jurisdictions of the world, state the challenges that faced this new law, and how it can be resolved through collaboration with relevant authorities and the collection of essential information from other jurisdictions of the world.

Current taxing system in Nigeria

Globally, taxation is the nucleus and the path to development, because it is one of the formidable options to generate revenue by the government. The principle that taxation requires the consent of the legislature has become well-established in virtually all jurisdictions. This principle inter alia ensures certainty in the level of financial distribution within the jurisdiction and, perhaps, beyond. According to Abiola Sanni, this principle is, therefore, a bulwark against arbitrary imposition or increases of tax by the sovereign government.

The previous Nigerian tax laws for taxing foreign enterprises is through establishing that the entity has a taxable presence or has a permanent establishment (PE) in Nigeria. This law serves as an escape route for non-resident companies (NRCs) to exploit money from Nigeria through her citizens. Amazon - one of such companies, grew its net income by a whopping 1,846per cent in five years and more than doubled its revenue from $107 billion in 2015, without establishing a physical presence in all the countries where it earn its revenues. Its $280 billion revenue generated last year is more than double of Nigeria’s economy.

Rightly so, to ensure that digital companies do not escape tax, the Organisation for Economic Cooperation and Development and the G20 had taken steps to address these challenges, particularly, through the Task Force on Digital Economy (TFDE). In the course of its work, the TFDE had analysed some alternatives to the current approaches. For example, the introduction of Permanent Establishment thresholds based on “significant economic presence”, new withholding tax on certain types of digital transactions, and the introduction of an “equalisation levy.”

While none of these options or any other alternatives has been adopted as the applicable global standard, members of the OECD have employed unilateral measures with the aim that they respect the provisions of other double-tax treaties, which were modelled after the OECD’s recommendations. An emblematic case is the Indian Equalisation Levy, which taxes online advertising payments; and UK’s Digital Services Tax 2019, which imposes a 2 per cent tax on social media platforms, search engines, and online market places used by UK users.

In other to borrow a leaf from other nations that have taken bold steps to tackle tax leakages in the digital economy through innovative tax legislation, Nigeria enacted the Finance Act 2020 to ensure that no part of the economy, not even the highly digitalised business models of foreign entities not being subjected to tax in Nigeria, escapes tax liability. The new section 13(2)(c) of the CITA amends the CITA to adapt to changing technological innovation by providing that profit from a company doing business via an electronic platform is taxable if it has SEP in Nigeria.

Challenges associated with present system

Nigeria’s efforts to effectively tax the digital economy is laudable, as it might help in diversifying the government’s revenue and increase its low tax-to-GDP ratio (6 per cent in 2019, below the continental average). Obviously, the SEP policy clarifies what it takes to establish a significant economic presence to be taxed, but does not address the profit attribution issue in taxing non-resident MNEs. There lies the problem with the efficacy of the SEP Order for the purpose of taxing the digital economy.

It is a well-known fact that taxing the digital economy requires global coordination and a resolution of the twin problems of physical establishment and profit attribution. Research conducted by the International Centre for Tax and Development reveals that the issue with taxing the digital economy in Nigeria is due to a lack of comprehensive rules for profit attribution of MNEs and not so much the absence of permanent establishment.

As a result, India recently designed SEP policy, using a formula that combines the sales, assets, and payroll of its multinational enterprises to attribute profit, making it effective and easy to administer. However, in Nigeria, it is difficult to imagine how the SEP policy will be administered and how the Federal Inland Revenue Service (FIRS) intends to enforce this rule on MNEs without a clearly defined profit attribution rule.

Way forward

To achieve the goals of the SEP policy, access to the financial information of the MNEs is important. Fortunately, Nigeria has the Country-by-Country Regulations 2018 (CbyC Regulations), which places an obligation on MNEs to provide this information. Therefore, effective enforcement of the CbyC Regulations will be critical if the SEP policy is to succeed. The Nigerian government will also be required to simplify the process of attributing profits of the MNEs and make it cost-effective to encourage compliance.

Further, with proper legislation on taxation of digital transactions, the tax authorities can work with banks to identify payments relating to digital transactions with non-resident companies that should be subject to tax. Furthermore, tax authorities should leverage the automatic exchange of information between jurisdictions and employ innovative technology to secure a proper database of the various online suppliers of goods and services. This will go a long way in providing the tax authorities with sufficient data to go after tax defaulters directly.

Conclusion

The planet digital age has opened the way to digitalised successful business companies without a permanent establishment. The emergence of technology has outsmarted the outdated tax law, this should call for an upgrade in the tax law to meet up with the present age. The advent of the Finance Act 2020 came along with a challenge in the administration and implementation of the new act.

Indeed, this challenge can be tackled through collaboration with bank authorities and the collection of information from different jurisdictions. Through the implementation of the aforesaid recommendations, the new finance act will have the ability to generate a substantial amount of revenue, totally block the lacuna opened up by the previous CITE act, open up opportunities to provide public services, and improve the economy.

Olasupo Jubril Adedimeji writes from Lagos.

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