Taxing Nigeria’s Digital Economy


Ohiorenuwa Imosemi and Lucky Okwu, KPMG


Recently, the Executive Chairman of the Federal Inland Revenue Service (FIRS), Mr Babatunde Fowler, disclosed the Nigeria government’s intention to collect Value Added Tax (VAT) on both domestic and international online transactions from January 2020. This proposal may be attributed to the Nigerian government’s effort to shore up tax revenue to reduce budget deficit. The effort is also in consonant with the initiatives by the Organization for Economic Cooperation and Development (OECD) (i.e. Action 1) to reduce tax leakages under the Base Erosion and Profit Shifting (BEPS) project.

This article reviews the proposal by the FIRS within the BEPS framework and examines similar initiatives in some of other jurisdictions. It also evaluates the timeliness and suitability of the effort by the Nigeria government to commence the taxation of the nation’s digital space.

BEPS Action 1 Plan – Digital economy and issues arising

The BEPS Action 1 defines a digital economy as one “characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs”. In simple terms, it is an economy that leverages digitized information and knowledge as key factors of production.

The digital economy, though wide in scope, may be broadly classified into three. These are digitally ordered services, platform enabled services and digitally delivered transactions. Digitally ordered services involves transactions that are digitally ordered, which are, transactions in goods and services that reflect e-commerce. Second is the platform enabled services which relates to peer-to-peer services such as Uber, Airbnb, that facilitate the transaction of goods and services. Third element of a digitalised economy are the digitally delivered transactions which captures services and data flows that are delivered as digital downloads or web streaming products. Examples include software, e-books, data and database services.

The spread of the digital economy has brought about many benefits including growth, employment and human well-being. However, at the same time, it has given rise to a number of challenges for policy makers—particularly due to its pervasiveness of scope and continual speed of advancement. Some of these challenges have been discussed below.

One major issue facing stakeholders has been the challenge of the allocation of rights (i.e. the Nexus rules) and profits sharing between jurisdictions for business enterprises that leverage technology to transact internationally without necessarily establishing physical presence in the user’s jurisdiction. This challenge raises the question of the effectiveness of our existing tax laws to address such transactions complexities. For instance, in Nigeria, there remains contention on the applicability of direct tax to international vendors who sell their products through electronic market places with the assistance of local independent agents, in line with Section 13 of the Companies Income Tax Act and Article 7 of the Double Tax Treaties (DTT) between Nigeria and other Treaty countries.

Another issue is the administrative tax challenge. The borderless nature of digital economy has resulted in specific administrative issues around identification of businesses, determination of the extent of activities, information collection and verification, and identification of customers. This issue is discussed in further detail below:

• First, is the difficulty of identification of physical presence. The dominance of the digital economy has increased the challenge of identifying business structures. For instance, the jurisdiction in which sales is made may not require registration or other identification when overseas businesses sell remotely to customers in the jurisdiction. This often results in difficulty for tax authorities to ascertain activities are taking place, to identify remote sellers and to ensure compliance with domestic rules.

• Second, is determining the extent of activities. Even if the identity and role of the parties involved can be determined, it is often difficult to ascertain the extent of sales or other activities without information from the offshore seller, as there may be no sales or other accounting records held in the local jurisdiction. Also, it may be possible to obtain this information from third parties such as the customers or payment intermediaries, but this may be dependent on privacy or financial regulation laws.

• Third, is the information collection and verification. Most times, to verify local activity, the market jurisdiction’s tax administration may need to seek information from parties that have no operations in the jurisdiction and are not subject to regulation therein. However, the ease of this is often predicated on the exchange of information amongst relevant jurisdictions.

The OECD aims to deliver a set of consensus-based solutions to the G20 by 2020. This consensus would address key issues such as the revising of the profit allocation and nexus rules. Further, it seeks to ensure that value created by a business’s activity or participation in a user or market jurisdictions are recognized in the framework for allocation of profits.

Experiences in other jurisdictions

It is quite instructive to note that some jurisdictions have taken the initiative to enact tax legislations towards ensuring the adequate taxation of their digital economies. Some of these initiatives include:

In 2018, the India government enacted the “India Finance Act” which seeks to provide guidelines to address tax challenges facing its digital economy, particularly, the India government sought to adopt the “significant economic presence” approach which aims to redefine what would constitute a taxable presence in relation to permanent establishment for the digital economy. This measure includes a 6 percent surcharge on advertising activities.

The French government, in 2016, introduced a 2 percent Youtube tax on revenues of companies providing streaming services in France. In addition, the French government recently passed a bill adopting a digital service tax (DST) on large multinationals providing digital services to users located in France, subject to certain thresholds. The main objective of the French bill is to update the tax laws to accommodate the taxation of foreign companies’ profits in the digital economy whose present operations are not linked to a permanent establishment or physical presence in France.

The United Kingdom (UK) government has commenced plans to impose a DST of 2 percent on certain streams of income beginning from 1 April 2020. This would be applicable to businesses with revenue in excess €500million globally, and €25million in the UK. It is estimated that DST will generate over €1.5billion in taxation to the UK government .
In South Africa, tax laws have been enacted towards the taxation of foreign supplies of electronic services, subject to specific thresholds. This requirement holds for all suppliers regardless of the establishment of PE or physical presence in SA. However, to promote compliance, the SA government has simplified the registration process to ease the compliance burden on affected parties.
Evaluation of Nigeria’s digital tax adoption

The taxation of the nation’s digital economy, though a new phenomenon, is unavoidable.
Given the successes in other jurisdictions, it is important for Nigeria to review its existing tax laws towards providing an adequate tax administrative framework for the digital economy.

To this end, we suggest the following steps be taken:

• Adopt international best practices in relation to the tax administration of the digital economy. This should include proposals by the OECD under the BEPS Action Plan.
• Review of the existing tax laws towards including provisions for the taxability of players in the Nigeria digital space.
• Reduce compliance burden by simplifying the registration requirements for companies in the digital space
• Transitory periods should be introduced by the tax authorities to ensure that newly enacted legislations are smoothly introduced into law. To achieve this, it may be necessary for stakeholders to embark on sensitization campaign and publicity towards improving public awareness. Hence, it may be argued that the tax authorities’ efforts to impose VAT in January 2020 on online transactions, considering the short timeline, may be premature.


The Nigeria digital economy is fast growing and will continue to evolve. Hence, it is important that concerted efforts be made towards ensuring that our tax laws are effective and reflective of the BEPS measures in relation to the nation’s digital economy.

Ohiorenuwa and Lucky are Senior Associates at KPMG in Nigeria