Legal Constraints May Hinder Policy on Digital Taxes, Expert Warns 


James Emejo in Abuja 

The proposed move by the Federal Inland Revenue Service (FIRS) to tax online transactions, could face legal brick wall, an information technology expert has warned. 

The Executive Chairman of FIRS, Mr.  Tunde Fowler recently disclosed that the agency would begin to impose Value Added Tax (VAT) on local and international online transactions, with effect from January 2020.

However, commenting on the planned initiative to boost the country’s revenue drive, Technical Manager, IT and Profession, Institute of Chartered Accountants in England and Wales (ICAEW), Mr. David Lyford-Smith, said the move could encounter some legal bottlenecks, adding that similar implementation in the European Union wasn’t smooth.

In an exclusive interview with THISDAY, he said it would be difficult to reach an initial agreement on determining profit shifting or at what point to exact taxes. 

According to him: “It is a big issue and it’s the same thing in the European Union concerning profit shifting and looking at this question of saying if a customer is in one jurisdiction and buying from a website where the server is and the second one where the company is headquartered and they are buying digital goods that’s physical anywhere- whose tax rules should apply?”

According to him, the development could prove to be a challenge to many concepts and philosophy underlying tax laws which were based on physical transactions.

According to him, when it involves a, “physical person buying a physical thing from a physical person and they are all in the same place, it’s very clear who’s laws should be applying and who should receive the tax revenues.

“Whereas, the digital marketplace is not like that and it’s very easy for the digital companies to make sure that whatever the physical rules are, they would pay their taxes wherever it’s best for them.”

He explained further: “I think there really an important question of thinking about the philosophy of what constitutes an establishment, what constitutes trade, should it be based where a customer is…these are very different ways of approaching tax different from the traditional.”

Nevertheless, Lyford-Smith said international collaboration would be critical for the successful implementation of digital taxation.

“The other thing that is of course, important is international collaboration because it’s no use trying to pin down where the company really is: it’s got to be about collaboration between all of the countries who are affected so that they can agree on a sensible service rules: avoiding double taxation and not hampering business and not trying to stifle digital trade while also making sure that somewhere, the right tax is being paid to the right people,” he added.

He said the complexity would usually arise from the need to have a clear legislation on the policy.

He said: “That means eventually you have to write something that is exact and prescriptive and there’s always the possibility than for a clever lawyer working for a digital company to find some careful way of making sure that they are still making a profit in a different place to do the tax somewhere else.

“And I think that’s very difficult to find a way of reflecting the complexity of the digital market space in legal rules, it’s very difficult.”