Nigeria’s Tax Policy and Legal Frameworks to Tackle the Challenges of Tax Administration Occasioned by Base Erosion and Profit Shifting (BEPS) Associated with the Digital Economy

Survey of Nigeria’s Tax Policy and Legal Frameworks to Tackle the Challenges of Tax Administration Occasioned by Base Erosion and Profit Shifting (BEPS) Associated with the Digital Economy

Chukwu, Chidi Barry

The digital economy refers to an economy that is primarily based on digital technologies and the internet. It encompasses a wide range of economic activities that utilize digital tools and platforms to facilitate transactions, communication, and information sharing. Key components of the digital economy include: e-commerce, digital services, digital platforms, digital infrastructure, fintech.

The global shift toward digital business models has created challenges for traditional tax frameworks, leading to Base Erosion and Profit Shifting (BEPS) concerns, especially where multinational companies can exploit digital channels to reduce tax burdens in countries where they generate significant revenues but have limited physical presence. Nigeria has taken significant steps to address the BEPS risks associated with the digital economy.

Main Measures aimed at addressing these challenges:

1. Significant Economic Presence (SEP) Rule

The SEP rule, introduced through the Finance Act of 2020, establishes a basis for taxing non-resident companies (NRCs) that provide digital services in Nigeria. Specifically, NRCs generating annual revenues of at least ₦25,000,000 (approximately $15,000) from Nigerian consumers are considered to have a "significant economic presence" and are therefore taxable under the Companies Income Tax Act (CITA). This rule applies to foreign digital services, including technical, professional, management, or consultancy services.

2. Filing Requirements for NRCs

To ensure comprehensive tax oversight, NRCs subject to the SEP rule must file both global and local financial statements. This includes audited financial statements of their global operations and statements for Nigerian-specific operations. An independent Nigerian accountant must certify the local financial statements, while NRCs must also submit tax computations and self-assessment forms. Notably, companies earning passive income where withholding tax (WHT) is the final tax are exempt from these requirements.

3. SEP Expansion to Non-Resident Individuals and Unincorporated Entities

Nigeria has extended SEP principles to non-resident individuals and unincorporated entities earning income from technical, management, professional, and consultancy services. These entities, if meeting SEP criteria, are now subject to tax obligations on income remotely earned in Nigeria. Under the Personal Income Tax Act (PITA), WHT deducted by Nigerian clients will be considered the final tax.

4. Technological Advancements in Tax Collection and Compliance

The Federal Inland Revenue Service (FIRS) is leveraging technology to automate the tax collection and compliance process for digital transactions, especially in business-to-customer (B2C) transactions where Nigerian consumers may lack the capability to self-account for and remit Value-Added Tax (VAT). FIRS can deploy technology or partner with third-party payment processors to track and assess digital transaction data, though implementation may face complexities due to the fluid nature of digital transactions.

5. VAT Registration Requirements for Non-Residents

Non-resident suppliers of goods or services to Nigerian customers are now required to register for VAT and obtain a Taxpayer Identification Number (TIN), even without a physical presence in Nigeria. The Finance Act 2020 stipulates that all taxable supplies consumed by Nigerian residents are subject to VAT, regardless of the supplier’s location. This measure targets tax collection on digital sales, ensuring that non-residents include Nigerian VAT on invoices issued to Nigerian clients.

Challenges and Future Directions

While these measures strengthen Nigeria’s stance against BEPS in the digital economy, challenges remain, including compliance enforcement, practical difficulties in implementing automated data collection, and balancing international cooperation with local regulatory needs. By aligning with global initiatives, like those spearheaded by the OECD, and continuing to adapt its legal framework, Nigeria aims to refine its approach and enhance revenue collection from the fast-evolving digital economy.