In January 2020, when I first read the Nigerian Finance Act of 2019, one of the instinctive questions that came to me was: “Is Nigeria now taking taxes on virtual trade seriously?” There were several reasons for this skepticism.
First, the law seeks to tax non-resident companies (NRCs) that have a “significant economic presence” (MS) in Nigeria, but then delegates the definition of this term as essential. Secondly, I wondered how Nigeria can apply/manage this unilateral tax, which is paid through companies outside its borders.
Third, I imagined that Nigeria’s unilateral attempt to tax the virtual industry could simply undermine relations with a strategic economic and political partner, the United States. Nigeria has now overcome the first hurdle to the definition of MS, certainly a significant step forward, but much remains to be done before Africa’s largest economy can begin milking the virtual cow.
Nigeria is in the midst of extensive tax reform. Revenue deficits, which stand out through the country’s very low tax/GDP ratio and the colossal debt profile, as well as the long-standing desire to diversify the oil export economy, are some of the drivers of reform.
One of the most pronounced reforms introduced by the Finance Act relates to the taxation of virtual commerce. Section four of the Finance Act amends the Corporate Income Tax Act (CITA) by introducing a new paragraph thirteen (2) (c).
Under this new provision, the NRC is taxable in Nigeria if it does business in Nigeria through electronic means (such as the transmission of sounds, signals, images, data) provided that the company has MS in Nigeria and the benefit can be attributed to NRC activities in Nigeria.
Activities included e-commerce, transmission/download, collection/transmission of knowledge, rental and taxi advertising.
In addition, the Finance Act introduces a new paragraph thirteen (2)(e) of the CITA, in which technical, management, consulting or non-resident professionals services are taxable in Nigeria if they provide services to a Nigerian resident, provided that the service provider has MS in Nigeria.
The recently published Corporate Income Tax Ordinance of 2020 (significant economic presence) now provides the missing definition. According to the definition, an NRC is considered to have MS in Nigeria if its virtual trading activities generate profits or a profit source of N25,000,000 ($65,000).
The College anticipates that localized advertising and domain call usage will also be classified as MS, with no revenue source thresholds. There is also no income source threshold for citation paragraph thirteen (2). These measures are designed to paint until the conclusion of the ongoing multilateral deliberations on the formulas of virtual tax rules.
The new CITA regulations seek to adapt Nigeria’s fiscal framework to the truth of fashion business, that is, that today is done and earned a lot digitally and remotely; that is, without the need for a physical presence in the country where the source of income comes from.
The new regulations also have implications for foreign taxes and relations with foreign industry. Taxation of NRS without a physical link represents a basic replacement for existing foreign tax regulations/conventions on the distribution of tax powers between states.
Existing rules, which are being revised, require the lifestyle of a physical presence in the country of taxation, commonly known as “stable establishment” (EP), for the taxation of the advertising benefits of an NRC.
Thus, in the context, unilateral measures, such as those of Nigeria (which attempt to circumvent the classical EP rule), while asserting the sovereignty of a state, may nevertheless contravene a foreign conference or even legally binding pacts, where it is a double taxation treaty (TNT).
There are that existing foreign regulations – designed a century ago – no longer have compatibility for their purpose. These reviews aim to unfairly distribute tax rights between states, as well as the existing trade/virtual tax conundrum.
Many agree that it is a question of adjusting existing regulations in the light of radical digitization which, in many cases, has created space for the misalignment of price creation with the tax obligation.
One of the fiscal implications of the existing scenario for Nigeria is that multinational CRs avoid operational or investment structures that lead to the creation of a strong establishment in Nigeria by offering virtual goods or services.
The OECD/G20 Inclusive Framework on BEPS leads multilateral efforts to adjust regulations. Nigeria is a participant. International tax regulations are the product of political negotiations (such as the one the OECD is seeking to attack), but when negotiations struggle or fail to produce the required consensus, there is a threat of widespread unilateralism.
Not surprisingly, in the face of the OECD’s protracted deliberations still hampered by the COVID-19 pandemic, Nigeria is just one of many countries seeking to tax non-resident virtual enterprises.
The United States, the home country of many of the toughest players in the area of virtual advertising (Amazon, Apple, Google, Microsoft, Facebook, etc.) strongly opposes these unilateral tax measures, while undertaking multilateral efforts with some resentment.
The United States asserts its unique sovereignty to tax its virtual inputs, regardless of its industry, and has expressed its willingness to engage in an industrial war with any country, adding some of its closest allies (UK and France, for example), Array USA has recently withdrawn from OECD-led talks, leading to a deadlock in reaching an agreement.
U.S.-Nigeria relations
Unlike countries like the United Kingdom and France, Nigeria has TNT with the United States, so technically there are no legal restrictions in Nigeria that apply an expanded definition of “tax presence” in its tax code to tax U.S. corporations operating digitally in Nigeria. . However, there are eco-political points that require Nigeria to act cautiously and, perhaps, expect a multilateral solution.
The United States is a close and indispensable friend of Nigeria and one of the largest foreign investors in the African country. The world’s toughest economy has once returned to a major customer of Nigerian oil, an essential export to Nigeria’s survival. In addition to trade, the United States provides Nigeria with military and non-military assistance.
In addition, Nigerians living in the United States send billions of dollars each year in much-needed cash. In trying to enforce the new rules, Nigeria risks affecting its relations with a much tougher counterparty. There are palpable signs that the U.S. does not hesitate to re-establish relations with Nigeria if it feels dissatisfied.
During the Jonathan Obama era, the United States imposed a restriction on the sale of “Leahy Act” to Nigeria for serious human rights violations allegedly committed through the Nigerian armed forces in the war against Boko Haram. Relations tightened in January 2020, leading the United States to impose a visa ban on Nigeria.
Along with his Nigerian counterpart, U.S. Secretary of State Mike Pompeo made sure of U.S. investments in Nigeria and strategic economic, political and military relations between the two countries when he addressed the visa issue. It would possibly be just a coincidence that this tension intensified right after President Buhari signed the finance law.
So far, only the EU’s hard bloc, or some members of this bloc, have shown their willingness to participate in the ring with the US. On this subject. It is hard to think that Nigeria will so far prevail given its much weaker ability to confront and respond to US reprisals.
A possible U.S. reaction to Nigeria is not so entrenched in the view that the Nigerian tax will particularly damage the backline of AMERICAN companies, but the fact that the United States simply doesn’t need anyone to think that “we can do it.” The deterrent technique reflects the fact that “if the United States” is done by us, Nigeria, why not the others”?
Why now for Nigeria?
Nigeria appears to be under even more budgetary constraints than in the early 2020s when the finance law was signed. Since then, the COVID-19 pandemic has devastated the country’s profit forecasts, with oil markets in disarray. Recently, Nigeria’s president sought national assembly approval to borrow another $5.5 billion. This follows another application in April to borrow $2.360 million.
At the same time, Nigeria is passionately pleading with some foreign creditors to cancel a portion of the country’s external debt to cushion the economic effects of the pandemic. In April, the Federal Internal Revenue Service (FIRS) issued a circular calling on certain legal entities (telecommunications, e-commerce, monetary institutions, etc.) to be “experiencing a boom” due to the pandemic to pay their tax obligations in advance.
On April 29, 2020, FIRS issued a circular describing the government’s goal of beginning to implement the stamp duty provisions imposed on electronic documents.
The fee receipt tools or receipts described in the brochure come with documents or files, emails, short message services, instant messages, any Internet messaging service or cloud platform.
With such a vigorously displayed need for cash, it is easy to see why Nigeria is eager to tax digital transactions. Moreover, by official projections, there are indications that investments in the digital economy will generate up to $88 billion and three million jobs for Nigerians before the end of 2021.
Conclusion
The provision of administrativeity requires a state to impose only one tax that it can administer and collect. While any country can write what it needs in its tax code, it is that a country writes only what it can manage/enforce.
According to the drafting of the Finance Act, the CNR taxpayer must have a “significant economic presence” in Nigeria and the profits shall be attributable to the company’s activities in Nigeria.
Legally, Nigeria can only tax when these criteria exist. Without bilateral or multilateral cooperation, it will be up to Nigeria to administer its virtual tax legislation.
Nigeria might want its opposite numbers, also monetary establishments, to track and collect taxes. While there are cooperation and data exchange agreements, it can be argued that these agreements do not reflect the tax regime Nigeria seeks to impose.
For example, other countries might not be required to disclose data about their corporations operating digitally in Nigeria. In the absence of data, it is difficult to say what NRC’s cash is, let alone the percentage of that cash that can be a benefit attributable to Nigeria, unless FIRS invokes the alleged benefit option of CITA segment 30 (1).
Even when data is available, with no mutual collection agreements with other countries, Nigeria still cannot collect. This can lead to a disruptive/non-neutral scenario in which Nigeria only must enforce the law that opposes corporations that voluntarily cooperate or reside in cooperative countries.
Imagine, only hypothetically, the anti-competitive effect on the transmission of taxes from Spotify (a Swedish company) and Deezer (a French company) but not from Apple or YouTube Music (US companies).
If Nigeria uses a source deduction model, it is to capture enough tax base to justify the problem, since the maximum of the proposed transactions are business-to-customer.
One option would be to paint with payment issues to automate fees on business-to-customer transactions and, perhaps, business-to-business transactions. Even then, CRRs can simply shift the tax burden to their (injured) Nigerian consumers, making it look more like an income tax than a source of income tax. All of this is a great effort.
However, in this assertive enterprise, Nigeria is in danger of straining some important external relations that may also have economic and political repercussions for the country. It is conceivable that having an effect on Nigeria’s monetary effects may have an even greater effect than the revenue that Nigeria is likely to generate through the implementation of the fiscal measure being incubated. These practical and political considerations return me to my New Year’s question: “Does Nigeria now take taxes on the virtual industry seriously?
Okanga, a lawyer, wrote from Lagos.
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