Digital services tax – taxation of the digital economy

A non-resident company deriving income from Nigeria in the digital economy now has a tax obligation in Nigeria. The profit of a non-resident company is deemed to be derived from or taxable in Nigeria when the company: 

1. “transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity;
   
   
2. “the trade or business comprises the furnishing of technical, management, consultancy or professional services outside of Nigeria to a person resident in Nigeria to the extent that the company has significant economic presence in Nigeria; and
   
   
3. “provided that the withholding tax applicable to the income under this paragraph shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of subsection (2) (a)-(d)”.

The Significant Economic Presence Order  

The effective date of the Significant Economic Presence (SEP) Order was 03 February 2020. The conditions and circumstances under which non-resident companies have significant economic presence in Nigeria in an accounting year are:

1. Derives gross turnover or income of more than NGN 25 million from the following activities:

• Streaming or downloading services of digital contents (including movies, videos, music, applications, games and e-books);
• Transmitting data collected about Nigerian users generated from the activities of Nigerians on digital interfaces including websites or mobile applications;
• Providing goods and services directly or indirectly through a digital platform to Nigeria; and 
• Providing intermediation services through a digital platform, website, or other online application that link suppliers and customers in Nigeria.

3. Has purposeful and sustained interactions with Nigerians via a customised digital page or platform which includes providing prices of products and services in Naira (NGN) or providing options for payment in Naira.

Tax obligations of non-resident companies with significant economic presence in Nigeria

1. Register with the Nigerian Federal Inland Revenue Service (FIRS) Non-Resident Companies taxpayers office.

2. Prepare audited financial statements and file companies income tax (CIT) returns annually; the income to be reported and taxed is income generated from business activities in Nigeria.

There are penalties for failure to file CIT returns. 

Effect of double tax treaty agreements

Section 1(3) of the SEP order states that the conditions and circumstance for significant economic presence does not apply to non-resident companies domiciled in countries with whom Nigeria has a double taxation treaty (DTT). This is because the provisions of a DTT override the provisions of domestic tax laws in Nigeria. However, to claim a treaty benefit, a non-resident company must apply to FIRS.

Conclusion

The 2020 Companies Income Tax (Significant Economic Presence) Order introduced significant economic presence as the basis for the taxation of non-resident companies with no fixed base which provide remote, digital services to Nigerians and Nigerian companies. Non-resident companies with no fixed base in Nigeria must now file CIT returns on income earned from Nigeria if they earn more than NGN 25 million from business activities in Nigeria.