A paper by Afolabi Elebiju and Chuks Okoriekwe Taxation of the Digital Economy – Rethinking the Fixed Base Rule in Nigeria A paper by Afolabi Elebiju and Chuks Okoriekwe Presented by Chuks Okoriekwe at the ATAF/ATRN Research Methods Workshop

Preliminaries Research Problem Increased tax avoidance by multinational technology companies through digital transactions has created disparity and promoted market dominance by Big Tech Companies against “brick and mortar”/traditional companies. Research Questions 1) Are non-resident digital companies taxable under Nigeria’s present tax regime? 2) What measures can Nigerian legislature put in place to bring digital companies into the revenue authorities’ tax net? Research Objective Develop a framework which addresses issues of taxation of the digital economy by examining Nigeria’s tax laws and compare same with developments in other jurisdictions. Research Methodology Doctrinal Qualitative Research Method – analysed the CIT, VAT, etc. provisions of Nigeria’s tax laws and discussed how they are impacted by the developments in the digital economy.

Introduction Globalisation has spurred the growth of the digital economy (DE) DE is the economic activities resulting from online connections amongst people, businesses, devices, data and processes. Digital penetration continues to deepen (49.2% - Africa, 55.5% - Nigeria) thereby widening the scope and reach of the DE (global DE is estimated to hit US$25 trillion by 2025 with Nigeria estimated to generate US$88 billion by 2027). Today, businesses are conducted through digital means thereby ‘circumventing’ the established principles of taxation one of which the fixed base rule/permanent establishment (PE) principle. PE principle simple posits that profits of a company is taxed within the jurisdiction where it has or deemed to have a ‘physical’ presence – which evolved on the premise of physical transaction of good and services.

Business Taxation in Nigeria Generally, to transact business in Nigeria and be liable to company income taxes (30% of profit + 2% education tax), a foreign company is required to register a local subsidiary – section 542 Companies and Allied Matters Act (CAMA). However, non-resident companies are still subject to income taxes if they have a fixed base or permanent establishment in Nigeria. Given the spate of digital transactions, companies now do business without the need to physically incorporate a local subsidiary or have any physical presence. These have created an unfair tax regime with “brick and mortar” or traditional business/companies. See, Google, facebook, etc. business models utilising base erosion and profit shifting (BEPS).

Permanent Establishment Principle in Nigeria s 13(2)(a) – (c) Companies Income Tax Act (CITA) prescribes as follows: “The profits of a company other than a Nigerian company from any trade or business shall be deemed to be derived from Nigeria - (a) if that company has a fixed base of business in Nigeria to the extent that the profit is attributable to the fixed base; (b) if it does not have such a fixed base in Nigeria but habitually operates a trade or business through a person in Nigeria authorized to conduct on its behalf or on behalf of some other companies controlled by it or which have a controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company, to the extent that the profit is attributable to the business or trade or activities carried on through that person; (c) if that trade or business or activities involves a single contract for surveys, deliveries, installations or construction, the profit from that contract.”

Taxation of Intangibles (‘imported’ digital services) Unlike the CIT, the Nigerian courts have made remarkable pronouncements on the application of Value Added Tax (VAT)/Goods and Services Tax (GST) on intangibles (digital services). Using the OECD International GST/VAT Guidelines - Reverse Charge Mechanism (destination principle should apply to international trade services and intangibles - In essence, VAT/GST should be levied in the consumer’s jurisdiction, rather than the supplier’s jurisdiction), the Federal High Court (FHC) in Vodacom Business Nigeria Limited v. FIRS (2018) 35 TLRN 1 Argument – tax is statutory, does the Nigerian tax law create such exemption in VAT cases?

Developments in other Jurisdictions European Commission (EC) - Proposal for Council Directive (COM (2018) 147) which seeks to create digital permanent establishment. EC- Proposal for Council Directive (COM (2018) 148) which seeks to establish the common system of Digital Service Tax (DST) on the revenues resulting from the provision of certain digital services. The Italian Agency of Revenue (IAR) through the state’s enactment (Law No. 2015 December 27, 2017) imposed taxes on sales of digital services to customers within the country. Indian Revenue Service (IRS) will be implementing India’s Finance Act (FA), 2018 which seeks to expand the PE principle in taxing non-resident entities by introducing “significant economic presence”

Recommendations Review existing provisions on Permanent Establishment Enact specific laws which imposes taxes on digital transactions Utilise the OECD’s Convention on Mutual Administrative Assistance in Tax Matters (the Convention) which was ratified in 2015 to enforce taxes in the jurisdictions where the digital companies have a physical presence.