Taxation of the Digital Economy – Rethinking the Fixed Base Rule in Nigeria

1. 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

2. 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.

3. 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.

4. 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).

5. 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.”

6. 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?

7. 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 entitiesby introducing “significant economic presence”

8. 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.