The internet has profoundly influenced various aspects of human life, creating a global business value chain that transcends borders and geographic locations. Studies have shown a positive correlation between internet access and the growth of a nation’s Gross Domestic Product (GDP), indicating that the internet has the potential to enhance business efficiency, market share growth, outreach expansion, and employment opportunities.
Businesses with a digital presence can generate substantial revenue from non-resident jurisdictions without a physical presence in those countries. Notable examples include Facebook and Google, which derive a significant portion of their revenue from outside their home countries.
In Nigeria, both local and foreign businesses actively participate in various social media platforms, fostering interactions between suppliers and consumers. However, tax administrators globally face challenges in taxing the significant wealth generated by digital economy businesses that lack a physical presence in different tax jurisdictions.
This article delves into the issues associated with taxing social media and online activities in Nigeria, examining the existing legislative framework for administering applicable taxes.
The Nigerian Tax Framework for Online Businesses:
In recent years, the Nigerian government has intensified efforts to ensure that online businesses contribute their fair share of taxes in accordance with existing tax laws. Nigeria, with its large population, is positioned to benefit substantially from the global digital economy. However, the country’s tax-to-GDP ratio has remained relatively low at 6%, prompting the government to explore initiatives aimed at widening the tax net.
Before 2020, taxing non-resident companies in Nigeria was contingent on having a physical presence or a fixed base. The Finance Act of 2019 introduced the concept of Significant Economic Presence (SEP), considering a company’s economic activities to determine its taxable presence. The Minister of Finance, Budget, and National Planning subsequently issued the SEP Order to complement the provisions of the Companies Income Tax Act (CITA). The SEP concept considers various factors to determine whether a non-resident company is liable to income tax in Nigeria.
According to the SEP Order, a foreign entity engaging in digital transactions with a Nigerian resident is deemed to have created a SEP in Nigeria if it derives a turnover or income exceeding ₦25 million from activities such as streaming or downloading digital content, transmitting data collected about users in Nigeria, providing intermediary services through a digital platform, using a Nigerian domain name (.ng), or registering a website address in Nigeria.
The introduction of the SEP concept aims to broaden the tax net, align with global best practices, and facilitate tax compliance for multinational companies participating in Nigeria’s digital economy. Section 55 of the Finance Act (2020) mandates companies meeting the SEP criteria to submit tax returns, audited financial statements, and other relevant documents.
In conclusion, Nigeria’s efforts to tax online businesses reflect a global trend as countries seek to adapt their tax frameworks to the evolving digital economy. The SEP concept represents a significant step toward addressing the taxation challenges posed by the digital economy.
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