The Nigerian federal government has amassed N2 trillion ($2.5 billion) in taxes over 15 months from foreign corporations conducting business in the country, including tech giants such as Google, Netflix, and Facebook. These taxes encompass both Company Income Tax (CIT) and Value Added Tax (VAT).
Company Income Tax (CIT), a 30% tax applied to corporate profits, and Value Added Tax, a 7.5% consumption tax levied on goods and services purchased by end consumers, are part of the government’s revenue-generation strategy.
In 2020, there were reports that Nigeria intended to impose taxes on foreign digital service providers, targeting companies providing various digital services to Nigerian users and earning revenue in Nigerian Naira (NGN). This measure aimed to ensure that these foreign entities contributed to the country’s revenue in light of the income they derived from the Nigerian market.
The Companies Income Tax (Significant Economic Presence) Order, introduced by former Finance Minister Zainab Ahmed in 2020 as an amendment to the 2019 Finance Act, was the government’s response to this issue. This order focused on taxing foreign entities engaged in specific services or digital transactions based on their Significant Economic Presence within Nigeria.
The order empowered the finance minister to define the criteria for what constitutes a Significant Economic Presence (SEP) within Nigeria, allowing for a tailored approach to identifying substantial economic engagement.
Entities like Netflix, Facebook, and Twitter, offering digital video and advertising services to the Nigerian population, fell within the scope of the tax. Similarly, companies like Alibaba and Amazon, generating income through activities such as processing user data and providing goods or services directly, were also subject to tax due to their revenue stream being tied to the Nigerian market.
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Exploring the 2020 ‘Companies Income Tax Order
The ‘Companies Income Tax Order’ of 2020 specified that companies earning an annual income of at least #25 million or $31,250 (at an exchange rate of #800 per dollar) and possessing a Nigerian domain name or web address would be subject to the tax. The Significant Economic Presence order focused on foreign companies consistently interacting with Nigerian individuals and tailoring their digital platforms to attract local customers by displaying prices in the local currency.
In January 2022, the government announced its intention to impose a 6% turnover tax on offshore companies providing digital services to Nigerian customers. This rule was detailed in the 2021 Finance Act.
Understanding the Mechanism of Digital Service Taxation
Former Finance Minister Zainab Ahmed explained that digital service taxation covered activities such as apps, electronic data storage, and online advertising, introducing a fair turnover tax system. The government aimed to collaborate with companies like Amazon to collect and remit Value Added Tax (VAT) from customers, aligning with international standards and tapping into a previously untapped revenue source.
While some concerns were raised about enforcing compliance with international companies, recent data showed that foreign digital firms contributed over N1.98 trillion ($2.475 billion) in taxes between Q1 2022 and Q1 2023.
During this period, Nigeria collected N1.32 trillion ($1.65 billion) through Company Income Tax and N661.93 billion ($827.41 million) through Value Added Tax from foreign corporations.
Conclusion
Year-on-year analysis revealed fluctuations in tax earnings, reflecting the evolving landscape of digital taxation and economic factors.
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