The federal government of Nigeria has accumulated taxes to the tune of N2trillion ($2.5b) from foreign companies that are operating in Nigeria, like Google, Netflix, and Facebook, over a span of 15 months. This includes both Company Income Tax (CIT) and Value Added Tax (VAT).
According to the Federal Inland Revenue Service, Company Income Tax (CIT) is a 30% tax levied on the profits of companies, while Value Added Tax is a 7.5% consumption tax paid by the end consumer when purchasing goods or using services.
In 2020, it was reported that the Federal Government of Nigeria had intentions to impose taxes on foreign digital service providers. These providers are companies offering various digital services to Nigerian users and earning revenue in Nigerian Naira (NGN). The aim of this taxation was to ensure that these foreign companies contribute to the country’s revenue, considering the income they generate from Nigerian customers.
Certain service providers, specifically video streaming platforms, social media companies, and businesses providing digital content downloads, were required to pay digital tax to the Federal Inland Revenue Service (FIRS).
To address this, the former Minister of Finance, Zainab Ahmed, introduced the Companies Income Tax (Significant Economic Presence) Order in 2020, amending the Finance Act of 2019.
The purpose was to levy taxes on foreign entities engaged in specific services or digital transactions, contingent upon their Significant Economic Presence within Nigeria.
The Companies Income Tax (Significant Economic Presence) Order of 2020 includes a provision allowing the finance minister to define what qualifies as a Significant Economic Presence (SEP) within Nigeria. This means the finance minister can determine the specific criteria that would indicate a foreign entity’s substantial economic engagement within the country.
For example, companies like Netflix, Facebook, and Twitter fall under the category of foreign entities that provide digital video and advertising services to the Nigerian population. On the other hand, companies like Alibaba and Amazon generate income from Nigeria through various activities. This includes processing and transmitting user data collected in Nigeria, and directly providing goods or services, either individually or through a digital platform.
Additionally, they might offer intermediate services that connect suppliers and customers within Nigeria. All of these activities contribute to their revenue generation from the Nigerian market.
About the ‘Companies Income Tax Order’ of 2020
According to the Federal Government of Nigeria, the regulation will be applicable to companies that earn an annual income of #25 million or $31.250 (at #800 per dollar). Additionally, it will be relevant to those possessing a Nigerian domain name (.ng) or a web address within the country.
Under the Significant Economic Presence (SEP) order, foreign companies engaged in consistent interactions with individuals in Nigeria, and whose digital platforms are tailored to attract Nigerian customers by displaying prices in naira, will be obligated to pay taxes.
According to the order, a foreign entity offering technical services like training, advertising, personnel supply, professional, managerial, or consulting services will be considered to have a Significant Economic Presence in Nigeria during any financial year if it earns income or receives payments from a Nigerian resident, or operates through a fixed base or representative of a foreign company in Nigeria.
However, exemptions are made for payments made to foreign company employees or for educational instruction within an educational institution.
In January 2022, the Federal Government revealed its intention to impose a 6% turnover tax on offshore companies offering digital services to local customers in Nigeria. This rule is outlined in the 2021 Finance Act.
More context to how digital service taxation rule works
Speaking on the concept of digital service taxation, the former finance minister, Zainab Ahmed, elaborated that the scope covers activities like apps, high-frequency trading, electronic data storage, and online advertising. She emphasized that this approach introduces a fair and reasonable turnover tax system.
The strategy was detailed in Section 30 of the Finance Act, which brought amendments to Sections 10, 31, and 14, addressing VAT responsibilities for non-resident digital firms.
Ahmed clarified, “Section 30 of the Finance Act, aimed at modifying sections 10, 31, and 14 of VAT regulations, pertains to VAT obligations for non-resident digital companies. The mechanism will primarily target digital non-resident companies serving individuals in Nigeria who are unable to independently account for VAT.”
The statement means that when you make a purchase on platforms like Amazon, the expectation is that Amazon will include a Value Added Tax (VAT) charge in the total amount you are paying.
The government plans to collaborate with Amazon to officially register them as agents for the Federal Inland Revenue Service (FIRS). This arrangement means that Amazon would take on the responsibility of not only collecting the VAT charge from customers but also forwarding that collected amount to the FIRS. This practice aligns with international standards and is seen as a way to tap into a revenue source that has previously gone unnoticed.
The described law is targeted at foreign companies that offer digital services, covering various areas like apps, high-frequency trading, electronic data storage, and online advertising, among others. In essence, these foreign digital service providers would be subjected to VAT regulations, contributing to the country’s revenue.
She highlighted that in accordance with Section 4 of the Finance Act, foreign companies not residing in the country are now obligated to pay a tax of six per cent based on their turnover.
The minister emphasized the government’s intent to modernize taxation within its digital economy and enhance compliance. She clarified that digital foreign companies would not need to establish local registrations but would set up an arrangement with the FIRS to manage tax collection and remittance. This move is aimed at reducing the burden of compliance.
PricewaterhouseCoopers analysts previously indicated that certain affected foreign digital firms might have to register for income taxes in Nigeria and submit annual tax returns, even if they lack a physical presence in the country. They also pointed out that Nigerian resident businesses, as well as the fixed bases of non-resident firms engaged with these foreign entities, would need to include withholding tax on some of the payments made.
PwC expressed concerns about the FIRS’s ability to enforce compliance without international consensus, as some of the impacted companies could fall beyond the agency’s jurisdictional reach. The situation could be more complex when these companies directly sell products and services to individual consumers in Nigeria.
However, research by The PUNCH newspaper revealed that these corporations had contributed over N1.98 trillion($2.475bn) in taxes between the first quarter of 2022 and Q1 2023.
During the examined time frame, the Nigerian Federal Government garnered a total of N1.32tn ($ 1.65bn) through Companies Income Tax (CIT) and N661.93bn($827.41m) through Value Added Tax (VAT) from foreign companies.
Breaking down the Companies’ Income Tax earnings, Nigeria received N342.4 bn ($428 million) in the first quarter of 2022,80.39bn ($100.49m) in the second quarter of 2022, N327.02 bn ($408.77m) in the third quarter of 2022, N399.98bn ($499.97m) in the fourth quarter of 2022, and N168.23bn ($210.29m) in the first quarter of 2023.
Comparing year-on-year figures, there was a decrease of 50.87 per cent, equivalent to a negative value of N174.17 billion ($217.71m), in Companies’ Income Tax from foreign firms. On a quarterly basis, the decline was slightly more pronounced at 57.94 per cent, representing a decrease of N231.75bn ($289.69m).
Regarding the breakdown of Added Tax, Nigeria earned N117.99bn ($147.49m) in the first quarter of 2022, N11.13bn ($13.91m) in the second quarter of 2022, N121.85bn($152.31m) in the third quarter of 2022, N159.83bn ($199.79m) in the fourth quarter of 2022, and N151.13bn($188.91m) in the first quarter of 2023.
In terms of year-on-year analysis, there was a rise of 28.09 per cent, translating to an increase of N33.14 billion ($41.76), in Added Tax from foreign companies. However, on a quarterly basis, there was a decrease of 5.44 per cent, amounting to a decline of N8.7 billion($10.88m).
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