"In this world nothing can be said to be certain, except death and taxes".

Benjamin Franklin


Globally, tax laws assume that you need a certain level of physical presence (an office, a factory, a workshop etc.) in a foreign country before you can be assumed to have earned taxable revenue from that country.

There is a consensus that existing tax frameworks were not designed with the digital economy in mind, and there are challenges with applying the general tax rules to taxing digital transactions. Accordingly, while these transactions generate significant revenue for companies and individuals that transact within the digital space, the huge inflow and outflow in most cases have not resulted in a corresponding increase in tax revenue for the jurisdictions where these transactions occur, due primarily to the fact that the service providers do not have an identifiable physical presence in these jurisdictions.

This Article seeks to analyse the steps taken by the Nigerian government to address the tax implication of operations within the digital space especially for Non-Resident Companies.

What is a Digital Economy?

A digital economy is an economy that is based on digital technologies, especially electronical and through the internet, such as e-commerce platforms, app stores, ride hailing apps, online advertising, online payment services, cloud computing, participative networked platforms etc. Digital service providers include providers such as Netflix, Alibaba, Ali Express, PayPal, Amazon, LinkedIn, Facebook, Twitter, and a host of others.

Unlike businesses in the traditional economy, companies that are part of the digital economy can generate significant revenue in foreign countries without the need to have a physical presence or employees there. Under existing tax framework, no significant physical presence usually means no, or very little, tax for the host governments. This is one of the major reasons tax authorities globally are monitoring the digital economy and exploring various options to address the situation.

Organisation for Economic Co-operation and Development (OECD) Approach

The OECD has taken steps to address the tax challenges in the digital economy, particularly, through the Task Force on Digital Economy (TFDE).[1] In doing this, the OECD has considered three new and interrelated ideas. First, is the establishment of new bases for determining when a digital company was liable to tax in a foreign country. For this purpose, some of the bases considered were revenue, number of active users and extent of digital presence. Once this exceeded a certain threshold, the company would be required to pay tax.[2] The second idea was to subject digital businesses to a withholding tax (WHT) the same way you would apply WHT to dividends and interest earned by a foreign company.[3] And the third just like the second is applying an equalisation levy, that is, a direct tax which is withheld at the time of payment by the service recipient[4] on digital transactions.

While none of these options or any other alternatives have been adopted as the applicable global standard, members of the TFDE have however, expressed a commitment to continue working together towards building a consensus based long term solution.

The Nigerian Context

Considering the exponential growth of the global digital economy and its immense potential, it became imperative for the Nigerian tax authorities to explore a more creative approach to ensure effective taxation of the digital economy. With the pace of growth in the Nigerian digital economy, it has become necessary to expand the scope of "fixed base" under Section 13 of the CITA to effectively capture the digital economy for income tax purposes.[5]

Companies Income Tax Act

The Companies Income Tax Act (CITA)[6] is the primary law on  corporate taxation in Nigeria Section 105(1) CITA defines a ‘foreign company’ as any company or corporation (other than a corporation sole) established by or under any law in force in any territory or country outside Nigeria, and a ‘Nigerian company’ as any company incorporated under the Companies and Allied matters Act or any enactment replaced by that Act.

According to Section 13(1) CITA, the profits of a Nigerian company shall be deemed to accrue in Nigeria wherever they have arisen and whether or not they have been brought into or received in Nigeria. Furthermore, section 13(2) CITA provides that a foreign company is liable to pay tax on profits it derives in Nigeria from:

  • a fixed based business in Nigeria, to the extent that company’s profit is attributable to that fixed base;
  • a business or trade habitually carried on via a dependent agent;
  • execution of a turnkey project (i.e. a single contract for surveys, deliveries, installations, or construction); and
  • engaging in an artificial or fictitious transaction, which involves a related party in Nigeria.

A general interpretation of the above does not include foreign companies operating in the Nigerian digital economy in the tax bracket. However, this was remedied by the Finance Act, 2019.


Finance Act 2019

Section 4 of the Finance Act, 2019, amended the provisions of Section 13 of CITA to make companies involved in digital, electronic or online business in Nigeria, and having significant economic presence in Nigeria liable to tax. The power to determine what constitutes significant economic presence in Nigeria under the Finance Act lies with the Minister of Finance.[7]

Pursuant to this, the Nigerian Minister of Finance, Mrs. Zainab Ahmed issued the Companies Income Tax (Significant Economic Presence) Order 2020 (SEP Order) with a commencement date of 3 February 2020.

Significant Economic Presence Order (SEP)

The SEP Order provides that the profits of Non-Resident Companies (NRC) which has significant economic presence in Nigeria derived in Nigeria, accruing from undertaking any of the following activities would be taxable under the CITA:

  1. Operation in Nigeria’s digital economy; or
  2. Provision of technical, management, consultancy, or professional services in Nigeria.

Operation in the Nigerian digital economy includes:

a)Streaming or downloading of digital content to anyone in Nigeria;

b)transmission of data collected about users in Nigeria;

c)provision of goods or services directly or indirectly through a digital platform in Nigeria; or

d)provision of intermediation services via digital platforms, websites, or other online applications that link suppliers and customers in Nigeria.

Foreign companies involved in the provision of technical, professional, management or consultancy services shall be deemed to have SEP in Nigeria where such companies receive any payment from a person resident in Nigeria or a fixed base or agent of a foreign company in Nigeria.

An NRC would be deemed to have a significant economic presence in Nigeria in any accounting year, where it:

a) derives income of N25m or its equivalent in other currencies from Nigeria in a year;

b) uses a Nigerian domain name (.ng) or registers a website address in Nigeria;

c) has a purposeful and sustained interaction with persons in Nigeria by customizing its digital platform to target persons in Nigeria. (including but not limited to displaying prices in Naira)[8]

Activities carried out by connected persons will be aggregated to determine if the income hits the N25m threshold. Connected persons as defined in the Order are:

  1. persons that are "associates" [9] as defined in the Companies and Allied Matters Act (CAMA)[10] [sic]
  2. persons that are business associates in any form, such that one person participates directly or indirectly in the management, control or in the capital of the other, or the same person or persons participate directly or indirectly in the management, control or in the capital of both enterprises.[11]

However, an NRC is not considered to have significant economic presence where it makes payment: to its employees, under an employment contract; for teaching in an education institution or for teaching by an educational institution; by a foreign fixed base of a Nigerian company.

Impact of the SEP Order on Double Taxation Treaties

The SEP Order allows Nigeria to enter into multilateral agreements or consensus arrangement with NRCs to address the tax challenges that may be triggered by bringing the digital economy within the tax net and such NRC shall be treated according to the provisions of the agreement or arrangement. This follows that the income made from the Nigerian digital economy by an NRC operating from a country that has a Double Taxation Treaty (DTT) will be taxed in accordance with the provisions of the DTT. This is because by virtue of the DTT the income made by the NRC would ordinarily be subject to tax based on the arrangement in the DTT if it were a permanent establishment in Nigeria.

Compliance with the SEP Order

Whilst the SEP Order provides clarification on the amendments made by the Finance Act highlighted above, there are practical concerns from a compliance and tax administration perspective namely:

  1. Profit attribution – The Order is uncertain as to the accounting mechanisms to be deployed by the Federal Inland Revenue Service (FIRS) for determining the profits made by the NRCs that operate in the digital economy with no physical presence whatsoever in Nigeria. This will create uncertainties for NRCs who need to comply.
  2. Enforcement - The FIRS may have challenges enforcing compliance without international consensus, as several companies affected may be outside the territorial jurisdiction of the FIRS.

Value Added Tax

The Finance Act 2019 by virtue of the amendment made to the Value Added Tax Act widened the scope of application of VAT Act on taxable goods and services with the aim of bringing digital transactions within the Value Added Tax net. Value Added Tax is charged and payable on the supply of all goods and services in Nigeria other than those in the First Schedule.[12] A good shall be deemed to be supplied in Nigeria where the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right is situated, registered or exercisable in Nigeria.[13]  Interestingly, the meaning of goods as result of the amendments made by the Finance Act to VAT Act now include any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land. [14]

By implication from the foregoing, a transaction involving an NRC supplying intangible goods via the digital economy to a taxable person in Nigeria is liable to VAT.

Similarly, services provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria are deemed to be supplied in Nigeria and subjected to VAT.  This connotes that where an NRC renders service to a person in Nigeria, such service is subjected to VAT whether it is rendered within or outside Nigeria.[15]

NRCs that carries on business in Nigeria are now required to register for VAT with FIRS using the address of the person with whom it has a subsisting contract, as its address for correspondence relating to VAT.[16] Additionally, by virtue of amendment made by Section 37(3) of the Finance Act, an NRC is required to include VAT in its invoice and the person to whom the goods or services are supplied in Nigeria shall remit the tax in the currency of the transaction. Where an NRC fails to include VAT in its invoice, the recipient of the taxable supplies is required to self-account and remit the payable VAT.[17] The failure of a taxable person to comply with the provisions attract penalties.

It must be noted that taxable persons include individuals and corporations. However, an individual is not required to register for VAT in Nigeria thereby making it possible to make VAT returns. Therefore, it is impracticable to enforce the remitting responsibility where the recipient of goods and services supplied by an NRC is an individual or the self-accounting responsibility upon the failure of an NRC to include VAT in its invoice for the supply of goods and services if the taxable person involved is an individual.

Way Forward

The Federal Inland Revenue Service (FIRS) pursuant to Section 61 of the Federal Inland Revenue Service (Establishment) Act No.13 of 2007, issued the Income Tax (Common Reporting Standard) Regulations 2019. Enforcing this regulation will assist FIRS in obtaining the information necessary for the effective administration of taxes applicable to the digital economy.

The Regulation gives effect to the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC), the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Information  (AEOI) and the Common Reporting Standard (CRS), together with its commentaries. It provides how Reporting Financial Institutions (RFIs) such as depository institutions, investment entities, custodial institutions and specified insurance companies are to identify Reportable Accounts (RA); perform due diligence on the relevant financial information to be disclosed; outline compliance obligations, mode of compliance; and specify penalties for non-compliance. Failure to comply with obligations imposed by the Regulation attracts a general administrative penalty of ₦10 million in the first instance, and ₦1 million for every month in which the failure continues.

FIRS can also maximise the ‘powers of substitution’ conferred on it by Section 31 of the FIRS (Establishment) Act, 2007 to appoint banks and financial institutions as agents of taxable persons in order to get the requisite information to achieve compliance with the SEP Order.


By virtue of the provisions of the Finance Act and the SEP Order made pursuant to the Finance Act, NRCs operating in the Nigerian digital economy are now captured within the income tax bracket thereby reducing the level of tax leakages due to the absence of appropriate legislation. It is expected that the affected non-resident companies would determine how the rules affect them and take practical steps to ensure compliance.