The growing number of young people and the flourishing digital ecosystem provide Nigeria with a wide range of opportunities for diversifying its economy and innovation. To unlock these benefits, the country must adopt a fast and agile taxation approach. As Nigeria grapples with specific challenges in the taxation of the digital economy, a focus on innovative solutions, such as the revision of international tax rules and the adoption of digital-first policies, is emerging. The nation is in a state of readiness for shaping its economy’s future under the digital age.

In the new digital economy, Nigeria is confronted with challenges as well as opportunities, while navigating a landscape shaped by changing technologies. This basic change led to the global technological giants’ rise, as well as a redefinition of economic dynamics. The convergence of digitalization and commerce, e.g. online shopping and big data analysis, has shaken up industries and defied conventional national and local boundaries. Therefore, these developments raise complex challenges for taxation, as traditional systems struggle to make sense of the taxable profits generated in a limitless digital world. The challenge of taxing the digital economy has given rise to new regulatory initiatives, such as the Organization for Economic Co-operation and Development (OECD) and G20 inclusive framework on Base Erosion and Profit Shifting (BEPS), which aims to address challenges arising from digitization of the economy. Similarly, the OECD’s Pillar One project addresses the highly profitable multinational enterprises (MNEs), with global revenue above $22 billion, and the allocation of its new taxing rights to market jurisdictions. Complications are being created for tax administrations by the speed of digital transactions, the intangible nature of assets, and reliance on data as a basis for the generation of revenue.

In the following sections, I’ll be focusing in particular on the absence of physical presence of digital services, a key aspect of the OECD’s Pillar One project, in order to address Nigeria’s challenges in the taxation of the digital economy and see what innovative solutions are being proposed. With Nigeria at the crossroads of the challenges and opportunities of the digital age, the roadmap to a robust and equitable tax system is beginning to take shape, from revising international tax rules to adopting digital first policies.

Key Concepts and Explanations of the Digital Economy

By integrating digital technologies widely, the digital economy is a transformative force that fundamentally changes economic activity.[1] According to the World Bank, Nigeria has made some progress in its digital transformation, but strategic investments and innovations are still needed to reach its full potential.[2] This paper will discuss some basic concepts of the digital economy including:

1. E-commerce: Transforming traditional retail and enhancing global trade by buying and selling goods and services online.
2. Fintech: Improving financial services via innovative technologies such as mobile banking, digital payments, and block chain.
3. Cloud computing: Delivering services to business via the internet, offering high levels of flexibility, cost efficiency, and accessibility.
4. Big Data and Analytics: Managing large, complicated sets of data to provide valuable insights that influence business decisions in all sectors.
5. Block Chain Technology: Ensuring digital transaction transparency and trust by the decentralized and reliable ledger technology.
6. Artificial Intelligence (AI): Developing computer systems capable of tasks requiring human intelligence, driving automation, and efficiency.

Technological progress and an entrepreneurial spirit have led to the emergence of some key sectors in Nigeria’s dynamic digital economy.[3] These sectors have an essential role to play in shaping the country’s economic development.[4] Since the digital economy and relevant tax frameworks are so new, the inclusion of different sectors in varying taxation frameworks is sometimes unclear. In this case, both OECD’s Pillar One and a proposed digital service tax (DST) for Nigeria are considered. As mentioned previously, Pillar One is intended to capture tax revenue related to profitable MNEs within the digital economy. The rationale behind the imposition of the digital service taxes (DSTs) aimed to ensure that countries increased their taxation rights over the profits of tech-based MNEs that sell in their local markets.[5] Accordingly, let’s take a look at some of the key sectors, the important players in them, and consider their inclusion in different tax frameworks:

1. Telecommunications: Players like MTN, Airtel, and Glo provide the infrastructure for digital connectivity. Telecommunication services are usually not subject to Pillar One, because they mainly target consumer-facing businesses.[6] Telecommunications services, like voice calls and SMS, often fall under existing regulations rather than the scope of the DST frameworks. DSTs focus on revenue generated from digital transactions, including online advertising and digital platforms.[7]
2. E-commerce: Platforms like Jumia and Konga facilitate online shopping, contributing to the virtual marketplace. E-commerce undertakings may be part of the Pillar One framework, particularly if they are engaged in significant consumer interaction and user participation.[8] Depending on Nigeria’s DST regulations, e-commerce platforms may have to be included in the scheme.
3. Fintech: Companies like Interswitch, Flutterwave, Paypal, and Paystack, amongst others drive financial inclusion through innovative digital payment solutions. In particular, if their revenue is associated with substantial user participation, the Fintech sector could be included in Pillar One.[9] If Nigeria’s DST framework covers their services, financial technology companies could be subject to it.
4. Technology Startups: Andela, Flutterwave, and Paystack are among the startups contributing to innovation and disruption in Nigeria. In view of the focus on consumer-facing businesses with high user involvement, it is possible to include startups in Pillar One.[10] Startups would be covered by Nigeria’s DST rules if the services they provide fall within its scope.
5. Digital Content and Entertainment: Platforms like IrokoTV, Amazon Prime, ESPN Plus, and Netflix, amongst others are part of the digital content industry offering streaming services and online entertainment. Unless there are substantial user participation characteristics, content providers cannot be included in the primary scope of Pillar One.[11] Digital content and entertainment platforms might have been subject to a DST if they were covered by Nigeria’s regulations.
6. Telecom Infrastructure Development: Companies like MainOne and Phase3 Telecom play a crucial role in expanding and improving digital connectivity. Infrastructure development companies are typically outside the scope of Pillar One, because they do not engage in consumer facing activities.[12] Due to the fact that they cannot be classified as digital services, telecom infrastructure companies are not likely to fall within the scope of the DST.

There would be revenue differences if Nigeria adopted DSTs and suspended attempts to adopt Pillar One. A new DST framework could cover sectors that are outside the scope of Pillar One. If no alternative measures are put in place supplement or replace Pillar One, and to capture revenue from sectors like telecoms infrastructure development and digital entertainment, Nigeria could see a reduction in tax revenues. In light of both the scope of coverage and the potential revenue implications, it is important for Nigeria to carefully assess the implications of the transition to DST. These considerations have been complicated by the dynamic nature of digital economies and international tax frameworks.

If Nigeria implements digital DSTs, it stands to potentially boost government revenue by taxing digital transactions, online advertising, and services offered by multinational tech giants operating in the country. Such a policy shift would necessitate creating robust legal structures to define which digital services are taxable, set appropriate tax rates, and ensure adherence to the new regulations. While DSTs have the potential to strengthen Nigeria’s fiscal health and support public services, they could also impose higher compliance burdens on multinational tech companies and lead to adjustments in how they price their services for Nigerian consumers.

Nigeria’s dynamic adaptation to the digital era, which places it at the center of technological innovation and economic diversification, is illustrated by its rapid growth and transformation in electronic businesses.[13] An exponential increase in the number of internet users, widespread adoption of mobile technologies and a growing entrepreneurial spirit have led to Nigeria’s digital landscape experiencing an unprecedented growth over recent years,[14] which includes among others:

1. Increasing internet penetration: The digital market, connecting businesses and consumers, has been enhanced by the growing access to the internet.
2. Adopting mobile technology: Digital transformation has been accelerated by widespread use of mobile devices, enabling mobile based services.
3. Implementing government initiatives: The enabling environment for start-ups and digital businesses has been created through supportive policies.
4. Fostering entrepreneurial spirit: A dynamic business ecosystem has triggered a boom of new technology start-ups, contributing to job creation and diversification in the economy.
5. Leveraging a favorable demographic: Demand for digital services and innovation are driven by the young population in Nigeria, which is tech-savvy.
6. Benefitting from investment inflows: Increased investment in the digital economy, both domestic and foreign, has fuelled the growth of digital start-ups and technology companies.

Overall, the integration of key technology into different sectors has given Nigeria’s digital economy a positive impact on innovation, economic growth and global competitiveness.[15] The nation’s adaptability to the challenges and opportunities brought about by the digital age is reinforced by its rapid development and transformation of digital businesses.

Understanding Digital Service Taxes and the OECD in Relation to Pillar One: The Nigerian Perspective

The Base Erosion and Profit Shifting (BEPS) project, which focused mainly on the digitization of the economy, conceded that it is impossible to ring-fence the digital economy. Consequently, countries have started creating their own unilateral rules to taxing the digital economy, mainly through what are called digital service taxes (DSTs). DSTs have emerged to address the challenges posed by the minimal physical presence and globalized nature of digital companies.[16] In order to ensure that companies contribute proportionally to local tax bases, these taxes aim at generating revenue from digital services. At the same time, OECD has engaged in a two pillar approach to redefine international tax frameworks as they change with digital times.[17] Reallocating tax rights to jurisdictions with a significant number of users, regardless of physical presence is part of the OECD’s Pillar One project, and the enforcement of the global minimum tax of 15% forms Pillar Two.

In order to be able to provide an answer for the taxation of big global enterprises, especially in the digital sector, Pillar One introduces concepts like profits allocation based on a sustained market involvement and new nexus rules (i.e. the new international tax reform efforts led by the OECD under the framework known as the BEPS project).[18] The objective of this initiative is to set up a global framework aimed at preventing double taxation and trade distortion in response to the challenges posed by the digital economy. The common objective of establishing a harmonized, globally recognized approach to the taxation of the digital economy lies within the relation between DSTs s and Pillar One.[19] In order to provide clarity and equality between business and tax authorities, the OECD is working towards replacing unilateral measures with an overall strategy.

The concept of “significant economic presence”  which establishes and recognizes that companies today can generate substantial revenue and profit from economic activities conducted in other countries remotely, is applied by the Nigerian DST.[20] According to the Nigeria tax law, when a digital entity has reached an income level of NGN 25 million ($54,000) or more during any calendar year, it is obliged to declare and remit both revenue and Value Added Tax.[21]

So far, Nigeria has not to accepted Pillar One and is instead pursuing a residence-based form of taxation. The country’s tax to GDP ratio is one of the lowest worldwide, and its informal sector, which made up 57.7% in 2021, constitutes a major challenge for collecting taxes.[22] Nigeria amended its tax code in 2020, introducing a tax on digital players with significant economic presence.[23] Nigeria’s resistance to transitioning into a multilateral arrangement such as Pillar One is probably driven by the success of this initiative, which resulted in record tax revenues.

Given the success of its current DST regime, Nigeria’s decision not to implement Pillar One and Pillar Two may have no significant impact on tax revenues. Nevertheless, using Pillar One could provide for a more standardized and internationally accepted method of transition to Pillar Two. Pillar Two is considered to be more urgent and easier to implement than Pillar One, as it introduces a global minimum effective tax rate (ETR) where multinational groups with consolidated revenue over €750m are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.  Pillar Two aims to prevent large multinational corporations from shifting profits to low-tax jurisdictions and avoiding taxes. While Pillar One on the other hand, is more complex and requires more time to implement due to the need for agreement on the allocation and distribution of taxing rights among countries. Nigeria should adopt Pillar Two to help in facilitating easier international cooperation and reducing the complexity associated with unilateral measures.

In Nigeria’s view, adopting Pillar One or Two could be compatible with efforts to strengthen the tax base and reduce reliance on foreign exchange earnings. In terms of policy, this would be an indication of the government’s commitment to internal revenue generation, a key element in addressing economic challenges. Since Pillar One is a global effort, Nigeria’s decision could affect its international standing. Nevertheless, possible effects may be minimized by focusing on Nigeria’s economic independence and successful implementation of its current framework.

The digital economy of Nigeria has grown significantly, driven by sectors like e-commerce, fintech and tech startups. The DST and existing tax measures aim to ensure fair contributions from digital players. Concerns about foreign direct investment may affect Nigeria’s decision about whether to adopt Pillar One and/or Two.[24] In view of the global minimum tax rate and the potential loss of tax benefits on repatriation of returns, the adoption of Pillar One could deter foreign direct investment.

In contrast, the existing DST may be regarded as a tool for attracting investments, which would benefit from specific tax incentives.[25] The reluctance of Nigeria to accept Pillar One may be due to its desire to remain economically competitive. The government perceives that Nigeria’s attractiveness as an investment destination could be reduced by a global minimum tax rate.

Taxation Challenges in the Digital Economy

Taxation of the digital economy is faced with significant problems, as traditional tax models that are aimed at physical businesses need to adapt to the virtual, globalized nature of digital transactions.[26] Digital business models often operate globally without significant physical footprints,[27] which makes it difficult to determine where economic activity takes place, unlike traditional models that rely on physical presence to assess taxes.

This issue is compounded by the intangible nature of digital assets, i.e. data and intellectual property rights, which means that tax authorities are having difficulty calculating accurate profit values due to their transferability across borders.[28] Traditional tax residency rules are complicated by remote work and virtual businesses, which blur the lines of where businesses should be taxed.

Due to the variabilities of cross border activities, a decline in tax bases by profit sharing strategies, and challenges related to value allocation for data streams, it is becoming increasingly difficult to keep track of digital transactions.[29] Moreover, it is also difficult to establish a clear connection for the purpose of taxation due to lack of geographical presence in some jurisdictions. To ensure that taxation practices in the digital era are fair, uniform, and globally accepted, international tax systems must be rethought as the digital economy continues to evolve.

Regulatory and Policy Considerations

Regulatory and policy considerations include the development of adaptive legal systems, a review of international tax treaties as well as data protection concerns in the field of digital taxation. To ensure fair taxation in the global digital economy, countries are working towards the development of standardized approaches, as shown by the OECD’s two pillars approach.[30] Implementing legislation on data protection, introducing interim measures such as digital services taxes and incentivizing compliance are all ways for policymakers to deal with challenges. The objective is to strike a balance of encouraging innovation in digital media and protecting personal data, while at the same time creating an internationally harmonized tax environment that promotes cooperation among governments and digital businesses.

Conclusion and Recommendations

Taxation has been seriously challenged due to the changing nature of the digital economy, which requires an adapted regulatory framework.[31] The borderless-ness and intangible nature of digital transactions pose a problem for the existing tax models. The OECD’s two pillars approach is intended to achieve a global framework of taxation in line with international law, but there are still challenges such as data flows and privacy concerns. To balance promoting innovation with a level playing field for the provision of fair taxation, countries respond by imposing digital service taxes, revising global agreements, and introducing broad data protection measures. Consequently, even though Nigeria has yet to implement the DSTs, the country continues to evaluate global developments and their implications for its digital economy and tax policies. There is the need to introduce DSTs, as their introduction could potentially enhance government revenue by taxing digital transactions and services provided by multinational tech companies operating within its borders, and also help increase the level of foreign direct investment in Nigeria.

Recommendations

1. Global Collaboration: Encourage international collaboration to develop standardized approaches to digital taxation, preventing conflicts and ensuring a level playing field for businesses.
2. Adaptive Legal Frameworks: Continuously update legal frameworks to accommodate the evolving digital landscape, considering factors like user participation and economic presence.
3. Comprehensive Data Protection: Prioritize the implementation of robust data protection laws to address privacy concerns and instill confidence in consumers and businesses.
4. Incentives for Compliance: Explore incentive structures for digital businesses to voluntarily comply with tax obligations, fostering cooperation between tax authorities and the private sector.
5. Public-Private Partnerships: Facilitate ongoing dialogue and partnerships between governments and digital businesses to address emerging challenges collaboratively.
6. Education and Awareness: Enhance awareness and understanding among businesses, policymakers, and the public about the complexities and implications of digital taxation.
7. Agile Policy Formulation: Embrace agility in policy formulation to respond promptly to the dynamic nature of the digital economy, ensuring that tax regulations remain relevant and effective.
8. Engage Stakeholders: Include the major players in the Nigerian digital economy, such as tech companies, industry experts, and policymakers in the development and review of digital service tax policies. This ensures that the policies are comprehensive, practical, and acceptable to all parties.

 

 

 

[1] Luo Shiyue et al, Digitalization and Sustainable Development: How Could Digital Economy Development Improve Green Innovation in China?, 32(4) BSE 1847-1871 (2023)

[2] The World Bank, “Nigeria Digital Economy Diagnostic: A Plan for Building Nigeria’s Inclusive Digital Future” Nigeria Digital Economy Diagnostic: A Plan for Building Nigeria’s Inclusive Digital Future (worldbank.org) (Retrieved November 30,2023).

[3] Okorie N.N et al. Technopreneurship: An Urgent Need in the Material World for Sustainability in Nigeria 10 Eur. Sci. J, Oct 2014, 1857, 1857-59 (2014)

[4] Oladinrin, T. O. et al, Role of Construction Sector in Economic Growth: Empirical evidence from Nigeria, 7(1) J. Environ. 50-60 (2012)

[5] William Moris & Pat Brown, Digital Service Taxes: Are They Here to Stay?, PwC (June 12, 2024), https://www.pwc.com/us/en/services/tax/library/digital-service-taxes.html.

[6] Yılmaz Hakan and İnci Oya Coşkun. “New Toy of Marketing Communication in Tourism: Gamification.” e-Consumers in the Era of New Tourism (2016): 53-71.

[7] Noonan Chris and Victoria Plekhanova. “Taxation of Digital Services under Trade Agreements.” Journal of International Economic Law 23, no. 4 (2020): 1015-1039.

[8] Sussan Fiona, and Zoltan J. Acs. “The Digital Entrepreneurial Ecosystem.” Small Business Economics 49 (2017): 55-73.

[9] Arner Douglas W., Ross P. Buckley, Dirk A. Zetzsche and Robin Veidt. “Sustainability, FinTech and Financial Inclusion.” European Business Organization Law Review 21 (2020): 7-35.

[10] Rukundo Solomon. “Addressing the Challenges of Taxation of the Digital Economy: Lessons for African Countries.” (2020).

[11] Langaro Daniela, Paulo Rita and Maria de Fátima Salgueiro. “Do Social Networking Sites Contribute for Building Brands? Evaluating the Impact of Users’ Participation on Brand Awareness and Brand Attitude.” Journal of Marketing Communications 24, no. 2 (2018): 146-168.

[12] Sussan Fiona and Zoltan J. Acs, Ibid

[13] MALECKI, EDWARD J. & BRUNO MORISET, THE DIGITAL ECONOMY: BUSINESS ORGANIZATION, PRODUCTION PROCESSES AND REGIONAL DEVELOPMENTS 7 (Routledge, 2007).

[14] DODGE MARTIN & ROB KITCHIN, MAPPING CYBERSPACE (Routledge, 2003).

[15] Schwab, Klaus & Xavier Sala-i-Martín, The Global Competitiveness Report 2013–2014: Full data edition, World Economic Forum, 2016

[16] Rukundo Solomon, Addressing the Challenges of Taxation of the Digital Economy: Lessons for African Countries, 10 MDPI, 219 (2020).

[17] Christians Allison, BEPS and the New International Tax Order, BYU L. Rev. 1603, 1603-20 (2016).

[18] Christians Allison & Tarcisio Diniz Magalhaes, A New Global Tax Deal for the Digital Age, 67 Can. Tax J. 1153 (2019).

[19] CHEN, SHU-CHIEN, TOWARDS A NEUTRAL FORMULARY APPORTIONMENT SYSTEM IN REGIONAL INTEGRATION (Kluwer Law International BV, 2023).

[20] Ahmodu Abdul-Lateef Olamide and N. S. Ezeani. “Tax Dispute in a Digital Economy: The Legal Implication in Nigeria.” KIU Journal of Social Sciences 9, no. 3 (2023): 39-45.

[21] Kifordu Bridget Chinye. “Machine Learning in Tax administration: A Case Study of Nigeria.”

[22] Akinyosoye Tobiloba and Oluwadamilola A. Adejumo. “Effective Taxation of the Digital Economy: An Analysis of the Global Tax Deal and the Domestic Tax Laws in Nigeria.” IRLJ 4 (2022): 163.

[23] Bankole Oluwafunmilayo Mary and David O. ADETORO. “TAXATION OF DIGITAL ACTIVITIES: AN EVALUATION OF THE NIGERIAN APPROACH IN A GLOBAL CONTEXT.” Journal of Public Administration, Finance & Law 23 (2022).

[24] Obadan Michael I. “Direct Foreign Investment in Nigeria: An Empirical Analysis.” African Studies Review 25, no. 1 (1982): 67-81.

[25] Lowry Sean. “Digital Services Taxes (DSTs): Policy and Economic Analysis.” Congressional Research Service Report 45532 (2019).

[26] Mpofu Favourate Y, Taxation of the Digital Economy and Direct Digital Service Taxes: Opportunities, Challenges and Implications for African Countries, 10 MDPI, 219 (2022).

[27] Fehske, Albrecht, et al., The Global Footprint of Mobile Communications: The Ecological and Economic Perspective, 49 IEEE Commun. Mag. 55-62 (2011).

[28] Bryan, Dick et al, Capital Unchained: Finance, Intangible Assets and the Double Life of Capital in the Offshore World, 24 Rev. Int. Political Econ. 56-86 (2017).

[29] Mooij Ruud A. de et al., 10,  IN CORPORATE INCOME TAXES UNDER PRESSURE: WHY REFORM IS NEEDED AND HOW IT COULD BE DESIGNED

[30] Harpaz, Asaf, Taxation of the Digital Economy: Adapting a Twentieth-Century Tax System to a Twenty-First-Century Economy, 46 Yale J. Int’l L., 57 (2021).

[31] Moreno Andres Báez & Yariv Brauner, Taxing the Digital Economy Post BEPS… Seriously, 58 Colum. J. Transnat’l L., 121 (2019).