Taxation of Digital Economy in Nigeria: Gaps and Realities


By Temiloluwa Olowoyo


  • “The world’s largest taxi firm, Uber, owns no cars. The world’s most popular media company, Facebook, creates no content. The world’s most valuable retailer, Alibaba, carries no stock. And the world’s largest accommodation provider, Airbnb, owns no property. Something big is going on.” – Tom Goodwin

The advent of the world quickly moving away from the traditional mode of economic activities to a digital model has necessitated the immediate need for countries, both developed and developing to instantly step up their games in ensuring that they are not left behind as the new mode of conducting economic activities rockets into the future by updating the various legislations to reflect the new reality of the fast-approaching Internet of things, after all, one of the major characteristics of Law is its dynamism.

It has often been said that necessity is the mother of invention; it is the necessity, for countries like Nigeria to move with trends, that birth the ingenious idea of incorporating companies that have no physical structure within her territory into the existing legal framework, more of patching than overhauling the whole system.

Digitalization has significantly contributed to the creation of a new borderless global economy. Along the numerous advantages created by the spread of digitalization are new tax challenges. It puts in check the inadequacy of existing tax rules designed almost a century ago. Regretfully, large multinational entities have remained the winners of the globalization bout despite numerous conversations within the international tax community.

This article shall be tailored to address the term Digital Economy and the players therein, the legislations involved, the Finance Act of 2019, Finance Act of 2020, and the Company Income Act and most importantly, the Significant Economy presence rule. (SEP).


With technology fully becoming part and parcel of the world economy, it goes to say that it has also digitalized, essentially, services that are at the core of any nation’s development. Digital Economy refers to operations carried out entirely online without necessarily having to come in contact with any physical structure of the company providing the services, Non-Resident Companies (NRCs), some of these operations include e-commerce, app stores, online advertising, online payment services, cloud computing, participative networked platforms and the likes. This brings to mind what went down between the Federal Government and the Social Media Giant some months back, Twitter, which brought to fore, among many other things, the need for Twitter to erect a structure here in Nigeria, for the purpose of taxation and checks and balances, but it is obvious that the world has gone far beyond that spectrum as the nexus between the Internet and Technology has availed humankind endless possibilities.

Before the introduction of digitalization to commerce, nonresident companies were unable to provide their services in jurisdictions other than where they are domiciled without the need for a local establishment or operation through agents, which were recognized as taxable nexuses. However, the continual increase in mobility of intangibles, the increasing role of network effects and the decreasing relevance of permanent establishments highlight the inadequacy of current nexus rules. The spread of the digital economy has resulted in a paradigm shift in the mode of operation of multinational companies, thus, radically rendering ineffective principles of taxations established for the taxation of the brick-and-mortar business models.

It is in view of this that the Nigeria legislature has gone back to the drawing board to modify the existing laws on taxation to reflect the new norms of the possibility of taxing Companies that operate here in Nigeria but with no structures or Permanent Establishments (PE),and at the core of this is Significant Economic Presence Rule (SEP)


The Deemed Profit Basis was used, prior to 2014, as the means of taxing NRCs, the FIRS issued a directive pursuant to Sec 55 of the Company Income Tax Act, 2004, rendering the deemed profit basis inadequate and ordered all companies operating in Nigeria to file, in addition, essential documents such as income tax return and audited financial statements.

This directive, alongside ongoing conversations within the international community, spotlights non-resident companies, particularly those operating in the digital space, thereby deriving profits from Nigeria while paying minimal taxes. Hence, there was an attempt to impose tax obligations on such organizations, which failed for the inability to establish adequate nexus.

It is important to note that prior to the advent of the Finance Act of 2019 and 2020, taxation of NRCs has been captured in sections 9 and 13 of the Company Income Tax Act, but it was modelled or drafted in line with the traditional basis of taxation, which makes it impossible to effectively monitor or properly tax companies operating in the digital space. In essence, this reflects a source or fixed-based taxation, which means taxing NRCs who are operating in Nigeria through an authorized agent, this principle fostered, among others, the requirement of permanent establishment as the basis of taxation for companies operating within any jurisdiction.

However, the advent of the digital economy which has made it possible for NRCs to conduct business in Nigeria without the need for a Permanent Establishment makes the traditional basis of taxation grossly ineffective.

This prompted the legislature and tax administrators to amend the substantive legislature, and this brought forth the Finance Bill of 2019, passed into law in January 2020.

The Finance Act amended section 13(2) of CITA which seeks to tax NRCs by introducing the Significant Economic Presence Rule. This further extends the taxation net which, prior, wouldn’t have captured the NRCs. Interestingly, the Finance Act failed to define what Significant Economic Presence means, but going by the provision of CITA, 2004, in sections 13(2)(c) and (e), it draws into the tax net companies drawing 25million (or its equivalent in foreign currency) as annual return.

The current tax rate for NRCs in Nigeria is as follows

a.) Companies Income Tax Act: 30% for companies with 100m nairas annual turnover; 20% for companies with 25m to 100m naira; 0% for small companies with less than 25m turnovers50

b.) Capital Gains Tax: 10%

c.) Value Added Tax: 7.5%

d.) Dividend, Interest and Rent: 10%

e.) Royalties: 10%

f.) Tertiary Education Tax: Not applicable to NRCs

g.) Nigerian Police Trust Fund Levy: 0.005%[1]


Effective Taxation of the Digital Economy is a global issue and there have been calls across different international quarters for the need to have uniform Taxation policies that will address the issue holistically.

The primary aim of the OECD is to develop a generally accepted regime for taxing the digital economy. This objective would be achieved through a continuous review of recommendations put forward by member states, the Task Force on The Digital Economy, and the Inclusive Framework with the ultimate goal of reaching a consensus.

BEPS is used to describe actions by Companies, in this case, NRCs to avoid tax payment (tax avoidance refers to exploiting the loopholes in legislation to reduce the taxes they pay or to not pay at all, which is quite different from tax evasion which is an outright refusal to pay and it is criminal).

The BEPS Project aims to set up an international framework to combat tax avoidance by multinational enterprises and non-resident companies using base erosion and profit shifting tools.

With this, effective Taxation of NRCs will be brought to bear and Nigeria being a party to the agreement will join the international league of countries that are able to nip in the bud, the challenges posed by the Digital Economy.


The recent and timely amendment of the Finance Act by the National Assembly to deal decisively with the challenges posed by the digital economy is one that will see Nigeria being an active player in the international scene as regards taxation.

However, just like it has plagued and still plaguing most of our laws in Nigeria, implementation through proper and active administrative quarters appears to be the only clog that might stumble the wheels of progress of the Finance Act, 2020, on its ride to the promised land, though this issue, transcending Nigeria, is more of a political will than administrative will, if the Finance Act 2019, 2020 are adequately implemented, taxation of the digital economy will be properly captured and the Nigerian Economy will be better for it.

Temiloluwa is a law student at the Faculty of Law Ekiti State University. He has a strong interest in Intellectual property law, Space law and Tax law.


  1. Taxation of Digital Economy in Nigeria- Analysis Of The Policy, Legal And Administrative Dimensions. – OGIDAN RACHAEL OLUWATOSIN.

[1] Nigeria Fiscal Guide 2021, KPMG, March 2021, available online at (accessed 19 June, 2021)

Source: DNLlegal

lawpavilion • June 25, 2022

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