TAXATION OF THE NIGERIAN DIGITAL ECONOMY IN VIEW OF THE 2019 AND 2020 FINANCE ACT

CHAPTER OUTLINE

CHAPTER ONE

1.0    INTRODUCTION.

1.1    Background to the Study

1.2    Statement of the Problem

1.3    Aims and Objectives of the Research

1.4    Significance of the Research

1.4    Scope of the Research

1.5    Research Methodology

CHAPTER TWO

2.0    OVERVIEW OF THE DIGITAL ECONOMY

2.1    Introduction to the digital economy

2.1.1 Meaning of digital economy 

2.1.2 Distinct Nature of the digital economy

2.1.3 Tax-Disruptive Digital Business Models

2.2    Prospect of the taxation of the digital economy

2.3    Tax Challenges in the digital economy

2.3.1 Allocation of Taxing right

2.3.2 cross-border income and transactions 

2.3.3 Base Erosion and Profit shifting

2.3.4 Double Taxation

2.3.5 Tax administration

CHAPTER THREE

3.0    GLOBAL APPROACH TOWARDS THE TAXATION OF THE DIGITAL ECONOMY

3.1    Introduction.

3.2    The Organization for Economic Co-operation and Development 

3.3    Significant economic presence 

3.4    Digital service tax (DST) 

3.5    Profit shifting tax (PST) or diverted poll tax

3.6    Social media and mobile application taxes

CHAPTER FOUR

4.0    TAXATION OF THE DIGITAL ECONOMY IN NIGERIA

4.1    Traditional basis for taxation of entities within the digital economy

4.2    Taxation of the Nigerian Digital Economy under the Finance Act 2019 and Finance Act 2020

4.3    Enforcement Mechanism for the Taxation of the Digital Economy

4.4    The Challenges of Nigerian's Approach towards the Taxation of the Digital Economy

CHAPTER FIVE

5.0    SUMMARY AND CONCLUSION.

5.1.   Summary

5.2.   Recommendations.

5.3.   Conclusion.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

In today's world, “Uber, the world's largest taxi company, owns no cars, Facebook, a wellknown media company, produces no content, the world's most valuable retailer Alibaba has no inventory, and the world's largest accommodation provider Airbnb has no real estate”.[1] This is a testament to the fact that the desire to evolve and innovate is the most obvious characteristic of human life. To this effect, traditional methods for carrying out all human activities are increasingly being discarded as the world settles on new tech-based innovations in view of making the most challenging tasks easier to carry out.  

Without a doubt, we are living in the digital era, and the rapid spread and growth of Information and Communication Technologies (ICT), as well as constant access to it, has had a significant impact on our economic practices, causing businesses to follow new business models, rely more on tech-based solutions, and E-commerce to take on entirely new forms. This evolution of a Digital Economy is characterized by a high level of innovation and disruption of the status quo.[2] With this state of affairs comes the challenge of taxing the digital economy's key players and individuals. This problem is amplified through different sectors of the economy that were once characterized by brick-and-mortar companies (from transportation to housing, to media, and so on). The challenges in taxing the digital economy are caused primarily by the fact that the existing tax laws were designed for conventional structures and did not anticipate the difficulties that would arise from taxing the digital economy. The problem is exacerbated by these companies' desire to pay little or no corporate tax. As a result, tax authorities at both the national and regional/global levels are working diligently to ensure that current tax systems address the challenges and demands raised by the digital economy.

1.2 STATEMENT OF THE PROBLEM

Economic activities are crucial to any nation because revenue is derived from the smooth and well-regulated operation of these activities. Businesses have previously strived by first establishing a physical presence, in most cases through registration,3 and then continuing operations, requiring certainty in the location of their operational markets. As a result, the government found it easier to levy taxes on such businesses, and the businesses had more certainty about whom to pay taxes to.

The effectiveness of this system, on the other hand, has been put to the test by the trend of business digitalization, which depicts businesses going off the grid or having no physical presence in operational areas, while still generating revenue. Companies in the digital economy can avoid paying taxes by exploiting many of the traditional tax system's loopholes to ensure that they pay little or no tax at all. They can do so by taking advantage of weak transfer pricing regimes, hybrid mismatch arrangements, double tax treaty benefits, and exploiting the lack of a permanent establishment in jurisdictions where they operate, etc.  

The major challenge for revenue authorities to tax the digital economy is, however, the lack of a permanent establishment; this involves companies carrying out their business activities without a physical presence or an office in the jurisdiction of operation. This strategy is enhanced by the adoption of business models that prevents them from having real assets in the jurisdictions in which they operate or where they can be subject to any form of taxation. So, when there are no offices within the jurisdiction, it will be difficult to tax these companies.  Thus, it is a challenge for tax authorities all over the world and they have to devise a perfect mechanism for first identifying the complexities of these businesses and then proposing and enforcing a long-term taxation solution.

1.3 AIM AND OBJECTIVES OF THE RESEARCH

This research aims to critically evaluate the taxation of the Nigerian digital economy in view of the 2019 and 2020 Finance Acts. To effectively achieve this aim, the following research questions are to be examined. 

The first question to be answered is this: what is the meaning and nature of the digital economy? This question must be answered as the researcher has to show, to the reader, the basic concept behind the digital economy and how it operates. To effectively answer this question, a proper definition of the digital economy will be given, and its nature will also be extensively discussed. 

The second question is: why is it important to tax the digital economy? This question is very important, as it is one of the fulcrums upon which the project rests. This question must be answered as it lays a good foundation for the research work. In an attempt to answer this question, this research shall make a case for the taxation of the digital economy by providing an insight into the prospect of the taxation of the Digital Economy, especially since the digital economy, just like a lot of technology-based innovations, poses the threat of disrupting the existing legal framework of any country as it creates loopholes in which the lawmakers never anticipated. 

The third question to be answered is: what effort has been deployed all over the world for the taxation of the digital economy? This question will be answered by discussing the various models and innovations for the taxation of the digital economy. 

The fourth and final question is: is Nigeria taxing the digital economy? This is another very important question to be answered. To answer this, an examination of the Finance Acts of 2019 and 2020 will be carried to ascertain the legal framework for the taxation of the Nigerian digital economy.

1.4 SIGNIFICANCE OF THE RESEARCH

This research work is significant because of the current state of Nigeria’s economy and the untapped tax potentials of the digital economy. The Nigeria economy has suffered in recent times, largely as a result of our monolithic economy with a strong dependence on the oil and gas sector, which until recently accounted for more than 70% of our revenue; the dwindling of oil prices has been fatal to the Nigerian economy.[3] As a result of this, the focus is now being placed on taxation as a viable means of generating revenue for the country. 

To achieve the needed revenue boost, the tax system must be seamless. However, the traditional Tax system is currently threatened by the emergence of the digital economy. A major reason for this is outdated laws, which make it possible for individuals and companies to escape paying taxes on certain earnings or transactions that the laws do not provide for.

The research is significant because it seeks to evaluate Nigerian efforts toward taxation of the digital economy in light of global efforts toward taxation of the digital economy. This research shall also make recommendations to ensure the seamless taxation of the digital economy.  Thus, this research will be useful to legislators and the Law Commission in promoting positive legislative change. This study will also benefit entities operating in or planning to operate in the Nigerian digital economy.

1.5    SCOPE OF THE RESEARCH

This work mainly focuses on the definition, nature, operation, and complexities of the digital economy, as well as the global effort to effectively tax the digital economy, particularly the taxation of the income of companies. The research focuses on the efforts made in Nigeria to tax the digital economy in light of the provisions of the Finance Acts of 2019 and 2020.

1.6    RESEARCH METHODOLOGY

This research will be involving a strong doctrinal analysis. The majority of the research will be conducted through a review of relevant literature on the subject. This would include primary materials, (case laws, and regulations by relevant tax administrators) and a number of secondary materials. It should be noted that this research is not comparative in nature but rather an evaluation of Nigeria's position in relation to global and international perspectives and efforts aimed at the taxation of the digital economy. In addition, this research will look at Nigeria's efforts to tax the digital economy by reviewing the relevant provisions of the Finance Acts of 2019 and 2020.