The digital economy is fast becoming the most innovative and widest reaching economy in the world. In 2018, the Nigerian Investment Promotion Commission explained that the Nigerian digital economy is expected to generate $88 billion and create three million new jobs by the end of 2021.

However, Nigeria may find that it is unable to tax the huge income that the digital economy would generate unless it amends its laws to adapt to changing technological advancement.

Typically, the general rule under Nigeria tax laws for taxing income of foreign enterprises in a given jurisdiction is by establishing that the entity has a taxable presence or has a permanent establishment (PE) in Nigeria. Given that digital transactions require little or no physical presence of the transacting parties, the income from the transaction may not be captured in the jurisdiction where the income is derived.

Whilst the Nigerian tax authorities are working towards ensuring digitalisation of the tax collection process, it is unfortunate that this digitalisation has not been extended to cover effective monitoring and collection of taxes from digital transactions. However, the Chairman of the Federal Inland Revenue Service (FIRS), Mr. Babatunde Fowler, recently disclosed that the FIRS would soon begin collection of Value Added Tax (VAT) on online transactions. According to the Chairman, the FIRS plans to start directing banks in Nigeria to be the collecting agents for VAT on online transactions for purchase of goods and services. As innovative as this move may sound, it may give rise to a number of undesirable consequences given that no clear legal framework exists for this move.

This Article discusses some of the challenges and prospects of taxing the digital economy in Nigeria and examines some developments in other jurisdictions with respect to taxation of the digital economy.

Challenges of Taxing the Digital Economy in Nigeria

The applicable rules for corporate taxation in Nigeria do not effectively capture the realities of a modern economy in our world of fast-paced digital transactions. Given that non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to income tax in Nigeria is usually controversial. Section 13 of Companies Income Tax Act (CITA) implies that a non-resident company must have physically performed activities in Nigeria, directly or indirectly, before such a company can be liable to income tax in Nigeria. Thus, where a software company provides online data to users in Nigeria without being physically present in Nigeria in any form, it may be difficult to conclude that such a company is liable to CIT in Nigeria, although the company could have derived income from Nigeria. A major challenge is therefore determining at what point such non-resident would be deemed to have carried on business in Nigeria and thus liable to income tax in Nigeria. This is because the absence of the required fixed base or physical operations in Nigeria under Section 13 of CITA has made it difficult for the FIRS to establish liability of such foreign companies to Nigerian tax.

To ensure that digital companies do not escape tax in Nigeria, the FIRS has often required Nigerian companies to withhold tax on all payments made to non-resident persons regardless of the non-establishment of the tax presence specified under Section 13 of CITA. This requirement has encountered resistance from taxpayers given that such non-resident persons may not be liable to tax under Nigerian laws.

However, the FIRS seems to have succeeded in ensuring that VAT is deducted and accounted for on cross border payments for transactions between foreign companies and Nigerian companies such as in the case between Vodacom Business Nigeria Limited v FIRS. In that case, the Federal High Court ruled in favour of the FIRS and held that the Nigerian company was required to account for the VAT on such transactions regardless of the fact that the supplier/foreign company did not perform the services and had no physical presence in Nigeria.

Thus, the absence of relevant provisions in the Nigerian tax laws covering taxation of digital activities is a major challenge that has resulted in loss of revenue to the government.

Insights from Other Jurisdictions

It is important to note that the challenges arising from taxation of digital transactions are not peculiar to Nigeria. Due to the resultant revenue loss arising from these challenges, various jurisdictions and international associations have sought means to ensure that taxes are paid in the jurisdictions where income is derived. We have examined below some of the measures taken by other jurisdictions on the taxation of the digital economy:


India introduced new digital permanent establishment rules effective April 2019 to address the challenges that arise from the taxation of the digital economy. These rules, which are contained in the 2018 Indian Finance Act, seek to subject businesses that have a "significant economic presence" in India to Indian tax notwithstanding that such businesses may not have any physical presence in India. The Act defined "significant economic presence" to mean, amongst others, transactions where the aggregate payments exceeds such amounts as may be prescribed.

In addition, India currently imposes a surcharge tax of 6% on payments to foreign companies for online advertising services when such companies do not hold a permanent establishment in India.

Ultimately, these rules aim at capturing companies that do significant business in India through digital channels but who would not have been captured by preexisting PE rules.

European Union

In March 2018, the European Commission (the Commission) proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly manner in the EU. The Commission has made two legislative proposals.

One proposal recommends that member states apply an interim tax on companies that generate an annual total revenue of over £750 million and an annual total revenue of over £50million from digital activities in the EU. This interim tax is to cover the main digital activities that currently escape tax in the EU and is to be levied at 3% on the gross revenue of businesses derived from online advertising, sale of collected user data and other digital services etc. The other proposal seeks to introduce the concept of a "taxable digital presence" or a Virtual Permanent Establishment (VPE). A VPE is designed to introduce a taxable nexus for digital businesses operating within the EU with little or no physical presence.

Prospects for Taxation of the Digital Economy in Nigeria

Given the rising statistics on the digital economy and its immense potential, it has become expedient for the Nigerian tax authorities to explore a more creative approach to ensure effective taxation of the digital economy.

Nigeria will need to borrow a leaf from other nations that have taken bold steps to tackle tax leakages in the digital economy through innovative tax legislation. Just like India, the government should expand the scope of "fixed base" under Section 13 of the CITA to ensure that the digital economy is effectively captured for income tax purposes. The introduction of a digital fixed base in Nigeria will certainly increase the tax base, thereby ensuring an increase in government revenue.

A major drawback, however, relates to enforcement of taxation of digital transactions, given that most digital transactions are concluded with non-resident companies, which makes efficient tracking of such transactions difficult. However, with proper legislation on taxation of digital transactions, the tax authorities can work with banks to identify payments relating to digital transactions with non-resident companies that should be subject to tax. Furthermore, tax authorities should leverage the automatic exchange of information between jurisdictions and employ innovative technology to secure a proper database of the various online suppliers of goods and services. This will go a long way in providing the tax authorities with sufficient data to go after tax defaulters directly.


It is apparent that the digital economy is a major economy given its immense revenue potentials for the government. With a population of over 180 million people, Nigeria stands to gain a lot with the taxation of the digital economy and it has become expedient for the Nigerian tax authorities to explore a more creative approach to ensure taxation of the digital economy.

Consequently, it is important for the Nigerian government to enact a legislation to address the issues inherent in taxation of the digital economy rather than seeking to extend the interpretation of existing laws that are not sufficient to bring cross border digital transactions into the tax net.

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