With the growing digitalization of businesses, it is becoming increasingly evident that the existing international rules that allocate taxing rights among countries are largely ineffective. Advancements in technology have made it possible for businesses to carry out economic activities in different jurisdictions with little or no physical presence. Hence, the allocation of taxing rights can no longer be exclusively determined by reference to physical presence.
To address the unique tax challenges created by the digital economy, the Organization for Economic Cooperation and Development (OECD) and the G20 have come up with various proposals. In January 2019, the OECD issued a policy note proposing two Pillars to address the challenges arising from digitalization. Pillar One goes beyond the arm's length principle to focus on the allocation of taxing rights through revised nexus and profit allocation rules while Pillar Two addresses broader Base Erosion and Profit Shifting (BEPS) issues through an international minimum taxation framework and a tax on base eroding payments.
However, the OECD has not been able to reach a consensus on its proposals among its member countries. Thus, many countries have begun to opt for the imposition of unilateral measures to tax digital businesses deemed to be deriving income from their jurisdiction. Countries like France and India and most recently Nigeria have taken proactive steps to tax digital businesses by the use of the Nexus approach. That is, rather than rely on the principle of physical presence, companies carrying out digital activities may be considered taxable in a jurisdiction based on their Significant Economic Presence (SEP).
In Nigeria, the concept of SEP was introduced with the enactment of the Finance Act, 2019. In May 2020, an official gazette titled Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order) was subsequently issued. The SEP Order describes two broad categories of foreign companies that will be deemed to have an SEP in Nigeria; companies involved in digital transactions and companies providing Technical, Professional, Management or Consultancy (TPMC) services.
Foreign companies involved in digital transactions have an SEP in Nigeria where the company:
- derives a gross turnover or income of more than ?25 million or its equivalent in other currencies from its digital activities;
- uses a Nigerian domain name (.ng) or registers a website address in Nigeria;
- has purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria, including reflecting online payments in Nigerian currency.
A non-resident company providing TPMC services will have an SEP in Nigeria where it earns income or receives payment from a person resident in Nigeria or from a fixed base or agent of a foreign company in Nigeria.
In view of the recent developments, this article discusses the administration of the SEP Order and the considerations for foreign companies doing business in Nigeria from a Transfer Pricing (TP) perspective.
Originally published July 21, 2020.
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