There is a general consensus that the current global and national legal/tax frameworks were not designed for taxation of the digital economy which presents major challenges in applying principles under the general tax rules to taxation of digital transactions. There is also no argument, that these transactions generate significant revenue for companies and individuals that transact within the digital space. However, the huge inflows and outflows in most cases have not resulted in the expected corresponding increase in tax revenue within the jurisdictions where these transactions occur. One primary reason for the mismatch is that a number of service providers within the digital space are not captured within the tax net because they do not have an identifiable physical presence in jurisdictions where these economic activities take place.

The Organisation for Economic Co-operation and Development (OECD) and the G20 had taken steps to address these challenges, particularly, through the Task Force on Digital Economy (TFDE). In the course of its work, the TFDE had analysed some alternatives to the current approaches, for example, the introduction of Permanent Establishment thresholds based on "significant economic presence", new withholding tax on certain types of digital transactions and introduction of an "equalisation levy".1 While, none of these options or any other alternatives has been adopted as the applicable global standard, members of the TFDE have however, expressed a commitment to continue to work together towards building a consensus based long term solution.

In other to address these challenges, some countries have opted for the adoption of some alternatives either by enactment of new legislation or issuance of regulations, while other countries have adopted rules for interpreting existing tax laws. In our case, Nigeria recently took the initiative of amending its tax laws to foster the taxation of the digital economy through the enactment of the Finance Act 2019. The Act provides for the taxation of businesses that have Significant Economic Presence (SEP) in Nigeria. The Minister of Finance, Budget and National Planning (the Minister), is empowered to determine the definition and scope of "SEP" through an Order. However, this step is yet to be taken by the Minister.

In view of global and local developments, this Article discusses the taxation of the digital economy globally and under the Finance Act. It also highlights options that may be adopted by the Minister and relevant tax authorities in determining the definition and scope of SEP and the rules of apportionment that should apply to qualifying transactions.

Developments on Taxation of the Digital Economy

Prior to the enactment of the Finance Act 2019, Section 13 of the Companies Income Tax Act (CITA) laid down the basis for the taxation of companies in Nigeria. In summary, the section required a non-Nigerian company to have a physical presence in Nigeria before the profits of that company will be deemed to be derived in Nigeria. This meant that companies that had no physical presence in Nigeria were not ordinarily subject to companies' income tax even where they have digital presence in Nigeria, generate revenue from Nigeria and make profits in Nigeria2. This gap created a huge window for revenue loss and tax leakages, especially with Nigeria's active participation in the global economy and our increasing involvement on the demand side of the global digital economy.

In addressing this obvious loophole in our laws, one major highlight of the Finance Act 2019 is the introduction of the concept of significant economic presence (SEP). The Act amends Section 13 of the CITA by expanding the incidence of taxation for non–resident companies and introduces two conditions for non-resident digital companies to be taxed in Nigeria, i.e., they must have significant economic presence in Nigeria and the profit must be attributable to such activity

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