Globally, tax laws assume that you need a certain level of physical presence (an office, a factory, a workshop etc.) in a foreign country before you can be assumed to have earned taxable revenue from that country.

There is a consensus that existing tax frameworks were not designed with the digital economy in mind, and there are challenges with applying the general tax rules to taxing digital transactions. Accordingly, while these transactions generate significant revenue for companies and individuals that transact within the digital space, the huge inflow and outflow in most cases have not resulted in a corresponding increase in tax revenue for the jurisdictions where these transactions occur, due primarily to the fact that the service providers do not have an identifiable physical presence in these jurisdictions.

This Article seeks to analyse the steps taken by the Nigerian government to address the tax implication of operations within the digital space especially for Non-Resident Companies.

What is Digital Economy?

Digital economy is an economy that is based on digital technologies, especially electronical and through the internet, such as e-commerce platforms, app stores, ride hailing apps, online advertising, online payment services, cloud computing, participative networked platforms etc. Digital service providers include providers such as Netflix, Alibaba, Ali Express, PayPal, Amazon, LinkedIn, Facebook, Twitter, and a host of others.

Unlike businesses in the traditional economy, companies that are part of the digital economy can generate significant revenue in foreign countries without the need to have a physical presence or employees there. Under existing tax framework, no significant physical presence usually means no, or very little, tax for the host governments. This is one of the major reasons tax authorities globally are monitoring the digital economy and exploring various options to address the situation.

Organisation for Economic Co-operation and Development (OECD) Approach

The OECD has taken steps to address the tax challenges in the digital economy, particularly, through the Task Force on Digital Economy (TFDE)1. In doing this, the OECD has considered three new and interrelated ideas. First, is the establishment of new bases for determining when a digital company was liable to tax in a foreign country. For this purpose, some of the bases considered were revenue, number of active users and extent of digital presence. Once this exceeded a certain threshold, the company would be required to pay tax2. The second idea was to subject digital businesses to a withholding tax (WHT) the same way you would apply WHT to dividends and interest earned by a foreign company3. And the third just like the second is applying an equalisation levy, that is, a direct tax which is withheld at the time of payment by the service recipient4 on digital transactions.

While none of these options or any other alternatives have been adopted as the applicable global standard, members of the TFDE have however, expressed a commitment to continue working together towards building a consensus based long term solution.

The Nigerian Context

Considering the exponential growth of the global digital economy and its immense potential, it became imperative for the Nigerian tax authorities to explore a more creative approach to ensure effective taxation of the digital economy. With the pace of growth in the Nigerian digital economy, it has become necessary to expand the scope of "fixed base" under Section 13 of the CITA to effectively capture the digital economy for income tax purposes.5

Companies Income Tax Act

The Companies Income Tax Act (CITA)6 is the primary law on corporate taxation in Nigeria. Section 105(1) CITA defines a 'foreign company' as any company or corporation (other than a corporation sole) established by or under any law in force in any territory or country outside Nigeria, and a 'Nigerian company' as any company incorporated under the Companies and Allied matters Act or any enactment replaced by that Act.

According to Section 13(1) CITA, the profits of a Nigerian company shall be deemed to accrue in Nigeria wherever they have arisen and whether or not they have been brought into or received in Nigeria. Furthermore, section 13(2) CITA provides that a foreign company is liable to pay tax on profits it derives in Nigeria from:

  • a fixed based business in Nigeria, to the extent that company's profit is attributable to that fixed base;
  • a business or trade habitually carried on via a dependent agent;
  • execution of a turnkey project (i.e. a single contract for surveys, deliveries, installations, or construction); and
  • engaging in an artificial or fictitious transaction, which involves a related party in Nigeria. A general interpretation of the above does not include foreign companies operating in the Nigerian digital economy in the tax bracket.


1 M. Ango and S. Ibrahim, Taxing the Digital Economy based on Significant Economic Presence: A Guide for the Implementation of the Finance Act, 2019 mentation-of-the-finance-act-2019/

2 Seun Adu, Taxation in the digital economy - How much will things change?

3 Ibid

4 Ibid

5 Ogochukwu Isiadinso and Emmanuel Omoju, Nigeria: Taxation of Nigeria's Digital Economy: Challenges and Prospects

6 Cap C21, LFN 2004 as amended.

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