GEO TAX INSIGHTS: FINANCE ACT, 2019 (10): Emerging Tax Issues

IN today’s publication, we will continue with our discussion on the taxation of the digital economy to guide corporate and individual taxpayers of the impacts on their businesses.

 

Addressing the challenges associated with taxing Digital Economy in Nigeria

Digital economy is rapidly growing globally and as such, there is need for urgent action for blocking tax revenue leakages associated with existing gaps in taxing transactions consummated through the digital platform.

The following actions are recommended to tackle the challenges posed in the case of Nigeria:

 

1. Review the scope of “Fixed base rule” under the old Section 13 of Companies Income Tax Act 2004 as amended.

This defect has been addressed by the Finance Act 2019 through the new Section 13 (c.) of the Companies Income Tax Act and Section 13(f) by the introduction of “Significant Economic Presence Rule” in Nigeria rather than the defective old S.13 that stipulates the existence of Permanent Establishment before the profit of non-resident taxpayers can be subjected to Tax.

Note the following new Value Added Tax provisions that addressed the challenge of loss of VAT revenue through the “Physical Economic Presence Rule” in the old Act:

(a) Section 2(ai and aii) and Section 2(bi and bii) of the new Value Added Tax Act;

(b) Section 14(3 & 4) that introduced Reverse Tax Mechanism as explained in our earlier publication.

The impact of the new Value Added Tax provisions in the Finance Act is that taxable digital transactions with a non-resident person can be easily captured and be subjected to Nigerian Tax as appropriate.

 

2. Adopting Innovative Tax Legislation Approach

It is high time for Nigeria to adopt the above approach so as to be in tune with the fast growing Information Technology globally. The failure to do so will undoubtedly lead to huge tax revenue leakages for the government.

Although some of the challenges have been addressed in the Finance Act 2019 but much is still required to be done holistically to the Nigerian Tax Legislations to ensure global comparable fiscal/tax administration.

3. Automation of Tax Administration

The Nigerian Tax Authorities should ensure fast migration from the traditional manual approach that requires physical presence/representations of the taxpayer and tax authorities before any issue can be resolved to improved tax system right from Registration for tax purposes by the taxpayer, remittance of tax, filing of monthly and annual returns, correspondences with the tax authorities, tax audit and investigation.

Though the Nigerian tax administrations (both State and Federal) have been partially automated but full automation is yet to be largely achieved due to lack of the required facilities, capital and manpower requirements.

4. Data Handling

Efficient and effective data handling is key to taxing the digital economy. This has become the case in the developed world than in Nigeria due to the advantage of technological advancement which they possess.

Time is ripe for Nigeria to ensure huge capital investment is committed to this project so that we can be able to easily gather, process and store data that will serve as reference point for the taxation of the transactions carried out through the digital platform.

5. Collaboration with the Digital Platform Service Providers

The Nigerian tax authorities should facilitate collaboration with the providers of digital platforms for possible exchange of taxable financial related information as this will ensure easy capture of digital transactions and possible assessment to Nigerian Tax.

6. Ratification of multilateral tax treaties

There is the need for Inter-governmental ratification of multilateral tax treaties to address the challenge posed by Base Erosion and Profit Shifting and other sharp practices of achieving tax avoidance/tax evasion by the multinational companies. The advantages are that the tax treaties will swiftly modify the existing bilateral agreements to implement tax treaty related matters in a cost-efficient and effective matters rather than individual agreements and amendment to bilateral  tax treaties.  This action will curb tax revenue leakages and increase tax revenue for participating government, promote transparency and curb illicit financial flows.

7. Capacity development

There is a great need for capacity development among the staff of various tax authorities in Nigeria.  They need to be exposed to both local and foreign trainings in Information Technology, Accounting, Taxation, Laws and other relevant trainings as this will improve their performance and enhance tax revenue generation for the government.

Conclusion

We shall continue with the other current/emerging tax issues in the next publication.