Nigeria has recently amended its Finance Act bill, with the Finance Minister, Zainab Ahmed, mandating foreign companies to pay income tax on services rendered within the country. This significant change was introduced through the Companies Income Tax (Significant Economic Presence) Order, 2020, as an amendment to the Finance Act 2019. The new legislation specifically targets companies that provide digital services, including video streaming, downloading of digital content, and those operating social media platforms, requiring them to pay digital tax to the Federal Inland Revenue Service (FIRS).

The scope of this amendment, underpinned by the Significant Economic Presence (SEP) clause, applies to foreign entities with an annual income of at least N25 million, or its equivalent in other currencies, derived from Nigeria. The Finance Minister retains the power to review and adjust this benchmark. Beyond digital content and social media, the SEP clause also encompasses foreign entities providing various technical services such as training, advertising, supply of personnel, professional, management, or consultancy services, provided they earn income or receive payments from a Nigerian resident or a fixed base or agent of a foreign entity in Nigeria. Prominent global companies like Netflix, Facebook, Twitter, Google, Alibaba, and Amazon, which offer content streaming, advertising, and e-commerce services, are among those now subject to these new tax provisions. Further criteria for a foreign company to be considered taxable include possessing a Nigerian domain name (.ng web address) or having a website address within the country.

Despite the clear intent, the feasibility of implementing and enforcing these income taxes on foreign companies, particularly concerning annual returns generated from Nigeria, presents considerable challenges. Analysts from PricewaterhouseCoopers (PwC) have highlighted that this amendment would necessitate foreign digital companies to register and file income taxes, irrespective of their physical presence in Nigeria. However, the amendment has not effectively addressed the mechanisms for ensuring compliance. While the bill suggests that Nigerian-based companies transacting with foreign entities could be held accountable for withholding tax on payments made, the vast number of individuals who deal directly with these foreign companies poses a complex enforcement problem.

The challenges are further compounded by existing international tax rules. Traditionally, international tax frameworks, as observed by the Organisation for Economic Cooperation and Development (OECD), accrue profits and taxes to the jurisdiction where products or technologies are created, rather than solely where sales occur. This often leads to global tech giants like Amazon and Facebook paying the majority of their taxes in their home countries, such as the US, even when generating substantial sales in other nations like Nigeria. The OECD's Base Erosion and Profit Shifting (BEPS) project, initiated in 2013 to strengthen international tax law, requires tax authorities to assess if a foreign company's revenue is derived from functions performed, assets employed, and risks assumed within the country. For digital companies, whose businesses are heavily tech-based, these inputs (e.g., design and development of technology, direction and priority setting, management and control of technology) are often considered intangible and predominantly executed in their parent countries. Without a solid physical presence or significant operational footprint in Nigeria for these critical functions, securing income tax payments from such companies under traditional rules remains a tall task.

However, the OECD has acknowledged the shortcomings of the old approach, which often resulted in less-developed countries being shortchanged and provided avenues for tech companies to shift profits to avoid taxation. In response, the OECD has proposed a new framework titled "Proposal for a Unified Approach Under Pillar One." This proposal explicitly recognizes that the current BEPS allocation of taxing rights is insufficient for fair distribution, especially given the increasing globalization of the digital economy. The new approach aims to establish new taxing rights by introducing a new nexus rule. This rule would apply wherever a business demonstrates a sustained and significant involvement in the economy of a market jurisdiction, through consumer interaction and engagement, regardless of its physical presence. Under Pillar One, countries wishing to impose taxes on international digital companies would define a revenue threshold in their market, which would serve as a primary indicator of sustained and significant economic involvement. This threshold would also consider activities like online advertising services directed at non-paying users in locations different from where revenues are booked. Crucially, while developed for the benefit of major economies, this proposal grants countries like Nigeria the right to tax these highly digitalized businesses based on sales, not necessarily physical presence. It is important to note that this specific rule would apply only to companies with annual revenues of approximately $825 million and above.

Nigeria has made several previous attempts to tap into the digital sector's revenue. In September 2019, the Advertising Practitioners Council of Nigeria (APCON) mandated a #25,000 vetting fee for social media advertisements, which faced criticism regarding the control of digital content hosted on foreign servers. In May, the FIRS introduced a #50 Stamp Duty on SMS, WhatsApp messages, and other digital communications confirming money receipt or transfer exceeding #10,000, again raising concerns about compliance enforcement. The current Companies Income Tax order is the latest in this series of efforts. It is evident that Nigeria currently lacks adequate structural mechanisms to ensure full compliance with these policies. Obstacles include the necessity of international agreements and the complex task of tracking the financial operations of foreign companies within Nigeria. For successful digital taxation, governmental agencies must move beyond merely enacting policies and develop a profound understanding of how the tech digital sector operates, enabling them to implement effective and enforceable tax regimes.