The internet has made significant impact on all aspects of human lives. As the world becomes more and more comfortable with virtual interractions, a huge value chain of businesses that transcend continents, borders and geographical locations has been created to cater to the ever expanding human needs. Several studies have confirmed positive correlation between access to the internet and growth in the Gross Domestic Products (GDP) of a nation. This is generally because the internet platform in itself has the capacity to increase efficiency of businesses, growth in market share, enhanced opportunity to reach more people and increased employment opportunities.

Unlike businesses without digital footprints, companies that harness the opportunities provided by the internet have the capacity to earn huge revenue from non-resident jurisdictions, without any physical presence in such countries. For example, Facebook, a giant tech company incorporated in the United State of America (U.S.A) reported a general revenue of $47.5 Billion from the rest of the world, apart from the U.S.A and Canada in 2020, out of the global revenue of $84.16 Billion.1 Further, in Q1 2021, about 55% of the total revenue recorded by Google was generated outside the USA.2 This explains the significant revenue generated by companies that are part of the digital economy.

Unlike businesses without digital footprints, companies that harness the opportunities provided by the internet have the capacity to earn huge revenue from non-resident jurisdictions, without any physical presence in such countries. For example, Facebook, a giant tech company incorporated in the United State of America (U.S.A) reported a general revenue of $47.5 Billion from the rest of the world, apart from the U.S.A and Canada in 2020, out of the global revenue of $84.16 Billion.1 Further, in Q1 2021, about 55% of the total revenue recorded by Google was generated outside the USA.2 This explains the significant revenue generated by companies that are part of the digital economy.

This article analyses the issues associated with taxing social media and other online activities in Nigeria, and the existing legistlative framework available to administer the applicable taxes.

The Nigerian tax framework for online businesses

In recent times, there has been increased focus from the Nigerian government to ensure online businesses pay their fair share of taxes, in line with the extant provisions of the applicable tax laws. Given its population of over 200 million citizens, with about 62% of this population under the age of 253 , Nigeria is uniquely positioned to benefit enormously from the world's digital economy. This population notwithstanding, the Nigerian tax to GDP ratio has stood at 6% (which is considerably low when compared to what obtains in other African countries) over the years. This anomaly has forced critical reasoning on the part of the government and several efforts are being made to shore up the contribution of tax to the GDP. In fact, efforts have been geared towards initiatives that would widen the tax net, in order to generate more revenue to finance government activities. Some of these initiaves have focused on both local and non-resident companies that provide digital/online services to Nigerian residents.

Prior to 2020, taxing non-resident companies was hinged on having physical presence in Nigeria or a fixed base. However, the Finance Act, 2019 urshered in the concept of Significant Economic Presence (SEP) which seeks to give consideration to the extent of a company's economic activities in Nigeria, in order to determine its taxable presence. Pursuant to this concept, the Minister of Finance, Budget and National Planning issued the SEP Order ("the Order"), in order to complement the extant provisions of the Companies Income Tax Act (CITA), as amended by the Finance Act, 2019. The SEP stipulates the conditions precedent and the threshold to be considered, in determining whether a non-resident company could be liable to income tax in Nigeria or not.

The Order provides that any foreign entity that carries out digital transactions with a Nigerian resident would be deemed to have created a SEP in Nigeria, where it derives a turnover or income that is more than ₦25 million or its equivalent in other currencies from streaming or downloading of digital contents, the transmission of data collected about users in Nigeria, providing intermediary services through a digital platform, uses a Nigerian domain name (.ng) or registers a website address in Nigeria and has a purposeful and sustained interaction with persons in Nigeria by customizing its digital page or platform to target persons in Nigeria.

Given the introduction of the SEP concept, the Nigerian government seeks to widen the tax net, align with global best practices and make tax compliance easier for multinationals with digital participation in the country. Section 55 (as amended by the Finance Act, 2020) requires such companies to submit tax returns for the relevant period, containing a full audited financial statements and the financial statements of the Nigerian operations certified by an independent accountant in Nigeria, tax computations for its Nigerian operations, a written statement containing the profits from all sources in Nigeria and duly completed CIT self-assessment forms. However, where the nonresident company has only earned income on which Withholding Tax (WHT) is the final tax, the obligation to file tax returns in the prescribed manner shall not apply.

Taxation of local businesses operating through social media in Nigeria

The digital economy has also given rise to novel business models distinct from the conventional ways of concluding business transactions within the country. These business models allow entities, individuals and enterprises who are Nigerian residents to operate e-commerce and other ancillary businesses through the different social media platforms. Through these media, both incorporated and unincorporated entities disseminate and promote goods and services, advertise on behalf of their principals, engage in brand influencing, plan events via the internet, and negotiate between brands and prospective customers. Upon the discharge of the agreed terms of the sales or services, these entities earn income or revenue in the form of a fee or commission. Thus, the need to pay the applicable taxes on the income earned through these social media platforms becomes critical.

Contrary to recent misconceptions that there are special requirements for local businesses that operate through the social media platforms, Nigeria currently does not have any special regime for these businesses in its taxing framework, separate from what applies to businesses that operate through the conventional means or both. Generally, companies incorporated in Nigeria are liable to income tax on their income, based on the relevant provision of CITA.

Accordingly, any income earned by a company from its social media activities would be liable to income tax at the applicable rate in Nigeria, provided such income is not expressly exempt by the CITA. Meanwhile, zero percent (0%) rate would apply to the taxable income, where such company is a small company and only earns a revenue of ₦25 Million or less within a relevant year of assessment. With an annual revenue greater than ₦25 Million but less than ₦100 Million, the income of such company would be subject to tax at twenty percent (20%) while the thirty percent (30%) rate would apply where the annual revenue is more that ₦100 Million. For resident unincorporated

For resident unincorporated entities in Nigeria, the income generated from the digital activities, as well as those generated from other sources within and outside Nigeria, are taxable under the Personal Income Tax Act (PITA). Section 3 (1a) of PITA, provides that tax shall be payable on any gain or profit from any trade, business, profession or vocation engaged into by these entities. Further, such unincorporated businesses are also required by law to withhold taxes at the required rates on payment to vendors and remit the same to the relevant tax authority (RTA) as appropriate.

While the idea of generating additional revenue for the government and widening the tax net is laudable, the implementation of actionable steps required to properly tax social media activities and online busineses can be very challenging. Even though there are existing laws to ensure both resident and non-resident entities (incorporated and unincorporated) pay their taxes, tax administrators at the different levels have to strategically deploy their resources to ensure full compliance with the laws.

Challenges of taxing social media activities in Nigeria and what obtains in other jurisdictions

While the idea of generating additional revenue for the government and widening the tax net is laudable, the implementation of actionable steps required to properly tax social media activities and online busineses can be very challenging. Even though there are existing laws to ensure both resident and non-resident entities (incorporated and unincorporated) pay their taxes, tax administrators at the different levels have to strategically deploy their resources to ensure full compliance with the laws. This is especially because voluntary compliance is key to increased collection of taxes due and this can only be improved if the trust between the government and its citizens is not breached. Therefore, concerted efforts must be shown on the part of the government to maintain the trust of the taxpayers, while the taxpayers continually strive to fully fulfil their civic responsibility, as stipulated by the extant provisions of the enabling laws.

Meanwhile, the need to generate additional revenue to fund government projects is propelling many countries around the world to enact different policies and legislative amendments that would help tighten the screws of their tax systems, in order to mitigate tax leakages and close the loopholes explored by digital companies to escape tax in their countries. For example, the European Commission (EC) in March 2018, recognized the mismatch between where multinational tech companies create values and where they are eventually taxed. The EC thus proposed the Digital Services Tax (DST), a new rule which ensures that the activities of digital businesses are fairly taxed in the European Union (EU). Based on this rule, a digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a member state if it meets one of certain criteria- if it exceeds a threshold of €7 million in annual revenue in a member state or it has more than 100,000 users in a member state in a taxable year; and over 3,000 business contracts for digital services created between the company and business users in a taxable year.4

Likewise in the United Kingdom, the DST applies to any company that provides a digital service where its global sales exceed $500 million, and the UK sales exceed $25 million. The first $25 million is exempt from tax, while any profit above the $25 million is taxed at 2%. The UK government is only entitled to this 2% tax when the profit generated is connected to UK users.5 In the same vein, South Africa adopted this international trend in April 2019 when it updated its existing tax laws to include the definition of electronic services. The updated law defines electronic services as all services supplied through an electronic agent, electronic communication or the internet. Similarly, the Bureau of Internal Revenue (BIR) in Philippines, released its Revenue Memorandum Circular No. 97-2021 on 30 August 2021, in order to clarify the tax obligations of all social media influencers and individuals in Philippines. The BIR classified social media influencers, other than corporations and partnerships as self-employed and sole proprietors and must pay personal income tax (PIT) on the income they generated from such businesses

Conclusion

Although, Nigeria currently does not have any special tax regime for social media activities, there are specific provisions in existing laws that fully cover the operations of both incorporated and unincorporated entities, whether resident or non-resident, and these provisions must be properly administered by relevant tax authorities.

Taxpayers should also be encouraged to ensure voluntary compliance through good governance and stakeholder engagements at different fora, while non-compliance must be seamlessly identified and discouraged in line with the provisions of the laws.

Footnotes

1. https://dazeinfo.com/2020/04/16/facebook-annual-revenue-by-region-graphfarm/

2. https://businessquant.com/google-revenue-by-region

3. https://theconversation.com/endsars-how-nigeria-can-tap-into-its-youthful- population-148319#:~:text=How%20would%20you%20characterise%20the%20 demographic%20profile%20of%20Nigeria%3F&text=According%20to%20 population%20projections%20by,are%20below%20age%2025%20years.

4. Taxation Of The Digital Economy Is A Sphinx: Lessons From The Developed And Developing Countries To Guide Ghana (modernghana.com)

5. What is Digital Services Tax and How Does it Work? (electropages.com)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.