Finance Act 2019 and Nigerian digital economic system

In this text, Phillips  Akintola Micheal assessed the affect of the Finance Act 2019 on the Nigerian Digital Economy


The Finance Bill, 2019 obtained presidential assent on January 13, 2020; which reworked the invoice into what’s now often known as the Finance Act 2019. This Act introduced refined modifications to the Nigerian tax system and laid numerous controversies to relaxation.

One is the difficulty of taxability of franked funding earnings and extra dividend tax (EDT). Both points have been largely popularised by the dispute in Oando Nig. PLC v FIRS(Oando IV) (2014) 16 TLRN 99, which was determined in favour of FIRS by the Tax Appeal Tribunal on 18th July, 2014, and later by the Federal High Court, Lagos on September 29, 2016.

Asides the above, the Finance Act amends some key provisions of the Companies Income Tax Act (CITA), Value Added Tax Act (VATA), Personal Income Tax Act (PITA), Petroleum Profit Tax Act (PPT), Stamp Duties Act and the Customs, Excise Tariff Etc (Consolidation) Act. The Act additionally introduced new improvements certainly one of which impacts the Nigerian Digital Economy.

This article seeks to evaluate the potential impacts of the Finance Act 2019 on the Nigerian Digital Economy.


A short overview of the Nigerian Digital Economy

Digital economic system refers to all financial transactions that happen on the web or by way of web.

Digital economic system is outlined as an economic system that focuses on digital applied sciences, i.e. it’s based mostly on digital and computing applied sciences. It primarily covers all enterprise, financial, social, cultural and many others. actions which can be supported by the net and different digital communication applied sciences.

Nigeria, being one of the crucial populous nations on this planet with a teeming youth inhabitants and a major tech savvy populace, is little doubt a hotspot for digital financial actions in Africa.

The every day enchancment of know-how in Nigeria has boosted the rising variety of start-ups  within the West-African nation, lots of that are tech reliant for his or her every day actions starting from customer support, downside fixing, finance, logistics, commercial and lots of extra.

According to the World Bank’s 2019 Nigeria Digital Economy Diagnostics Report; in 2016, the worldwide digital economic system was value some USD 11.5 trillion, equal to 15.5per cent of the world’s total GDP. A Huawei funded Global Industry Vision (GIV) 2025 report said that by the 12 months 2020, there can be 40 billion private sensible units and 100 billion connections around the globe, and the usage of Artificial Intelligence (AI) will result in a completely linked and clever world, thereby fostering new enterprise species and driving leapfrog improvement for industries; Mass innovation, tapping into the alternatives of a digital  economic system valued at $23 trillion.

The Finance Act 2019 and the Nigerian Digital Economy

Looking on the above figures, Nigeria is strategically positioned to have an enormous chew at revenues from the worldwide digital economic system now, and sooner or later. Nigeria’s E-Commerce sector alone was value an estimated $13 Billion in 2018.

This exhibits that what the longer term holds for the Digital Economy in Nigeria is definitely not trying gloomy. In the 2020 KPMG  Nigeria Banking Industry Customer Experience Survey, First Bank Nigeria Limited alone  created over 150,000 oblique jobs and executed 3,000,000 transactions via certainly one of its  quite a few digital banking choices (FirstMonie).

Also, in keeping with the report, E- transactions for purchasers earned Guarantee Trust Bank, United Bank for Africa and different eight banks N135.5 billion between January and September, final 12 months.

The report said additional {that a} have a look at the unaudited 2019 third quarter reviews of the banks exhibits that their income from digital transactions grew by 57 % as in opposition to the primary 10 months of 2018.

The numerous tiers of presidency and its businesses, the Military, Corporations, Start-up and even entrepreneurs have in a single kind or one other embraced digitalisation of enterprise. One frequent instance that ties all collectively is Remita, which is a digital fee platform.

In its September 2016 Report, McKinsey noticed that digital platforms are essential to the expansion of contemporary economies. It initiatives that by 2025, the digital trade will enhance the Gross Domestic Product (GDP) of rising economies by $3.7 trillion.

Provisions  of the  Finance Act 2019 because it impacts the digital  economic system

With regards to how the brand new act impacts the Nigerian Digital Economy, Section Four of the Finance Act 2019 added new paragraphs c & e to part 13(2) of the Companies Income Tax Act, and in addition a brand new paragraph Four to the Act.

Under the brand new Section 13(2)(c) of CITA, the earnings of an organization apart from a Nigerian Company from any commerce or enterprise shall be deemed to be derived from or taxable in Nigeria if such firm transmits, emits or receives alerts, sounds, messages, pictures or knowledge of any sort by cable, radio, electromagnetic techniques or every other digital or wi-fi equipment to Nigeria in respect of any exercise, together with digital commerce, utility retailer, excessive frequency buying and selling, digital knowledge storage,on-line adverts, participative community platform, on-line funds and so forth, to the extent that the corporate has important financial presence in Nigeria and revenue will be attributable to such exercise. Under the brand new Section 13(2) (f) of CITA, the earnings of an organization apart from a Nigerian Company from any commerce or enterprise shall be deemed to be derived from or taxable in Nigeria if the commerce or enterprise contains the furnishing of technical, administration, consultancy or skilled providers exterior of Nigeria to an individual resident in Nigeria to the extent that the corporate has important financial presence in Nigeria; supplied that the withholding tax relevant to earnings beneath this paragraph shall be the ultimate tax on the earnings of a non resident recipient who doesn’t in any other case fall throughout the scope of subsection (2) (a) – (e).  The impact of the proviso right here is that the Withholding tax is ultimate earnings tax of the non-resident supplier of the technical, administration, consultancy or skilled service provided that it doesn’t additionally fall inside any of the opposite classes in subsection (2)(a) – (e). In different phrases, if a non-resident firm falls beneath the applicability of each Section 13(2) (c) and Section 13 (2) (f), the WHT won’t be the ultimate tax. Rather, such an organization shall be liable to pay Companies Income tax.

The new Section 13(4) states that the Minister could by order, decide what constitutes important financial presence of an organization apart from a Nigerian Company.


Possible tax affect on the Nigerian Digital Economy

To interpret the above provisions in easy phrases, overseas firms that present the aforementioned digital providers, skilled providers, consultancy or technical administration providers in Nigeria with no important financial presence (SEP) in Nigeria shall be liable to pay withholding tax as the ultimate tax on their earnings. The withholding tax shall be surcharged and remitted by the Nigerian firm the overseas firm is in enterprise with. The Finance Act and CITA has left the willpower of what constitutes SEP because it pertains to firms beneath Section 13(2) (c) and (e) of CITA to the Minister.

The Organisation for Economic Cooperation and Development (OECD)’s Action 1 on stopping Base Erosion and Profit Shifting (BEPS), to handle the tax challenges of the digital economic system, the OECD, proposed SEP as one of many approaches for taxing the digital economic system by its members. Taking India for instance, in response to the proposed OECD strategy, made an modification to the Income Tax Act of 1961 to cowl this space and in addition defines via S.9 (1) (i), Explanation 2A of the act {that a} non-resident firm shall be thought-about to have an SEP in India if:

(a) If the non-resident receives income exceeding an quantity to be prescribed; for transactions carried on by the non-resident inside India, (b) (i) If the non-resident systematically and repeatedly solicits enterprise in India via digital means; (ii) If the non-resident engages in interplay with customers in India via digital means. The minimal variety of customers that may entice the supply of SEP shall be prescribed by notification.

However, in Nigeria, we await the choice of the Minister for Finance to present the order on what would represent SEP for a overseas firm in Nigeria. One concern with an association like that is that the brink for what is going to represent SEP may fluctuate based mostly on the coverage of the administration in authorities.

The Vice President, Professor Yemi Osinbajo SAN on January 31, 2020 reaffirmed the dedication of the Federal Government to tax digital and multinational know-how firms who in his phrases, do not need a bodily presence in Nigeria, but make important earnings in Nigeria from on-line actions. He went additional to state that “under the new Act, once you have a significant economic presence in Nigeria, you are liable to tax whether you are resident or not”.

Given the truth that Nigerian Digital Economy depends on the Western World digital service suppliers, the implications of part Four of the Finance act shall be felt by the Nigerian finish customers and might need over reaching penalties. If a few of these firms decide that they’re higher off not doing enterprise in Nigeria, they may withdraw their providers or higher nonetheless, enhance the price of offering these providers in a bit to offset their eventual tax liabilities. The Nigerian ultimate client shall be left to bear the brunt the place any of those occurs.

According to the 2016 The Economist Intelligence Unit Report titled “Building a digital Nigeria”; Nigeria is linked to the Internet by 5 submarine cables, all of which land in Lagos, that are the South Atlantic 3-West Africa Submarine Cable (SAT-3/ WASC), the Main One Cable, the Glo-1 Cable, the West Africa Cable System (WACS), and the African Coast to Europe (ACE) cable. These cables originated from overseas nations largely in Europe and a bigger share of them owned by overseas entities apart from the Glo-1 Cable. One sure implication almost about this specific sector is, name, texts and web knowledge shall be dearer. Internet Data is already overpriced in Nigeria with an web pace 50% slower than the worldwide benchmark of 25.38 mbps (Megabytes per second).

The Support construction of the digital economic system in Nigeria which ranges from Cloud service suppliers like Azure, Amazon internet providers, Rackspace and many others.; Web service suppliers equivalent to WordPress, blogger and many others.; Hosting options firms equivalent to Bluehost and many others.; Application programming interface (API) suppliers like Plaid, Visa, MasterCard and many others.; Software as a service (SaaS) suppliers equivalent to Slack, G suite for enterprise, Office 365, Zoom and many others.; and a bunch of many others are digital providers offering firms that the Nigerian Digital Economy is closely reliant on are all overseas owned, managed, and non resident. The most essential of those courses of service suppliers are the FinTech Companies like PayStack, PayPal, and Wallets Africa and many others. Majority of Nigerians transacting out of Nigeria depend on these FinTech service suppliers to offer a gateway for people and company organizations to obtain overseas funds whatever the foreign money.

These firms that present such digital providers, particularly these domiciled within the United States haven’t reacted favourably to digital taxation by overseas firms and have typically taken their protests to the President of the United States of America via the workplace of the US Trade Representative (USTR).

The United States in return have proposed levelling excessive tariffs on imports from Countries equivalent to France, Spain, Italy, Austria and Britain which have both formalised digital tax or are nonetheless considering.

According to out there knowledge on the web site of the workplace of the US Trade Representative (USTR), Nigeria is at the moment the 49th largest items buying and selling associate of the United with $8.Three billion in complete (two manner) items commerce throughout 2018. Goods imported from Nigeria to the U.S. totalled $5.6 billion. The U.S. items commerce deficit with Nigeria was $2.9 billion in 2018. This large commerce deficit truly offers the United States room for retaliatory measures in response to the digital tax beneath Section Four of the Finance Act 2020; measure equivalent to enhance in tariffs on Nigerian items exported to the United States.

On Wednesday 22nd January, 2020; French Finance Minister Bruno Le Marie confirmed that France will droop assortment of its digital providers tax this 12 months to forestall the United States from making use of retaliatory tariffs on a spread of French items. This underscores the effectivity of the United States’ bargaining energy in issues like this. Considering the state of the Nigerian Economy, a doable financial showdown with the United States will not be one thing the Nation would want at this second..


The Finance Act 2019 is a laudable piece of laws that may little doubt drive financial development. However, because it pertains to the digital economic system, the taxman’s foot continues to be firmly on the brakes for the reason that Minister has not made the order of what is going to represent SEP for a non resident overseas firm doing enterprise in Nigeria.

With regards to doable commerce cum political battle the taxation of digital firms beneath the Finance Act may create, Section 23(2) CITA states:

(2) The President could exempt or order

(a) any firm or class of firms from all or any of the provisions of this Act; or

(b) from tax all or any earnings of any firm or class of firms from any supply, on any floor which seems to it ample.

This permits the President to grant exemption to some digital firms whose residence nations is likely to be strongly against the Digital Tax. The discretion as as to if to grant this exemption is solely on the prerogative of the President.


Counsel at Hermon Legal Practitioners

LinkedIn: Michael Akintola Phillips

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