By Adedotun Adesile
As the world becomes more digital, and the government becomes more aggressive with revenue generation, taxation policies are adapting to the rise of digital business models. In Nigeria, digital taxation is becoming increasingly important for businesses, especially as governments aim to capture revenue from the rapidly growing e-commerce, technology, and digital services sectors. This article examines the impact of digital taxation on Nigerian businesses and offers practical steps for companies to navigate the evolving regulatory environment.
The Nigerian e-commerce sector is experiencing significant growth, driven by key segments such as fashion, electronics, and media. According to Statista in a December 2023 published article titled “Leading e-commerce Sectors in Nigeria”, fashion accounted for 35% of the total e-commerce value, followed by electronics and media at 28%, and furniture and appliances at 17% in the prior year (2022). The increase in internet penetration rate and smartphone usage in Nigeria are also contributors to the sector’s expansion.
Understanding Digital Taxation in Nigeria
Digital taxation refers to taxes imposed on digital transactions, platforms, and services that may not have a physical presence within a country but generate substantial revenue from its residents. Traditionally, tax systems are based on the physical presence of businesses, but the digital economy has disrupted this model. Nigerian businesses – especially those operating in e-commerce, fintech, and online services – need to be aware of how these changes may impact them.
In 2020, the Nigerian government introduced significant changes to its tax framework to include provisions for taxing digital transactions. One key development was the introduction of the Significant Economic Presence (SEP) rule under the Finance Act, which requires foreign companies providing digital services to Nigerian customers to pay taxes even if they lack a physical presence in Nigeria. The SEP rule aims to capture revenue from global tech giants such as Google, Facebook, and Netflix; but it also has implications for local businesses and startups with franchises in the fashion, electronics, and media sectors.
The Implications of Digital Taxation for Nigerian Businesses
Nigerian businesses operating online or providing digital services will face increased tax compliance obligations. Companies must therefore understand and adhere to new reporting and filing requirements to avoid penalties. As the government seeks to tighten its tax collection, businesses need to invest in systems that track and report taxable digital transactions. For example, starting September 9, 2024, fintech companies including Opay, Palmpay, and Moniepoint, will begin imposing a N50 levy on all transactions of N10,000 and above, in compliance with the Federal Inland Revenue Service (FIRS) regulations. The Electronic Money Transfer Levy that guides these fintech companies’ transactions, was introduced in the Finance Act 2020 as an amendment to the Stamp Duty Act. Failure to adhere and comply could result in significant penalties or tax audits by the FIRS.
For businesses providing digital services, the introduction of taxes on digital transactions may lead to higher overall tax burdens which could affect many businesses, particularly small and medium-sized enterprises (SMEs) that rely on digital platforms to reach a wider customer base. An online retail platform serving Nigerian customers could face additional taxes on digital advertising costs, payment processing fees, or even customer data analytics services – leading to increased operational costs.
How Nigerian Businesses Can Prepare for Digital Taxation
To thrive, Nigerian businesses must take proactive steps to stay compliant and optimize their tax strategies. Below are some key actions businesses can take to prepare:
- Understand the Regulations and Stay Informed
The digital taxation landscape in Nigeria is still evolving, and businesses must stay updated on any changes to tax laws and regulations. Keeping up with updates from the Federal Inland Revenue Service (FIRS) and engaging with tax professionals is crucial. Business owners should also understand their obligations under the SEP rules and other digital tax provisions.
Practical Tip: Set up a tax team or designate an individual responsible for monitoring digital taxation updates. This will ensure that the business stays compliant as new regulations emerge. An alternative may be to engage with tax professionals or legal advisors who specialize in digital taxation to ensure compliance.
- Invest in Digital Accounting and Tax Compliance Systems
Digital taxation will require businesses to keep accurate records of all their online transactions, both domestic and international. Investing in digital accounting software that integrates with tax reporting systems can help automate the tracking of taxable activities, reduce human errors, and ensure timely filing.
Practical Tip: Consider cloud-based accounting software like QuickBooks, Xero, SAP (in the case of large organizations) or local solutions that are tailored to Nigerian tax laws. These tools can automatically track sales, VAT, and other taxes, simplifying compliance.
- Review Pricing Strategy
Digital taxes can affect the profitability of online services, particularly if businesses fail to account for them in their pricing. Nigerian businesses should review their pricing strategies to ensure they can absorb any additional costs related to digital taxation without hurting their margins.
Practical Tip: A Nigerian e-commerce platform that charges a flat fee for its services might need to adjust its pricing to account for new taxes on digital transactions, ensuring that the additional tax burden is passed on to customers in a fair and transparent way. An example is the recent communication from Fintech’s like OPAY, Palm Pay, Moniepoint to their teeming customers regarding a one-time fee of N50 applicable to electronic transactions from N10,000 and above, effective September 9, 2024.
- Seek Professional Advice & Advocacy, Engage with Authorities
Given the complexity of digital taxation, seeking advice from tax professionals is essential. Engage tax consultants who specialize in digital taxation to help navigate cross-border tax issues and ensure compliance with both Nigerian and international tax regulations. Additionally, businesses should advocate for clearer tax policies through industry associations, such as the The Fintech Association of Nigeria (FintechNGR).
Practical Tip: Collaborate with other businesses in the same industry to voice concerns, ask for clarification on ambiguous tax rules or regulations and push for fairer, clearer digital taxation policies. Industry groups can help influence policymakers to create a more business-friendly environment.
- Prepare for Future Tax Audits
As the Nigerian government is seeking ways to increase her revenue base, businesses should anticipate increased scrutiny and tax audits from the FIRS. To avoid disputes or penalties, ensure that your business maintains thorough records of all digital transactions, including invoices, contracts, and tax filings. Regular internal tax audits can help identify any potential issues before they escalate.
Practical Tip: Expose finance and accounting teams to training that would familiarize them with digital tax requirements. Keep the team informed about any changes in digital tax laws and how they impact the business. Conduct periodic tax audits with the help of external auditors to ensure that digital transactions and tax filings are in compliance with Nigerian laws. This proactive approach can help mitigate the risk of facing costly tax disputes.
Conclusion
As Nigeria continues to modernize its tax system to capture revenue from the digital economy, businesses must adapt to the new reality of digital taxation. By taking these steps, Nigerian businesses can better navigate the complexities of digital taxation and ensure they remain compliant while optimizing their tax strategies.
Digital taxation is here to stay, and the sooner Nigerian businesses prepare, the better positioned they will be to compete and grow in a fast-changing landscape.
- Adesile is a highly accomplished business leader with over 15 years of experience guiding multinational corporations through transformative growth and strategic initiatives. His extensive expertise encompasses accounting, audit, taxation, and revenue generation, with a strong focus on driving business success.
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