Country Note: Taxing The Income Of Digital Non-Resident Companies Under The ‘Significant Economic Presence’ (Sep) Rules In Nigeria

Abstract

The digital economy poses challenges to the traditional international corporate tax rules. Contrary to ‘source rules,’ digital multinational companies (MNCs) – such as Facebook, Netflix, Yahoo, Google, Amazon, etc. – can avoid tax from source/market countries where value is created because they have no permanent establishment (PE) in such countries. This position is damaging to developing countries, including Nigeria, that rely heavily on taxes on revenue sourced within their jurisdictions. Therefore, in January 2020, Nigeria responded by amending its corporate tax rules to introduce the ‘significant economic presence’ (SEP) as an additional basis for taxing digital non-resident companies (NRCs) with Nigerian sourced income. This amendment follows attempts at reforming international tax rules by the United Nations (UN), European Union (EU), and G20/ Organization for Economic Cooperation and Development (OECD). The G20/OECD’s Action 1 of the Base Erosion and Profit Shifting (BEPS) Project and the Inclusive Framework for BEPS seek to provide policy suggestions for aligning the place of taxation with that of ‘value creation’. However, while all countries within the Inclusive Framework are presumed to be operating on equal footing, policy discussions have revealed a well-known problem: the role of international tax principles in the perpetuation of imbalances in the international allocation of taxing rights among states. Against this background, this article will examine the scope of the SEP and its suitability, workability, and sustainability for taxing digital NRCs in Nigeria, review judicial decisions on taxation of digital NRCs, and analyse the enforcement challenges of the SEP in the context of Nigeria’s digital and wider economy. Significant economic presence, digital taxation, value creation, permanent estabilishment, allocation of taxing rights, BEPS, UN, EU, G20/OECD, Nigeria.