INSIGHT: New Value-Added Tax on Online Services in Nigeria

According to the Organization for Economic Corporation Development (OECD), the digital economy is increasingly becoming “the economy” by itself. The digital economy has therefore recently become an area of focus for revenue authorities: perhaps the fundamental question to be asked then is whether local tax laws reflect the current dynamics in the digital economy.

While there is as yet no international consensus on taxation policies on the digital economy, revenue authorities in different countries have been proactive in introducing local laws that address this issue. In Nigeria, the Federal Inland Revenue Service (FIRS) has signified its intention to impose value-added tax (VAT) on online transactions in 2020.

In this article, we analyze the proposed structure of the VAT on online transactions and make a comparison with other African countries.

Proposed VAT on Online Transactions

As part of Nigeria joining the current global drive for effective taxation of the digital economy, the former Executive Chairman of the FIRS, Tunde Fowler, announced in August 2019 that transactions involving the digital purchase of goods and services would be subject to VAT in 2020. The VAT would cover transactions arising from local and foreign businesses with activities within Nigeria’s digital space.

This announcement was a game changer for foreign entities providing services to customers in Nigeria via a digital platform, as these businesses may have to register for and collect VAT on all sales within Nigeria. It is therefore highly probable that the VAT on the online transactions framework would result in double taxation on products and services, with the customer bearing the tax burden. It is possible that this extra tax burden, in addition to the lack of trust in online platforms by Nigerian users, may increase customer aversion and result in a fall in tax revenues from online businesses.

The tax revenue generated by the FIRS in fiscal year 2018 is estimated to have been 5.3 trillion Nigerian naira ($14.6 billion), against a budget of 6.7 trillion Nigerian naira, of which VAT contributed about 21%, while corporate income tax and Petroleum Profit Tax contributed 26% and 47%, respectively. With the introduction of VAT on online transactions, we are optimistic that the FIRS may be able to meet its revenue targets during the 2020 fiscal year.

Practice in Other African Countries

Several other African countries have followed this trend, and are either implementing, or are in the process of drafting, regulations which have been designed to increase their revenue generation from VAT on online transactions.

In Kenya, the Finance Act, 2019 introduced significant VAT requirements for online transactions. The Kenyan revenue authority requires entities whose turnover is above 5 million Kenyan shillings ($49,800) to register for VAT and file VAT returns. The Finance Act has provided the Kenyan revenue authority with the tools for generating VAT from transactions in the digital marketplace.

In South Africa, since as far back as 2014 regulations have been in place for the taxation of online service providers who are not resident in South Africa. The relevant regulations were recently updated in April 2019 to require VAT registration and remittance by foreign providers of online services. There is, however, a threshold income of 1 million South African rand ($67,000) per annum which the foreign business must exceed before the VAT compliance requirement is applicable.

Ghana’s tax legislation has also provided a platform for the taxation of online businesses operating within its digital economy. Section 16 of Ghana’s VAT Act states that: “an unregistered, non-resident person who provide telecommunication services or electronic commerce to persons for use or enjoyment in the country, other than through a Value Added Tax registered agent must register if that person makes taxable supplies exceeding the threshold.” This section of the regulation clearly stipulates a requirement for local and foreign online service providers to register for VAT purposes.

It is not always the case that the imposition of VAT on activities within the digital economy goes unchallenged. When India introduced taxes on online transactions in 2018, the U.S. believed the taxes imposed were unfair, based on the argument that it resulted in double taxation of U.S. companies. The U.S. is proposing a restriction on the number of Indian foreign workers to be granted work visas into the U.S. Similarly, the U.S. threatened retaliation against France when the latter introduced a digital services tax on the giant technology companies that were mainly headquartered in the U.S.

Recommendations

Despite the revenue generation strategies of the tax authority, Nigeria’s tax to GDP ratio remains very low, at about 6%. The FIRS and other policy formulating agencies must employ strategies that will not be seen as punitive, unfair and unnecessarily burdensome. An online VAT framework should be designed to capture foreign online service providers and other online platforms that have not yet been captured within the tax net.

Perhaps the FIRS should borrow from the Israeli tax authority’s requirement for foreign businesses with a significant digital presence in Israel to have VAT registration and make VAT remittances on business-to-consumer supplies of digital services and online marketplace services, as a benchmark to ensure the success of its own tax laws concerning VAT on online transactions.

With the rate at which technology is advancing, the revenue authorities are presented with a great opportunity and, possibly, a great challenge. The shift towards digitization demands that the revenue authorities take action that not only has an immediate impact, but also that will determine the future of investments and ease of doing business for decades to come.

Hilary Iloka and Aimée Dushime are senior transfer pricing advisers at KPMG Professional Services, Nigeria. The views herein are those of the authors and do not represent the views and opinions of their employer.

The authors may be contacted at: hilary.iloka@ng.kpmg.com; aimee.dushime@ng.kpmg.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.