Nnamdi Azikiwe University Journal of Commercial and Property Law (NAU.

JCPL 9 (4) 2022)

TAXING THE DIGITAL SECTOR OF THE NIGERIAN ECONOMY:

CHALLENGES AND PROSPECTS

CHIOMA O. NWABACHILI, PhD

CHUDI C. NWABACHILI, PhD

Abstract
The digital economy is fast becoming the most innovative and widest reaching economy in the world. The growth and
development of digital trade facilitate globalization and ensure international development through the establishment
of borderless economic relationship inter alia. However, Nigeria may find that it is unable to tax the huge income
that the digital economy would generate unless it amends its laws to adapt to changing technological advancement.
Consequently, the Finance Act of 2019, 2020 and 2021 were enacted with their innovations regarding digital
economy. The provisions of the CITA (Companies Income Tax Act) prior to amendment in 2019 were not sufficient
to bring digital companies within the tax net, and the directives by the FIRS (Federal Inland Revenue Service) were
surrounded with a lot of ambiguities and many controversies. Notwithstanding, the recent amendments introduced
by Finance Act of 2019, 2020 and 2021, the application and enforcement of these provisions remain the persistent
challenges to effective taxation and administration of digital economy in Nigeria. This paper examines the nature of
digital economy in Nigeria. It also, considers the challenges in taxing the digital economy and the prospects in taxing
digital economy. The paper concludes by making recommendations on measures to be adopted by the Government
and Revenue authority for effective taxation of the digital sector.

Keywords: Digital, Economy, Taxation, Permanent Establishment, Challenges,

Prospects.

1. Introduction
Historically goods were physical: the production and the channel of these goods can be easily
traced, making it easier to be taxed.1 Improvements in Information and Communication
technology are helpful to human endeavors. The Nigerian tax regime covers a wide range of taxes
payable by taxable persons.2 The different tiers of the government have their legislative
competence to make laws relating to taxation as enshrined in the Constitution of Federal Republic
of Nigeria 1999 (CFRN) (as amended).3

Before the enactment of the new Finance Act 2019 which captured the collection of VAT on
intangible goods, thus referred to as, taxation of the digital economy, the Nigeria tax laws, did not
envisage the changing face of taxable items and services as they relate to digital economy and
transactions for many years. Virtually all human endeavors are now digitalized. For instance, here


Chioma O. Nwabachili, PhD, Senior Lecturer, Head, Department of International Law and Jurisprudence, Faculty
of Law, Nnamdi Azikiwe University, Awka. Email: [Link]@[Link]

Chudi C. Nwabachili, PhD, Professor of Law, Dean, Faculty of Law, Chukwuemeka Odumegwu Ojukwu
University, [Link]: [Link]@[Link]
1 R Jones, ‘Taxation of Electronic Commerce: A Developing Problem’ [2002] (16) (1) International Review of Law

Computers &Technology Journal 3.

2 O O Adebayo, ‘Taxation of Electronic Commerce: Prospects and Challenges for Nigeria’ (August 2010)

<[Link] or <[Link] accessed 21 March 2022.

3 The Constitution of Federal Republic of Nigeria 1999.

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Taxing the Digital Sector of the Nigerian Economy: Challenges and Prospects
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is digital-government, digital-banking, digital-waste and others. It can, therefore, be said that

taxation of digital economy is an evolving phenomenon, with state and international bodies yet to
discover a concrete basis for the taxation of this sector of the economy purely on a principle –
approach basis to bring it within the tax net.

The invention of the internet poses a challenge on various tax jurisdictions for an effective tax
administration of digital commerce globally. The exponential growth of digital economy poses a
daunting challenge to taxing authorities’ traditional approaches to both direct and indirect
taxation.4 Tax administrations worldwide are faced with the arduous task of protecting their
revenue base, without hampering either the development of new technologies or the involvement
of the business community in the growing e-market place. Nigeria is no exception. The issue is
whether or not, in view of glaring fact that internet eliminates borders between parties to internet
transactions, taxes of physically- oriented commercial transactions apply to internet-based
commercial transactions.

The taxation of digital economy is a vexatious problem because it is difficult to establish the
residence of buyers and sellers or where the transaction took place. The international nature of the
internet brings into conflict various issues that used to be treated routinely under domestic law
with a level of certainty. The taxable basis of the transaction and the jurisdiction to which it must
be submitted will differ according to which domestic law one subject it to.

The European Union (EU) digital economy directive provides that for electronically delivered
services, the supply will be treated as being made in EU if the recipient belongs there. Supplies to
EU members state recipient will, therefore, be subjected to the state`s VAT regardless of where
the supplier belongs.5On purely domestic level, UK tax policy seeks to promote the OECD frame
work conditions, particularly the principle of neutrality to ensure that UK residents conducting
business via the internet in the UK are taxed in the same as persons running a traditional, physical
business.

Digital commerce is still relatively unexplored in Nigeria; however, the drive to facilitate its
development is evidenced by the Nigerian Economic Policy of 1999 - 2003.6 Presently, the
enactment of the new Finance Act is laudable as it brings some new innovation into the regulation
of taxation. It is therefore necessary to x-ray the provisions of the new Finance Act, to know the
adequacy of its contents and to proffer solutions where necessary in other to secure compliance
on taxation of digital economy.

4 W Hellerstein, ‘Electronic Commerce and the Challenge for Tax Administration’ (Revenue Implications of E-
Commerce for Development; the World Trade Organization Committee on Trade and Development Seminar,
Geneva, Switzerland, 22 April 2002).
5 New European E-Commerce VAT Rules<htt://[Link]/[Link]>accessed on 03 March 2022.
6‘Nigeria Considers the Implications of E-commerce on its Tax System’ [2001] (3) Published in Tax Planning International

E-Commerce Journal 126 or at<.[Link] >accessed

18 March 2022.

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For instance, as it relates to the Companies Income Tax,7 the inclusion of non-resident companies
with “significant economic presence” that profits can be attributable to into the tax net is of
significant importance in the Government’s quest to increase tax revenue. The expansion of
taxable activities of these nonresident companies would no doubt serve the end of the objective
of increased tax revenue.

The implementation of this provision will no doubt raise conflicts which may be unintended. The
first one is that the failure to define what constitutes “significant economic presence” in the Finance
Act leaves room for ambiguity and as it gives so much so much discretion to the supervising
Minister to determining what constitutes significant economic presence and such discretion is
open to abuse. Secondly, is this provision really a thinly disguised ‘digital tax’ targeted at the global
tech companies operating in Nigeria and deriving significant revenue in Nigeria without necessarily
having a fixed base in Nigeria? Given the opposition of the present American Companies to the
digital taxation of the big tech companies which are majorly American Companies, does the
Nigerian Government possess the capacity to engage in the political storm that may arise from the
imposition of digital tax or would the brunt of this digital tax be borne by small players in the
online world hoisting their bases in tax havens? Has the Nigerian Government made enough
provisions for double taxation these non-resident companies may face as a result of the provision
of the law?

Thus, the purpose of this paper is to evaluate the main issues involved, analyze the legal challenges
posed on the taxation of digital economy, and prospects; the new Finance Act, its strengths,
weaknesses and impact in taxation of the digital sector of the economy.

2.1. Nature of Digital Economy

The term “digital commerce” means shopping on the part of the Internet called the World Wide
Web (the Web). However, digital commerce (or e-commerce) also includes many other activities,
such as businesses trading with other businesses and internal processes that companies use to
support buying, selling, hiring, planning, and other activities.8

Digital commerce today exists in a number of forms and contexts. The commonest forms are
Business-to-consumer (B2C), where businesses sell goods or services to individual customers, and
Business-to-business (B2B) in which case businesses sell goods or services to other businesses.
Other forms include Consumer-to-consumer (C2C) which is simply exchange of goods and
services between consumers who are usually participants in an online marketplace, Business-to-
government (B2G) digital commerce where businesses sell goods or services to governments and
government agencies. Finally, there are Business processes that support buying and selling
activities. Businesses and other organizations maintain and use information to identify and evaluate

7‘Overview of E-Commerce in Nigeria from the Economist intelligence Unit’

<[Link] &doc id=8403 && title=overview+of+e-
commerce+in+Nigeria & channel id=31> accessed on 18 March 2022.
8<[Link] accessed 18 March

2022.

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customers, suppliers, and employees. Increasingly, businesses share this information in carefully
managed ways with their customers, suppliers, employees, and business partners.9

In essence, contemporary digital commerce is conducted in a variety of different ways, ranging

from ordering "digital" content for immediate online consumption, to ordering conventional
goods and services, which facilitates to other types of electronic commerce. Though a large
percentage of digital commerce is conducted electronically (e.g. online banking and bill payments),
many involve the transportation of real, physical items in some way.10

2.2 Scope of Digital Economy

The concept of digital commerce is not limited to trades conducted on the internet, but also
includes all purchases, orders and payments made with telephone, fax and other electronic
communication devices. However, Digital commerce includes many business and commercial
activities that can be performed using closed and open networks, which can be categorized under
the following11:
1. Purchase of goods and services in electronic environment,
2. Implementation of operations such as production planning and production chain,
3. Presentation, advertisement and information,
4. Order creation,
5. Making a contract,
6. To carry out bank transactions and fund transfer electronically,
7. The company's financial and personnel system management,
8. Inventory distribution and supply chain management,
9. Electronic money transactions,
10. Electronic stock market,
11. Direct marketing to the consumer using electronic means,
12. Taxation in electronic environment,
13 Protection and transfer of rights: intellectual, industrial and commercial property.

3. Challenges in the Taxation of the digital Sector of the Economy

Taxation of digital commerce poses a global challenge in securing compliance among the tax payers
which Nigeria is not an exception. Despite the entire tax regime in place as seen in other
jurisdictions, there are still tax deficits from this sector of the economy. Many countries are still
struggling to capture taxation of digital commerce as it involves Non-Resident Companies and
individuals, to bring them within the ambit of her tax net. Some countries apply income source
rule as against resident rule. The permanent establishment rule has been a herculean task to be
determined. It is not always easy to determine the tax regime that has jurisdiction to services given
through the internet providence address (IP) in terms of software and other online downloads.
This becomes a great concern, hence a need for a universally acceptable approach to be adopted
by all countries. The essence of this is to avert the possibility of over flow of legal frame work
from different tax systems in the world which may lead to double taxation, as every tax

9 Ibid.
10< [Link] accessed on 24 March 2022.
11 Ibid.

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administration claims tax jurisdiction on the same tax issue. For instance, a global attempt to
prevent large, multinational companies from shifting their profits to lower-tax jurisdictions is
setting off a fight between United States and Europe, as policy makers on both sides of the Atlantic
spar over efforts to impose new taxes on foreign firms.

3.1 Identification of Taxing Jurisdiction

The place of execution of contract and place where a title to the goods or services passes are
important in determining where the income accrues or can be deemed to accrue and, therefore
taxed.12In e-commerce, with offer and acceptance on the networks, the place where the contract
is executed will not be known under laws and rules applicable to traditional commerce. This poses
a great challenge where the transaction involves e-commerce, digitalized goods. However, is a legal
issue? The remedy lies in clarifying the position under the domestic laws. The law is, therefore, in
place for determination of place of execution of contract or place of passing of title in digitized
goods or services provided through networks.13

2.2 Permanent Establishment

The contemporary international tax system developed to allocate taxing jurisdiction over buyers
and sellers of tangible, physical goods. Accordingly, the current system is based on the actual
geographic location of these buyers and buyers. The Organisation for economic Co-operation and
Development (OECD) has incorporated and consistently reaffirmed these physical presence
principles in its Model Tax Convention on Income and on Capital (OECD), the predominant
world-wide model for bi-and multi-lateral tax treaties.14 The challenges of applying the permanent
establishment principle to e-commerce have gained special attention in the debate on e-commerce
taxation and have been discussed extensively. E-commerce enterprises can sell their products or
services worldwide with very limited physical presence in any particular consumer’s country. They
can operate without agents because they can directly, easily and cheaply contact customers
worldwide.

Another issue is the question of what constitutes a permanent establishment with regards to
electronic commerce. A website does not have a physical presence, and therefore, cannot be
designated as a permanent establishment. Even if the business maintains its own server within a
taxing jurisdiction, the storage, display or delivery of goods on the internet has been compared to
similar mail-order activities, which are not considered a permanent establishment.

Furthermore, a corporation conducting business on the internet can separate its ordering, delivery
and payment functions by delegating them to ancillary sites throughout the world. This
fragmentation results in the corporation circumventing the definition of permanent establishment
under most tax treaties and thereby being exempted from taxation on income.15 Therefore, the

12 D Adeyemi, Taxation of Electronic Commerce in Nigeria (Ilorin: University of Ilorin Press 2014).
13 Ibid.
14 H Benjamin, ‘Permanent Establishment in the Digital Age: Improving and Stimulating Debate through an Access

to Markets Proxy Approach’ [2011] (6) (1) Northwestern Journal of Technology and Intellectual Property 34 0r
<[Link] accessed 28 June 2022.
15 P Kathryn, ‘Taxation of Electronic Commerce: An Assessment of the Opportunities and Challenges Facing Tax

Payers and Tax Authorities’ [2002] (1) (2) Journal of E-Business 3.

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Taxing the Digital Sector of the Nigerian Economy: Challenges and Prospects
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premise of the permanent establishment rule-that is, to conduct business in a country, you need a
presence there-does not apply to ecommerce. The concept of ‘fixed place’ is meaningless in e-
commerce business because it can be located anywhere and can conduct business everywhere.

3.3 Residency
E-commerce taxation challenges are not limited to source-based taxation. Residence –based
taxation also faces challenges. The main challenge is to determine the residency of e-commerce
corporations. 16These corporations usually lack physical facilities. Their websites are usually their
main storefronts and their employees are highly mobile. The physical presence of the corporation
in a ‘central place of management and control’ is limited and the mobility of the corporation is
very high. Therefore, it is not easy to determine the ‘central place of management control’ is limited
and the mobility of the corporation is very high, therefore, it is not easy to determine the ‘central
place of management and control’ of such a corporation in order to determine its residency under
traditional definitions. In addition, it is easy to abuse the traditional definitions and locate an e-
commerce corporation in a low tax jurisdiction to reduce or even escape taxation all together.17

E-commerce challenges residence taxation by making it easier for corporations to decide where
they want to be located for tax purposes. The residence of corporations is generally determined by
the place of incorporation test or ‘the place of management and control’ test. The ‘place of
incorporation’ test is subject to taxpayer manipulation because E-commerce can be conducted
anywhere, as it is inexpensive to establish a company in a tax haven. Therefore, the test of place
of incorporation basically allows taxpayers to decide whether or not they want to pay tax on the
basis of residence or source of income.18

The legal authority to levy tax, also called jurisdiction, resides with national government and is
based on the concepts of residence and source. Residence-based taxation implies that a country
can tax its residents on worldwide income, whether the source of that income is domestic or
foreign. Source-based taxation infers that countries levy taxes on any income earned within its
borders, without regard to whether a resident or a non-resident of the country earns it. Thus, the
same economic activity may be taxed twice, once by the country where the income is earned and
again by the country in which the tax payer is deemed a resident.19

3.4 Online Delivery and E-Cash

The real problems for enforcement in an e-commerce situation arise in transactions involving
online delivery and payment. 20 Even though, the volume of online commerce is only a fraction of
the total e-commerce, it is important enough to be specifically included in the definition of e-

16 Ibid 52.
17 Ibid.
18 L Jinyan and S Jonathan,’ Electronic Commerce and International Taxation’
<[Link]
[Link]>accessed on 13 June, 2022.
1919 P Kathryn, ‘Taxation of Electronic Commerce: An Assessment of the Opportunities and Challenges Facing

Taxpayers and Tax Authorities’ [2002] 1 (2) Journal of E-Business 3 or at

<[Link] 30 August, 2022.
20 Ibid.

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commerce to include electronically marketed products like travel and ticketing services, software,
entertainment, banking, insurance and brokerage services, legal services, real estate services, health
care, education and government services. In these transactions, where the supplier is from a foreign
tax jurisdiction, it becomes difficult to charge or collect direct as well as indirect taxes. Withholding
of tax through a large number of small consumers for direct tax purposes or realizing indirect taxes
from them is administratively impossible. Normal audit in the form of documents like purchase
vouchers, transportation documents and intermediaries, such a wholesalers or retailers would be
missing in such transactions. The development of e-cash21 also referred to as ‘net cash’ or digital
cash’ is an even more serious challenge for the tax administrations.

Another consideration is that the anonymity revocation does not motivate crimes more serious
than those it protects against. E-cash is intended to emulate the perceived anonymity of regular
cash transactions for protection of use privacy and prevention of the compilation of personal data.
But it can also facilitate frauds and criminal acts, such as money laundering, anonymous
blackmailing and illegal purchases. The attempt is, therefore, to develop ‘anonymity controlled e-
cash’ with either ‘owner tracing’22 or ‘coin tracing’23 models. Although, the development of e-cash
is not likely being significant in near future, there is a need for monitoring the developments in
areas of e-cash on a regular basis in co-operation with other enforcement agencies.24

2.5 Cyber attack

According to a research by Newman25 and Eghosa, cyber tax crimes or electronic tax frauds are
any criminal infraction in the process of registration for tax purposes, tax assessment, and filing of
returns and payment of taxes through the use of electronic computer systems or the internet. In
Nigeria, cyber tax crimes will include making false statements and income declaration while e-filing
tax returns or making e-payments. It will also include any act capable of obstructing the effective
operations of the electronic tax systems and networks. 26With the digitalisation of government
activities and the preference for deploying technology in tax assessment, filing of tax returns and
payment of taxes globally, taxation has become exposed to the activities of cyber criminals who
try to compromise websites and manipulate data in the sites of tax authorities, by exploiting the
loopholes in the cyber security system. Also, there is an increase in fraudulent tax refund claims27
and the filing of false tax returns and data leaks, both from private and public sources, owing to
the activities of hackers and rogue employees. It is estimated that, globally, over 700 million
personal data records were compromised in 2015. The US Internal Revenue Service Consumer

21 In its simplest form, e-cash system consists of three parties (a bank, a user and a shop) and four main procedures
(account establishment, withdrawal, payment, deposit).
22 This model is useful for tracing legal and regulatory requirements of large money exchanges.
23 This second model’s main purpose is to track fraud and other criminal activities in a manner similar to tracking

based on serial numbers on the notes.

24 ‘Enforcement Issues in Electronic Commerce’ <[Link] [Link]> accessed June

2022.
25N Richards and O Eghosa, ‘Electronic Taxation in Nigeria: Challenges and Prospects’ (2019) [Link]

[Link]>accessed June 2022.

26 Ibid.
27 KPMG, "How Vulnerable is Governments to Cybercrime?" (2 May 2016) available at:

<[Link]
[Link]>accessed 31 August, 2022.

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Alert (IR-2016-28 (18 February 2016)) confirms that tax scams are increasing and that tax-related
phishing emails and malware have surged 400% in one tax season. The emails are designed to
deceive taxpayers into thinking they are official communications from tax authorities or bodies
linked to them.28 In 2015 alone, over 2,748 phishing emails and malware were reported to the
[Link], in the US, cyber tax crimes will include tax refund fraud, corporate account
takeover (the hacking of the website of a corporate body), personal identity theft and sensitive data
theft.30 Similarly, the Indian Income Tax Department recently warned that "cybercriminals are now
targeting people filing income tax returns online by sending malicious bulk emails to trick them to
provide their net banking credentials. These emails are camouflaged in a manner that one feels that
it has come from an authentic e-mail id".31In India, electronic tax offences include sending a
request to change passwords of a taxpayer without authority, quoting a false address or email while
creating a tax ID online, hacking passwords with false digital signatures, quoting a bogus online
bank entry in the self-assessment paid tax column, failure to remit tax deposits deducted from
employees but making deductions from employees with fake online entries, or filing false income
tax returns to claim false deductions for tax saving: these will occur where false claims are made
to enable a taxpayer enjoy relief, such as allowable deductions.32 From the contemporaneous
illustrations above, it is certain that the introduction of electronic taxation in Nigeria has given rise
to a new set of tax offences which are cyber tax crimes. This new set of tax crimes, which are the
attendant consequences of the introduction of computer systems and technology in tax
administration, are beyond the contemplation of the existing tax laws. Thus, there is a need to look
elsewhere for legislative instruments that can complement the tax laws in the protection and
sustaining of the electronic tax system. This is where cybercrime laws become relevant in the
administration of electronic taxation in Nigeria.

4. Prospects in Taxation of Digital Sector of the Economy

Having discussed the challenges and ways in which taxation of digital sector of the economy to be
more efficient, it becomes pertinent to throw a poser as to what would be the potential prospects
realizable from an effective taxation of digital sector of the economy. A good tax regime can help
in securing e-commerce within the tax net, hence an increase in the revenue as a result of an
adequate tax system. The prospects among others are;

28IRS, ‘Consumers Warned of New Surge in IRS E-Mail Schemes during 2016 Tax Season’ (18 February, 2016,
2022)<[Link]
season-tax-industry-also-targeted >accessed 31 August, 2022.
29IRS, "Consumers Warned of New Surge in IRS E-Mail Schemes during 2016 Tax Season" (18 February,

2016)<[Link]
season-tax-industry-also-targeted >accessed 31 August, 2022.
30Center for Agricultural Law and Taxation, ‘Don’t let Disaster Destroy Your Office: Disaster Proof from Cybercrime’

(2017)<[Link]
%204%[Link]>accessed 31 August, 2022.
31"Filing Income Tax Returns not exempt from Fraud avoid Unknown Sources asking your Banking Details" (3

August2017) Business [Link]

exempt-from-fraud/story/[Link]>accessed 31 August, 2022.
32Indian Information Technology Act 2000 ss.65, 66, 71–72.

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4.1 Redefining Tax Treaties

Tax treaties are bilateral and cover income and capital taxes, though there are some examples of
multilateral tax treaties and treaties concerning other taxes. 33The purpose of bilateral tax treaties
is typically expressed in their preamble to be ‘the avoidance of double taxation and the prevention
of fiscal evasion’34. Consequently, the internet will cause tricky problems of interpretation for the
negotiators of tax treaties. Can existing concepts such as that of permanent establishment and
royalties be adapted to cover activities on the internet or should tax authorities be undertaking a
more fundamental review?35

A central element in determining taxation rights in tax treaties is that of business presence
employed to establish whether or not a permanent establishment exists. Whether or not the
operation of an establishment in a country rises to the volume that makes it a permanent
establishment is primarily a question of fact. Does the existence of a website or a server in a
jurisdiction create a permanent establishment and therefore give that jurisdiction the right to tax
the income attributed to that enterprise? 36Treaty negotiators will have to examine these questions
and more generally to see how treaty concepts can be applied to new ways of doing business.37

4.2 Tax Policy Reform

It is now axiomatic that a paradigm shift is occurring in the way business is conducted in the
present economy. Tax policy is a major factor in the growth and development of any economy.
However, with the recent global emergence of e-commerce, serious global challenges to tax policy
and tax administration are inevitable. If new taxes are imposed and regulations increased, the
benefits and potential of e-commerce may be curtailed. The area of taxing virtual economy is
ambiguous and unsettled.38

The Present tax regime did not envisage the sudden and exponential developments in
informational Communications Technology (ICT). The tax authorities, whose administrative
powers are largely restricted to their local jurisdictions, are now faced with the challenges of the
borderless world. While it is, of course, expedient for the Nigeria government to decide on the
necessary public expenditure and to decide how to raise required revenue through the appropriate
tax policies, it is necessary as well to keep in close contact with the global best tax practices that
will address tax implications of electronic commerce which the present tax regime did not
envisaged.

Nigerian government should raise awareness and promote Nigerian Information Technology
capabilities and competencies in the international market. However, taxing e-commerce, would

33 D Adeyemi, Taxation of Electronic Commerce in Nigeria (Ilorin: University of Ilorin Press 2014) p.14.
34 ‘Electronic Commerce: The Challenges to Tax Authorities and Taxpayers’
<[Link] 13 August 2022.
35Ibid.
36 Ibid 61.
37 O Jeffrey, ‘Electronic Commerce Answering the Emerging Taxation Challenges’ <[Link]

internet-Sales-Tax/Agency-Activities/ACEC/[Link]> accessed August 2022.

38K Jac etal , ‘The lnternational Handbook of Electronic Commerce, (USA: The Glenlake Publishing Company Ltd

2000)235.

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require a separate legal and regulatory frame work; otherwise, amendment of the existing tax laws
to accommodate taxation of virtual business would be of urgent necessity.

In Nigeria, cyber tax crimes were not contemplated by the existing tax laws, and thus reliance must
be placed on the provisions of the Cybercrimes Act to protect electronic tax systems and
networks.39Experience from other countries indicates that the enforcement of cybercrime laws and
the strengthening of relevant institutions are effective strategies to fight electronic tax fraud. Thus,
it is important for tax authorities to collaborate with the office of the National Security Adviser to
form the necessary synergy to protect electronic tax systems in Nigeria.40This will help tax
authorities to benefit from the efforts of relevant cybercrime protection and prevention agencies
in combating cybercrime, considering that these agencies are saddled with the responsibility to
evolve strategies to prevent and combat cybercrime in Nigeria.41

4.3 Information Communication Technology and Strategy Management

It is suggested that Nigeria government should improve in the Information Communication.
Technology (ICT) since the hall mark of e-commerce is all about a digitalized service. Since e-
commerce is carried on through the internet by the use of Computer, the government should
ensure a reliable steady power supply system. A total or partly blackout in the entire system can
cause a great deficit in taxing this sector of the economy. Federal Inland Revenue Service Act along
Side with Cyber Crime Act should be amended to bring it into conformity with the global trend.
Also the Finance Act 2019 needs be amended to include items like, what constitutes a significance
economic presence? Issues like Permanent Establishment, Source and Resident rules with respect
to e-commerce to be considered. These calls for a public scrutiny, and consideration while creating
any regulation that will affect e-commerce, government must consider the potential impact that e-
commerce will have on the economy.

It follows from the forgoing that this research has shown the difficulties posed in taxation of the
digital sector of the economy which Nigeria is not an exception, taxation of digital commerce
poses a global challenge in securing compliance among the taxpayers. Despite the entire tax regime
in place as seen in other jurisdictions, there are still tax deficits from this sector of the economy.
Many Countries are still struggling to capture taxation of digital commerce as it involves Non-
Resident Companies and individuals, to bring them within the ambit of her tax net. There is a
need for a universally acceptable approach to be adopted by all countries as a guide. The essence
of this is to avert the possibility of over flow of legal frame work from different tax systems in the
world which may lead to double taxation, as every tax administration claims tax jurisdiction on the
same tax issue.

5. Conclusion
The Finance Act 2019 captured the taxation of the digital economy, introducing the principle of
significant economic presence (SEP) to expand the scope of Nigerian tax on foreign companies

39N Richards and O Eghosa, ‘Electronic taxation in Nigeria: Challenges and Prospects’ (2019)<
[Link]>accessed on June 2022.
40Ibid.
41 Cybercrimes Act 2015, ss 41–42.

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deriving income from their activities in the country which were not captured in the tax net.
However, the Act failed to define what constitutes ‘Significant Economic Presence’ (SEP), leaving
the Minister with discretion to determine so. There is an ambiguity on what constitutes significant
economic presence between nonresident countries. The confusion can be traced to the criticised
case of Vodacom v FIRS, 42where the supreme court held that the transaction qualified as a VATable
supply under the VAT Act because Vodacom had received the bandwidth capacities with
equipment located in Nigeria without having regards to the distinction between the location of
supply of a service and the location of the receipt of the such service. It was in this regard that
the Minister made a fresh ‘order’ as part of ‘finance regulation’ to expand the scope of Nigerian
tax on foreign companies deriving income from their activities in the country which were not
captured in the tax net. 43

6. Recommendations
Having looked at the challenges posed in taxing the digital sector of the economy, there is no clear
cut solution towards securing an effective taxation of the digital commerce; however there is a
myriad of solutions which might be country specific and are attuned to the prevailing local
circumstances:

Administrative Reforms
In order to secure an effective taxation of the digital commerce, there is a need to take cognizance
of the fact that tax administration matters a lot, for the best tax policy ineffectively administered
amounts to nothing; this has been captured in the phrase “tax administration is tax policy”.

Reorganising Tax Administration

The most straightforward strategy for improving taxation of the digital commerce is to reorganize
tax administrators, so as to strengthen monitoring, services and incentives for administrators.
Privatization of tax administration with respect to digital commerce through auctioning of tax
collection right with individual firms bidding for collection rights, and retaining any additional
revenue collected. By this means, expertise can be promoted, thereby reducing the tax evasion
encountered in the digital commerce globally, bringing them within the tax net.

Tax Policy Reforms

It is now axiomatic that a paradigm shift is occurring in the way business is conducted in the
present economy. Tax policy is a major factor in the growth and development of any economy.
However, with the recent global emergence of e-commerce, serious global challenges to tax policy
and tax administration are inevitable. If new taxes are imposed and regulations increased, the
benefits and potential of e-commerce may be curtailed. The area of taxing virtual economy is
ambiguous and unsettled.

The Present tax regime did not envisage the sudden and exponential developments in
informational Communications Technology (ICT). The tax authorities, whose administrative

42 Vodacom v FIRS [2019] 345 (AC).

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Taxing the Digital Sector of the Nigerian Economy: Challenges and Prospects
NWABACHILI & NWABACHILI

powers are largely restricted to their local jurisdictions, are now faced with the challenges of the
borderless world. While it is, of course, expedient for the Nigeria government to decide on the
necessary public expenditure and to decide how to raise required revenue through the appropriate
tax policies, it is necessary as well to keep in close contact with the global best tax practices that
will address tax implications of electronic commerce which the present tax regime did not
envisaged.

Nigerian government should raise awareness and promote Nigerian Information Technology
capabilities and competencies in the international market. However, taxing e-commerce, would
require a separate legal and regulatory frame work; otherwise, amendment of the existing tax laws
to accommodate taxation of virtual business would be of urgent necessity.

In Nigeria, cyber tax crimes were not contemplated by the existing tax laws, and thus reliance must
be placed on the provisions of the Cybercrimes Act to protect electronic tax systems and networks.
Experience from other countries indicates that the enforcement of cybercrime laws and the
strengthening of relevant institutions are effective strategies to fight electronic tax fraud. Thus, it
is important for tax authorities to collaborate with the office of the National Security Adviser to
form the necessary synergy to protect electronic tax systems in Nigeria. This will help tax
authorities to benefit from the efforts of relevant cybercrime protection and prevention agencies
in combating cybercrime, considering that these agencies are saddled with the responsibility to
evolve strategies to prevent and combat cybercrime in Nigeria. Until there is new international
agreements on e-commerce taxation have been defined, an increasing number of goods and
services will be traded on-line, largely tax-free. This will have an effect on government revenue,
especially if the goods and services have been subject to import duties in the past.

Double Taxation Treaties

One of the simplest ways to curb tax evasion with reference to digital commerce is by encouraging
state parties to enter into bilateral or multilateral tax agreements. This will help to reduce multi
legal frame works on taxation of digital commerce of the same subject matter.

Administration Incentives
It is suggested that Nigerian government should improve in the Information Communication.
Technology (ICT) since the hall mark of e-commerce is all about a digitalized service. Since e-
commerce is carried on through the internet by the use of Computer, the government should
ensure a reliable steady power supply system. A total or partly blackout in the entire system can
cause a great deficit in taxing this sector of the economy.

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