Not in on global tech giants tax
United Capital analysts say implications may be heavy on already weak FDI flows
IN A BID TO WIDEN ITS TAX base and expand revenue sources, Nigeria has said it would impose a tax on global tech...
IN A BID TO WIDEN ITS TAX base and expand revenue sources, Nigeria has said it would impose a tax on global tech giants with economic operations in the country. But this plan has found no comfort with some economic and tax analysts who see it as sending a negative signal to the international tech firms, as well as the attendant unsavoury effect the move will have on the already weak inflows of foreign direct investments (FDI) into the country.
Vice President Yemi Osinbajo in announcing this government thinking had declared it as a new mechanism the government was going to introduce to widen the tax net, explaining that it involves the collection of taxes on the Nigerian income of global technology giants not based in the country, but with significant economic presence. Osinbajo further supported the grounds for this new approach with reference to Section 4 of the Finance Act 2019, which states that the finance minister, may by the order of the president, determine what constitutes the significant economic presence of a company other than a Nigerian company.
In a statement titled, ‘How FG will tax profits made by global tech, digital giants in Nigeria’, Osinbajo said: “We have had severe economic downturns which, of course, implies that we may not be able to collect taxes with the aggressiveness that would ordinarily be expected. I think the most important thing is that we must widen our tax net so that more people who are eligible to pay tax are paying.
“Several efforts have been made, and I am sure you are aware of the initiatives, including the Voluntary Assets and Income Declaration Scheme, which was also an attempt to bring more people into the tax net, including those who have foreign assets. We have also recently taken a step with respect to a lot of the technology companies that are not represented here but who do huge volumes of business here.
“The Finance Act has shown that we are very prepared to ensure that these big technology companies do not escape without paying their fair share of taxation in Nigeria. Many of them do incredible volumes here in Nigeria and in several other parts of the region. We have drawn up the regulations and we are prepared to go, and I think that we are at least in a good place to tap into some of the tax resources we can get from some of these companies,” he stated.
The law as outlined in the Finance Act of 2019 states that companies that provide video streaming services and downloading of digital content will have to pay digital tax to the Federal Inland Revenue Service. “A foreign entity providing technical services such as training, advertising, supply of personnel, professional, management or consultancy services shall have a SEP in Nigeria in any accounting year if it earns any income or receives any payment from a person resident in Nigeria or a fixed base or agent of a foreign entity in Nigeria.”
With this, according to the vice president, the Nigerian government is set to utilize this legal provision by taxing profits made in the country by global technology and digital firms, such as Google, Twitter, Facebook, Microsoft, Netflix, among others. However, there is a Significant Economic Presence (SEP) clause attached that makes it only apply to companies with an annual income of at least N25 million or its equivalent in other currencies.
The country has over the years experienced some shortcomings in its quest to meet the annual revenue target from taxes. Consequently, efforts have been made to widen the tax net, including the creation of the Voluntary Assets and Income Declaration Scheme (VAIDS), which was an attempt to bring more people into the tax net, and hiking the VAT rate from 5.0 per cent to 7.5 per cent as noted in the 2019 Finance Act. Notably, total tax revenue increased by 59.1 per cent to N5.3 trillion between 2016 and 2019. However, due to COVID-19 and the resultant effects on the economy, tax revenues declined by 5.8 per cent to N4.9 trillion in 2020 below the tax revenue target of N5.1 trillion, driving an urgent need to broaden the tax base.
Analysts at United Capital Research following the development have offered mixed reactions to the government plan, taking into cognizance the pros and the cons associated with it. They assert that the move can potentially yield some results to the Nigerian government coffers and recommend that the government focuses its lens on strategy modifications to strengthen the tax base.
“In our view, given the local reach of the technology giants, the mechanism can potentially yield some results - increasing the revenue contribution from tax and easing the burden on public debt. However, taking into account the recent Twitter ban, this may send unfriendly policy signals to foreign technology businesses and may have negative implications for already weak FDI flows. We recommend that the government focuses more on the underlying causes of the country’s weak tax base and implement policies to improve the ease of doing business, to support business growth and attract foreign investors, which strengthens the tax base.”
Nigeria has been celebrated as one of the few countries in Africa attracting huge investments into its tech ecosystem; thus, the need to attract more investments into the Nigerian technology space should be a focus and as such, the country needs to remedy the already weak FDI inflow rather than sending an unfriendly signal to the international tech business community of Nigeria’s discouraging tax policies for tech firms.