Tuesday, November 19, 2019 / 6:56 PM / by
Abiodun M. Aina* / Header Image Credit: Federal Inland Revenue Service
- Taxes are statutory charges
imposed by government on consumption, income and gains of individuals and
- Taxes are used to finance
development projects and it is the duty of every tax resident to fulfil
his/her tax obligation to the state considering that this is not
- It is a sovereign right
exercised by relevant authority over persons or activities within its
- Corporate Income tax is usually
levied on a net basis (i.e. revenue less costs )over the world-wide
profits (except under territorial tax system).
- Transaction tax (Stamp duty,
GST, VAT, etc.) is levied on the gross value of transactions.
- Transaction tax is levied in
jurisdiction where the transaction takes place. For instance, consumption
tax (GST or VAT) is applied under the destination principle such that the
tax is borne at place of consumption
- On-line transactions being commercial activities
between two or more persons conducted over a network are often done
through electronic channels e.g. internet-based platforms.
- Common e-commerce models are:
-B2B-transactions between business enterprises
-B2C-transactions between an enterprise and an individual
-C2C-transactions between individuals.
- This led to the conception of the "digital
economy" which is not a distinct economy from the traditional brick
and mortar economy.
- Rather, digital economy is the result of a
transformative process brought by information and communication technology
(ICT), which has made technologies cheaper, more powerful, and
widely standardized, improving business processes and bolstering
innovation across all sectors of the economy (OECD BEPS Report, Action 1, 2015)
- This beautiful bride (digital economy) is a nightmare and
opportunity for tax authorities world over.
Growth of Online
Global Online Buyers
Online Business Models
Online Transactions & Income Tax
- The customer may be resident or non-resident
persons using a digital channel in Nigeria.
- Delivery of the product or service may be
physical or digital depending on the nature of object of the transaction.
- When the seller or service provider is resident
in Nigeria, income tax applies under relevant domestic tax law. (What
happens when such vendors are non-resident?)
the tax authority must have the capacity to track all online transactions
to ensure full disclosure of income.
Revenue Models Of Online Transactions
Direct Tax on Online Transactions: Issues for
- Companies are now able to conduct huge
transactions online without having physical presence in source countries.
- Based on the existing nexus rules in the tax
laws, Nigeria will only be able to tax profits from domestic online sales
while losing a significant chunk of revenue from cross-border online
transactions for inbound.
- Is it time for a policy change?
Taxes On Online Transactions
VAT AND WHT
Lessons From Other Jurisdictions
- The effectiveness of tax rules are being
constantly challenged by evolving digitalised business models.
- This is not peculiar to Nigeria; some countries, however, have
proffered interim solutions such as:
-Italy: Introduced Law 147, (aka web tax) targeting online advertisement
services viewable in Italy.
-Argentina: In 2014, introduced gross receipts tax on specific
e-commerce transactions (aka Netflix tax).
-Spain: introducing online advertisement & data sales tax.
-UK: Diverted profits tax (aka Google tax) in 2014; and Digital Services
Tax effective April 2020
-France: Online services tax 2019.
- The Inclusive Framework on BEPS (Global Tax Body)
is currently working on globally agreeable Tax Rules for digitalised
- The Fundamental challenges of Digitalised Economy
as it pertains to taxing right does not affect transactions taxes, because
they are usually paid in the country of the transaction or consumption.
- VAT is a fast growing tax type as earlier indicated
- Non-collection of VAT for instance, on online
transaction is more of an administrative challenge than a structural one.
- FIRS is determined to put in process a robust system that will
ensure collection of VAT and other relevant taxes from online
Of The Envisaged VAT Collection System
- In this
architecture, NIBSS at the centre, is INTEGRATED with all (Online
and Offline) payment gateways and FIRS Tax Portal.
this approach, VAT is deducted on VATable online transactions either at
the Payment Gateways or at NIBSS and the VAT Federation account credited
with the VAT while the transaction records sent to FIRS Tax Portal for
accounting and reporting purposes.
By Cash And Bank Transfer
Offline Payment Methods
- In above architecture, methods of VAT collection
for offline payments are outlined. Offline payments include:
- Payment via cash on delivery
- Payment by bank transfer
FIRS identifies online merchants and integrates with
their billing system.
- Whenever a receipt has been generated for a
sale, FIRS collates the data on the VAT elements, aggregate and advise on
- The online merchant would then fund a Direct
debit account for VAT remission
Where We Are
- Engage with NIBSS and discuss the system architecture
- Engage online payment gateways on system design
and implementation approach
- Engage with online Merchants
- Organize stakeholder consultative meeting with
critical stakeholders-payment gateways, online Merchants and others
- Procurement/engagement of software vendor
- Design and sign off of solution architecture
- Develop, test (User Acceptance Testing-UAT) and
deploy the system
About The Author
Abiodun M. Aina is the Coordinating Director -Domestic Taxes
Group, Federal Inland Revenue Service
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