Taxation Of On-Line Transactions - Implications On Domestic Revenue Mobilisation


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 corporate entities.
  • 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 voluntary.
  • It is a sovereign right exercised by relevant authority over persons or activities within its domain.
  • 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


Online Transactions

  • 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 Transactions


Proshare Nigeria Pvt. Ltd.


Global Online Buyers


Proshare Nigeria Pvt. Ltd.


Online Business Models


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Online Transactions & Income Tax


Domestic Online Transactions:

  • 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?)
  • However, the tax authority must have the capacity to track all online transactions to ensure full disclosure of income.


Revenue Models Of Online Transactions

Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Direct Tax on Online Transactions: Issues for Considerations


  • 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?


Transactional Taxes On Online Transactions



Proshare Nigeria Pvt. Ltd.


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 economy.


Looking Ahead


  • 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 transactions.


Architecture Of The Envisaged VAT Collection System


 Proshare Nigeria Pvt. Ltd.


Online VAT Collection

  • In this architecture, NIBSS at the centre, is INTEGRATED with all (Online and Offline) payment gateways and FIRS Tax Portal.

  • Through 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.


VAT Payment By Cash And Bank Transfer

Proshare Nigeria Pvt. Ltd.


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 VAT payable
  • 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
  • Go-live

The Way Forward

Proshare Nigeria Pvt. Ltd.


About The Author

Abiodun M. Aina is the Coordinating Director -Domestic Taxes Group, Federal Inland Revenue Service


Proshare Nigeria Pvt. Ltd.

Related News

  1. Tax 101 - How The Proposed VAT On Online Transactions Will Affect You
  2. CBN to begin online transactions for govt, banks
  3. 2019 Finance Bill: 20 Sweeping Changes To Nigeria's Tax Laws That May Affect You
  4. TAT Judgement On Taxation Of Dividend Paid From Tax-Exempt Income
  5. The Key Changes In The 2019 Finance Bill - Focus on Taxation
  6. FHC Judgement on Appointment of Banks as Agents for Tax Collection
  7. Nigeria: We Live In Taxing Times! But Should Government Increase VAT Rate?
  8. FIRS to Introduce e-TP Filing in 2020
  9. Tax Appeal Tribunal Rules In Favour Of Taxpayers In Two Successive Landmark Judgment
  10. Companies Operating In Nigeria To Pay 0.005% Net Profit Levy Under The NPTF (Establishment) Act 2018
  11. Matters Arising On VAT - Income Model vs Gross Product Model
  12. MTEF Review: VAT Increase Could Be A Smoke Screen For Something Larger
  13. TAT - It Is Illegal To Impose Tax Based On Taxes And Levies Act Without A Primary Taxing Law
  14. Companies Operating In Nigeria To Pay A New Police Fund Levy
  15. FEC Approves Increase In VAT To 7.5% From 2020, To Seek NASS Approval For Enabling Law
  16. Tax Appeal Tribunal Delivers Landmark Ruling against Abia State Board
  17. The New Migrant e-Registration Guidelines - Nigeria Immigration Service
  18. N311.94bn Generated As VAT in Q2 2019 - NBS

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
Related News