A note on Nigeria’s Significant Economic Presence rules

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Earlier this year, Nigeria introduced measures to tax foreign digital businesses that generate income within the country. The new taxing right rests on the concept of a business having a ‘significant economic presence’ within Nigeria.

The rules took effect on 3 February 2020. They cover both digital and non-digital businesses, however, this post focuses on the digital businesses aspect of the rules.

‘Significant economic presence’

There are three scenarios under which a taxpayer would be deemed to have a ‘significant economic presence’ (SEP) in Nigeria.

Scenario 1.

The taxpayer has a gross turnover or income of more than NGN 25 million (around USD 60,000) from any or a combination of the following activities:

  • streaming / downloading services of digital content;
  • transmission of data collected from Nigerian users, generated via a digital interface;
  • provision of certain goods and services via a digital platform to Nigeria; and
  • provision of intermediation services via a digital interface linking suppliers and customers in Nigeria.

It’s debatable whether the gross turnover threshold has been set at an appropriate level. If the aim is to target only the large multinationals, one would argue that the threshold is rather low, and would also catch other, smaller, businesses. On the other hand, one should also consider the size of the market. While USD 60,000 might not seem like a lot of money for one country, it’s worth setting that amount into the African context. But also worth noting that Nigeria is one of the larger African markets. The threshold doesn’t seem to fit right, in any case.

Scenario 2.

The use, by the taxpayer, of Nigeria domain name (.ng) or registration of a website in Nigeria.

Scenario 3.

Where the taxpayer has a “purposeful and sustained interaction with persons in Nigeria” by customising its digital page or platform to target persons in Nigeria (localised pricing, billing, payment).

Scenarios 2 and 3 do not contain a revenue threshold. This means that even small businesses can be caught by the rules – for example, a non-resident SME that supplies digital services to Nigerian customers via a Nigerian website, and using localized pricing. Here the amount of turnover is immaterial – the turnover condition applies only to Scenario 1.

What happens if / when a global solution is found?

The OECD has been doing its utmost to persuade countries to hold off on introducing unilateral measures to tax digital businesses, and instead to wait for a global solution from the OECD Inclusive Framework. However it also realises that many countries will plough on regardless.

Bearing that in mind, the OECD issued some guidance for countries that wish to introduce unilateral measures.

The OECD advises that such unilateral measures should have the following characteristics:

  • they should be temporary;
  • they should be targeted;
  • they should minimize overtaxation; and
  • they should have little to no impact on small companies.

So how do the Nigerian rules fare?

Temporary?

Well, not exactly. The rules provide that they will remain in place until a global solution (i.e. an international agreement) is in place. But they will only be withdrawn in respect of any taxpayers or transactions that come within the ambit of the international agreement. For those falling outside the agreement, the rules will remain. This is quite a sensible belt-and-braces approach, even though it will likely lead to complexity. Worth contrasting that with the position in other countries (for example, the United Kingdom) where such taxes have been introduced with the clear commitment that they would be withdrawn once a global solution is in place. The Nigeria position is a kind of halfway house.

Targeted?

To some extent. As mentioned above, the rules cover both digital and non-digital businesses. As far as the digital part is concerned, it is clear the types of businesses being targeted. The issue though is that the net might be being cast too wide.

Which leads on to the next point.

Minimize overtaxation?

Absolutely not. As stated above, the threshold in Scenario 1 might be on the low side. And, as for Scenarios 2 and 3, there is no threshold at all. As drafted, the provisions would land heavily on small businesses.

This also links in to the point about the impact on small businesses.

Limitation of the SEP rules

There is one serious limit to the rules, though.

They are domestic rules, and therefore will be overridden by any of Nigeria’s tax treaties that contain a permanent establishment provision. That provision will prevail over the domestic law rules, with the effect that the relevant income will only be taxed in the source state (in this case, Nigeria) if the non-resident company has a permanent establishment in Nigeria. As the standard definition of ‘permanent establishment’ is not wide enough to cover the Nigerian ‘significant economic presence’ concept, that concept will be overridden by the treaty concept of permanent establishment.

The SEP rules will therefore work only as concerns a jurisdiction with which Nigeria does not have a double tax treaty.