Analysing Nigeria’s bid to tax Global Tech companies and the problem with enforcement
Analysing Nigeria’s bid to tax Global Tech companies and the problem with enforcement
Nigeria's government has resurrected its campaign to tax multinational technology companies in the country.
According to a recent statement by Vice President Yemi Osinbajo titled 'How FG will tax profits made by global tech, digital giants in Nigeria,' the government intends to use legal authority to collect taxes on profits made by global technology and digital firms in the country.
This latest development comes nearly a year after Nigeria's Finance Minister, Zainab Ahmed, mandated that foreign companies pay income tax through an amendment to the Finance Act.
As previously stated, the vice president's new action is based on the Financial Act Law.
According to the law, businesses that provide video streaming services and digital content downloads will be required to pay a digital tax to the Federal Inland Revenue Service.
However, it is subject to a Significant Economic Presence (SEP) clause that limits its application to businesses with an annual revenue of at least N25 million or its equivalent in other currencies.
The vice president explained that under the act, the majority of large technology companies are required to pay their fair share of taxes because they conduct an enormous amount of business in the country.
This means the government is considering large technology companies such as Netflix, Facebook, Twitter, and Google as a new strategy for increasing tax revenue in the country.
Is taxing global tech companies justified?
The government's decision to tax large technology companies has elicited a range of responses. However, recent developments demonstrate that the move to tax large technology companies may be justified. The following are some facts.
For a country with one of the world's largest populations and the largest in Africa, big tech companies frequently bypass countries like South Africa when it comes to establishing local offices.
Previously, the only way for most countries to tax the majority of large technology companies was through their local subsidiary. Nigeria has been denied this, as the country is home to only a handful of the world's largest technology companies, from Apple to Twitter.
Given the large number of users that the big tech companies receive from the country as a result of its large population, which undoubtedly translates into millions of dollars in revenue, it seems reasonable that Nigeria benefits from the success of the big tech companies.
Second, Nigeria has had a difficult year. Following an economic depression and subsequent naira devaluation, even the vice president agrees that tax increases would be ineffective. As a result, they are broadening the tax base by enticing large technology companies.
On the other hand, despite the pandemic, large technology companies have had a relatively good year. Google, Facebook, and Amazon all generated profits during the previous fiscal year.
Given that Nigeria is one of the countries that contributed to this success, it is only natural that Nigeria benefits from the fruits of that success through the taxes that it so richly deserves. This could be extremely beneficial as the country attempts to resurrect its flagging economy.
Nigeria is also not alone, as several countries around the world (Austria, India, Italy, Spain, Turkey, and the United Kingdom) have begun or are considering taxing large technology companies. India, for example, levies a 2% tax on revenue generated by foreign companies offering e-commerce services.
It is estimated that US businesses pay the government $55 million in digital service taxes each year.
Finally, the Organization for Economic Cooperation and Development (OECD) is currently working to amend international tax law to accommodate the FG's current plans.
According to reports, the OECD is leading negotiations with approximately 140 governments to develop new standards for digital service taxes that will supersede the 2013 Base Erosion and Profit Shifting (BEPS) international tax standard.
The scheme would require the world's top 100 corporations to pay taxes on their global sales regardless of their physical presence in each country.
Can government enforce the new tax law?
It remains to be seen whether the government will be able to enforce the new tax law, as previous attempts to enforce similar tax laws have failed.
Similarly, the 2020 Financial Act does not adequately address the manner in which the government intends to enforce compliance. It merely states that Nigerian-based businesses that transact with foreign businesses may be held liable for withholding tax on payments made to the businesses.
While attacking organizations that do business with technology companies appears to be effective, what happens to the millions of individuals who do business with these companies directly?
Regardless, recent developments in Nigeria's digital space demonstrate that the country's government is not powerless to enforce the tax. As heinous as the recent Twitter ban appears, it demonstrates that the government is capable (and willing) to use coercive measures such as internet censorship to bring the big techs to the table.
Another possibility is to direct banks to halt all payments from the country to large tech accounts. A recent example of this is the country's recent prohibition of crypto transactions.
This means that Nigerian businesses will be unable to pay for advertising and other services offered by Big tech. All of these methods, however, are circumventable, particularly when technology is involved. A good example is the widespread use of VPNs in the aftermath of the Twitter ban.
Another disadvantage of the ban in this instance is that the use of VPN effectively reroutes Nigerian users of large technology services to other countries, such as the United States, where they have designated as their preferred locations. This could digitally reduce revenue generated in Nigeria, and thus taxable revenue.
In Conclusion
Nigeria's decision to tax large technology companies could result in retaliatory measures by large technology companies' home countries, such as the United States.
A recent example is the United States' recent decision to impose tariffs of up to 25% on approximately $2 billion in goods from six countries in retaliation for their taxation of American digital services.
However, the global community is already considering imposing comparable taxes. The government may not have to take drastic measures to convince big tech to pay taxes in the country.
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