Are We Closer To Taxing Digital Companies In Nigeria?

In May 2020, the Minister of Finance, Budget and National Planning Zainab Shamsuna Ahmed, issued the Companies Income Tax (Significant Economic Presence) Order 2020, to expatiate on the 2019 Finance Act. This article traces the necessity of Significant Economic Presence and its introduction into the Companies Income Tax Act. Finally, it summarizes the provisions of the SEP Order.


Tax laws are traditionally jurisdictional. The laws of a country determine its tax system. Companies in Nigeria are mandated by the Companies Income Tax Act (CITA) to pay 30% of the profit earned in the year preceding assessment. There are two kinds of taxable companies in this regard - resident and non-resident companies. Section 13(1) of CITA is clear to the effect that a Nigerian (resident) company is taxable on its worldwide income. By Section 13(2) however, the profits of a non-resident company are deemed to be derived from Nigeria if (i) it has a fixed base in Nigeria (ii) it operates through a dependent agent (iii) it is involved in a turnkey project or (iv) it is involved in a related party transaction deemed artificial.

The standout implication of this is that a foreign company must have a fixed base in Nigeria before its profits can be subject to tax. This was the holding of the Federal High Court in cases like JGC v. FIRS and Shell v. FBIR. In Shell v FBIR the court held that the profits sourced from Nigeria by foreign companies cannot be taxed; except they have a fixed base and the profits are attributable to that base. 

The court held in Shell’s case that “fixed base” could be interpreted to mean “residence”or “ordinary residence” but in the context of the Companies Income Tax Act, it connotes a place where a company has carried on business over a long period of time. “Fixed Base” was further explained by Paragraph 4.1 of a 2014 Federal Inland Revenue Service Circular to include facilities such as a factory, an office, a branch, a mine, gas or oil, activities such as building, construction, assembly or installation and furnishing of services in connection with the previous.
The Fixed Base requirement has however become an impediment. This is because digitization allows businesses to reach markets in jurisdictions where they have little or no physical presence. The internet, for instance, allows digital companies to make profits in countries where they have no physical presence. Therefore, the Fixed Base requirement causes the source state to collect a reduced amount of tax while the multinational makes significant revenue.
Enter, Significant Economic Presence

Significant Economic Presence is therefore a direct replacement for Fixed Base. It creates a virtual, intangible basis for taxation and has been a go-to for many best practices. For instance, the European Union has had conversations to reach an agreement over the taxation of digital companies. Its long-term solution entails reforming and synchronizing corporate tax rules of different countries so that profits are registered and taxed at the appropriate jurisdictions. This extends to determining the significant digital presence and attributing profits to a digital business.

The Organization for Economic and Community Development (OECD) and its BEPS (Base Erosion and Profit Shifting) project was launched in 2012 to tackle tax avoidance and harmful tax practices with a multilateral approach. The OECD published a report titled Addressing the Challenges of the Digital Economy: Action 1 in October 2015 and it is aimed at addressing challenges of the digital economy with a focus on the concept of Permanent Establishment (Fixed Base). Three alternatives to this rigid concept were suggested. First, a “nexus” test based on the concept of “significant economic presence”.

A few countries have individually implemented a redefinition of Permanent Establishment to include digital presence. Or directly employed significant economic presence. Israel, India, Italy and Saudi Arabia are good examples.


The Finance Bill was presented by the Presidency to amend tax provisions and make them more responsive to the tax reform policies of the Federal Government. The Finance Act amended various tax laws in Nigeria. The Finance Act is unprecedented in Nigeria. Not in Africa however, as countries like Tanzania and Kenya did the same in 2017 and 2019 respectively. It was one fast-paced Bill. It passed its second reading on November 6, 2019 and came into force on January 13, 2020.
Importantly, a new paragraph was added to Section 13(2) of the Companies Income Tax Act. The effect is that a non-resident company is now taxable in Nigeria to the extent that it has a “significant economic presence” in Nigeria and profit can be attributable to a digital activity. But what constitutes “significant economic presence”? The Finance Act provided that the Minister may by Order determine this. That is, the Minister of Finance, Budget and National Planning. Consequently, the Finance Minister has now issued an order with an effective date of February 3, 2020.
The Companies Income Tax (Significant Economic Presence) Order, 2020


The SEP Order specifies the two kinds of (non-resident) companies that it concerns. They include the following:
  • Digital Service Providers: These are non-resident companies whose activities include the following:
  1. Streaming or downloading services of digital contents (e.g. movies, videos, music, applications, games and e-books),
  2. Transmission of data collected about Nigerian users generated from users' activities on websites or mobile applications,
  3. Provision of goods or services through digital platform, or
  4. Provision of intermediate services through digital platforms, website or other online applications that link suppliers and customers in Nigeria.
  • Non-Resident Companies that provide technical, professional, management, or consultancy services to Nigerian customers.

However, the Order does not impact these companies absolutely as it provides for further criteria in the form of thresholds.
  • A non-resident digital service provider will meet the SEP threshold in Nigeria if:
  1. It derives gross turnover or income in excess of ₦ 25million (about US$65k) in a given year from the activities listed, or
  2. It uses a Nigerian domain name (.ng) or registers a website in Nigeria, or 
  3. It has a purposeful and sustained interaction with persons in Nigeria by customising its platform to target persons in Nigeria.
  • A non resident company that provides technical, professional, management or consulting services will have a significant economic presence in Nigeria if it earns any income or receives payment from:
  1. a person resident in Nigeria, or
  2. a fixed base or agent of a non-Nigerian company.
For this category, the withholding tax deducted by the (resident) recipient of the service is the final tax.

The SEP Order anticipates international agreements that Nigeria may enter into. It provides that if Nigeria enters into such in a bid to address the tax challenges arising from the digitalization of the economy, the provisions of that other agreement will override the provisions of the Order. That is, in relation to any NRC that is covered by that agreement.

Are we closer to taxing digital companies? In July 2019, I wrote that “in combating the challenge of a fixed base, Nigeria can also adopt a nexus-based approach. Quantitative thresholds can be employed to determine a “significant economic presence… between taxing the digital economy and legislatures of the world, political will and expediency is everything.” Well, since then the Finance Act and this Order have taken effect, so yes. We are closer to taxing digital companies.

This article was written by  David Akindolire

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