Taxing the digital space: the principle of significant economic presence

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Rotimi Akapo

Advocaat Law, Lagos

Lateef Bamidele

Advocaat Law, Lagos

Linda Asuquo

Advocaat Law, Lagos


There are 7.77 billion people in the world, 4.54 billion of whom are active internet users.[1] Over 2.05 billion people shop online.[2] Globally, 66 per cent of companies use online advertising,[3] with 37.9 per cent of consumers purchasing something online, a quarter of such purchases come from viewing an advert online. Forty-seven per cent of global retail sales take place online.[4]A farmer in a remote village in Nigeria can now purchase farm equipment from a company based in China via an e-commerce site with the help of a smartphone and the internet. Similarly, a book can be ordered by a customer in Kenya from a list available on an e-commerce site based in India or a customer based in South Africa can stream a film from a video on demand platform based in Canada.

The ease with which these global transactions can be initiated and concluded has transformed how business is conducted and concluded. It has also introduced many other issues, not least of which is the taxation of these transactions. Surely, the income-earning party should remit a percentage of their earnings to the state tax authority. Given the global nature of these transactions, the question however arises as to which jurisdiction is legally entitled to the tax accruing from such transactions and what tax rate should be applicable.

As the Covid-19 pandemic and the crash in global oil prices continues to adversely affect Nigeria’s economy, one means by which the country is attempting to shore up its revenue base is through the taxation of goods and services and has to this end, Nigeria has introduced some tax reforms through its newly introduced Finance Act.[5] One of the elements of this new legislation is the recognition and inclusion in the tax dragnet, businesses which operate online with income derivable from Nigeria. Such businesses in ‘the digital space’ are now to be subjected to tax on their income derived from Nigeria through the principle of significant economic presence (SEP).

The digital economy and significant economic presence

A 2016 Report by Oxford Economics valued global digital economy at US$11.5tn or about 15.5 per cent of the global economy. Its value is expected to rise significantly within the next few years.[6] Most countries, in realisation of this economic trend, are developing the necessary regulatory framework to govern and regulate digital economic activities. Nigeria recently launched its National Digital Economy Policy and Strategy, which is a policy document on the use of digital technology as a platform for stimulating economic growth in all sectors through the development of Nigeria’s digital economy.

As the digital economy continues to expand, traditional taxation principles are struggling to keep up, given the borderless nature of transactions. The Organisation for Economic Cooperation and Development (OECD)’s Action 1 on preventing Base Erosion and Profit Shifting (BEPS), characterises digital economy as massive use of data, with unparalleled reliance on intangibles, and difficulty in determining the jurisdiction in which value creation occurred as little or no physical presence is required for value creation or service delivery. To address the tax challenges of the digital economy, the OECD, through its BEPS Inclusive Framework, has proposed the following approaches for allocation of taxing rights and nexus rules, for consideration by its members:

  • User contribution

This allocates taxing rights by focusing on user base for digital services, data and content generation in a highly digitised business.

  • Marketing intangibles

This has a broader application by focusing on aspects of commercial exploitation of a product or service, and includes trademarks, customer list, proprietary market, etc.

  • Significant economic presence

This allocates taxing rights based on evidence of a combination of factors that create purposeful and sustained interaction with the economic life of a jurisdiction through digital means.

Nigeria and the adoption of SEP principle

The Finance Act, 2019 (Act) amended the Companies Income Tax Act (CITA) for the purposes of taxation of non-resident companies in Nigeria. It introduced the concept of SEP as a basis for determining same for providing digital services and technical, management, consultancy or professional services. The Act, empowers the Minister of Finance to determine what constitutes SEP in Nigeria so as to be able to give effect to the provisions of the Act. In this regard, the Order made effective from 3 February 2020, was recently issued to define what constitutes SEP in Nigeria as provided under Section 13(2)(c) and (e) of the CITA.

Prior to the passage of the Act, non-resident companies were only deemed liable to tax in Nigeria if they: (1) carried on business through a fixed base in Nigeria; (2) carried on business through an agent in Nigeria; (3) executed a turnkey project in Nigeria; or (4) failed to price their related party transactions at arm’s length. The newly introduced reform is expected to operate through general digital transactions and the provision of consulting services.

It is important to note that the Order applies to ‘non-resident companies’ or as stated in the Order ‘a company other than a Nigerian company’. Under CITA, a Nigerian company is regarded as any company incorporated under the Companies and Allied Matters Act.

Digital transactions

By the Order, a foreign entity involved in digital transactions will be deemed to have created an SEP in Nigeria and therefore be liable to tax if it derives an income of NGN25m (approximately US$65,000) or equivalent in other currencies from Nigeria in a year from any of the following: streaming or downloading of digital content; transmission of data collected about users in Nigeria; provision of goods or services directly or through a digital platform; intermediation services that link suppliers and customers in Nigeria; uses Nigerian a ‘.ng’ domain name, or registers a website address in Nigeria; has a purposeful and sustained interactions with persons in Nigeria by customising its digital platform to target persons in Nigeria, for example by stating the prices of its products or services in Naira.

In order to determine if a company meets the NGN25m (approximately US$65,000) threshold in a year, the activities carried out by connected persons in that year will be aggregated. The Order defines ‘connected persons’ as associates or business associates where one person is involved in the management or control of the other or where both people are involved in the management or control of both enterprises.

Consulting services

The Order stipulates that the SEP applies to a foreign company involved in the provision of technical, (including training, advertising, supply of personnel), professional, management or consultancy services when payment is received from a person resident in Nigeria or a fixed base or agent of a foreign company in Nigeria. It however allows an exemption of payments made under a contract of employment or by an educational institution and payment by a foreign fixed base of a Nigerian company.

The Order provides that any company covered under any multilateral agreements to which Nigeria is a party will be treated according to those agreements. The effect of this provision would be that the provisions of such agreements and not the Order will apply. In addition, non-resident companies from countries with which Nigeria has a double taxation treaty would not be affected by the Order.

It is believed that the Non Resident Persons’ Tax Office (NRPTO) established to administer taxation of non-resident entities and individuals will administer this tax regime, and as a first step, the non-resident company is required to register with NRPTO for tax purposes after which, it will be advised on the next steps. The NRPTO is still working out the format for the implementation of the new tax regime and should publish applicable guidelines on how the profits attributable to the entity will be determined and compliance will be monitored and enforced.

The implication of tax reform

The Order has provided the necessary framework to fill the vacuum in the Finance Act by the absence of a definition of SEP. The SEP principle has widened the net for the taxation of non-resident entities in Nigeria.

With the Order, Nigeria has joined countries which have taken a unilateral approach in dealing with the challenges of taxing the digital economy. India, Israel and Kenya are a few of the other countries to have imposed digital taxes in one form or another. It is important to note that for the countries that have implemented digital services tax, the structure, scope and tax rates differ.

Major stakeholders in the digital space are dissatisfied with the introduction of the SEP principle and the attempt to tax these non-resident companies and we expect that there will be engagements with the Federal Government to agree on a fair and acceptable compromise.


[1]Internet World Stats, available at:, last accessed 8 November 2020.

[2]‘Frequency of online consumers who have made a purchase based on online or social media advertisements as of January 2019’, Statista, available at:, last accessed 8 November 2020.

[3]Internet Stats & Facts (2020), Hosting Facts, available at:, last accessed 8 November 2020.

[4]Global online purchase data, Think with Google, available at:, last accessed 8 November 2020.

[5]This new Act amends the Companies Income Tax Act, Cap C21, Value Added Tax Act, Cap V1, Customs and Excise Tariff, etc (Consolidation) Act, Cap C49, Personal Income Tax Act, Cap P8, Capital Gains Tax Act, Cap C1, Stamp Duties Act, Cap S8, Petroleum Profit Tax Act, Cap p13, Laws of the Federation of Nigeria, 2004 to provide for the review of tax provisions and make them more responsive to tax reform.

[6]As quoted in the Nigeria National Digital Economy Policy and Strategy, 2020.

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