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Nigeria has experienced a rapid digital transition in the modern period, with e-commerce standing out among other sectors. The explosion of internet transactions has not only changed the way businesses function, but it is now a major factor affecting Nigeria’s economy. It is hardly shocking that so many businesses are adopting this cutting-edge method of doing business so quickly. But with all of its success and quick expansion, the question of e-commerce taxes has gained a lot of attention. In Nigeria, e-commerce, or the electronic purchase and sale of products and services, has grown significantly in the last several years. The acceleration of this trend has been further accelerated by the COVID-19 epidemic, forcing more individuals to opt for internet purchasing as an alternative to physical storefronts.
GROWTH OF E-COMMERCE IN NIGERIA
The growth of e-commerce in Nigeria can be attributed to several factors. Firstly, the increasing penetration of smartphones and internet connectivity has made it easier for people to access online platforms. According to a report by Statista[i], the number of smartphone users in Nigeria is expected to reach 98 million by 2025, up from 47 million in 2020. Secondly, the rise of social media and digital marketing has enabled businesses to reach a wider audience at a lower cost. Thirdly, the convenience and speed of delivery offered by e-commerce platforms have made them a popular choice for consumers.
A report by KPMG[ii] estimates that the e-commerce market in Nigeria was valued at $136 million in 2019 and is projected to grow at a compound annual growth rate (CAGR) of 53% between 2019 and 2023, reaching $1 billion by 2023. This growth is driven by factors such as increasing smartphone penetration, rising disposable income, and improved internet infrastructure.
TAXATION FRAMEWORK IN NIGERIA
In Nigeria, the tax system has undergone significant reforms in recent years, with a focus on modernization and digitization. The traditional taxation system, which relied heavily on manual processes and physical documentation, has given way to e-commerce taxation, which leverages technology to streamline tax collection and compliance[iii]. The traditional taxation system in Nigeria is governed by the Federal Inland Revenue Service (FIRS), which is responsible for collecting taxes on behalf of the federal government. The FIRS is empowered by the Companies Income Tax Act (CITA) and Personal Income Tax Act (PITA) to impose taxes on various sources of income, including profits from business operations, salaries, and wages.
Under the traditional taxation system, taxpayers are required to file their returns manually or electronically through a designated tax office. The FIRS relies heavily on physical documentation, such as bank statements and receipts, to verify income and expenses. This process can be time-consuming and prone to errors, particularly for small businesses and individuals who may not have access to sophisticated accounting software.
Evolving E-Commerce Taxation Landscape in Nigeria
E-commerce taxation in Nigeria is a dynamic field encompassing the collection of taxes on electronic commerce transactions, including online sales and digital services. At the forefront of this regulatory landscape is the Value Added Tax (VAT) Act, which imposes a 7.5% tax on goods and services sold within Nigeria[iv]. This legislative framework has been crafted to adapt to the rapidly increasing popularity of online shopping and digital service consumption among Nigerians, with platforms such as Jumia, Konga, and Amazon serving as prominent examples.
Recognizing the immense revenue potential inherent in these online platforms, the Federal Inland Revenue Service (FIRS) has been proactive in implementing measures to ensure compliance with VAT obligations. However, the transition to e-commerce taxation hasn’t been without its challenges. One significant hurdle lies in guaranteeing that all transactions are meticulously documented and reported to the FIRS. Achieving this necessitates seamless collaboration among e-commerce platforms, payment service providers, and various stakeholders across the digital ecosystem.
From a legal standpoint, the VAT Act plays a central role in governing e-commerce taxation in Nigeria[v]. Among its key provisions is the requirement for e-commerce platforms to register with the FIRS and obtain Tax Identification Numbers (TINs). This enables them to effectively collect VAT on behalf of their merchants and remit it to the FIRS on a monthly basis. Furthermore, these platforms are mandated to maintain comprehensive records of all transactions conducted on their platforms, encompassing details such as merchants’ sales, expenses, and VAT payments.
Additionally, the VAT Act imposes obligations on payment service providers (PSPs), requiring them to report all electronic transactions to the FIRS on a monthly basis. This reporting mechanism enables the FIRS to diligently monitor compliance with VAT obligations across a diverse array of electronic channels, including online marketplaces, mobile money platforms, and digital wallets. By mandating PSPs to furnish detailed information about each transaction, such as the transaction amount, involved parties, and applicable taxes or fees, the VAT Act underscores the importance of transparency and accountability in Nigeria’s evolving e-commerce taxation landscape.
TYPES OF E-COMMERCE TAXES IN NIGERIA
As the government continues to promote e-commerce activities, it has become crucial to understand the different types of taxes that apply to e-commerce transactions in Nigeria.
A. Value Added Tax (VAT)
1. Applicability to E-Commerce Transactions:
VAT is a consumption tax charged on the value added to goods and services at each stage of the supply chain. In Nigeria, VAT is currently 7.5%. E-commerce transactions are subject to VAT, just like traditional brick-and-mortar transactions. The VAT liability arises when the goods or services are supplied or imported into Nigeria. This means that both local and foreign e-commerce businesses operating in Nigeria are required to charge VAT on their sales.
2. Registration and Compliance:
To charge VAT on e-commerce transactions, businesses operating in Nigeria must register for VAT with the Federal Inland Revenue Service (FIRS). The registration process involves completing a VAT registration form and providing supporting documents such as evidence of business registration, proof of business address, and tax identification number (TIN). Once registered, businesses are required to submit monthly or quarterly VAT returns to the FIRS, depending on their turnover. Failure to register for VAT or submit returns can result in penalties and interest charges.
B. Corporate Income Tax
1. Taxation of E-Commerce Businesses:
Company Income Tax (CIT) is indeed a tax levied on the profits earned by a company or business entity in Nigeria. However, the application of CIT to e-commerce businesses in Nigeria isn’t solely determined by a flat rate of 30%. Instead, CIT rates can vary based on the turnover or income bracket of the company. E-commerce businesses, like other businesses, are subject to CIT rates that correspond to their taxable income, which may differ from the standard 30% rate. Therefore, while CIT applies to e-commerce operations in Nigeria, the specific rate applicable depends on the company’s taxable income level. This applies to both local and foreign e-commerce businesses that have a permanent establishment in Nigeria or derive income from sources within Nigeria. A permanent establishment is a fixed place of business through which the business carries out its activities in Nigeria. This includes offices, warehouses, and other physical locations.
2. Nexus and Permanent Establishment:
The concept of permanent establishment is crucial for e-commerce businesses in Nigeria, determining their tax liabilities. Even without a physical presence, they may face Corporate Income Tax (CIT) if generating income within Nigeria, termed “agency nexus” when operations involve agents. To avoid this, businesses must ensure agents operate independently.
Even if an e-commerce business lacks a permanent establishment within Nigeria, it could still be liable for Corporate Income Tax (CIT) if it generates income from sources within the country. This scenario, often termed as “agency nexus,” arises when the e-commerce business conducts its operations in Nigeria through agents or intermediaries. In such cases, if the e-commerce business’s agents or intermediaries have the authority to conclude contracts on its behalf or represent the business as its own, it can establish a taxable presence for the business in Nigeria. To mitigate the risk of agency nexus, e-commerce businesses should ensure that their agents operate as independent contractors, without the authority to bind the business in contractual agreements or represent it as their own entity.
C. Withholding Tax
1. Applicability to E-Commerce Transactions:
Withholding Tax (WHT) is a tax deducted at source from payments made by one person to another. WHT applies to various types of payments such as dividends, interest, royalties, and management fees. In the context of e-commerce transactions, WHT applies to payments made by non-resident suppliers to non-resident customers for the supply of goods or services through electronic platforms. The WHT rate for such transactions is currently 10%.
2. Rates and Compliance:
The WHT liability arises when payment is made by the customer to the supplier for the supply of goods or services through electronic platforms. The customer is responsible for deducting WHT at the applicable rate from the payment made to the supplier and remitting it to the FIRS on behalf of the supplier. Failure to deduct WHT or remit it to the FIRS can result in penalties and interest charges for both the customer and supplier. Customers need to make payments to non-resident suppliers through electronic platforms to ensure compliance with WHT requirements to avoid any tax liabilities arising from non-compliance.
CHALLENGES IN IMPLEMENTING E-COMMERCE TAXATION[vi]
The rise of e-commerce in Nigeria has brought about a new era of convenience and accessibility for consumers, as well as opportunities for businesses to expand their reach and increase sales. However, the implementation of e-commerce taxation in Nigeria has presented several challenges, including compliance issues[vii], technology and administrative challenges, and the need for policy adjustments.
One of the major challenges in implementing e-commerce taxation in Nigeria is compliance. The tax regime in Nigeria is complex, and many small businesses operating in the e-commerce sector are not aware of their tax obligations. This lack of awareness has led to non-compliance, as many businesses fail to register for tax or underreport their sales.
The Nigerian government has taken steps to address this issue by increasing awareness through campaigns and workshops. The Federal Inland Revenue Service (FIRS) has also introduced a simplified tax registration process for small businesses operating in the e-commerce sector. However, more needs to be done to ensure that all businesses are aware of their tax obligations and are compliant with the law.
2. Technology and Administrative Challenges
Another challenge in implementing e-commerce taxation in Nigeria is technology and administrative challenges. The e-commerce sector is highly dependent on technology, and many small businesses lack the resources to implement the necessary systems for tracking sales and remitting taxes[viii]. This lack of technology infrastructure has resulted in underreporting of sales and evasion of taxes.
To address this challenge, the Nigerian government has introduced measures such as the use of digital signatures and electronic invoicing to facilitate compliance. The FIRS has also introduced a voluntary compliance program for small businesses operating in the e-commerce sector, which provides them with a waiver on penalties for past non-compliance if they register for tax and become compliant moving forward.
3. Need for Policy Adjustments
The implementation of e-commerce taxation in Nigeria also requires policy adjustments to ensure that the tax regime is fair and equitable for all businesses operating in the sector. One major issue is the lack of clarity regarding the applicability of VAT (Value Added Tax) on imported goods sold through e-commerce platforms. This ambiguity has led to confusion among businesses and consumers, resulting in non-compliance and underreporting of sales.
Government Initiatives to Encourage E-Commerce[ix]
1. National Digital Economy Policy and Strategy
Nigeria’s commitment to digital transformation is encapsulated in the National Digital Economy Policy and Strategy. This strategic framework outlines initiatives to drive the growth of digital businesses, including E-commerce. The focus is on creating an enabling environment through regulatory reforms and infrastructure development.
2. E-Government Initiatives
The Nigerian government is actively embracing E-government initiatives to enhance efficiency and transparency. Streamlining administrative processes and promoting online interactions not only benefits citizens but also creates a favorable ecosystem for E-commerce businesses to thrive.
3. Digital Skills Development Programs
Recognizing the importance of digital literacy, the government has initiated programs to enhance the skills of the workforce. This not only prepares individuals for the digital economy but also ensures that E-commerce businesses can tap into a skilled talent pool.
Tax Incentives for E-Commerce Businesses[x]
1. Pioneer Status Incentive
E-commerce businesses in Nigeria may qualify for the Pioneer Status Incentive, which grants a tax holiday for an initial period. This initiative is designed to attract and encourage investments in specific sectors, including digital businesses.
2. Value Added Tax (VAT) Exemptions
Certain digital goods and services may be eligible for VAT exemptions, providing a cost advantage for E-commerce businesses. This encourages the growth of digital transactions and aligns with efforts to make online services more accessible.
3. Corporate Income Tax Reductions
The government may offer corporate income tax reductions for qualifying E-commerce businesses, fostering an environment where digital entrepreneurs can reinvest profits into their ventures for sustained growth.
Supporting Small and Medium Enterprises (SMEs)
1. Funding Initiatives
The government, in collaboration with financial institutions, provides funding initiatives specifically tailored for SMEs in the E-commerce sector. These funds may come with favorable terms, reducing the financial burden on startups and promoting entrepreneurship.
2. Training and Capacity Building
Recognizing the unique challenges faced by SMEs, the government sponsors training and capacity-building programs. These initiatives aim to empower entrepreneurs with the skills and knowledge necessary to navigate the complexities of the E-commerce landscape.
3. Market Access and Promotion
The government actively promotes SMEs, including E-commerce ventures, by providing platforms for market access. This may involve participation in trade fairs, inclusion in government procurement programs, and other measures to enhance visibility and market reach.
CONCLUSION.
In conclusion, Nigeria’s rapid digital transition has propelled e-commerce to the forefront of its economy, transforming the way businesses operate and consumers engage in transactions. The growth of e-commerce in Nigeria is undeniable, fueled by factors such as increased smartphone penetration, digital marketing, and the convenience of online platforms. As a result, the e-commerce market is projected to reach significant milestones in the coming years, reflecting a promising trajectory for economic expansion.
However, alongside this growth comes the imperative need to address e-commerce taxation. The implementation of a robust taxation framework is essential to ensure that e-commerce businesses contribute their fair share to the nation’s revenue while maintaining a conducive environment for growth. The Nigerian government has made strides in modernizing its tax system, with initiatives aimed at streamlining tax collection and compliance in the digital era.
Despite these efforts, challenges persist, including compliance issues, technological barriers, and the necessity for policy adjustments. It is imperative for stakeholders to collaborate in overcoming these challenges to foster a fair and equitable taxation regime that supports the sustainable growth of e-commerce in Nigeria.
Furthermore, the Nigerian government has demonstrated its commitment to supporting e-commerce businesses through various incentives and initiatives. From tax incentives to funding opportunities and capacity-building programs, there are ample resources available to empower entrepreneurs and drive innovation in the digital space. By leveraging these opportunities and addressing challenges proactively, Nigeria can harness the full potential of e-commerce to drive economic prosperity and inclusive growth for its citizens.
[i] https://www.statista.com/statistics/467187/forecast-of-smartphone-users-in-nigeria/
[ii] https://www.go-globe.com/e-commerce-in-nigeria-growth-and-future-trends/
[iii] https://www.linkedin.com/pulse/role-technology-tax-collection-nigeria-abdulateef-olatunji-abdulrazaq/
[iv] https://www.firs.gov.ng/value-added-tax-vat/
[v] https://dc.cbn.gov.ng/cgi/viewcontent.cgi?article=1494&context=bullion
[vi]https://www.mfa.gov.tr/e-commerce-and-taxation_-understanding-the-difficulties.tr.mfa
[vii] https://truehost.com.ng/challenges-of-ecommerce-in-nigeria/
[viii] https://www.apgads.lu.lv/fileadmin/user_upload/lu_portal/apgads/PDF/HSSLatvia/HSS_28-2/hssl.28.2.05_Okolie-Ojomo.pdf
[ix] https://www.instamojo.com/blog/government-programs-to-accelerate-small-business-e-commerce-growth/
[x] https://www.linkedin.com/advice/1/what-future-trends-developments-e-commerce-taxation
Written by Maureen Esegie for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com