From Nigeria: Taxation of the Digital Economy
The digital economy is increasingly becoming the economy itself. International borders are closing in and distance is no longer a barrier to sealing business deals. In 2014, the U.S. was reported to have exported almost $400 billion in digital services which represented 56% of U.S. services exports and 17% of total U.S. goods and services export.
On the other hand, taxation of digital transactions has become a herculean tax for tax authorities all over the world because digital transactions require little or no physical presence of the parties to which income accrues, in the jurisdiction of the consumer. It is usually challenging to determine whether tax on cross border transactions should be paid to the jurisdiction where value is created or consumed. Moreover, the general rule for taxing income of foreign enterprises in a given jurisdiction is by establishing that the entity is physically present or has a permanent establishment in such a country. Thus, profits derived from foreign jurisdictions might end up not being taxed in the jurisdiction of the consumer where money was parted with.
The Organisation of Economic Cooperation and Development (OECD) and the European Union (EU) have offered certain recommendations to address incidences of non-taxation of income arising from digital transactions. These include the introduction of a Digital Service Tax and the concept of a Virtual Permanent Establishment to help determine the incidence of permanent establishment for tax purposes.
Nigeria seems not to have made significant progress in the taxation of digital transactions although myriads of digitalized transactions are carried on in Nigeria daily. Although the Nigerian tax authorities are working towards ensuring digitalization of the tax collection process, it is unfortunate that this digitalization has not been extended to cover effective monitoring and collection of taxes from digital transactions.
In this newsletter, we have examined some of the challenges and prospects of taxing the digital economy and highlighted some of the proposals of the OECD and EU on the subject matter.
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