Taxation of the digital economy: significant economic presence, VAT and digital assets

A subscriber in Lagos pays ₦4,500 a month, in naira, for a film streaming service run from Ireland. A Nigerian bank pays a firm in London to host its data in the cloud. A trader buys and sells cryptocurrency through an exchange abroad.

None of the sellers has an office, an employee or a stock of goods in Nigeria, so the old rule, which needs a physical presence, would leave all of that income outside the Nigerian tax net. The digital economy is the reason the law moved from physical presence to economic presence.

This topic covers what the digital economy is, why it is hard to tax, the Nigerian rules on significant economic presence (SEP), digital assets and value added tax (VAT), the challenges and ways of dealing with them, the responses of the Organisation for Economic Co-operation and Development (OECD), the European Union (EU), the United Kingdom (UK) and India, and what Nigeria should do next. The previous topic covered non-resident taxation. The next covers tax treaties.

Key terms in plain English

Syllabus check

This topic is in syllabus area C (international taxation, 20% of marks). It covers:

• the meaning of the digital economy and how it differs from the traditional economy;
• the problems of taxing the digital economy and the gaps in Nigerian law;
• the measures other countries use and what Nigeria can do to block revenue leakage.

CAMA 2020 and digital businesses

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

The digital economy and how it differs

The digital economy is the network of economic activity, trade and professional contact that ICT makes possible. It is also called the internet, web or new economy. Its essential elements are heavy use of ICT, the coding of knowledge, the turning of information into a commodity and new ways of organising work. It is no longer a separate sector, because the traditional economy now runs on it.

The OECD describes digital business models by a wide digital footprint with little or no physical presence, heavy use of intangible assets, and the importance of data and user participation. The EU puts the problem as a gap between where value is created and where tax is paid.

Why the old rules fail

• A foreign company is usually taxed in a country only if it is physically present or has a permanent establishment there.
• Profit earned from consumers in one country may never be taxed there.
• It is hard to say whether tax belongs where value is created or where it is consumed.
• Digital assets have no independent market price; their value comes from how they are used, so valuation and the deduction of expenses are disputed.
• Tracking digital transactions is hard, and restrictions on cryptocurrency make it harder.
• Transactions may escape VAT if they are not treated as taking place in Nigeria.

Significant economic presence

Section 17(9)(b) of the NTA 2025 gives a non-resident SEP where it transmits, emits or sends signals, sounds, messages, images or data of any kind to Nigeria by cable, radio, electromagnetic systems or any other electronic or wireless apparatus, in respect of an activity, and profit can be attributed to it.

The activities include electronic commerce, application stores, high frequency trading, electronic data storage, online adverts, participative network platforms, online payments, supply of user data, search engines, digital content, online gaming, cloud computing and online teaching. Satellite activity is within “any other electronic or wireless apparatus”.

The 2020 SEP Order. The Companies Income Tax (Significant Economic Presence) Order 2020 gives the detail for digital activity. A foreign company has SEP in an accounting year where it:

• derives ₦25 million of annual gross turnover, or the equivalent in another currency, from streaming or downloading digital content (movies, video, music, apps, games, e-books); transmission of data collected from Nigerian users; goods or services supplied through a digital platform; or an intermediation platform that links suppliers and customers in Nigeria; or
• uses a Nigerian domain name (.ng) or registers a website address in Nigeria; or
• has a purposeful and sustained interaction with persons in Nigeria by customising its page to target them, including pricing in naira or offering naira billing or payment.

The Order does not treat a payment as SEP where it is made to an employee under a contract of employment, for teaching in or by an educational institution, or by a foreign fixed base of a Nigerian company. It also gives way to any multilateral arrangement on the digital economy.

Under the older text, technical, professional, management and consultancy services supplied remotely created SEP on any payment from a Nigerian resident. The NTA 2025 deleted that rule (s. 197(d)); such a payment now suffers deduction at source as final tax unless the company also has a permanent establishment or SEP. Some older notes still describe the old rule, so write the current position.

Profit and compliance. Profit attributable to SEP is worked out like profit of a permanent establishment, and where it cannot be found the Nigeria Revenue Service (NRS) applies the group’s margin to the Nigerian turnover. A non-resident with SEP must register, file returns, keep Nigerian records and, in some cases, appoint a Nigerian tax representative.

Digital assets

Under s. 35(1) NTA 2025 a disposal of a digital asset occurs when a capital sum is derived from a sale, lease, transfer, assignment, compulsory acquisition or other disposition. The scope covers digital files, cryptocurrency, non-fungible tokens, virtual property and valuable accounts such as social media profiles and websites.

The gain is computed like any chargeable gain: the proceeds less cost (or tax written down value where allowances were claimed) and incidental costs of acquisition and disposal. A company’s gain is added to assessable profit, relieved by loss and capital allowances and taxed at 30% as part of total profit. The same applies to assets situated within or outside Nigeria.

VAT and other indirect taxes

A supply of digital services by a non-resident to a Nigerian customer is a taxable supply under s. 151 NTA 2025. The supplier registers and charges VAT at 7.5%.

In Vodacom Business Nigeria Limited v FIRS the Federal High Court held that the Nigerian company must account for VAT on services bought from a foreign supplier, even though the supplier did not perform the services in Nigeria, because the services were not expressly exempt. From 1 January 2026 the VAT is claimable as input tax by a registered buyer.

Challenges in Nigeria

• Cross-border income and difficulty in choosing the right jurisdiction, which invites evasion and profit shifting.
• Valuation of digital assets, and sharp disputes over gains, expenses and allowances.
• Weak tracking of digital transactions, and leakage of direct and indirect tax on e-commerce.
• Corporate tax rules written for a physical economy.
• Resistance by Nigerian companies to withholding tax on payments to non-residents who may not be liable.
• Systems and data that are not fully integrated, with the cost of data protection.

Ways of dealing with the challenges

• Assess foreign app-based operators, such as ride-hailing platforms, on income derived from Nigeria.
• Form partnerships with payment and platform providers to track transactions.
• Require deduction at source on payments to non-residents, and VAT on cross-border payments.
• Enact specific digital economy legislation rather than stretch old law.
• Automate administration (registration, returns, audit and payment) so that systems connect with payment platforms.
• Ratify the multilateral convention that amends tax treaties and checks profit shifting.
• Build the capacity of tax staff, including data handling and security.

Responses by other jurisdictions

What Nigeria should still do

Widen the permanent establishment definition to cover a digital presence; legislate for the digital economy in its own terms; automate and connect tax systems to payment platforms; protect and join up its data; partner with platform providers; ratify the multilateral convention; and train its officers. The statutory SEP rule and VAT on digital services are the first steps.

Worked examples

1. Year 1: turnover is below ₦25m, but pricing in naira is a purposeful and sustained interaction, so SEP exists under that limb.
2. Year 2: turnover exceeds ₦25m from streaming, so SEP exists under the turnover limb as well.
3. Profit attributable to Nigeria is taxed and VAT of 7.5% is charged on the supplies.

1. Attributable profit.
   20% × ₦90m = ₦18m.
2. Tax at 30% = ₦5.4m.
3. VAT output.
   7.5% × ₦90m = ₦6.75m.

1. Remote consultancy no longer creates SEP by itself.
2. The Nigerian payer deducts tax at the rate in the deduction at source regulations, and that is the final tax.
3. The London firm still registers if it has a taxable presence; here it has none.

1. Gain = 20 − 8 − 1 = ₦11m.
2. Total profit.
   100 + 11 − 10 − 20 = ₦81m.
   Tax at 30% = ₦24.3m.
3. Without the gain, tax would be 30% × 70 = ₦21m, so the gain adds ₦3.3m.

How to score full marks

• Define the digital economy and contrast it with physical presence.
• Cite NTA s. 17(9)(b) for SEP and quote the ₦25m threshold.
• List the three limbs of the 2020 Order: turnover, .ng domain, naira targeting.
• State that remote consultancy no longer creates SEP alone.
• Add VAT at 7.5% and the Vodacom decision for cross-border services.
• Give OECD, EU, UK and India responses with the figures.

Common mistakes in the exam

• Saying a foreign company needs an office to be taxed in Nigeria.
• Quoting CITA s. 13 instead of NTA s. 17.
• Treating remote consultancy as automatic SEP.
• Leaving out the .ng domain and naira pricing limbs.
• Writing the EU thresholds in pounds instead of euros.
• Charging the old 10% capital gains tax on a digital asset.

Quick revision

• SEP: NTA s. 17(9)(b); ₦25m threshold; .ng domain; naira pricing.
• Digital assets: s. 35(1); gain in total profit at 30%.
• VAT 7.5% on digital services by non-residents (s. 151).
• OECD: Pillar One reallocation, Pillar Two 15% minimum tax.
• EU DST 3%; virtual PE: €7m, 100,000 users, 3,000 contracts. India levy 6%.
• CAMA 2020: ss. 54, 55, 119, 377(1), 378.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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