E-commerce and digital economy taxation: significant economic presence and the tax problems

A Nigerian buyer pays by card for software that is made in one country, sold from a website registered in a second, and delivered from a server in a third. No parcel crosses a border, no shop is opened, and no agent signs a contract. Which country may tax the profit, which may charge VAT, and who is to be taxed at all?

The tax systems of the last century were built on physical presence: a factory, an office, a warehouse or a resident owner. Electronic commerce removes that presence, and the law has been catching up since.

This topic covers the meaning of e-commerce and e-business and how they differ, the rules in the Companies Income Tax Act for foreign companies and the significant economic presence test, the treaty rules on residence, permanent establishment and the arm’s length principle, the problems that e-commerce poses for income tax, VAT, withholding tax and customs, the case for taxing it, the proposed approaches, and the problems of enforcement.

The previous topic covered free trade zones and tax incentives. The next covers information technology in taxation.

Key terms in plain English

Syllabus check

This topic is in syllabus area D, company taxation. It covers:

• meaning of e-commerce and e-business
• the significant economic presence rules
• treaty rules, problems and approaches to taxing e-commerce

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

E-commerce and e-business

There is no single definition of electronic commerce. Some include every financial and commercial transaction done electronically, including electronic data interchange, electronic funds transfer and card activity. Others limit it to retail sales to consumers.

The definitions share one idea: the use of electronic networks to exchange information, products, services and payments between consumers, businesses and governments, based on the processing and transmission of digital data, including text, sound and images. In a phrase, e-commerce is all transactions, visible or invisible, that are conducted electronically.

E-commerce is therefore a subset of e-business.

The Nigerian rules for foreign companies

Section 9 of the Companies Income Tax Act taxes the profit of any company from any trade accruing in, derived from, brought into or received in Nigeria.

Section 13(2) taxes a non-Nigerian company where it has a fixed base; where it has no fixed base but habitually operates through an authorised person or keeps goods here for regular delivery; where it carries out a single contract for surveys, deliveries, installations or construction; where it deals artificially with a connected person; and, since the Finance Act 2021, where it transmits or receives signals, messages or data to Nigeria for electronic commerce and has a significant economic presence.

A foreign company has a significant economic presence in a year where it earns gross turnover or income above ₦25 million (or its equivalent) from any one or a combination of:

1. streaming or downloading of digital content (films, video, music, apps, games, e-books) to anyone in Nigeria;
2. transmission of data collected from Nigerian users, from their activity on a digital interface;
3. intermediation through a digital platform linking suppliers and customers in Nigeria;
4. supply of goods or services directly or through a digital platform;
5. use of a Nigerian domain name (.ng) or registration of a website address in Nigeria; or
6. purposeful and sustained interaction with persons in Nigeria through a digital page customised for them, including prices in naira or payment options in naira.

The activities of connected persons are added up to test the ₦25 million. A company covered by a multilateral agreement on the digital economy to which Nigeria is a party is treated under that agreement.

For technical, professional, management and consultancy services, a foreign company has a significant economic presence where it earns income or receives payment from a Nigerian resident or from a fixed base or agent of a foreign company, except payments 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.

Withholding tax on such income is the final tax on a non-resident who is not otherwise within the fixed base and agency cases. The Service may also charge a fair percentage of the turnover attributable to the Nigerian presence (section 30).

Residence and source in Nigeria

Three principles govern international taxation in Nigeria under section 13(2):

• the jurisdictional nexus (what links the income to Nigeria)
• the source of the income (taxed where it arises)
• the status of the taxpayer (a resident is taxed on global income and a non-resident on Nigerian income only)

Residence of an individual follows the 183 day test in the First Schedule to the Personal Income Tax Act. Residence of a company follows the place of control and management.

The treaty rules for taxing business profit

Double taxation treaties are mostly adaptations of the OECD Model Tax Convention. Although treaties differ, the principles on business profits are similar. They decide how far e-commerce profit can be taxed by a country that is not the home of the seller.

Liability: residents and non-residents

Under a treaty, liability first depends on whether the taxpayer is a resident of the country. A resident may be taxed on business profit wherever it arises, and the country of residence must remove double taxation. A non-resident may, as a general rule, be taxed only on business profit that is attributable to a permanent establishment in the country.

Residence for treaty purposes depends on liability to tax under domestic law, by reason of domicile, residence, incorporation or place of management, the factors that give the widest liability. A company could be a resident of two countries on that test, so treaties contain tie-breaker rules. The OECD tie-breaker says a company resident in both is a resident only of the country where its place of effective management is.

The permanent establishment

The permanent establishment is the nexus, or threshold, for taxing a non-resident’s business profit. It also acts as a source rule, because the only profit a country may tax is the profit attributable to the permanent establishment. The basic definition is a fixed place of business through which the business of an enterprise is wholly or partly carried on.

It has a geographical requirement, a fixed physical location. A time requirement, that the enterprise is there for more than a merely temporary period having regard to the kind of business. The place must be at the disposal of the enterprise for its business activities.

The definition says that a place used only for activities of a preparatory or auxiliary character is not a permanent establishment, even though the basic definition might be met. The definition is supplemented by an agency rule: a non-resident is deemed to have a permanent establishment in a country if another person acts there as its agent and habitually uses authority to conclude contracts in its name.

The rule does not apply to independent agents acting in the ordinary course of their business.

On e-commerce, the OECD has clarified its view. Its main conclusions are:

1. A website cannot, in itself, be a permanent establishment.
2. Website hosting arrangements do not normally give the enterprise that runs the hosted website a permanent establishment.
3. Except in very unusual cases, an internet service provider is not a dependent agent permanent establishment of the enterprises it serves.
4. A place where computer equipment such as a server is located may in some cases be a permanent establishment, but only if the functions performed there go beyond what is preparatory or auxiliary.

Profit that may be taxed without a permanent establishment

Some categories of profit can be taxed by the country of source even with no permanent establishment:

• profit from immovable property such as hotels and mines
• profit of entertainers and athletes where the performance takes place
• payments such as dividends, interest, royalties and technical fees on which a treaty allows a limited gross tax at source
• under some treaties, profit from collecting insurance premiums or insuring risks in the source country
• under some treaties, profit from services where the provider is present for more than 183 days in a 12 month period

An aircraft in international traffic may not be taxed by the source country even if there is a permanent establishment there, and most treaties say capital gains, other than on immovable property and business property of a permanent establishment, may not be taxed by the source country.

Computing the profit: separate entity and arm’s length

The rules for computing business profit are the same whether the country taxes a resident or the permanent establishment of a non-resident. Each legal person or permanent establishment is treated as a separate taxpayer, whatever its relationship to other entities.

Each branch or subsidiary of a multinational group is treated separately, but the conditions of dealings within the group, mainly the price, may be adjusted to those that would apply between independent enterprises. This is the arm’s length principle. The OECD Transfer Pricing Guidelines call the separate entity approach the most reasonable means of achieving fair results and limiting unrelieved double taxation.

The first three are the traditional methods; the last two are transactional profit methods. The OECD prefers the traditional methods, and allows profit methods only as a last resort where the others cannot be applied reliably. Since 1995, however, profit methods have been used much more, especially for integrated groups and unique, valuable intangibles.

1. Arm’s length price.
   ₦200 million × 115% = ₦230 million.
2. If the subsidiary charged only ₦210 million, the Service may adjust its profit upward by ₦20 million.

1. Arm’s length purchase price.
   ₦500 million × (1 − 20%) = ₦400 million.
2. A purchase price above ₦400 million would be adjusted.

Sharing the tax base between countries

Because a treaty lets both the source and the residence country tax some business profit, the competing claims are settled by giving priority to source taxation. This is done either by exempting from residence taxation the income that the treaty gives to the source country, or by allowing the source tax as a credit against the residence tax.

Where the source country, the country of the permanent establishment and the country of residence could all tax, the treaty removes triple taxation by giving priority first to the source, then to the country of the permanent establishment, with the residence country holding what remains.

Why these rules strain with e-commerce

The treaty system depends on a place. The permanent establishment needs a fixed place of business, the agent rule needs a person with authority, and the place of effective management needs a decision to be taken somewhere. A foreign seller can serve Nigerian customers through a website hosted on a server it does not own, in a country with no connection to its business, without any of these.

That is why the Finance Act 2021 added the significant economic presence test, which measures nexus by turnover and activity and not by presence.

1. The treaty tie-breaker gives residence to the country of the place of effective management, which is country B.
2. With e-commerce, where board decisions may be taken online by directors in several countries, it is hard to find that place, which is one of the main problems.

The growth of e-commerce and why tax law must respond

E-commerce has become part of daily life. By the end of 2017, some 4.1 billion people had internet access, and Nigeria had about 98.3 million internet and broadband subscribers. Many companies now run profitable businesses outside their home countries through websites on servers they neither own nor operate. Physical presence is no longer needed to do the traditional commercial activities, because technology has replaced physical transactions with data.

Borders matter less for e-commerce, and that challenges the basic assumptions of international tax: physical presence and the residence of a person, which are the usual basis for finding tax liability.

Twin problems

E-commerce raises two problems. The first is the character of the income: is it royalty, business profit or a fee for technical services? The second is the income that is liable: it requires showing that there is a permanent establishment and deciding what income is attributable to it.

Characterising the income

The Act and the treaties treat cross-border income differently by type. Business profit is generally sourced to the country where the business is based and taxed on a net basis. Royalty income is sourced to the country where the intellectual property is used, and may bear gross withholding tax.

In the digital world it is hard to say whether a transfer of a product has happened, whether a service has been performed or whether an intangible has been licensed. The transactions are hard to track, which makes it hard for the authority to impose tax.

The OECD commentary lists 28 categories of passive e-commerce income but its classification is not accepted everywhere: some countries have a broad definition of royalty so that negotiated withholding tax can be applied to payments that would not otherwise be taxable in the source country. Mismatches in classification between countries can lead to double taxation or to no tax at all.

Income tax: the limit of a fixed base

Under Nigerian law, a resident company is taxed on global income and a non-resident only on activities carried out in Nigeria through a permanent establishment. Section 13 of the Act taxes a non-Nigerian company that has a fixed base, works through an authorised agent or carries out a contract in Nigeria.

The question is how Nigeria is to tax a foreign business that deals with a Nigerian online when it has no fixed place of business, no agent, and an activity that does not fit the Act. The answer was that, without change, the profit is a loss to the Nigerian revenue, and the authority would have to track the transactions, which is a very hard task.

The recommended response is that e-payments be encouraged and monitored, with liaison between the e-payment systems, banks, the authorities and the annual returns of companies, so that the profit from e-transactions can be traced and revenue leakage reduced. It also recommends that the framework for taxing electronic transactions follow the OECD model, and that the revenue issue an official circular on the tax treatment of e-commerce and e-business.

Part of that gap has since been closed by the significant economic presence rules.

VAT: the destination principle

VAT is charged at the place of consumption (the destination principle), and section 2 of the VAT Act charges tax on the supply of all goods and services except those exempted.

The Act defines the supply of goods as a transaction in which the whole property in the goods passes, or the agreement expressly contemplates that it will, including the sale and delivery of taxable goods, hiring or leasing, and any disposal. Services include any service provided for a consideration.

VAT must be included in the price of goods and services, and where goods are supplied for something other than cash, the value is the market value. The conclusion is that placing an order online does not remove VAT where goods are delivered in Nigeria. The value of imported goods includes all taxes and charges outside Nigeria, commission and costs up to the point of importation.

A taxable person must register within six months of starting business. A non-resident company is expected to register using the address of the person with whom it has a subsisting contract.

The difficulty is with intangibles. The VAT Act speaks of goods as tangible items. Music that was sold as a CD, and so was subject to VAT, can now be downloaded, and no “good” then arises on which to charge VAT.

Travel and ticketing, software, entertainment (games, gambling and music), insurance, brokerage, real estate services, banking, information, legal services and increasingly health, education and government services are all on the internet. Tax administrators then face three problems: finding when a transaction occurs; finding the place of supply; and finding its value, the consideration.

A further point is that VAT is a real cost for businesses that are exempt and cannot recover VAT on their inputs, such as drug manufacturers. They may look for non-resident suppliers with no fixed place in Nigeria and set up an artificial source of supply abroad, which would defeat the place of supply rule.

Withholding tax

Once the rules on source and destination are clear and e-payments are monitored, withholding tax can be applied on the supply of goods and services consumed in Nigeria. It is also argued that the income tax law should be amended to deal with e-commerce directly.

Customs

The text separates off-line supplies (ordered online but delivered physically) from on-line supplies (digital products delivered electronically). Off-line supplies are handled at the point of importation, with customs duty and VAT, so no new problem arises beyond a great increase in the number of small parcels, which means the customs service needs more resources.

It also notes the 1999 Kyoto convention of the World Customs Organisation on streamlining clearance, and the debate on the low value limit of $50 below which duty and sales tax are not charged, with a suggestion that it might be raised to $150.

On-line supplies of digitised information are a serious challenge to the place of supply rules and could lead to no tax or double tax, because the supplier needs no physical presence.

The challenges for the revenue service

1. Establishing identity. The revenue must know whether a transaction has happened, where and by whom. It may be impossible to find the real owner of a website, because it is easy to use a website without being traced, and the link between a domain name and the location of the activity is weak. The OECD recommended that businesses in electronic commerce identify themselves to the revenue as conventional businesses do. That depends on voluntary compliance, so it needs support, such as authority for the revenue to use records of internet protocol numbers to confirm identity.
2. Establishing location. A person can set up an internet address in almost any country, whatever his residence or the source of his activity. This can be used to claim a low or nil withholding tax rate on royalties, for example by a seller of digital photographs who sets up an address in a treaty country without any other link to it. Payers will need procedures to verify the identity of the other party before giving treaty benefit, and the internet presence can be moved easily to avoid undesired tax effects.
3. Obtaining documents and proof. The revenue has strong powers within Nigeria, but for activity abroad it must use the exchange of information provisions in treaties. Where records are kept in a tax haven it is hard to obtain them. The law on record keeping should be amended, and the onus of production must stay with the taxpayer, so that lost encryption keys are no excuse.
4. Impact on VAT. As above: intangibles, place of supply, value.
5. Impact on customs. As above: volume of small parcels and the low value limit.

Should e-commerce be taxed?

The information technology sector grew without state support, so some argue that e-commerce should be left tax free by law or by inaction. The argument is that profit from e-commerce should be taxed, for these reasons:

1. Benefit theory. A state’s right to tax rests on the benefits and services it gives to those who deal with it. In e-commerce the legal framework, the consumer base, stable exchange rates and economic stability are equally used, so the state should be paid for them.
2. Neutrality. Economic processes should not be affected by tax. The tax liability should not depend on whether business is done electronically. A traditional bookshop pays tax on its profit, so an online book retailer should too.
3. Vertical equity. E-commerce cuts the cost of procurement, processing and delivery for goods such as software, financial services and music. Exempting it would tax the traditional trader who earns less and exempt the e-trader who earns more.
4. Tax is not a constraint. E-commerce has grown without parallel in developed and developing countries, so taxation does not prevent its growth.
5. Against the spirit of reform. Infant industries given special treatment rarely grow up, and an exemption would draw businesses to restructure as e-commerce to avoid tax and erode the revenue base.

Taxing problems of electronic transactions: the steps

The process is: identify the taxpayer (the domain name usually identifies the business); decide the jurisdiction (residence or source); characterise the income; assess; and collect. A country may tax on the ground of residence, because the person receives its protection and is closely tied to its life, or on the ground of source, because the activity that produced the income took place there.

Most countries use both: a resident is taxed on global income with credit for source taxes, and a non-resident on income arising in the country. Double taxation arises from conflicts of residence and source, and double taxation avoidance agreements, based on the OECD Model, are meant to prevent it.

Nigeria uses the 183 day test for individuals under the First Schedule to the Personal Income Tax Act and the place of control and management for companies. For electronic commerce it is almost impossible to know where a decision was taken, so the place of effective management is hard to determine.

Alternative approaches to taxing e-commerce

Enforcement issues

• Identity and location of the parties. The customer is anonymous to the server and the server does not know the customer’s location. Australian experience showed that identity and location can often be traced.
• Anonymity of transactions and accounts. Electronic books can be hidden or stored abroad, and third party information is reduced as the internet removes intermediaries.
• Transfer pricing. Not created by e-commerce, but more complex, because speed and borderless mobility make it hard to measure each member’s contribution; international guidance is needed.
• Online delivery and e-cash. When a foreign supplier delivers online and is paid electronically, it is hard to collect direct or indirect tax; withholding through many small consumers is administratively impossible; e-cash is a more serious challenge.
• Place of contract. The place where the contract is made and where title passes decide where income accrues, but with offer and acceptance on a network the place is not known under the traditional rules.

1. Withholding = 5% × ₦300 million = ₦15 million, withheld by the payers.
2. The seller’s sales are below the threshold, so it can claim a refund if it shows it is taxed at home.
3. If its sales were ₦600 million, above the threshold, the amount withheld would not be refunded, but it could file on a net basis.

1. Under the old definition of goods as tangible items, no VAT arises on the download, while the same music sold on a CD in a Nigerian shop would carry VAT.
2. This is the revenue leakage that arises, and it is why countries have changed their place of supply and registration rules for digital services.

How e-commerce works: the three parties

Electronic commerce over the internet is conducted through global computer networks and generally involves three parties: the internet service provider (ISP), the trader and the customer. The ISP supplies the connection and often the hosting, the trader offers the goods, services or content, and the customer orders and pays.

E-commerce activities fall into categories that produce online revenue:

• the sale of physical goods ordered online and delivered by post or courier
• the sale of digital products delivered by download or streaming (software, music, films, e-books, games)
• services supplied online (travel booking, banking, insurance, education, legal and professional advice)
• advertising on websites and platforms
• commissions and fees earned by platforms that connect buyers and sellers
• the sale or licensing of data

Each category raises a different tax question. A sale of goods that are delivered physically is an ordinary sale with an online order. A download is a supply of an intangible and may be a sale, a service or a licence. A platform fee is a service fee that may arise abroad. An advertisement is a service to a business that may be a Nigerian customer.

The classification decides the tax, which is why character of income matters so much.

A step-by-step method for any e-commerce question

1. Identify the taxpayer. Who is the seller, and where is it resident? A resident company is taxed on its worldwide profit; a non-resident only on Nigerian profit.
2. Test the nexus. Does the foreign company have a fixed base, a dependent agent, a single contract, an artificial dealing or a significant economic presence in Nigeria? If none applies, there is no income tax on the business profit under the Act.
3. Check the treaty. If the seller is resident in a treaty country, the treaty may limit Nigeria’s right to tax business profit to a permanent establishment. A website alone is not one; a server may be, if it does more than preparatory or auxiliary work.
4. Characterise the income. Business profit, royalty, technical fee, dividend or interest. The class sets the sourcing rule, the net or gross basis and the withholding rate.
5. Consider VAT. Is it a supply of goods or services consumed in Nigeria? Where is the place of supply, and what is the value?
6. Consider withholding tax and customs. Is a Nigerian payer required to deduct tax on the payment? Do duty and VAT apply on import of a physical parcel?
7. Check enforcement. Can the revenue identify the party, find its records and collect the tax?

Residence and source: two bases, one conflict

A conflict arises when the residence country taxes the world income of a company and the source country taxes the same income at source. Double tax avoidance agreements settle this by priority to the source, then credit or exemption in the residence country. For individuals, residence in Nigeria follows the 183 day test (the First Schedule to the Personal Income Tax Act).

For a company, it follows the place of control and management. An individual who runs an online business from Nigeria for a foreign market is therefore taxed as a resident on world income. A foreign individual who runs one from abroad for Nigerian customers is, without a presence here, outside the old rules and is caught only by the significant economic presence rules for companies and by deduction at source.

Digitisation and the classification of income

Digitisation makes it harder to say whether income is a sale, a service or a royalty. If a customer downloads software and may use it, has a licence been granted (royalty) or has a product been sold (business profit)? If a customer accesses software on a remote server and never downloads it, is that a service? The treatment can differ between countries.

If the seller’s country treats the payment as business profit (taxed only at home) and the buyer’s country treats it as business profit with no permanent establishment, neither taxes it. If one treats it as a royalty and the other as business profit, both may tax it. Such mismatches are a main source of non-taxation and double taxation.

Source countries want a wider royalty definition and withholding tax regime to protect their base, while residence countries prefer classifications that keep the taxing right at home. The OECD commentary lists 28 categories of passive e-commerce income to give a common standard, but not all countries accept it.

1. As a service fee (business profit): taxed in Nigeria only if the foreign company has a permanent establishment or a significant economic presence here.
2. As a technical service fee: it is a payment for technical services to a person outside Nigeria, which is within the significant economic presence rule for services, and withholding tax is the final tax if no fixed base or agent is present.
3. As a royalty (if it is a licence to use software): subject to withholding tax at source on the gross amount.
4. The analysis depends on the contract: what the bank receives, and whether it gets a right to use a copyrighted programme or a service that the supplier performs.

VAT in more detail

VAT has three practical questions in e-commerce: when the supply occurs (the time of supply), where it occurs (the place of supply), and how much it is (the value). Under the destination principle, VAT belongs to the country where the goods or services are consumed. In ordinary trade, the place of supply is easy to find, because goods move and the supplier is known.

For online services consumed by a Nigerian customer, the supplier is abroad and may have no registration. If the supplier does not charge VAT, the Nigerian customer, a business, can account for it by self-assessment (reverse charge), but a private consumer will not, and tax is lost.

There are three leakages:

• digital goods that are not “goods” under the Act
• services bought from abroad by exempt businesses that cannot recover VAT and so prefer a foreign supplier
• the very large number of small cross-border purchases by consumers

1. The value for VAT is the price plus charges and costs up to the place of importation: ₦900,000 + ₦50,000 = ₦950,000, plus any duty.
2. VAT = 7.5% × ₦950,000 = ₦71,250, collected at import with the customs duty.
3. The online order did not remove VAT, because the goods are physical and delivered in Nigeria.

1. The service is used in Nigeria, so the company self-accounts for VAT: 7.5% × ₦20,000,000 = ₦1,500,000.
2. If it makes taxable supplies it can claim the same sum as input tax, so the net cost is nil. An exempt company cannot, so VAT is a real cost, which is the incentive to move purchases abroad.

Withholding tax in more detail

Withholding tax is the easiest tool to collect from a non-resident. The Nigerian payer deducts tax at source when it pays a royalty, technical fee, interest or other qualifying payment to a foreign supplier, and remits it. For a non-resident with no fixed base and no agent, the deduction is the final tax on the income. It does not need the foreign company to register or file.

Its weakness is that it works only where the payer is a Nigerian business that knows what it is paying for. It does not reach a payment by a private consumer, such as a card payment for a download or a streaming subscription, which is why the significant economic presence rules and registration for VAT are needed too.

1. Tax deducted.
   10% × ₦50,000,000 = ₦5,000,000, remitted by the Nigerian company.
2. The foreign firm receives ₦45,000,000, and the ₦5,000,000 is its final Nigerian tax if it has no fixed base or agent here.

Ready-made answers to the questions the exam asks

The questions on this topic are nearly always essay questions that ask you to explain, discuss or state. These outlines give the points that carry marks. Write each point as a heading in a sentence and add one line of explanation.

1. Discuss the challenges that e-commerce poses to the tax system

Open by saying that the tax system rests on physical presence, residence and tangible goods, and that e-commerce weakens each.

Then give the challenges:

• identity, because a website owner may not be traceable and a domain name does not show where an activity takes place
• location, because an internet address can be set up anywhere, which allows a seller to claim treaty rates of withholding tax on royalties without any real link
• documents and proof, because records can be encrypted or stored in a tax haven and evidence from cyberspace may not satisfy the standards of the law
• characterisation of income, because digital transfers blur sale, service and licence
• permanent establishment, because the concept needs a fixed place
• VAT, because the Act is written for tangible goods, the place of supply is hard to find and value is hard to fix
• withholding tax, because it is hard to impose on small consumers and e-cash
• customs, because of the volume of small parcels and the low value limit
• transfer pricing, because group dealings are faster and harder to measure
• enforcement, because of anonymity and e-cash

Close with the response: amend the law, monitor e-payments, require identification, adopt the OECD approach and use significant economic presence rules.

2. Should e-commerce be taxed?

State the view that it should, and give the five arguments in order:

• benefit theory (the state provides the legal framework, consumer base, stable currency and economic stability)
• neutrality (online and traditional business should pay the same tax, such as the bookshop and the online book seller)
• vertical equity (e-commerce cuts costs, so exempting it taxes the less profitable trader and spares the more profitable one)
• no constraint (e-commerce has grown fast in rich and poor countries despite tax)
• against reform (infant industry protection rarely ends and businesses would re-label themselves as e-commerce to avoid tax)

Conclude that the real task is how to tax it, not whether.

3. Explain the approaches to taxing e-commerce

Give the three approaches with a line each on what, benefit and weakness: base erosion (a single rate of withholding on payments that erode the source base, simple but leaves the permanent establishment concept untouched), virtual permanent establishment (remove the need for a fixed place and tax core activity at source, neutral but no agreed nexus standard and hard to attribute profit), and refundable withholding (a uniform rate on all electronic income, refundable below a sales threshold, with no refund and a net-basis return above it, a hybrid and stable basis).

Add that Nigeria has taken a different route, a significant economic presence test with a ₦25 million threshold, and fair percentage assessment of turnover.

4. Explain the treaty rules on permanent establishment and e-commerce

Define a permanent establishment as a fixed place of business through which the business is wholly or partly carried on, with a geographical and a time test, and with the place at the disposal of the enterprise. Add the exclusion of preparatory or auxiliary activity and the dependent agent rule, which does not apply to independent agents.

Then give the four OECD conclusions:

• a website is not a permanent establishment
• hosting does not give one
• an ISP is not a dependent agent except in very unusual cases
• a server can be one only if its functions go beyond preparatory or auxiliary work

Then list profits that can be taxed with no permanent establishment: immovable property, entertainers and athletes, dividends, interest, royalties and technical fees at a limited rate, some insurance, some services over 183 days.

5. State the transfer pricing methods

Give the three traditional methods (comparable uncontrolled price, resale price and cost plus) and the two profit methods (profit split and transactional net margin), say that the traditional methods are preferred and the profit methods are a last resort. Add that e-commerce makes the contributions of each group member harder to measure.

6. Explain significant economic presence

State the ₦25 million threshold, the six activities (streaming and download, data transmission, intermediation, supply of goods and services, a .ng domain, and sustained interaction including naira prices and payment), aggregation of connected persons, the separate services rule with its three exceptions (employee payments, teaching, and a foreign fixed base of a Nigerian company), final withholding tax for non-residents with no fixed base or agent, and the fair percentage of attributable turnover.

7. Distinguish between e-commerce and e-business

Use the table: e-commerce is buying and selling over the internet, narrow, usually a website; e-business covers all processes, including procurement, customer education and supplier search, uses CRM and ERP, and can run on the internet, an intranet or an extranet. E-commerce is a subset of e-business.

Common traps in e-commerce questions

• Saying that a company with a website in Nigeria has a permanent establishment because the website can be seen here. It does not, on the OECD view.
• Applying the ₦25 million test to profit instead of gross turnover or income.
• Leaving out the aggregation of connected persons.
• Treating all online income as business profit when the question describes a licence to use software or images.
• Charging VAT on a download as though it were goods, without mentioning that the Act’s idea of goods is tangible.
• Forgetting that a resident company is taxed on world income while a non-resident is taxed only on Nigerian profit.
• Giving only a list of problems without the solutions.

Solutions: what the revenue can do

1. Amend the law so that the income tax and VAT laws deal with electronic transactions directly, and issue an official circular on their treatment.
2. Register foreign suppliers: require businesses in e-commerce to identify themselves as businesses in conventional trade do, and give the revenue access to internet protocol number records.
3. Monitor payments through links between the e-payment systems, banks and the revenue, and match them with the annual returns of companies.
4. Deduct at source through Nigerian payers and card and payment processors, so that tax is collected without the foreign seller’s co-operation.
5. Use treaty exchange of information to get records held abroad, and keep the onus of production on the taxpayer, including encrypted records.
6. Adapt VAT by redefining supplies to include digital goods and services, setting a clear place of supply rule, and requiring non-resident suppliers to register.
7. Adapt customs by equipping the service for small parcels, and by reviewing the low-value limit.
8. Co-operate internationally on transfer pricing and the allocation of profit, through the OECD.

1. Nexus. It acts as an intermediary on a digital platform linking Nigerian suppliers and customers and prices in naira, and its income is above ₦25 million: a significant economic presence.
2. Treaty. Under the treaty, business profit is taxable here only through a permanent establishment. A website alone is not one, so the treaty may protect it, although the Nigerian law now takes the economic presence view. The answer must say that a treaty can override the domestic rule where it applies.
3. Character. The commission is a fee for intermediation, so business profit and not royalty.
4. VAT. The commission is a service consumed in Nigeria and VAT is due; the platform should register, or the Nigerian users that are VAT-registered account by reverse charge.
5. Enforcement. The revenue should use registration, payment monitoring and exchange of information.

Short questions and answers for revision

A one-page summary to learn before the exam

1. Meaning. E-commerce is buying and selling online; e-business is all business online.
2. Law in Nigeria. Section 9 taxes profits from Nigeria; section 13(2) taxes foreign companies through a fixed base, agent, single contract, artificial dealing or significant economic presence.
3. Significant economic presence. ₦25 million, six digital activities, connected persons added, services rule with three exceptions, final withholding tax, fair percentage.
4. Treaty. Non-residents are taxed on business profit only through a permanent establishment; website no; server only beyond preparatory work; agent with authority yes; tie-breaker is the place of effective management.
5. Profit. Separate entity and arm’s length: CUP, resale price, cost plus, profit split, net margin.
6. Source before residence. The treaty gives priority to the source, then the permanent establishment country, then residence.
7. Income tax problems. Identity, location, documents, characterisation, permanent establishment.
8. VAT problems. Tangible goods, time, place and value of supply, exempt businesses buying abroad.
9. Customs. Off-line parcels (volume) and on-line digital supplies (place of supply).
10. Case for tax. Benefit, neutrality, equity, no constraint, reform.
11. Approaches. Base erosion, virtual permanent establishment, refundable withholding.
12. Enforcement. Identity and location, anonymity of accounts, transfer pricing, online delivery and e-cash, place of contract.

A candidate who can reproduce this summary and expand each line into a sentence or two has the content for any question the examiner can set on e-commerce taxation in this paper.

Three more points to close the topic

Foreign examples. Many examples in this area come from OECD papers and academic writing in other countries. The exam expects you to apply the principles to Nigeria: refer to sections 9, 13 and 30 of CITA, the VAT Act, the withholding tax rules and the Finance Act 2021 where you can, and use the foreign examples only to illustrate.

Tangible and intangible. The point behind most of the VAT discussion is that old tax law is written for things you can touch. The new economy sells things you cannot. A simple sentence to use in an answer is that the law taxes what is delivered, while the market now sells what is downloaded.

Neutrality. The aim of every reform is that two businesses selling the same thing, one in a shop and one online, pay the same tax. If a question asks you to evaluate a reform, test it against that aim: does it tax the online seller the same as the shop, can it be administered, and does it leave room for avoidance?

1. Neutrality: the online seller pays tax on Nigerian profit, as a shop would.
2. Administration: the threshold is easy to test, but the revenue must find the turnover, which needs payment monitoring.
3. Avoidance: splitting among connected companies is blocked by aggregation.
4. Conclusion: a workable rule, which depends on registration and data.

The position from 2026

The Nigeria Tax Act 2025 widens the taxation of non-residents.

A “force of attraction” rule lets certain activities of a non-resident or its related parties be taxed as part of its permanent establishment even if they are not carried out through it; profits from engineering, procurement and construction contracts can be taxed in Nigeria though some work is done under separate contracts or abroad; and a non-resident with a taxable presence pays at least the withholding tax rate or 4% of its Nigerian income.

Profits from digital and virtual assets are taxable, and VAT e-invoicing and fiscalisation are mandatory. Use the significant economic presence rules above for periods before 2026.

Worked examples

1. It supplies streaming services to persons in Nigeria and bills in naira, which are two of the listed activities.
2. Its Nigerian income of ₦40 million is above ₦25 million, so it has a significant economic presence.
3. The profit attributable to Nigeria is taxable, and the Service may use a fair percentage of that turnover.

1. The activities of connected persons are added together: ₦32 million.
2. That is above ₦25 million, so the test is met.

1. It gives professional services to a Nigerian resident, so it has a significant economic presence.
2. Withholding tax on the payment is the final tax, if the firm has no fixed base or agent here.

1. A payment to an employee under a contract of employment does not create a significant economic presence.

1. The payment is for the right to reproduce the image, so it is a royalty, which is taxed where the intellectual property is used and may bear gross withholding tax.
2. If the same agency had sold a printed photograph, it would be business profit, taxed on a net basis only through a permanent establishment.

How to score full marks

• Define e-commerce and distinguish it from e-business in a short table.
• State the six digital activities and the ₦25 million test.
• Link each problem to the tax it affects: income tax, VAT, withholding tax or customs.
• Give the case for taxing e-commerce in the order: benefit, neutrality, equity, no constraint, reform.

Common mistakes in the exam

• Treating e-commerce as the same as e-business.
• Saying a website is a permanent establishment.
• Forgetting that connected persons are added together.
• Giving VAT on digital services without the place of supply problem.

Quick revision

• Significant economic presence: ₦25m, six activities, connected persons added.
• PE: a website is not a PE; a server may be, if beyond preparatory work.
• Four approaches to reform: base erosion, virtual PE, refundable withholding, neutrality.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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