The digital economy is creating new business models and new kinds of assets while disrupting physical markets. ISAAC ANYAOGU examines Nigeria’s preparedness to meet the complex challenges involved in taxing the digital economy and offers useful models from advanced systems.
Every time you shop on Amazon, Nigeria dies a little – figuratively. What is even more infuriating is that Nigeria isn’t even aware it is dying in instalments – literally.
Twenty-four year old Jane, a consultant, at a suave strategy consulting firm located on Victoria Island, a posh Lagos metropolis (when it is not raining), recently bought an iphone 7 from Amazon, USA, though there are over a dozen high end phone shops around Victoria Island. She paid $800 for the phone which was delivered to her office through a courier service six days later. But Jane has denied the Federal Inland Revenue Service, (FIRS) $40 that would have accrued as 5 per cent Value Added Tax (VAT), a form of consumption tax on products and services, on the transaction.
However, Jane isn’t the only one shopping online, nor is her action unlawful. Ope, Chika, Aisha and Gbadegeshin are now on Amazon and Alibaba loading carts with everything from laptops to Gucci shoes.
You see, the world is a global village, borders are now mostly imaginary, (at least until Trump builds his wall). The herd has been let loose on the communal farmland and things will no longer remain quite the same.
So there is a sea of change underway in purchasing patterns, delivery mechanisms and payment systems around the world. It is driven by digital revolution and occurring on a scale, only imagined as a scene from a fantasy movie only a few decades ago.
According to figures from the National Bureau of Statistics (NBS), a government agency that publishes data for Nigeria, the total value of electronic payment transactions in the banking system stood at N65 trillion in 2016, eight times the value of the national budget.
The chart below depicts data on some of the largest electronic channels, sourced from the Central Bank of Nigeria (CBN). NIBSS Instant Payment (NIP) and Nigeria Electronic Funds Transfer (NEFT), are on the rise while cheque transactions see a decline. NIP and NEFT are products used by corporate organizations to make payments for huge transactions electronically, in line with the cashless policy.
Why the tax authorities should be worried
While Nigeria has woken up to the reality of mobile payment systems, tax authorities still play catch up. But this is not just a national concern, all over the world; tax authorities are tweaking models to plug tax leakages in cross-border transactions. This is because administrating VAT taxes across different tax jurisdictions gets very tricky.
Taiwo Oyedele, head of tax and regulatory services at PwC Nigeria and tax leader for PwC West Africa, explains the dilemma involved when someone buys goods from Amazon, in an interview published in the Nation. “They (Amazon) are supposed to charge VAT but do not even know that there is VAT in Nigeria and they are not even interested.
So the phone is $50 for instance and they ask you to pay just $50. “They cannot put VAT on it. So even if you look at origination and destination principles of tax compliance, which means the VAT, should be collected at destination which is Nigeria but who should collect it?
“The Nigerian tax authorities said Amazon should have charged it and they say go and collect from Amazon. But if you are lucky to even go to where Amazon is, you will be lucky if you come back. This is because; you have crossed your jurisdiction. What power do the Nigerian tax authorities have over an American company in America? No one can ever enforce that law,” said Oyedele.
Yet these kinds of transactions are now mainstream. Global online payment systems company, PayPal, last year ranked Nigeria as the 3rd highest mobile shopper worldwide with estimated 55 per cent of all overseas online purchases in the past 12 months coming from Nigeria.
Efi Dahan, general manager, PayPal Africa and Israel, said mobile shoppers in Africa’s largest economy spent $610 million in 2015 using the payment system, and PayPal has a target of $819 million ahead of 2016 transactions data release.
To illustrate the enormity of these tax leakages, consider if Nigeria could apply 5% VAT on the $819million PayPal projects to achieve in 2016, the country could earn $40.9 million. If it is converted to naira at the CBN rate of N305, Nigeria could have generated N12.5 billion. However this is just the value for PayPal, there other online payment systems in use in Nigeria including Mastercard, SecurePay, Visa, Authorise.Net among others which Nigeria does not get tax benefits from transactions across their channels.
Highlighting the complexity in capturing these transactions, Oyedele further said, “The other option is charging the person who ordered the phone to collect the VAT. Imagine the millions of Nigerians who make purchases from Amazon.
The cost of attempting to collect VAT from them alone will be more than the tax you want to collect.
“This is because, one tax officer must be aware of the phone, where the buyer lives, how much it cost – maybe trying to get information from MasterCard, which is another challenge because they will argue that they have a confidential agreement with their customers and cannot release their information,” Oyedele said.
As result of these complexities in taxing the digital economy, large volumes of money that should accrue to the government are unaccounted for at a time Nigeria sorely needs tax revenue.
How prepared is Nigeria to tax the digital economy?
With an estimated population of 170 million, where young people constitute nearly over 60 percent of the population, Nigeria has over 90 million internet users, more than half accessing the internet through mobile phones.
In February, Facebook said that were over 16 million users from Nigeria with 97 percent assessing it through mobile phones. Already there are thousands of services offered online from pants to penthouses.
The e-commerce appeal is in its promise of effortless, almost seamless transaction, ease of delivery and payment systems.
Sometime ago, Interswtich was almost the default local online payment gateway, now Nigerians are spoilt for choice. Options include: PayAttitude, Paga, Verve, Remita, CashEnvoy, SimplePay and several other platforms operated by banks like Guaranty Trust Bank (GTB) and Access Bank.
But how prepared are the tax authorities to keep pace with this changes at a time fluctuating oil prices questions continued reliance on the commodity for over 80 percent of national revenue?
Worse still, FinTech will yet cause further disruptions in the payment ecosystem. Okechukwu Enelamah, minister of industry, trade and investment said financial services in Nigeria’s digital economy could generate $88 billion and create 3million jobs over the next 10 years during the first Ministerial Meeting of the Friends of ECommerce for Development (FED), which held on the sidelines of the United Nations Conference for Trade and Development (UNCTAD) E-Commerce week in Geneva, Switzerland on April 25.
How do you structure the tax system to get a large portion of this pile of money?
More importantly, how do you plug the current tax leakages in the economy estimated to be around $1 billion from multinational companies alone, to see your way around taxing the new economy?
Nigeria’s tax income graph
In June this year, the Federal Inland Revenue Service (FIRS) announced the introduction of six new electronic tax services (e-services). As part of an integrated tax administration, key processes are planned to be automated to improve transparency, ease and speed of tax administration; for both taxpayers and tax administrators.
FIRS Electronic Tax Process
Tunde Fowler, executive chairman of the FIRS commenting on the electronic tax system said, “the idea behind the six ICT solutions is to make tax payment as easy as ABC, to bring convenience to our taxpayers. The ICT solutions will ensure that taxpayers could pay, get receipt, and get Tax Clearance Certificate (TCC), from the comfort of their homes and offices anytime, anywhere in the world and round the clock. This saves the time of taxpayers, is transparent, fast, easy to use and convenient.”
As a measure to combat tax evasion and avoidance rampant in Nigeria, of which a contributory, causative factor is a rudimentary tax system, the new electronic tax policy is a step in the right direction. However, this measure alone will adequately deal with the complexities involved in administering taxes in the digital economy about as much as a mop stick will aid the hunt of a deer.
“The non-tangible nature of the new technologies affects the ability of the tax authorities to successfully tax digital transactions and leads to a shortfall in fiscal revenue. Governments are therefore trying to reform their tax rules in order to be able to tax part of the profits made by digital companies,” says Virginie Aïdan, a lawyer at Hogan Lovells, an International law firm.
In 2013, the Organisation for Economic Co-operation and Development (OECD) and G20 countries agreed on a 15-point Action Plan to address tax base erosion and profit shifting (BEPS), with the most important issue being to combat the challenges wrought on by the digital economy.
According to Hogan Lovells, the OECD in its 2014 deliverable for Action 1, provides several potential actions to deal with the digital issue, the key ones being: an update of the permanent establishment definition that would take into account the nexus based on “significant digital presence” and the creation of a withholding tax on certain digital transactions.
Other actions include the introduction of a bandwidth or “Bit” tax; and the request for non-resident suppliers to register and account for value-added tax (VAT) in the jurisdiction of the consumer.
Europe has been bullish about taxing the digital economy since 2015. All telecommunications, radio and television broadcasting, and electronically supplied services rendered to a non-taxable person have been subjected to tax in the Member State in which the customer resides, regardless of where the taxable person supplying those services is established.
“In the past, the sale of a digital book by a French supplier to a Belgian customer was subject to VAT at the place of supply, i.e. French VAT at the rate of 5.5%. As from 1 January 2015, such a transaction would be subject to VAT at the place of consumption, i.e. Belgian VAT at the rate of 21%,” says Aïdan
Aïdan further said that France recommended the creation of two specific taxes to deal with the digital economy. There was the ad valorem tax based on revenues (sales or advertising) generated in France.
In this method, the tax rates would be different according to the origin of revenues: those generated by one-time access (e.g. sale of an item) would be taxed at lower rates than revenues generated by data exploitation (e.g. sale of search data to third parties).
The second measure would be a tax based on activity (number of users, flow of data or number of advertisers). It would be based on the collection of data and be calibrated at very low rates.
But if the digital economy is morphing into the real economy going by the sheer volume of activities therein, isolating it from the rest of the economy for special taxes would be difficult.
The OECD in its report on Action 1, of the OECD/G20 BEPS report presents comprehensive details on applying these options to tax the digital economy. This report aided France in introducing a bandwidth or “Bit” tax. It is based on the number of bytes used by the site, although different tax levels would apply depending on the enterprise size or turnover.
Nigeria’s digital economy and the urgency of now Kemi Adeosun, finance minister, on June 14 said that Nigeria has ratified multilateral conventions on tax related treaties to end profit shifting and tax evasion by multinational companies.
“The benefits are that the convention will swiftly modify existing bilateral tax treaties to implement tax treaty related matters in a cost efficient manner, instead of individual negotiations and amendment of the treaty,” said the minister.
Adeosun further said that the treaty will address abuse of tax laws, raise government tax revenue, promote transparency and check illicit financial flows. Analysts say the adoption of ITAS by the FIRS will help achieve the goals of the National Tax Policy (NTP) regarding the automation of the tax system.
There is however, a need for capacity development for tax administrators so they can implement a seamless interface with the different payment systems available.
A survey conducted at a tax stakeholder forum organised by PwC points the way to other reforms required. It found that 70% of Nigerians said they do not pay taxes because the government cannot justify the use. 22.5% said it was due to tax rules that are unclear and compliance process that were too complex. 7.5% said it was due to poor enforcement by tax authorities.
“Interestingly no one thought it was due to the people being too poor or not being aware. Understandably the survey result could have been different if it was conducted outside Lagos but largely the top 3 factors would have nonetheless remained the same,” writes Taiwo Oyedele on the PwC blog.
Another critical success factor in a digital economy is data handling. Elsewhere data is treated with something akin to reverence but Nigeria’s data gathering and storage processes are still not fully integrated. This will require huge investments including for data protection as the recent ransomware “WannaCry” threat showed.
Analysts at Deloitte counsels on the company’s blog, that the FIRS should form “a strategic partnership with institutions which provide platforms to consummate such transactions”, saying it “would ensure that the objective of minimizing and reducing tax leakages especially from the digital economy is achieved at a faster pace.”