Section 4 of the Finance Act (FA) 2019 amends Section 13 of the Companies Income Tax Act (CITA). The amended section 13(2) deals with the taxation of nonresident companies (NRCs) i.e. companies that transact businesses in Nigeria other than Nigerian companies.

Section 13 taxes four categories of NRCs viz: a company that has a fixed base in Nigeria, a company that operates through an agent habitually, the 3rd limb deals with a situation of one- off contract (Turnkey contract) and finally, the last codifies the arms-length principle under transfer pricing.

In view of global technological advancement, one may rightly argue that the above section does not cater for certain forms of business that can be conducted across borders without any fixed base or movement of any agent whatsoever. It therefore goes without saying that the section has become redundant. It further bugs the mind as to what happens to such cross border transactions which by their nature defy both the residency and source principles of taxation? Classical examples of Facebook and Netflix may be apposite.


As a way forward, the FA in section 4 amends section 13(2) to provide for taxation of digital transactions otherwise known as e-commerce. The said section 4 provides that if a NRC transmits or sends images, audio signals and the likes, to a person in Nigeria, in so far as profit is attributable to such activity then it is without more taxable. Indeed this codifies the position of the Court of Appeal in Vodacom v. FIRS wherein the court held that the transmission of wireless services by a NRC to another company in Nigeria qualified as “VATable” services under the VAT Act. The court went ahead to apply the destination principle and reverse charge principle to make the recipient Nigerian company liable to tax. Now the intriguing dimension under the present scenario is not under VAT. So, it is doubtful whether the reverse charge mechanism or destination principle will apply as far as income tax is concerned.

Furthermore, the Act makes a proviso that for the income of such company to be taxable it must have constituted a significant economic presence (SEP) in Nigeria. What constitutes significant economic presence is neither defined in the FA nor anywhere in the entire gamut of our tax laws. The Act instead leaves it open to the minister of finance to define what constitutes SEP by an Order. One wonders when the minister will make such order. In the interim, it is unclear whether the SEP will be considered on a case to case basis or whether a particular threshold will be set such that if a company reaches that threshold then it qualifies for tax under this Act. These are few questions that agitate the mind including that of possible double taxation.

The above notwithstanding, it is worthy of mention that the FA has done justice to the unclear position of our tax laws in view of technological advancements all over the world. The said section 4 is a welcome development in the sense that it has successfully expanded the tax net and also in tune with modern realities. On the flip side what one sees is that the said section will pose administrative challenges (to the taxman) given the fact that Nigeria is largely underdeveloped and use of efficient data base for the taxation of virtual economy is still new in this part of the world. Put differently, the database structure required to capture the transactions for deducting tax based on digital services is not yet available to us.

Consequent on the foregoing and by way of suggestions, a possible way out might be to first define what constitutes SEP by looking at jurisdictions like India and Egypt. Capacity building of personnel and training on use of modern day technology by the taxman is advised together with adequate funding. Again, the taxman should in the interim come up with notices or circulars on how it intends to tax the digital economy in view of the position of the FA. Of course it is conceded that the above challenges are arising simply because the FA seeks to tax virtual economy under the “income tax head”. Assuming this is provided for under the goods and services tax (VAT) the above challenges will obviously not be there. In view of this, it is further suggested that since the FA has a similar provision under the amendment for the VAT Act then the current section 4 should only be made recourse to in instances where VAT will not apply. This makes for ease of tax administration and in line with the OECD guidelines for GST. Supply of wireless services comes squarely under VAT and the VAT Act should apply and in other to avoid double taxation then this particular provision should be remedial. This suggestion is anchored on the reasoning that the subject under discourse folders on Base Erosion and Profit Shifting which is a global tax epidemic.


The FA is a deliberate attempt to engender ease of doing business in Nigeria and expand the tax net. Projecting into future, there is an indication on the part of government to engage in yearly review of the tax laws depending on the Appropriation Bill for the year. It is expected that this will help mop up all lingering issues like the one under discourse. But as it stands, taxation of digital economy pose challenges to many jurisdictions. Ours may not be different at least for now.


• VAT is a consumption tax which by its nature has a peculiar mode of assessment and remittance. This may not easily apply in the case of income tax.
• Significant economic presence is a bases for taxation of digital economies. It is developed as a mechanism for combating base erosion and profit shifting by the OECD Action Plan 2015. Significant economic presence operates in various industrialized economic jurisdictions of the world including India.