President Bola Ahmed Tinubu signed four executive orders including the Finance Act Order 2023, which defers the commencement date of the changes contained in the Act from May 23, 2023 to September 1, 2023. The suspension of 5% Excise Tax on Telecommunication Services and Excise Duty on Locally Produced Products; The suspension of the newly introduced Green Tax on Single Used Plastics and Import Tax Adjustment levy on certain vehicles; Customs Excise Tariff Amendment Order, 2023 which also shifts the commencement of the tax changes from march 27, 2023 to August 1, 2023 to ease tax burden on businesses. The growth in digital activities introduced a digital economy that has a solid potential of increasing the revenue of government vis-à-vis taxation in Nigeria. Foreign institutions have populated the digital scene with the likes of Netflix, twitter, Apple, Amazon, etc. making a fortune from the country. There are challenges for taxation of digital economy which include problem of identifying the income and profits of non- resident companies, lack of accurate data, lack of specialized court, distribution of taxing power between the source and the resident jurisdiction which have continued to be cankerworm eating the deep fabrics of the tax system. Digital companies making so much out of the country’s purse without any corresponding economic return would lead to economic drain and money made within the Nigerian economy is repatriated to foreign countries. This article examine the challenges of taxation of digital economy, how taxation of the sector will generate revenue for Nigerian government and recommended the need for a clear-cut legislation for the provision of a digital tax services and ensure effective implementation of the proposed digital tax legislation.
Key words: Taxation, digital economy, e-transaction, tax compliance, significant economic presence.
The outbreak of the Covid-19 pandemic and its ensuing side effects, including increased inflation, unemployment, public debt, as well as other negative economic indicators resulted in various importunate monetary policy interventions and fiscal policy measures targeted at cushioning the severity of economic decline. These birthed the Finance Act 2023 and other fiscal measures. The Act continues the tax reforms introduced by the finance Act 2021 and provides clarity for ambiguities contained in the preceding law. The new law makes changes with significant implications for non-resident companies and the digital economy 
The growth and development of digital trade facilitates globalization which ensures international development through the establishment of borderless economic relationship. However, concomitant with these advantages are taxation challenges within the international system. These challenges are borne out of the decreasing relevance of physical presence in the jurisdiction of consumers which destabilizes conventional tax regimes which are inherently location based. The proliferation of the aforementioned and the fast -pased nature of digitalization have resulted in critical discussions on the reformation of the Nigerian taxation regime. Globalization plays an essential role in determining the world’s future and digitalization has been identified as one of the primary drivers. 
The world is still only in the early days of the data-driven economy and by the end of 2023, Global IP traffic is projected to reach 150,700GB per seconds fuelled by the expansion of Internet of Things (IOT). The Undeniable reality is that digitalization has changed business models and the world as we know it. The digital economy is now accounting for up to 15% of Global GPD. This expansion has created multiple economic opportunities which were not foreseeable a decade ago. However, concomitant with these opportunities are tax challenges as the proliferation of digital economy resulted in tremendous changes in the “Brick and Mortar” economy which formed the basis of tax laws. The current trend circumvents the requirement of permanent establishment for the completion of transaction by multi-national companies. This development has resulted in severe revenue losses especially for developing countries unable to properly tax the revenue due to the absence of physical establishment within the relevant country. 
These discussions transcend the international tax regime and it appears that a common theme amongst all Government is revenue generation. A position re-affirmed by the court of appeal in SEIPEM CONTRACTING (NIG) LTD V. FIRS & ORS (2018 LPELR-45118) CA where the court reiterated the position of Niki Tobi J.C.A (as he then was) in PHOENIX MOTORS LTD V. N.P.F.M.B
If a statute is revenue based or revenue oriented, it will be part of sound public policy for a court of law to construe the provisions of the statute liberally in favor of deriving revenue by Government, unless there is a clear provision to the contrary. This is because it’s in the interest of the generality of the public and to the common good and welfare of the citizenry for Government to be in revenue and affluence to cater for the people. No court of law should lend its hands to a person or body bent on beating the efforts of Government at collecting revenue.’’
MEANING OF DIGITAL ECONOMY?
A digital economy is economy that is based on digital technologies especially electronically and through the internet such as e-commerce platforms, app stores, rides hailing apps, online advertising, online payment services, cloud computing and participative networked platforms etc 
Digital economy also refers to operations carried out entirely online without necessarily having to come out in contact with any physical structure of the company providing the services i.e Non-resident companies (NRC), some of these operations include e-commerce, online payment services, cloud computing and the likes. 
CHALLENGES FOR TAXATION OF DIGITAL ECONOMY IN NIGERIA
- Absence of Consensus- Based Long- Term Solutions.
While recognizing the work by the Organization for Economic Co-operation and Development (OECD) aimed at creating a uniform approach to taxing multi-national companies especially those operating in the digital space. A uniform approach has not been attained. The absence of a predictable, sustainable and efficient international tax system prescribing uniform rules for the taxation of non- resident companies poses a major challenge. What are obtainable are numerous bilateral treaties and unilateral approaches adopted by various states to prevent tax avoidance by multi-national companies. However, this approach spurred by the failure to deliver a comprehensive consensus-based solution has proven inadequate and detrimental to the respective states. 
- Application of Double Taxation Treaties
The number of bilateral treaties has significantly increased over the last few decades. The United Nations Model Double Taxation Convention between developed and developing countries (UNModelConvention) and the Organization for Economic Co-operation and Development Model Tax Convention on Income and Capital (OECDModelConvention) serves as a model for countries who adopt their provisions in negotiating the terms of their treaties. Tax treaties are inextricably linked with international law and the legal status of tax treaties in a country is subject to the relationship between international and municipal law. Therefore, the status of treaties in a country’s legal system may adversely affect how the bilateral tax treaties are applied which in turn affects the taxation of NRCs 
- The Imposition of Value Added Tax (VAT)
Value added tax is a challenge associated with taxing the digital economy. VAT remains considerable revenue for states and has been impacted by the growth of digital economy. The revenue loss from VAT typically arises from sale of goods and services and intangibles to local consumers from suppliers abroad. In the absence of a practical international framework to ensure VAT collection in the jurisdiction of consumption, most states have suffered tremendous reduction in revenue. A situation that’s further worsened by the difficulty in ensuring VAT is remitted to the relevant tax authority. 
The Federal Inland Revenue Service (FIRS) for example recently partner with Market Traders Association of Nigeria (MATAN) to collect Value Added Tax (VAT) from markets and remit to the agency by deploying technology to enumerate traders for collecting and remitting VAT to the agency. This lead to an expansion of the tax net and increased revenue for the Federation the initiative was crucial to revenue generation and also eliminating multiple taxation in the informal Sector
- Lack of Accurate Digital taxpayer information
Lack of accurate data of these digital non-resident companies is one of the major challenges facing the Federal Inland Revenue Service (FIRS) in taxation of the digital economy. The Companies and Allied Matters Act (CAMA) 2020 makes it mandatory for every foreign company having the intention of carrying on business in Nigeria to take all steps necessary to obtain incorporation as a separate entity in Nigeria. Until so incorporated the foreign company shall not carry on business in Nigeria or exercise any power of a registered company and shall not have a place of business or address for service or processes in Nigeria. If a foreign company fails to comply with the requirements of registration, the company has committed an offence and liable to be prosecuted. 
Moreover, for purposes of payment of tax, digital non-resident companies are required to register with the Federal Inland Revenue Service (FIRS) for company’s income tax. They are also mandated to file their annual returns with audited account showing the profits of the company and also to obtain a Tax Identification Number (TIN) for purposes of paying tax. In practice, a lot of these digital non-resident companies carrying on digital business in Nigeria are yet to register with the FIRS and many do not file annual returns with the FIRS. 
- Lack of Clear- Cut Legal Framework For Taxation of Digital Economy
Prior to the advent of the Finance Act 2019, 2020 and 2021, taxation of digital non- resident companies under the digital economy was captured by the Companies Income Tax Act  but it was drafted in line with the traditional basis of taxation, which makes it impossible to effectively monitor or properly tax companies operating in the digital economy or digital space because having a permanent establishment in Nigeria was the basis of taxation for companies operating within the Nigeria jurisdiction
However, the advent of the digital economy made it possible for digital non- resident companies to conduct business or carry out digital economy activities without the need for a fixed base or permanent establishment thereby making the traditional basis of taxation grossly ineffective. This prompted the legislative and tax administrators to amend the substantive laws and brought the Finance Act 2023 and the Companies Income Tax Act (Significant Economic presence) order 2020. 
The order 13 provides that a company other than a Nigerian company shall have significant economic presence in Nigeria, where it derives gross turn over or income of more than N 25 million or its equivalent in other currencies from any or combination of the following digital activities like streaming or downloading services of digital contents, movies, videos, music, applications, games and e-books. 
The former Minister of Finance Speaking at the opening of the 25th Annual Tax Conference (ATC) which was organized by the Chartered Institute of Taxation of Nigeria (CITN) stressed the need to critically analyze the solutions to address the tax challenges of the digitalized economy as well as the global minimum tax regime. Currently, non oil revenue has become more stable than oil revenue for the first time in history. The FIRScross the N10 trillion mark in revenue collection with total collection of N10.1 trillion. Non-oil taxes contributed 59% while oil tax stood at 41 percent 
- Problem of Identification of Income and Profits these Digital Non- Resident Companies and Persons
Digitalization allows businesses to engage in significant business activities without meeting the requirement of having permanent establishment in Nigeria. The Companies Income Tax (Significant Economic Presence) order provides that a company other than Nigerian company shall have a significant economic presence in Nigeria where it derives gross turn over or income of more than N25 million naira or its equivalent in other currencies through these digital activities it shall be deemed that the company have a significant economic presence in Nigeria and such income and profit made will be subjected to tax in Nigeria.
It therefore follows that non- resident companies do not need to establish a permanent establishment in Nigeria before doing business in Nigeria. Digital economic activities need not be accompanied by a physical presence. This is because these online activities and businesses are done with intangible assets and these intangible assets are easily moved around the world through digital technologies including the satellite. This no doubt makes it increasingly difficult for the tax authority (FIRS) to identify income generated through these intangible assets 
- Lack of a Specialized Court
There is no specialized court that entertains tax matters in Nigeria. The Tax Appeal Tribunal established by the Federal Inland Revenue (Establishment) Act 2011 and the Tax Appeal Tribunal Procedure Rules 2010  is a mere administrative Tribunal set up to determine the correctness of assessment to tax and entertain tax matters. The Federal Inland Revenue Service (FIRS) can appeal to the tribunal against a non- resident taxpayer for non- payment of tax or for non compliance with the provisions of the tax laws and non- resident tax payer can as well appeal to the tribunal challenging an assessment of tax. However, appeals from the tribunal goes to the Federal High Court and further appeal from the Federal High Court goes to the Court of Appeal and then to the Supreme Court.
Tax Appeal Tribunal is not a Superior Court of record like the Federal High Court. That is why all appeals from the tribunal goes to the Federal High Court as against when all appeal from the tribunal moves straight to the court of appeal. The tribunal not being a Superior Court of record will defeat its majority objective which is to maximize the delays and bottlenecks in adjudication of tax matters and improve the tax payer’s confidence in the Nigerian Tax system. When these objectives are not achieved the aim or reason for the creation of the tribunal will be defeated. This is one of the major challenges facing taxation of digital economy in Nigeria. The tax appeal tribunal not being a Court will delay the adjudication of tax matters but when the tribunal is a made a specialized court it will minimize the delays and aid in Nigeria. 
- Distribution of Taxing Rights Between Sources and Resident Jurisdiction
Most digital businesses are usually subject to their home countries (Residents) and market Jurisdictions (Source). Both the source and resident countries are entitled to tax profits. This is one of the major challenges posed by taxing the digital economy. The problem of how taxing rights on income derived from cross-border trade should be allocated amongst participating jurisdictions to address under or over taxation. Given that the transactions require little or no physical presence of the transacting parties, the income from the transaction may not be captured in the jurisdiction from where it is derived. Consequently, there is currently a mismatch between where profits are currently taxed and where and how value is created.
Additionally, the allocation of taxing rights is another core challenge of taxing the digital economy. The OECD in its two pillar policy recognizes the necessity of a contemporaneous development of issues of nexus, profit distribution and allocation of taxing rights particularly among market jurisdictions. This challenge goes to the root of taxing multinational entities and the current international framework is inadequate in ensuring the proper allocation of taxing rights between sources and resident jurisdiction 
- The Significant Economic Presence Order and other provisions of the Nigerian law fail to provide a formula for determining the profits of (NRCs) in Nigeria which would be liable to corporate taxes. The Unilateral approaches can only be effective when there is an operative established formula for allocating taxing rights. It is recommended that Nigeria liaises with other Nations in the international tax community to adopt a particular profit allocation formula which can be subsequently domesticated to address this lacuna.
- The Use of Digital Technology Tools to Increase Tax Compliance
There is need for the Federal Inland Revenue Service (FIRS) to make
adequate use of technology to increase tax compliance. The revenue authorities should use different ranges of technology tools, data source and analytics to increase tax compliance. This is because economic activities carried out under the digital economy are basically done through the internet. These digital non- resident companies do not need a physical establishment in Nigeria before carrying out digital economic activities, for that reason the revenue authority need an advanced technology tool in order to ensure tax compliance in Nigeria. 
- Proper Identification of Digital Non- Resident Taxpayer’s Income and Resources
There is need to identify the income and resources of these taxable digital non- resident companies and persons in Nigeria. In order to achieve an effective tax administration and enforcement under the digital economy, proper identification of these digital taxpayers’ income and resources must be done by the FIRS. The tax Identification Number (TIN) of these digital non- resident tax payers should be made to reveal the income and financial status of these digital non- resident taxpayers. This will help in achieving effective taxation of the digital economy in Nigeria 
- Elevation of Tax Appeal Tribunal to a Superior Court of Record
There is need for elevation of Tax Appeal Tribunal to a Superior Court of record. The Tax Appeal Tribunal is a mere administrative tribunal which do not have the status of a court. An appeal from the tribunal goes to the Federal High Court as a Superior Court of record. When the status of the tribunal is elevated to that of a Superior Court of record, its appeal will go straight to the Court of Appeal instead of the Federal high Court. This will no doubt aid in speedy dispensation of justice in taxation matters 
The world’s largest taxi firm, Uber, owns no Cars. The world’s most popular media company Facebook, creates no content. The world’s most valuable retailer Alibaba carries no stock and the world’s largest accommodation provider, Airnb, owns no property. The global economy has seen rapid growth in digital business transactions especially in the provisions of goods and services through the internet. This rapid growth can be attributed to the fast rate of technological advancement which has changed how business transactions are conducted globally. These economic activities are done by digital resident and non- resident companies with persons that are resident in Nigeria and these digital companies make a lot of profit without remitting the adequate tax due to the government.
Considering the exponential growth of the digital economy and its immense potential it has become imperative for the government and the Nigerian tax authorities to explore more creative approach to ensure effective taxation of the digital economy in Nigeria. Tax changes were intended to raise revenue while addressing important public health and environmental concerns. However, the lack of adequate clarity on the implementation of the changes will result in significant challenges for affected business including rising costs, falling margins and capacity underutilization.
Nigeria ranks very low on the global ease of paying taxes, while the country’s tax to the gross domestic product ratio is one of the lowest in the world. This has led to an overreliance on borrowing to finance public spending which in turn limits fiscal space as debt service costs consume a greater portion of government revenue, resulting in a vicious circle of inadequate funding for socio-economic development. The reforms of taxation in the country reflect commitment to addressing these challenges and bringing about transformative reforms in fiscal policy and taxation.
HASSAN SADISU IMAM is a Lawyer who graduated from the prestigious Ahmadu Bello University Zaria, Kaduna, Nigeria. He has a keen interest in Technology and Innovation Law. He has authored many articles on diverse contemporary legal issues; He can be reached via;
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- NWLR (1993) pt. 272-718
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- Temiloluwa Olowoye ‘’ Taxation of Digital Economy in Nigeria: Gaps and Realities’’ June 25, 2022 at https://lawpavilion.com/blog/taxation-of-digital-economy-in-nigeria-gaps-and-realities/
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- Op. Cit. at page, 4
- Unini Chioma ‘’ FIRS, Police Move against Multiple Taxes’’ https://thenigerialawyer.com/frs-police-move-against-multiple-taxes/ June 23, 2023.
- Op. Cit. at page, 5
- Companies Income Tax (Amendment) Act 2007 ss9-13
- OP. Cit. at page, 6
- Companies Income Tax (Significant Economic Presence) Order 2020. S.1 (1))
- Ibid S. 1(1) (i)
- Unini Chioma ‘’ Taxation of Digital Economy Critical, Problematic, Seeks Guidance From Tax Professionals’’ May 10, 2023 at https://thenigerialawyer.com/taxation-of-digital-economy-critical-problematic-seeks-guidance-from-tax-professionals-fg/
- Op. Cit. at page 7
- Federal Inland Revenue Service (Establishment) Act2007 S.59 & Tax Appeal Tribunal Procedure Rules 2010
- Op. Cit. at page 8
- Addressing the Tax Challenges of Digitalization of the Economy- Policy Note, OECD/G20 Base Erosion and Profit Shifting Project, May, 2019 at https://www.oecd.org/tax/beps/policy-note-beps-inclusive-framework-addressing-tax-challenges-digitalisation.pdf
- Meshach Nnama Umenweke, etal ‘’ Appraisal of the Challenges for Taxation of Digital Economy in Nigeria’’  UNIZIK, LAW JOURNAL. At https://www.journals.ezenwaohaetorc.org/index.php/ULJ/article/view/2277
- Ibid at page, 9
- Ibid at page, 10