The Vice President, Professor Yemi Osinbajo (SAN) recently declared that the Nigerian government is ready to introduce a new mechanism to widen the tax net. This mechanism involves the collection of taxes on the Nigerian income of global technology giants not based in the country, but with significant economic presence.
According to Section 4 of the Finance Act 2019, âthe finance minister, may by the order of the president, determine what constitutes the significant economic presence of a company other than a Nigerian companyâ.
The Nigerian government is set to utilize this legal provision by taxing profits made in the country by global technology and digital firms such as Google, Twitter, Facebook, Microsoft, Netflix, among others.
Over the years, efforts have been made to widen the tax net, including the creation of the Voluntary Assets and Income Declaration Scheme (VAIDS), which was an attempt to bring more people into the tax net, and hiking the VAT rate from 5.0% to 7.5%. Notably, total tax revenue increased by 59.1% to N5.3tn between 2016 and 2019.
However, due to COVID-19 and the resultant effects on the economy, tax revenues declined by 5.8% to N4.9tn in 2020, driving an urgent need to broaden the tax base.
In our view, given the local reach of the technology giants, the mechanism can potentially yield some results – increasing the revenue contribution from tax and easing the burden on public debt.
However, taking into account the recent Twitter ban, this may send unfriendly policy signals to foreign technology businesses and may have negative implications for already weak FDI flows.
We recommend that the government focuses more on the underlying causes of the countryâs weak tax base and implements policies to improve the ease of doing business, support business growth and attract foreign investors, which strengthens the tax base.