Taxation Of Social Media Activities In Nigeria

The internet has made significant impact on all aspects of human lives. As the world becomes more and more comfortable with virtual interractions, a huge value chain of businesses that transcend continents, borders and geographical locations has been created to cater to the ever expanding human needs. Several studies have confirmed positive correlation between access to the internet and growth in the Gross Domestic Products (GDP) of a nation. This is generally because the internet platform in itself has the capacity to increase efficiency of businesses, growth in market share, enhanced opportunity to reach more people and increased employment opportunities.

Unlike businesses without digital footprints, companies that harness the opportunities provided by the internet have the capacity to earn huge revenue from non-resident jurisdictions, without any physical presence in such countries. For example, Facebook, a giant tech company incorporated in the United State of America (U.S.A) reported a general revenue of $47.5 Billion from the rest of the world, apart from the U.S.A and Canada in 2020, out of the global revenue of $84.16 Billion.¹ Further, in Q1 2021, about 55% of the total revenue recorded by Google was generated outside the USA.² This explains the significant revenue generated by companies that are part of the digital economy.

The Nigerian tax framework for online businesses

In recent times, there has been increased focus from the Nigerian government to ensure online businesses pay their fair share of taxes, in line with the extant provisions of the applicable tax laws. Given its population of over 200 million citizens, with about 62% of this population under the age of 25³ , Nigeria is uniquely positioned to benefit enormously from the world's digital economy.

Taxation of local businesses operating through social media in Nigeria

The digital economy has also given rise to novel business models distinct from the conventional ways of concluding business transactions within the country. These business models allow entities, individuals and enterprises who are Nigerian residents to operate e-commerce and other ancillary businesses through the different social media platforms. Through these media, both incorporated and unincorporated entities disseminate and promote goods and services, advertise on behalf of their principals, engage in brand influencing, plan events via the internet, and negotiate between brands and prospective customers. Upon the discharge of the agreed terms of the sales or services, these entities earn income or revenue in the form of a fee or commission. Thus, the need to pay the applicable taxes on the income earned through these social media platforms becomes critical.

Contrary to recent misconceptions that there are special requirements for local businesses that operate through the social media platforms, Nigeria currently does not have any special regime for these businesses in its taxing framework, separate from what applies to businesses that operate through the conventional means or both. Generally, companies incorporated in Nigeria are liable to income tax on their income, based on the relevant provision of CITA.

Accordingly, any income earned by a company from its social media activities would be liable to income tax at the applicable rate in Nigeria, provided such income is not expressly exempt by the CITA. Meanwhile, zero percent (0%) rate would apply to the taxable income, where such company is a small company and only earns a revenue of ₦25 Million or less within a relevant year of assessment. With an annual revenue greater than ₦25 Million but less than ₦100 Million, the income of such company would be subject to tax at twenty percent (20%) while the thirty percent (30%) rate would apply where the annual revenue is more that ₦100 Million. For resident unincorporated

For resident unincorporated entities in Nigeria, the income generated from the digital activities, as well as those generated from other sources within and outside Nigeria, are taxable under the Personal Income Tax Act (PITA). Section 3 (1a) of PITA, provides that tax shall be payable on any gain or profit from any trade, business, profession or vocation engaged into by these entities. Further, such unincorporated businesses are also required by law to withhold taxes at the required rates on payment to vendors and remit the same to the relevant tax authority (RTA) as appropriate.

Challenges of taxing social media activities in Nigeria and what obtains in other jurisdictions

While the idea of generating additional revenue for the government and widening the tax net is laudable, the implementation of actionable steps required to properly tax social media activities and online busineses can be very challenging. Even though there are existing laws to ensure both resident and non-resident entities (incorporated and unincorporated) pay their taxes, tax administrators at the different levels have to strategically deploy their resources to ensure full compliance with the laws. This is especially because voluntary compliance is key to increased collection of taxes due and this can only be improved if the trust between the government and its citizens is not breached. Therefore, concerted efforts must be shown on the part of the government to maintain the trust of the taxpayers, while the taxpayers continually strive to fully fulfil their civic responsibility, as stipulated by the extant provisions of the enabling laws.

Conclusion

Although, Nigeria currently does not have any special tax regime for social media activities, there are specific provisions in existing laws that fully cover the operations of both incorporated and unincorporated entities, whether resident or non-resident, and these provisions must be properly administered by relevant tax authorities.

Taxpayers should also be encouraged to ensure voluntary compliance through good governance and stakeholder engagements at different fora, while non-compliance must be seamlessly identified and discouraged in line with the provisions of the laws.

Credit: Mondaq Nigeria

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