Introduction

Historically, commercial transactions were undertaken with the traditional perception of a market in mind and taxation of these market activities has been a source of government revenue. Global industrialization and efficiency in the factors of production and distribution of goods and service has significantly altered the primordial perception of a market from being a designated location for exchange of goods and services to boundless geography underpinned by daily human interactions in search for ways to meet their basic needs. This trend is the same with both developed and developing economies like Nigeria.

Unsurprisingly, technology has led the way in providing a platform for these voluminous and boundless transactions to happen leading to the birthing of a system of trade known as e-commerce which has made international trade easier, faster and less cumbersome while at the same time boosting the per capita income of participants therein. Not without its casualties, the laws on taxation in several jurisdictions have fallen prey to the fluidity of such transactions making it apt to give the subject a critical examination through the lenses of relevant statutes.

Some Relevant Taxes Applicable to Commercial Transactions Under Nigerian Laws

The participants to these transactions may be:

1. Business entities;
2. Individuals

Value Added Tax

In some quarters, VAT is considered an alternative to business income tax and  is territorial in nature. The Federal Inland Revenue Service Information Circular 9304[1] states that “supplies made outside Nigeria” are outside the scope of Nigerian VAT. It is payable in the jurisdiction where consumption rather than production occurs; thus, it has the intended effect of making exports exempt or zero rated for VAT purposes. Therefore, locally manufactured products are the main beneficiaries.

Section 2 of the Value Added Tax (Amendment) Act 2007 provides that tax shall be charged and payable on the supply of all goods and services excluding some specified goods.

In its interpretation section, the Act defines supply of goods to mean “any transaction where the whole property in the goods is transferred or where the agreement expressly contemplates that this will happen and in particular includes the sale and delivery of taxable goods or services used outside the business, the letting out of taxable goods on hire or leasing, and any disposal of taxable goods”[2]. It is therefore evident that the supplies of goods relates to physical goods. The same interpretation section also provides for the definition of supply of services to include any service provided for a consideration.

In considering the provisions of the Act, we observe that VAT is to be included in the price of the taxable goods or services[3]. Where the transaction is for the supply of taxable goods for consideration other than cash, the value shall be deemed to be its market value[4]. In this instant and bearing in mind the fundamentals of VAT, it can be safely assumed that VAT is payable at the location of supply. Following this, it is also logical to conclude that the fact that an order is made via the internet does not obliterate the incidence of VAT where there is a delivery of the goods.

Subsequently, the Act further provides that the value of imported taxable goods shall be equal to its price which is inclusive of all taxes as well as other charges levied outside Nigeria apart from the VAT and all costs by way of commission and other related costs up to the place of importation be equal to the price.

As in the case of Companies Income Tax, the Value Added Tax Act provides for the registration of a taxable person within six months of the commencement of business[5]. A non-resident company is expected to register for tax using the address of the person with whom it has a subsisting contract[6].

The Act further provides that the value of imported taxable goods shall be equal to its price which is inclusive of all taxes as well as other charges levied outside Nigeria and all costs by way of commission and other related costs up to the place of importation must be equal to the price[7]. Furthermore, the Act provides for the inclusion of tax in the invoice for the supply of goods and services in Nigeria by a non-resident company subject to the condition that such tax shall be in the currency of the transaction[8].

From the foregoing, where there is a supply of goods irrespective of whether the order was made via the internet or through physical contact, we can safely presume that such transaction is VATable. The challenge now becomes taxing the supply of intangible services or goods.

Withholding Tax

This is the deduction of tax by a party making payment on behalf of the receiving party. Such tax may be deducted from rent, interest/royalty[9], dividend, directors’ fees and income from source[10]. This form of tax is more restrictive in nature as it is limited to certain transactions. In the case of deductions on received income, there arises a challenge where both parties are in varying jurisdictions as the paying party who may be in another country is plagued with the problem of remitting the sum to the relevant tax authority. In this case, the principle of withholding tax may not be applicable.

In applying this form of tax to e-commerce transactions, this may be more practical in transactions performed within the country where taxable persons are more inclined to comply with tax legislation.

Income Taxes

It is a matter of fact that government generates revenue via taxation of all economic activity conducted within it. Ideally, before such income is subject to tax there must be a link between the government and such income. The development in the ICT sector as well as its enormous effect on and contribution to e-commerce portends the need for an upgrade of the tax system of any forward looking country to accommodate this new trend. This industry in its own right heralds an opportunity to yield enormous revenue; it therefore behoves on the government to explore the prospects inherent therein.

In tandem with development, oftentimes comes challenges and this emerging market is no exception. The current debate on taxation of e-commerce is sufficient proof to this effect.  Though e-commerce to some extent is testament of growth and advancement in very positive ways; on the flip side, it has succeeded in compounding the existing or traditional tax structure in terms of source of Income and residence principle.

Income taxes are premised on structure as imposition of same is limited to a particular geographical location of a taxable entity with the basic consideration of source of income and fixed base. Section 3 of Personal Income Tax Act 2011 (as amended) Laws of the Federation of Nigeria (PITA) provides for the taxation of income of a taxable person from a source within or outside Nigeria basically from or on in the course of trade. Section 9 of the Companies Income Tax Act 2004 (CITA) expounds on this by subjecting all profits of any company from any trade accruing in, derived from, brought into or received in Nigeria.

Section 6 of PITA, subjects the gains or profits derived from any business or trade carried on both home and abroad to tax with the exclusion of any gains derived from the foreign operations with no fixed based locally. Section 7 PITA and section 13 of CITA 2004, further provide for the tax assessment of a non-resident/non-Nigerian company where the taxable entity has a fixed base for business purposes, does business through an authorized agent and operates a business (contract for surveys, deliveries, installation or construction) in Nigeria.

The above is a clear limitation on the assessment and imposition of tax on a non-resident in Nigeria. The express restriction imposed by “fixed base in Nigeria” has strong tax implications on e-commerce. How then does the Nigerian government impose income tax on a foreign business/individual transacting business via the internet with a Nigerian wherein:

• The non-resident has no fixed place of business;
• Has no agency relationship with any person; and
• The objects of the business do not conform with the relevant income tax legislations.

These queries posit obvious answers that where the above conditions do not exist; the only logical conclusion is that gains from such transaction are a loss to the government tax-wise.

While local transactions are wholly chargeable to tax except where allowances and pioneer status apply, the ability of the relevant tax authority to access and assess chargeable income is put to test. This is the stiffest of all tests as the relevant tax authority is saddled with the responsibility of tracking e-transactions which is a herculean task.

The principles of source and residence have formed the basis for taxation internationally.

The nature of e-trade, whether it is for tangible or intangible goods and services is a key consideration in administering tax on e-commerce related transactions. The European Commission for instance had previously worked on a review of the tax rules of the 6th VAT Directive irrespective of the mode of sale[11]. Subsequently another working paper was done for a review to apply VAT to transactions relating to Internet delivery among others[12].

As part of its efforts, the European Union’s directive requires a non- EU company engaged in the trade of digital goods and services to undertake a VAT registration in an EU member state[13]. Thereby engaging in tax collection and remittance. Though it is conducted on a temporary basis, it is finalized when the EU member state via a “special scheme” arrangement shares the remitted VAT among the different EU states participatory in the sale[14].

The application of the VAT Directive is geared towards ensuring that e-trade is VATable. This system is not without its own challenges, the primary issue being the usual difficulty of observing to self-assessment obligations[15].

Conclusion

E-commerce is an industry patronized by different classes of business because of its wide coverage and the latent revenue inherent in it. Apart from the ever growing size of its revenue, it can also be considered an income injection into the economy. Taxation of e-commerce is however still a grey area in Nigeria. This is evident in the lacuna in our tax legislation.

It is notable that the ease with which e-commerce is transacted poses a major challenge to tax authorities with particular reference to tax enforcement and collection; the sometimes indeterminate location of trading parties complicates issues. The tax payer is not immune to challenges as they often suffer the fate of double taxation and the incomplete provisions of VAT Act has not helped. The latter is the case because Nigeria’s tax structure is physical trade based. Even our direct taxes have not helped as taxation is premised on permanent establishment.

In spite of the arguments in favor of the global nature of e-commerce, it would be foolhardy to ignore the threat posed by this form of trade to unstructured tax regimes. While celebrating globalized and decentralized trade via e-commerce, it is important that besides its ability to cut across cultural, socio-political and varying time zones, we must understand that taxation of e-commerce is an economic necessity which if not properly managed would constitute a revenue loss/leakage to the national income of an economy rather than be of benefit.  The only logical resolve would be a liaison between the e-payment systems, banks, the authority themselves and the annual returns filed by the taxable person.

Further to this, where possible Nigeria’s VAT legislation needs to be adumbrated upon to accommodate the scope of e-commerce while entrenching some of the provisions of the OECD regulations.

[1] .FIRS Information Circular No. 9304  of August 20, 1993

[2] .Section 45  Value Added Tax (Amendment) Act 2007.

[3] .Section 5 (1)(a) supra

[4] . Section 5 (1)(b) supra

[5] .Section 8 of the Value Added Tax Act

[6] .section 10 supra

[7] .Section 6 supra

[8] .section 10(2) supra

[9] .Royalties are subject to Withholding Tax under the Personal Income Tax (Amendment) Act but are excluded under the Companies Tax Act

[10] .Sections 69 – 73 of the Personal Income Tax (Amendment) Act 2011 and Sections 78 – 81 of the Companies Income Tax Act 2007.

[11] .European Commission, Directorate General XXI, Working Paper No 1 ‘Harmonization of turnover taxes’ Working Paper, 8 June 1999. <www.europa.eu.int>

[12] .Proposal for a regulation of the European Parliament and of the Council amending regulation (EEC) No. 218/92 on administrative co-operation in the field of indirect taxation (VAT) and proposal for a Council Directive amending Directive 77/388/EEC as regards the Value Added Tax arrangements applicable to certain services supplied by electronic means’(2000) 349 final, June 7, 2000, Brussels.

[13] .Council Directive 2002/38/EC amending Directive 77/338/EECD; EU (2002), Official Journal of the European Communities.

[14] .Commission Proposal for a Council Directive Amending Directive 77/388/EEC; EU (2002), Official Journal of the European Communities

[15] .Charles E. McLure Jr., ‘The Value Added Tax _in the European Union’