Interestingly, the challenges posed by the digital economy to tax authorities are not peculiar to Nigeria. The European Commission set up an Expert Group on Taxation of the Digital Economy to examine the key issues related to taxing the digital economy in the European Union and to present their ideas on the best approach to various challenges and opportunities in this dimension of business transactions.
The digital economy is sometimes referred to as the “new economy”. It is a convergence of communications, computing, and information. This implies a structural shift from the industrial economy toward an economy characterized by information, intangibles, and services, and a parallel change toward new work organizations and institutional forms.
The essential elements of the digital economy include:
Thus, a widely distributed access to the networks, the intranet and Internet, and of skills to live and work in the Information Society, is the basis for the digital economy. In a digital environment, the Internet's growth and e-commerce begins to create fundamental change to government, societies, and economies with social, economic and political implications (Sushil K Sharma, 2006). In a digital environment, the Internet's growth and e-commerce begins to create fundamental change to government, societies, and economies with social, economic and political implications (McGarvey, 2001).
The rapid growth in information and communications technology (ICT) in Nigeria has brought with it boundless opportunities and changes in the way we do business. Today, a significant number of transactions in Nigeria (sale and purchase of goods and services) are consummated using mobile devices and online payment platforms. This is broadly referred to as electronic commerce (e-commerce).
The e-commerce story in Nigeria started during the early part of the 21st century and its development has steadily been on the rise. This has been re-echoed by the Central Bank of Nigeria's recent implementation of the cashless policy with one of its aims being to encourage more electronic-based transactions (payments for goods, services, transfers, etc.).
Whilst there are numerous benefits of e-commerce, the paradigm shift from a physical to an 'invisible' business framework comes with its challenges. One of these challenges is tracking transactions especially for the purposes of taxation.
The drive towards growing non-oil tax revenue (through fiscal optimization) and eliminating leakages are not mutually exclusive objectives. Thus, the process of diversifying the revenue base of the economy can only be further complemented by the choices the Federation makes to arrest revenue leakages from the digital economy.
The inability to adequately capture the quantum of attendant direct and indirect taxes payable on ecommerce transaction has left leakages in the tax system. Whilst this is by no means a problem created or condoned by Federal Inland Revenue Service (FIRS), there is little doubt that a strategic partnership with institutions which provide platforms to consummate such transactions would ensure that the objective of minimizing and reducing tax leakages especially from the digital economy is achieved at a faster pace.
Interestingly, the challenges posed by the digital economy to tax authorities are not peculiar to Nigeria. The European Commission set up an Expert Group on Taxation of the Digital Economy to examine the key issues related to taxing the digital economy in the European Union and to present their ideas on the best approach to various challenges and opportunities in this dimension of business transactions. The Group presented its final report to the Commission sometime in May, 2014.
Relevant conclusions from the report include:
The Organisation for Economic Cooperation and Development (“OECD”), on 16 September 2014, also released a report on Action 1 of the OECD/G20 Base Erosion and Profit Shifting Project (“BEPS” Project). The report is meant to address the challenges of digital economy and identify potential solutions to restore tax revenue of countries. There is thus an avalanche of approaches that Nigeria can leverage to capture its share of tax revenue from the digital economy.
Presently, FIRS has adopted the ITAS, an electronic filing platform as an indication of its seriousness to implement the aspirations lucidly expressed in the National Tax Policy (NTP) regarding the automation of the tax system. The NTP expects that “all processes starting from registration of taxpayers, filing of returns, audits and investigations, payment of taxes including correspondence with taxpayers will become automated. Where there are gaps in current tax laws or where the laws do not support the use of such systems, necessary amendments shall be made to ensure that the use of the systems are in line with the law”.
The implication of this for the digital economy is two-fold. On one hand, full (or substantial automation) of the tax processes or system increases the degree of exposure of tax officers, administrators, taxpayers and other stakeholders in the use and mastery of those processes. On the other hand, it enhances the prospects of positioning the tax system and its electronic platforms for a robust and seamless interface with diverse payment platforms which can facilitate tracking of electronic transactions liable to tax in Nigeria.
Whilst it is tempting to assume the time is not ripe enough to mobilise resources to confront tax leakages from the digital economy (probably because there is evidence that FIRS is yet to maximize tax revenue from the registered taxpayers in the non-digital business front), the more reasonable course is to seek to deal with the tax leakages from the digital business simultaneously. The increasing number of business transactions that are consummated over digital platforms show that this is the way of the short to medium term future of business interactions.