Omo x 1000
The topic is Twitter and Taxes. And you know the latest, don’t you? Twitter was and is still suspended in Nigeria. You know the gist. Nigeria’s Twitter ban came two days after the platform took down a tweet by President Muhammadu Buhari.
Bubu had hinted that he would treat IPOB (Indigenous People of Biafra) and other secessionist groups “in the language they understand”. Twitter claimed the message had been deleted because it violated its rules against “abusive behavior”. Although no direct connection has been drawn, the ban has been said to be in retaliation.
However, the Minister of Information and Culture, Lai Mohammed described the rationale for this ban as “the persistent use of the platform for activities that are capable of undermining Nigeria’s corporate existence”. Hmmm, okay oh.
He also announced that Twitter is not the only platform the Federal Government is trying to regulate as the government intends to license/regulate social media and over-the-top (OTT) operations in Nigeria. This means that foreign social media entities with operations in Nigeria may be forced to register in the country. Yup, domino effect.
Speaking before a house of representatives’ investigative panel last Tuesday, Lai Mohammed said that the government was open to discussion with Twitter and its suspension may be reversed after meeting conditions imposed by the government. What are these conditions?
On June 9, he had briefed journalists on his exact objectives following the ban. He explained that similar platforms (digital service providers and OTT media services) must be made to register in Nigeria. They must have a corporate entity before they can do business in Nigeria. Twitter, especially, must register with the National Broadcasting Commission and pay taxes.
Notably, Lai complained that other platforms like Netflix, Iroko, and Facebook are all doing business in Nigeria, making money but not paying taxes. “They are making billions of naira out of this country and they are not paying tax. That can’t be allowed to go on.”, he cried.
Well, this part is our concern. Does Twitter make revenue from Nigeria? Sure. Does Twitter pay taxes to the Nigerian government? None that we know of. How will Twitter pay taxes in Nigeria? To explain, we would have to begin from the beginning.
The Finance Act 2020
In January 2020, the landmark Finance Act was passed.
The overall purpose of the Finance Act was to amend tax provisions and make them more responsive to the tax reform policies of the Federal Government and enhance its implementation and effectiveness. Several of our tax legislation required alteration, updating. Instead of amending them individually, the Finance Act did it all at once. You get?
One of its landmark provisions was the introduction of a “Significant Economic Presence”. And why is that? In Nigeria, companies are to pay 30% (or 20%) of their profits as Companies Income Tax. You know this. To this effect, there are two kinds of companies – resident and non-resident companies. Resident companies are taxable on their worldwide income while the profits of a non-resident company must be derived from Nigeria for it to be taxed. (Click here to view our previous article on Significant Economic Presence in Nigeria.)
When are the profits of a non-resident company deemed to be derived from Nigeria? Mainly, if they have a “fixed base” (see Section 13 of the Companies Income Tax Act). So foreign companies had to have a fixed base to be taxable. But there lay the problem. Foreign digital companies make profits even in countries where they have no fixed base or any physical presence whatsoever. For example, Twitter. Twitter is on the internet, not in Ebute Meta.
The FIRS (Federal Inland Revenue Service) cannot knock on their door, there is literally no door! The result of earning money in Nigeria without a Nigerian address for FIRS to send your tax assessment to is a continuous loss of revenue for the Nigerian government. So, the Finance Act said stop!
It introduced two new paragraphs to Section 13(2) of CITA which rendered non-resident Companies taxable in Nigeria to the extent that they provide digital services in Nigeria from which profit is attributable and have a “significant economic presence” in Nigeria. A bunch of digital activities were listed. Ain’t got time for that. The question is – what exactly is “significant economic presence”? The Finance Act provided that the Minister would determine this by an Order.
Did the Minister do this?
Significant Economic Presence
In May 2020, the Minister of Finance, Budget, and National Planning (Zainab Shamsuna Ahmed) issued the Companies Income Tax (Significant Economic Presence) Order 2020, to expatiate on the 2019 Finance Act.
Significant Economic Presence (SEP) is a direct replacement for fixed base. It creates a virtual, intangible basis for taxation – because many goods and services are now virtual, intangible. It has been a go-to for many best practices. The European Union, for instance, had conversations with digital companies concerning a significant digital presence. The OCED Action 1 also recommended a nexus test based on the concept of significant economic presence. Israel, India, Italy, and Saudi Arabia have all redefined “permanent establishment” (fixed base) to include digital presence.
The SEP Order specifies two kinds of non-resident companies – digital service providers and non-resident companies that provide technical, management, professional and consultancy services to Nigerian customers. The Order defined digital service providers as non-resident companies whose activities include the following:
– Streaming or downloading services of digital contents,
– Transmission of data collected about Nigerian users generated from users’ activities on websites or mobile applications,
– Provision of goods or services through a digital platform, or
– Provision of intermediate services through digital platforms, websites, or other online applications that link suppliers and customers in Nigeria.
Problem, another problem
Twitter does fall under two or three of these criteria. And again, the Finance Act and the SEP Order have been in existence since 2020. What then is the Minister going on about? Why is Twitter not been taxed already? Why is the Ministry of Information still making preliminary comments on the matter?
Well, because the aforementioned provisions have changed little. You see, the SEP Order was a step in the right direction but it raised practical concerns. First, the order did not provide any guidance on how the profits attributable to the Nigerian SEP of non-resident companies would be determined. I mean, how can we tell the exact amount of profit Twitter generates from Nigeria? Second, how does the FIRS enforce compliance? Non-resident companies are non-resident! That is, outside the territorial reach of the FIRS. Also, how are NRCs who have no form of presence in Nigeria expected to pay? Should they make monthly trips to the country? Is there an online assessment and a foreign bank account? Further, how would the SEP Order be implemented. It is one thing to create a law and an order, it is another matter entirely to effectively and sustainably implement it. These were the issues, people.
Well, maybe Twitter will shoulder these responsibilities and pay up now that it has been banned. The platform has asked to meet with the federal government. The latter has now approved a team of six ministers to oversee the negotiation process.
Six ministers. Six. To. meet. with. Twitter.
Some people have questioned Nigeria’s prioritization of this Twitter issue. Some people oh, not us. With all the insecurity and hyper-inflation going on, regulating Twitter is the federal government’s focus? Some people have also said that regulating Twitter is repressive – another affront on the Nigerian freedom of expression.
Well, what do we know? We’re just tax people. Some people have said that the Twitter ban has significant consequences for the economy though. Paradigm Initiative, a digital advocacy organization, put the cost of suspending Twitter operations in Nigeria at $250,600 per hour. Small and Medium Enterprises, for one, leverage social media to market their products and serve their customers. Meanwhile, SMEs are vital to the growth of the economy, providing as much as 60-70% of jobs. Numbering about 117.4 million, SMEs in Nigeria contribute 48% of national GDP, account for 96% of businesses, and 84% of employment.
Also, tech companies, who have brought increasing investments into the country ($663.24 million in venture capital last year, according to Weetracker) have been given another issue to worry about. Foreign investors will now need more convincing concerning regulatory risks, putting them tech bros in another quagmire.
We don’t know if and when Twitter will pay taxes. But until then, if this ban continues, Nigeria has much to lose. Too much. #KeepItOn?
David Akindolire is a dazzling writer and speaker. He remains keen on futuristic areas of law including taxation and media. He is a currently a student of the Nigerian Law School.