PROSPECT AND CHALLENGES OF DIGITAL TAXES IN THE 21ST CENTURY

1. WELCOME
Prof. Godwin Emmanuel Oyedokun
ND (Fin), HND (Acct.), BSc. Ed (Acct.), BSc (Acct. & Fin.), MBA (Acct. & Fin.), MSc (Econs), MSc. (Acct.), MSc. (Bus & Econs), MSc (Tax), MTP (SA), PhD (Fin),
PhD (FA), PhD (Acct), ACIB, ACS, ACIS, ACAMS, ABR, CICA, CFA, CFE, CIPFA, CPFA, CertIFR, IPA, MNIM, FCA, FCTI, FCNA, FCFIP, FCE, FERP, IFA, FFAR
godwinoye@yahoo.com
+2348033737184, +2348055863944 & +2348095491026
Professor of Management & Accounting
Lead City University, Ibadan, Nigeria.

2. PROSPECT AND CHALLENGES OF DIGITAL TAXES IN THE 21ST CENTURY
BY
PROFESSOR GODWIN OYEDOKUN
BEING A PAPER PRESENTED AT THE 23RD ANNUAL TAX CONFERENCE
OF THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA HELD AT
UMARU MUSA YAR’ADUA HALL, MURTALA MOHAMMED SQUARE,
RACE COURSE KADUNA DATED FRIDAY, 30TH OCTOBER 2020.

3. CONTENT
 INTRODUCTION
 DIGITAL SERVICES
 DIGITAL SERVICE TAX
 INTERNATIONAL DEVELOPMENTS CONCERNING
TAXATION OF DIGITAL SERVICES
 PROSPECTS OF DIGITAL SERVICE TAX
 CHALLENGES OF TAXING THE DIGITAL SERVICES
 CONCLUSION AND RECOMMENDATION

4. INTRODUCTION
 The twenty first century society birthed technology which today is transforming many
aspects of how business activities are conducted, as well as the way tax authorities and
governments administer various taxes imposed on business activities globally.
 The huge transformation and vast change brought about by technology is the manner
business transactions are conducted these days. This brings about both opportunities as
well as challenges for governments of developing economies.
 One positive effect of the introduction of digital business is that it has created, an
opportunity for governments to raise additional revenue for development. However, the
revenue generating opportunities presented by digital business demands a change in the
tax system and nature of taxation policies, through the development of a universal new
range of tax systems to support the development and implementation of taxation policies
(Richard & Subhajit, 2002).

5. INTRODUCTION
 The digitalization of the economy has been a key focus of tax debates in recent years.
Political debates have focused on the differences between taxing physical business
operations and virtual operations.
 These debates have intersected with multiple layers of tax policy including consumption and
corporate tax policies. Novel policies have also been developed including equalization levies
and digital services taxes alongside more common use of gross-based withholding taxes
targeted at digital services. However, in some cases political expediency has outpaced
consistent policy designs in line with sound principles of tax policy.
 As policymakers continue to evaluate the options to tax digital businesses it will be
necessary to avoid creating new distortive tax policies driven by political agendas. To this
end, this paper critically analyses the prospect and challenges of and effective digital
taxation.

6. CONCEPT OF DIGITAL SERVICES
The term Digital Services
refers to the electronic
delivery of information
including data and
content across multiple
platforms and devices
like web or mobile.
DIGITAL SERVICES?
 The term is more widely used in
government circles in terms of making
the overall interaction of citizens with
the public sector a more pleasant and
efficient experience.
 However, this is equally important in the
private sector in terms of improving the
customer experience while boosting
productivity

7. CONCEPT OF DIGITAL SERVICES/2
DIMENSIONS OF DIGITAL
SERVICES
INTANGIBILITY
INVARIANCE
HIGH TECH
SCALABILITY

8. CONCEPT OF DIGITAL SERVICES/3
1 INTANGIBILITY
 Digital services do not involve physical evidence of the unit of exchange.
 There are several implications arising from this notion. First, although
no concrete material evidence is present, environmental cues do
play a role in customer quality perception even in the digital
environment, similar to “tangibles” in the service quality concept.
 These can be called “digital tangibles” or “tangibilizers” (Edvardsson,
2005) since they help the customer in formulating initial perception,
attitude and intent towards the digital service.
DIMENSIONS OF DIGITAL
SERVICES

9. CONCEPT OF DIGITAL SERVICES/4
2 INVARIANCE
 Digital services can be standardized by both quality and
content, and the standardization is easier than for services
that require a high human touch/effort to be provided.
 This is in direct contradiction with the traditional view of the
service that asserts: “unlike tangible goods, 100 per cent
quality cannot be engineered into a service, especially when
even the definition of the service is in the eyes of the beholder.
DIMENSIONS OF DIGITAL
SERVICES

10. CONCEPT OF DIGITAL SERVICES/5
3 HIGH-TECH
 The customer interaction within digital services takes place
with the application interface; human touch has mainly a
supportive role.
 This “human distance” leads to anonym exchange between the
service provider and the customer. As oppose to “high touch”
services, the distant and anonym nature of the digital service
commands consideration to increasing trust, and perhaps
include more human interaction through the digital medium.
DIMENSIONS OF DIGITAL
SERVICES

11. CONCEPT OF DIGITAL SERVICES/6
3 HIGH-TECH
 This implies that the economies of digital services
are considerably different from traditional
services, for which scaling (defined as
increasing supply to match increased demand) is
typically more expensive, considerably slower
and requires greater focus on human issues,
such as recruitment and management.
 Digital services are characterized by “unlimited
seats”, meaning that they scale perfectly according
to true demand.
DIMENSIONS OF DIGITAL
SERVICES

12. FEATURES OF
DIGITAL
SERVICES
They possess a high level of mobility,
reliance on intangibles, data and
network effects, a tendency towards
monopoly or oligopoly and volatility.
The highly digitalized business models
contain several varieties of e-
commerce, app-stores, online
advertisement, cloud services,
networks platforms, and high speed
trading and online payment services.
CONCEPT OF DIGITAL SERVICES/7

13. DIGITAL SERVICE TAX
DIGITAL TAX
 Digital taxes include policies that
specifically target businesses which
provide products or services through
digital means using a special tax rate or
tax base.
 These include policies that extend existing
rules to ensure a neutral tax policy
toward all businesses, such as when a
country extends its Value-added Tax to
include digital services.
Digital services taxes are
gross revenue taxes with
a tax base that includes
revenues derived from a
specific set of digital goods
or services or based on the
number of digital users
within a country.

14. CATEGORIES OF
DIGITAL TAX
CONSUMPTION TAXES
DIGITAL SERVICES
TAXES
TAX PREFERENCES FOR
DIGITAL BUSINESSES
DIGITAL PERMANENT
ESTABLISHMENT RULES
GROSS-BASED
WITHHOLDING TAXES ON
DIGITAL SERVICES
DIGITAL SERVICE TAX/2

15. DIGITAL SERVICE TAX/3
CONSUMPTION TAXES
Consumption taxes are Value-added Taxes (VAT)
and other taxes on the sale of final goods or
services. Countries have been expanding their
consumption taxes to include digital goods and
services
DIGITAL SERVICES TAXES
Digital services taxes are gross revenue taxes with a
tax base that includes revenues derived from a
specific set of digital goods or services or based on
the number of digital users within a country.
TAX PREFERENCES FOR DIGITAL BUSINESSES
Tax preferences are policies such as research
and development (R&D) credits and patent boxes
that reduce the tax burden on digital businesses.

16. DIGITAL SERVICE TAX/3
DIGITAL PERMANENT ESTABLISHMENT RULES
 These policies include redefining what
constitutes a permanent establishment to
include digital companies that have no
physical presence within a jurisdiction.
 These virtual or digital permanent
establishments are usually defined using
specific criteria including engagement
with the local market.
GROSS-BASED WITHHOLDING TAXES ON DIGITAL
SERVICES
 Gross-based withholding taxes are used by
some countries instead of corporate taxes or
consumption taxes to tax revenue of digital
firms in connection to transactions within a
jurisdiction.
 As gross income taxes, these policies do not
substitute for income or consumption
taxation.

17. DIGITAL SERVICE TAX/4
SIMPLICITY
Tax codes should be easy for taxpayers to
comply with and for governments to administer
and enforce.
Digital tax policies fail the simplicity test when
they leave important definitions unclear or add
unnecessary compliance challenges for
businesses that are trying to understand how
much tax they owe.
TRANSPARENCY
Digital taxes are sometimes designed as thinly
veiled proxies for other taxes (either
consumption or corporate taxes) rather than
pure extensions of those existing policies.
Additionally, digital services taxes and gross-
based withholding taxes usually have low
statutory rates, but because they apply to
revenues rather than income the tax burden is
effectively much higher than the rate implies.
PRINCIPLES OF DIGITAL TAXATION

18. DIGITAL SERVICE TAX/3
NEUTRALITY
 The purpose of taxes is to raise needed revenue,
not to favor or punish specific industries,
activities, and products. Some digital taxes work to
create neutrality between digital business models
and other businesses.
 Extending consumption taxes to include digital
products and services can result in neutral
treatment of consumption.
STABILITY
 Taxpayers deserve consistency and predictability in
the tax code. Governments should avoid enacting
temporary tax laws, including tax holidays,
amnesties, and retroactive changes.
 Many digital tax policies are designed to be
temporary, with some timelines tied to international
agreements on changes. Temporary tax policy
creates uncertainty and challenges for both
administration and compliance.
PRINCIPLES OF DIGITAL TAXATION

19. INTERNATIONAL DEVELOPMENT CONCERNING DIGITAL TAX
 Following the finalization of the OECD’s Base Erosion and Profit-Shifting (BEPS)
reports in 2015, the G20 tasked the OECD in 2016 with undertaking further work
on the tax challenges arising from digitalization. In March 2018 the OECD’s Interim
Report noted the need for consensus-based longer term tax reform.
 The OECD also recognized that some countries wanted to take more immediate
action and issued a framework to guide the introduction of an interim DST,
broadly based on India’s Equalization Levy (2016) and a similar European
Commission (2018) proposal.
 However, the OECD noted it is important that countries follow the framework, as it
recognizes complexities like double taxation, compliance with international trade
rules and the risk that the tax may ultimately be borne by consumers. The OECD
noted that it expected countries would remove any DST’s once a longer term
solution was reached.

20. PROSPECT OF DIGITAL TAX
 The rising statistics of the digital services globally which is majorly due to its
immense potential, it has become expedient for the global tax authorities to
explore a more creative approach to ensure effective taxation in a means to
generate revenue.
 Although some developed and developing nations have ensured an effective
taxation of the digital services, countries like Nigeria will however need to
borrow a leaf from such nation that have taken bold steps to tackle tax
leakages in the digital economy through innovative tax legislation.
 Just like India, the government should expand the scope of "fixed base" under
Section 13 of the CITA to ensure that the digital economy is effectively
captured for income tax purposes. The introduction of a digital fixed base in
Nigeria will certainly increase the tax base, thereby ensuring an increase in
government revenue.

21. PROSPECT OF DIGITAL TAX/2
 A major drawback, however, relates to enforcement of taxation of digital
transactions, given that most digital transactions are concluded with non-
resident companies, which makes efficient tracking of such transactions
difficult.
 However, with proper legislation on taxation of digital transactions, the tax
authorities can work with banks to identify payments relating to digital
transactions with non-resident companies that should be subject to tax.
 Furthermore, tax authorities should leverage the automatic exchange of
information between jurisdictions and employ innovative technology to secure
a proper database of the various online suppliers of goods and services. This
will go a long way in providing the tax authorities with sufficient data to go
after tax defaulters directly.

22. CHALLENGES OF DIGITAL TAX
 The digitalization enables multinational enterprises to establish highly digitalized business
models in various jurisdictions with minor or nonexistent physical presence in the Market
State.
 These multinational active and highly digitalized business models are shifting profits to low-
tax jurisdictions in order to artificially reduce their tax burden by exploiting loopholes in
the interaction of different domestic tax systems.
 These loopholes are especially created by the key characteristics of the digital business
models. These new characteristics are undermining the current international tax system
by decreasing the relevance of the concept of physical presence, increasing the
importance of intangible assets and introducing value creation due to data usage, leading
to value-creation chains within several jurisdictions.
 These circumstances raise the fundamental questions of how to define and characterize
the TERMS OF INCOME, VALUE CREATION AND PERMANENT ESTABLISHMENT (PE) within the
digital economy.
 The business model of social-media-platforms such as Facebook, Instagram or Twitter are
especially challenging for the international tax regime.

23. CHALLENGES OF DIGITAL TAX/2
 The applicable rules for corporate taxation in Nigeria do not effectively capture the
realities of a modern economy in our world of fast-paced digital transactions. Given
that non-resident companies are taxed in Nigeria based on profits derived from
Nigeria, the question as to whether a foreign company is liable to income tax in Nigeria
is usually controversial.
 Section 13 of Companies Income Tax Act (CITA) implies that a non-resident company
must have physically performed activities in Nigeria, directly or indirectly, before such
a company can be liable to income tax in Nigeria.
 Thus, where a software company provides online data to users in Nigeria without being
physically present in Nigeria in any form, it may be difficult to conclude that such a
company is liable to CIT in Nigeria, although the company could have derived income
from Nigeria. A major challenge is therefore determining at what point such non-
resident would be deemed to have carried on business in Nigeria and thus liable to
income tax in Nigeria.
 This is because the absence of the required fixed base or physical operations in
Nigeria under Section 13 of CITA has made it difficult for the FIRS to establish liability
of such foreign companies to Nigerian tax.
CHALLENGES OF
DIGITAL TAX IN
NIGERIA

24. CHALLENGES OF DIGITAL TAX/3
To ensure that digital companies do not escape tax in Nigeria, the FIRS has often
required Nigerian companies to withhold tax on all payments made to non-resident
persons regardless of the non-establishment of the tax presence specified
under Section 13 of CITA.
This requirement has encountered resistance from taxpayers given that such non-
resident persons may not be liable to tax under Nigerian laws.
However, the FIRS seem to have succeeded in ensuring that VAT is deducted and
accounted for on cross border payments for transactions between foreign
companies and Nigerian companies such as in the case between Vodacom Business
Nigeria Limited v FIRS. In that case, the Federal High Court ruled in favour of the FIRS
and held that the Nigerian company was required to account for the VAT on such
transactions regardless of the fact that the supplier/foreign company did not
perform the services and had no physical presence in Nigeria.
Thus, the absence of relevant provisions in the Nigerian tax laws covering taxation of
digital activities is a major challenge that has resulted in loss of revenue to the
government.
CHALLENGES OF
DIGITAL TAX IN
NIGERIA

25. DIGITAL TAXATION INSIGHT FROM OTHER COUNTRIES
Here are some of the measures taken by other
jurisdictions on the taxation of the digital economy
 India introduced new digital permanent establishment rules effective April 2019 to address the
challenges that arise from the taxation of the digital economy.
 These rules, which are contained in the 2018 Indian Finance Act, seek to subject businesses that
have a "significant economic presence" in India to Indian tax notwithstanding that such businesses
may not have any physical presence in India. The Act defined "significant economic presence" to
mean, amongst others, transactions where the aggregate payments exceed such amounts as may be
prescribed.
 In addition, India currently imposes a surcharge tax of 6% on payments to foreign companies for
online advertising services when such companies do not hold a permanent establishment in India.
Ultimately, these rules aim at capturing companies that do significant business in India through
digital channels but who would not have been captured by preexisting permanent establishment
rules.

26. DIGITAL TAXATION INSIGHT FROM OTHER COUNTRIES/2
 In March 2018, the European Commission (the Commission) proposed new rules to ensure that
digital business activities are taxed in a fair and growth-friendly manner in the EU. The Commission
has made two legislative proposals.
 One proposal recommends that member states apply an interim tax on companies that generate
annual total revenue of over £750 million and annual total revenue of over £50million from digital
activities in the EU.
 This interim tax is to cover the main digital activities that currently escape tax in the EU and is to be
levied at 3% on the gross revenue of businesses derived from online advertising, sale of collected
user data and other digital services etc.
 The other proposal seeks to introduce the concept of a "taxable digital presence" or a Virtual
Permanent Establishment (VPE). A VPE is designed to introduce a taxable nexus for digital
businesses operating within the EU with little or no physical presence.

27.  It is crystal clear that the digital tax debate is far from over, and policymakers
should seek to follow sound principles in developing, refining, and (in some
cases) removing digital tax policies.
 In some country policy, consumption and corporate income taxes (and
associated permanent establishment rules), countries are working to extend
their existing rules to digital businesses. This presents an opportunity to move
toward equal treatment of physical and digital business models, but also real
challenges to align standards and implement policies on a multilateral basis.
 Policies in these areas should meet a high bar for alignment with other
jurisdictions, minimize complexity and compliance costs, and avoid differential
treatment of targeted business sectors.
 In some other countries, the country digital services taxes and gross-based
withholding taxes are relying on novel, but distortive and discriminatory,
approaches to taxing digital businesses. These policies have the potential to
lead to an economically harmful tax and trade war and should be avoided.
CONCLUSION

28. RECOMMENDATIONS
 Create Policies that clearly allow for relief from double
taxation.
 Avoid adopting digital services taxes to prevent the
distortions that such revenue-based taxes create.
 Ensure Preferences for digitalized businesses with focus
on innovation rather than creating tax windfalls.
 Ensure improvement of Research & development tax
credits to avoid compliance challenges that limit the
benefits to businesses that can afford to comply.
In this twenty first century, it is therefore
recommended that countries should: