We’re working to fully automate tax administration processes, says FIRS

The Federal Inland Revenue Service (FIRS) effort to tax digital businesses has opened up a whole new revenue opportunity for the federal government. The Executive Chairman FIRS, Muhammad Nami, in this exclusive interview with JOSEPH CHIBUEZE speaks on the progress recorded by the Service so far.

 
What types of businesses are considered to be digital businesses?
Digital businesses are those businesses that rely largely on digital technologies to drive day-to-day business operations, to create value and develop revenue, optimize performance and create meaningful experiences for customers. Digital businesses span all business sectors, they are not just the emerging digital service providers but include traditional businesses (the brick and mortar businesses) that are transforming their businesses with digital technologies.

Are we talking about digital businesses operating only in Nigeria or those operating both in Nigeria and overseas?
Under Section 9 of the Companies Income Tax Act, income of a business whether derived from, brought into, received in or accruing in Nigeria is subject to tax in Nigeria, irrespective of the location of such business. In line with the express provision of this law, taxable income in Nigeria includes the worldwide income of Nigerian tax residents and incomes generated in Nigeria by foreigners. As such, the drive of FIRS in widening the tax net focuses on ensuring that there is adequate policy and legislative framework in place for the imposition, administration and collection of taxes on all companies exploiting and deriving value from the Nigerian economy, including foreign and local digital businesses.

How much is Nigeria losing by not taxing these digital businesses?
The digital economy is a big and growing industry, running into trillions of dollars. According to the National Bureau of Statistics, digital transactions carried out by Nigerians in 2021 alone amounted to N286.45 trillion, and this is still growing tremendously. Value Added Tax alone, at 7.5% on that amount, if it is accurate, will amount to about N21 trillion. Although, it is difficult to accurately put a figure to the tax loss presently. In coming years, as the digital economy seeks to take over almost all aspects of businesses that are still being operated through the traditional brick and mortar processes, it is logical to expect that Nigeria stands to lose as much as it is presently generating from the taxation of the traditional brick and mortar businesses. The efforts of the Service to refocus the way taxation is done to keep pace with the changing business processes will stem this tide.

Why are we just coming up with this idea of taxing these businesses even though they have been in operation for many years?
Nigeria is not just coming up with these rules; there have always been rules to tax income of foreign companies. However, globalisation and digitalisation have changed the ways companies are carrying out their businesses, which made those rules outdated. Nigeria, like many other countries, is only trying to keep pace with these modern ways of doing business by keeping abreast with contemporary issues affecting the taxation of digital businesses.  Nigeria engages with the international community in identifying such issues and developing appropriate responses to address them. We also note that some of these tax issues have resonating consequences that contravene existing international tax norms and principles and cannot therefore be effectively addressed unilaterally. As such, Nigeria continues to explore both local and international tax solutions to address these challenges
 
What structures does the FIRS have or has put in place to ensure that taxing of digital businesses is effective and efficient?
The Service has put in place policy, legislative, administrative, physical and digital structures for the seamless discharge of its core functions, by first realigning its strategic goals towards achieving the overall policy goals of the government. The direction of the Service in the digital economy taxation keyed into the Government’s larger fiscal framework to adequately generate revenue to fund the activities of the government, promote ease of doing business and automate government businesses and revenue generation processes to take out leakages. 

The Service also focuses its strides towards the amendment of the tax laws and deployment of ICT infrastructure. In specific terms, the Service has put up some structures. In terms of legal framework, the Service liaised with the legislative arm of the Federal Government for the amendment of relevant tax laws (CITA, PITA, VAT Act and FIRS Establishment Act), introducing provisions that: create taxing rights for remote and digital based businesses (the Significant Economic Presence—SEP—concept as a new nexus rule) as well as the turnover basis of taxation, as an alternative rule for assessment of taxes (Section 30 of CITA); provide clarification on filing and payment obligations (Section 55 (1)(A) of CITA and Section 10 of VAT Act); allows for appointment of non-residents as agents of collection (Section 10 VAT Act); and allows for the deployment of proprietary and third-party technology to drive tax administration (Sections 25 and 26 of FIRS Establishment Act).

 
For administrative guidance, it includes the introduction of  the SEP Ministerial Order;  Guidelines on Simplified VAT Registration and Compliance Regime on VAT for Non-Resident Suppliers; Guidelines on filing of returns by foreign companies; Circular on taxation of non-residents and so on.
 
Our automation drive involves the deployment of an integrated tax administration system, the TaxPro Max, a cost saving, user-friendly and effective solution for ease of tax administration and compliance. This solution is accessible by tax officers and taxpayers alike, including non-residents for most tax operations. 
 
The Service has further expanded the deployment of technology to VATrac, an automated VAT filing and collection system in the wholesale and retail sector. The Service is deploying a digital service interface, to facilitate the implementation of the Simplified Compliance Regime on VAT for Non-Resident Suppliers. Its implementation will also assist the Service in determining entities that fall within the SEP threshold and their turnover from Nigeria. With all these, the Service strives to achieve 100% automation of all tax administration processes as soon as possible, which will block revenue leakages and revolutionize revenue generation.
 
In terms of administration, the Service has set up a dedicated office, the Non-Resident Persons Tax Office, located in Lagos, tasked with the duty to manage the taxation of non-resident persons and cross-border transactions, including income derived from Nigeria by non-resident individuals and companies. The office is responsible for the collection of taxes from non-residents under the digital economy tax initiatives.
  
For Intelligence Gathering and Data Mining, the Service is leveraging third party data for effective tax administration. We have set up the Intelligence, Strategic Data Mining and Analysis Department, a specialised department for intelligence gathering and data mining and analysis, to provide intelligence and information to enhance audit and investigation functions, including those in relation to foreign companies generating income from Nigeria through digital and other means. The Service has also entered into some international agreements on exchange of information for tax purposes, to ensure that the Service is able to leverage on quality information from other jurisdictions on taxable persons in Nigeria for effective tax administration.

How much success has the Service recorded in this pursuit of digital businesses for taxation?
So far, 23 multinational enterprises (MNEs) have voluntarily filed returns and paid income tax under the SEP rule, with more than N2 billion generated since commencement of the SEP rule, and many more are expected to be generated as the Service commences implementation of the deemed profit rule and enforce compliance on those that are yet to comply. 
 
Withholding tax (WHT) deductions from payment for remote services under the SEP rule has also generated a substantial amount of revenue. With respect to VAT, more than 30 non-resident companies are already registered and filing returns under the Simplified Registration and Compliance Regime, generating a little below N1 billion in 2021 and close to N2 billion in the first quarter of 2022. This figure is also projected to increase as more non-residents are brought into the tax bracket. The amount indicated above is distinct from the VAT withheld or self-charge and remitted to the Service by Nigerian businesses on purchases of goods, services and intangibles from non-resident suppliers, which also come under our digital economy or e-commerce initiative.

What challenges have you encountered in an effort to tax this class of businesses?
One of the challenges is timely and progressive legislation to keep pace with the fast changing business environment, structures and processes. There should be timely amendments to tax laws to keep up with the fast-paced evolution of schemes and arrangements employed by such businesses.
 
Enforcement and compliance is also a challenge, especially for non-resident digital businesses. Tax recovery is hindered where there is no provision for assistance under a treaty for the home country of a recalcitrant foreign taxpayer to assist the Service in the collection of the tax.
 
Funding is another challenge, as it costs money for tax administration to procure and deploy adequate technology and digital tools for the automation or digitalisation of their processes, as well as to subscribe to relevant databases both for research and risk profiling of those taxpayers. The technology to be deployed must also be up to date and be able to keep pace with the ever-changing processes and technology of the taxpayers.

How are you handling those challenges?
Nigeria has systematically increased its participation in technical discussions under several international fora on the development of rules governing the taxation of digital businesses.
 
Nigeria also collaborates with other jurisdictions on tax matters that focus on administrative assistance, such as exchange of information etcetera and is signatory to many multilateral conventions to this effect. 

 
Taxpayer education and enlightenment is at the focus of the Service’s strategy to enhance voluntary compliance. Consequently, FIRS has extensively reviewed and issued a wide array of information circulars, guidance and public notices to update and keep its taxpayers well informed on new changes to legislative and administrative processes and their compliance obligations.
 
The Service has introduced new initiatives to ease compliance by non-residents and optimize revenue collection through the use of technology and will continue to seek ways to expand on these until we have a fully automated system for transparency, accountability and reporting.
 
Lastly, the Service needs an up to date workforce to be able to effectively carry out specialised audits of the digital economy, revenue modelling and forecasting, data analytic and so on. As the Service is retooling its technology and processes, the same goes for the workforce, continuously updating them and building their capacity, in order to be effective in the ever changing digital world, refocusing them from the ways of taxation in traditional brick and mortar era to the modern digital era.