Taxation of Digital Businesses in Nigeria: Navigating Compliance and Enforcement Risks
The rapid growth of Nigeria’s digital economy has caught the attention of tax authorities. From streaming platforms to fintech apps and online consulting services, digital businesses, both local and foreign, are increasingly under scrutiny. The Federal Inland Revenue Service (FIRS), Nigeria’s primary tax authority, has taken active steps to ensure that digital service providers contribute their fair share of tax revenue, whether or not they maintain a physical presence in the country. Recent reforms, particularly through the Finance Acts of 2019 and 2020, introduced important changes to expand the tax net to cover income generated from digital platforms. For businesses operating in this space, keeping up with these developments and ensuring compliance is not just advisable, it is essential.
Taxation of Non-Resident Digital Companies in Nigeria
Non-resident digital service providers (that are not tax resident in a treaty country) that have a Significant Economic Presence (SEP) in Nigeria are subject to Companies Income Tax in Nigeria on profits attributable to their taxable presence in Nigeria.
A non-resident digital service provider will be considered to have a Significant Economic Presence in Nigeria if
1) It derives gross turnover or income over ₦ 25 million in a given year from any or a combination of the following activities
I. Streaming or downloading of books, music, movies, games or applications;
II. Transmission of data collected about Nigerian users generated from the users’ activities
III. Provision of goods and services through a digital platform to Nigeria
IV. Provision of intermediation services through a digital platform, website or online application linking suppliers and customers in Nigeria
These include activities carried on by its connected persons during the accounting year; or
2) If it uses a Nigerian domain name (.ng) or registers a website in Nigeria, or
3) If it has a purposeful interaction with persons in Nigeria by customising its platform to target persons in Nigeria (e.g. providing options for billing or payment in Naira)
VAT on Digital Services
In addition to CIT, foreign digital service providers are also required to charge and remit VAT on services provided to Nigerian customers. This obligation applies regardless of whether the services are Business to Business (B2B) or Business to Consumer (B2C), and is enforced under the VAT modification orders issued by the Minister of Finance.
Businesses must ensure that their invoicing systems are updated to reflect this and that VAT obligations are not overlooked in cross-border service transactions.
Local Digital Businesses and the Compliance Gap
While international platforms are often the focus of policy discussions, many local startups and SMEs also face serious compliance challenges. Some are unaware of their tax obligations, while others struggle with record-keeping or outdated business structures that do not support proper tax reporting.
Common compliance expectations include:
a) Registration with the FIRS
b) Timely filing of CIT and Value Added Tax (VAT) returns
c) Maintenance of proper financial records
d) Deduction and remittance of Withholding Tax (WHT) where applicable
Lapses in any of these areas can attract penalties, disrupt funding rounds, or damage business credibility.
Growing Enforcement Efforts by FIRS
The FIRS has become more assertive in pursuing compliance from digital service providers. Notices have been issued to foreign companies, and some enforcement actions have drawn international attention. Within Nigeria, local tech firms are also being audited, especially where financial transactions suggest underreporting or tax evasion.
FIRS now leverages technology, including data from payment gateways and financial institutions, to track digital revenue. This makes it increasingly difficult for digital businesses to operate under the radar.
Risks of Non-Compliance
Failure to comply with Nigeria’s digital tax regime comes with a range of risks:
a) Financial Penalties: Late filing, underpayment, or failure to register can result in substantial fines and interest.
b) Reputational Damage: For businesses seeking investor funding or international partnerships, tax non-compliance can raise red flags.
c) Regulatory Sanctions: FIRS may block access to Nigerian markets or take legal action to enforce tax collection.
Practical Steps for Businesses
To mitigate these risks, digital businesses both local and international should:
a) Conduct a tax health check to assess current compliance levels
b) Register appropriately with the FIRS and obtain a Tax Identification Number
c) Set up systems for regular tax filing and reporting
d) Seek professional advice on cross-border tax planning and transfer pricing
e) Monitor regulatory updates and Finance Acts that may impact obligations
Conclusion
As Nigeria strengthens its tax net to include digital services, businesses must adapt to the evolving landscape. Enforcement is already in action, and it is essential for both local startups and international digital service providers targeting Nigerian users to prioritise tax compliance. Early engagement with legal and tax professionals can prevent future complications and position your business for sustainable growth in Nigeria’s dynamic digital economy.