Taxation of the Digital Economy and the Introduction of Global Minimum Tax

Advancement in technology has led to fundamental changes in the economy and has also provided businesses with new opportunities to access global markets and execute business activities online.

Internet technology has also created many opportunities for business growth and development. To remain competitive in the market, many businesses are compelled to adjust and adapt to the changes in the modern economy characterized by the use of technology; as a result, this has birthed what we can call ‘Digital Economy.’

What is a Digital Economy?

Organization for Economic Co-operation and Development (OECD) refers to the digital economy as "an economy that incorporates all economic activity reliant on, or significantly enhanced by the use of digital inputs, including digital technologies, digital infrastructure, digital services and data. It refers to all producers and consumers, including government, that are utilising these digital inputs in their economic activities."

Simply put, the digital economy is one collective term for all economic transactions that occur on the internet. Hence, it is safe to say that multinational enterprises such as Amazon, Alibaba, Twitter, Spotify, Uber, Facebook, Google, Netflix, YouTube, etc., are operating in the digital space without necessarily having a physical presence in all the countries where they generate their revenues.

Why it Matters to Tax Authorities?

In the digital economy, multinational enterprises make significant revenue in different countries without even setting up offices or having their employees work in those countries. Therefore, it creates tax issues as to how the profit generated from various countries should be taxed since the company does not have a physical presence. Tax authorities are faced with the potential risk of multinational enterprises moving profit from certain jurisdictions where the economic activities took place, thereby eroding the value created in such jurisdictions. As a result, millions of revenues are lost from the tax authority perspective because they are not able to tax profit of those operating in the digital space.

Introduction of Significant Economic Presence (SEP) order

In Nigeria, prior to the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order), there must be a certain level of physical presence for companies to be subjected to tax. With this rule, it was practically challenging to tax companies operating in the digital economy because they could earn income without any physical presence in Nigeria. No physical presence usually means no or very little tax for the government.

With the introduction of the SEP Order, companies would not only be taxed on the basis of physical presence but also economic presence. Non-resident Companies (NRCs) providing digital services will be deemed to have a SEP in Nigeria in any accounting year where it:

  • derives from Nigeria, a gross turnover or income exceeding N25 million (64,000 USD) or its equivalent in other currencies from any or a combination of digital services provided;
  • Uses Nigerian domain name (.ng) or registers a website address in Nigeria; or
  • Has purposeful and sustained interactions with persons in Nigeria by customizing its digital platform to target the Nigerian market, including reflecting its product or service price in Nigerian currency or providing options for billing or payment in Nigerian currency.

An NRC involved in the provision of the above services will be deemed to have an SEP in Nigeria where it earns any income from:

  • A person resident in Nigeria; or
  • A fixed base or agent of an NRC.

The payments under the following arrangements by an NRC will not create an SEP in Nigeria:

  • in respect of a contract of employment for teaching in or for teaching by an educational institution; or
  • by a foreign fixed base of a Nigerian company.

Organization for Economic Co-operation and Development (OECD) Approach

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative Action 1, “Addressing the Tax Challenges of the Digital Economy,” identified the challenge of taxing the digital economy. The OECD/G20 Inclusive Framework on BEPS (IF) has agreed on a two-pillar solution to address the tax challenges arising from the digitalization of the economy.

In the OECD/G20 meeting held on Friday, 8 October 2021, 136 countries and jurisdictions representing more than 90% of global GDP have agreed to the two-pillar solutions. As at the time details of this agreement was released, 136 of the 140 Inclusive Framework countries have agreed to this release. Four countries - Kenya, Nigeria, Pakistan, and Sri Lanka have not yet joined the agreement.

Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence.  Specifically, multinational enterprises with global sales above EUR 20 billion and profitability margin above 10% will be covered by the new rules and 25% of the profit above the 10% threshold to be re-allocated to market jurisdictions.

Pillar Two introduces a global minimum corporate tax rate set at 15% to be effective 2023.  The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.

The aim of the Two-Pillar Solution is to make sure that MNEs do not take advantage of the old rules of international tax to avoid paying their fair share and the new rules are designed to capture and address this problem.


No doubt, digitalization has created global tax issues, but implementing the OECD Pillar 1 and 2 approach will ensure that companies pay a fair share of tax wherever they operate and generate profits. The Two-Pillar package provides for the standstill and removal of unilateral measures, such as Digital Services Taxes (DST) and other relevant similar measures. Should Nigeria join the agreement, the SEP order introduced would most likely be repealed while the Two-Pillar approach of the OECD would be adopted.