By Uche Helen Nzeh
Abstract
Nigeria’s digital economy, driven by e-commerce, fintech, cloud computing, and digital advertising, contributes significantly to economic growth, accounting for ~15% of GDP in 2020. However, traditional tax frameworks fail to capture revenues from digital transactions, leading to fiscal losses and regulatory gaps. This article examines Nigeria’s legal and administrative frameworks, including the Significant Economic Presence (SEP) regulation and digital VAT provisions, identifying key challenges: legal ambiguities, data opacity, limited administrative capacity, and public distrust. Drawing on comparative literature, local evidence, and case studies, it explores opportunities such as revenue diversification, digital SME formalization, and alignment with global tax standards. Informed by the OECD’s BEPS framework and Nigeria’s unique context, we propose actionable reforms: a tailored Digital Services Tax (DST), enhanced institutional capacity, robust VAT enforcement, inter-agency coordination, public engagement, and global cooperation. These reforms aim to modernize Nigeria’s tax system, improve compliance, and integrate the country into the global digital fiscal architecture, fostering equitable revenue generation and inclusive economic growth.
1. Introduction
Nigeria’s digital economy has grown significantly, driven by widespread internet access and a youthful population, with over 110 million internet users by 2024 (Statista, 2024). This expansion, reflected in platforms like Jumia and Paystack, contributed about 15% to GDP in 2020, offering an alternative to oil revenues, which made up 65% of government income in 2023 (Central Bank of Nigeria, 2023). Despite this progress, Nigeria’s tax system struggles to keep pace. Traditional tax rules based on physical presence fail to capture revenues from cross-border digital transactions, leading to revenue losses (Umenweke et al., 2022). While the Finance Act 2020 introduced reforms like VAT for non-resident digital firms and the SEP Order (Finnovohq, 2023), implementation remains inconsistent. Challenges include weak enforcement, data opacity, and public distrust (Akinyosoye & Adejumo, 2023). This study assesses legal and administrative gaps and proposes reforms informed by the OECD’s BEPS framework, tailored to Nigeria’s context.
2. Literature Review
The taxation of digital economies has gained global and national attention as traditional tax systems struggle with the complexities of digital transactions. The OECD’s BEPS framework—especially Pillars One and Two—redefines tax rights based on market presence and introduces a 15% global minimum tax to curb profit shifting by multinationals like Google and Amazon (OECD, 2021; Wikipedia, 2025). European countries and African nations such as Kenya and Uganda have adopted Digital Services Taxes (DSTs) of 1.5–3% to capture digital revenues (Munoz et al., 2022). Nigeria’s Finance Acts of 2021 and 2023 introduced a 6% VAT on digital services and SEP rules for non-resident firms (Finnovohq, 2023). However, enforcement is hindered by ambiguous laws, limited administrative capacity, and risk of double taxation (Umenweke et al., 2022; Nwabachili & Nwabachili, 2022). Critics argue Nigeria’s reliance on physical presence is outdated. Scholars suggest a revenue-based nexus and regional coalitions to protect African interests in global tax talks (Akinyosoye & Adejumo, 2023; Ibrahim et al., 2021). With just 60 digital tax experts at the Federal Inland Revenue Service (FIRS) in 2023—compared to South Africa’s 600—capacity gaps persist (South African Revenue Service, 2024). Socio-economic factors such as a growing youth population, digital divides, and public distrust further challenge compliance, with only 17% of Nigerians viewing tax evasion as unethical (Reddit, 2024; World Bank, 2024).
3. Theoretical Framework
The taxation of Nigeria’s digital economy is best analyzed through fiscal legitimacy, digital sovereignty, and public choice theories. Fiscal legitimacy theory asserts that effective taxation depends on perceived fairness and alignment with economic realities (Moore, 2014). In Nigeria, this is challenged by the rapid rise of digital businesses and distrust in tax revenue usage. Digital sovereignty supports Nigeria’s efforts to assert tax rights over digital activities via measures like Significant Economic Presence (SEP) rules and digital service taxes (OECD, 2021). However, enforcement is hindered by weak infrastructure, administrative limitations, and the informal nature of many digital SMEs (Umenweke et al., 2022). Public choice theory explains resistance to digital taxes as stemming from perceptions of injustice, poor enforcement, and lack of transparency (Brennan & Buchanan, 1980). A hybrid model combining these theories provides a robust framework for understanding Nigeria’s digital taxation challenges and potential policy directions.
4. Challenges
3.1. Legal Ambiguity in Nexus and SEP Implementation: Nigeria’s SEP Order lacks clear guidelines, creating uncertainty for non-resident digital firms like YouTube and TikTok (Finnovohq, 2023; Omotomilola & Oladimeji, 2024). Outdated double taxation treaties enable treaty shopping, weakening enforcement (Munoz et al., 2022).
3.2. Data Opacity and Transaction Visibility: Offshore platforms and proprietary algorithms obscure transaction data, limiting FIRS oversight (Umenweke et al., 2022; World Bank, 2024).
3.3. Institutional Capacity Constraints: FIRS lacks expertise and technology, employing only 60 specialists compared to South Africa’s 600 (Adejuwon & Olasunkanmi, 2023; South African Revenue Service, 2024).
3.4. Public Trust and Compliance Culture: Only 17% of Nigerians view tax evasion as unethical, reflecting distrust in government and perceived inequity (Reddit, 2024; Akinyosoye & Adejumo, 2023).
3.5. VAT Enforcement Challenges: FIRS struggles to enforce the 6% VAT on nonresident digital providers due to weak tracking systems (Finnovohq, 2023; Anushiem, 2023).
3.6. Limited Global Coordination: Nigeria’s weak participation in OECD’s BEPS limits its global influence, enabling treaty shopping and lost revenues (OECD, 2021; Munoz et al., 2022).
4. Opportunities and Benefits
Opportunities and Policy Recommendations for Digital Taxation in Nigeria
Revenue Diversification: Digital taxation can reduce Nigeria’s 65% oil revenue dependency (CBN, 2023), leveraging platforms like Jumia and Flutterwave to generate significant tax income (Jumia, 2024; Flutterwave, 2024).
Formalization of Digital SMEs: Tax policies encourage SME registration, enhancing access to finance and improving economic data (Anushiem, 2023).
Global Alignment and Fiscal Sovereignty: Implementing SEP and VAT aligns Nigeria with OECD norms, strengthening its global tax position and limiting profit shifting (OECD, 2021; Munoz et al., 2022).
Infrastructure and Innovation Spillovers: Digital taxation can spur infrastructure development and innovation, especially in rural areas through fintech partnerships (World Bank, 2024).
5.1 Policy Recommendations: Introduce a tailored 7–10% Digital Services Tax with clear thresholds (Munoz et al., 2022). Build FIRS capacity with 250 trained experts by 2027. Enforce VAT at point of sale via local processors (Wikipedia, 2025). Increase public trust with education campaigns. Foster inter-agency coordination and global tax engagement. Pilot DST in high-revenue sectors and use PPPs with fintechs for efficient enforcement (Flutterwave, 2024). These reforms will enable equitable, effective digital taxation.
6. Conclusion
Nigeria’s digital economy offers substantial potential for fiscal stability and inclusive growth but remains under-taxed due to vague regulations, limited transaction visibility, weak institutional capacity, and public distrust. This results in significant revenue losses and continued dependence on volatile oil income. However, opportunities exist to broaden the tax base, formalize digital SMEs, and align with global tax norms. Reforms such as a 7–10% Digital Services Tax (DST), improved VAT enforcement via local payment platforms, and equipping FIRS with technologies like AI and blockchain can modernize tax collection. Strengthening collaboration among key agencies and engaging in international tax dialogues will enhance enforcement. Yet, challenges persist, including high implementation costs and perceptions of unfair tax burdens on the poor. A phased rollout, starting with high-revenue sectors like e-commerce, is recommended.
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Mrs Uche Helen Nzeh, MBA, FCNA, CCrFA, FCCSA (USA) Deputy Director & Acting Head of Department, Planning Research and Statistics (PRS),
Federal Judicial Service Commission, Supreme Court Complex, FCT Abuja
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