Title: Taxation of the Digital Economy: A Paradigm Shift Towards

Improved Tax Revenue in Nigeria

Introduction:
The digital economy has revolutionized the global economic landscape and created new
opportunities for innovation, growth, and productivity. However, the digital economy also
poses significant challenges for developing countries, particularly in terms of taxation.
Globally, taxation serves as an important instrument for fiscal stability. In the real sector,
governments impose taxes on veritable goods and services to generate revenues for national
development. Recent advancements in technology have, however, created more sophisticated
ways of deploying technologies to do business. This has given rise to a digital economy that has
opened up avenues for rapid economic growth, innovation, enormous employment opportunities
and access to a variety of services. Most electronic business transactions are often considered
tax-free due to a lack of legal framework (Ibrahim, Haruna, Zannah & Babangida, 2021) or
regulatory provisions in some jurisdictions (Vuković, 2019). The digital economy in its broader
perspective refers to any economic activity involving a business model that comprises one or
more digital elements such as digital content, digital automation, digital communication, digital
distribution, digital payment or other electronic business that is classified as digital economic
activity (Lucas-Mas & Junquera-Varela, 2021). Taxation of the digital economy is an emerging
issue within the purview of international taxation as there is no universally acceptable practice on
the way and manner upon which income derived from digital economic activities should be
taxed. Hence, every tax jurisdiction designs and implements its own model. Consequently, the
concept of SEP is ultimately used as a major determinant of digital economic activities in a host
nation.This term paper aims to provide an in-depth analysis of the challenges and
opportunities of taxation in the digital economy, with a focus on the perspectives of
developing countries .

Objective:
The main objective of this term paper is to examine the challenges and opportunities of
taxation in the digital economy for developing countries and evaluate the effectiveness of
current tax policies and regulations in regulating the digital economy. The study aims to
identify the factors affecting tax compliance in the digital economy and the impact of
digitalization on the allocation of taxing rights among countries. The paper also aims to
assess the regulatory responses of developing countries to the challenges of taxation in the
digital economy. The rise of the digital economy has created new challenges and
opportunities for developing countries in terms of taxation. The objective of this term paper
is to examine these challenges and opportunities and to evaluate the effectiveness of
current tax policies and regulations in regulating the digital economy. The paper will
identify the factors that affect tax compliance in the digital economy and the impact of
digitalization on the allocation of taxing rights among countries.
One of the main challenges of taxation in the digital economy is the difficulty in tracking
and taxing digital transactions. The paper will explore the effectiveness of current tax
policies and regulations in addressing this challenge, as well as the potential of new
technologies such as blockchain and artificial intelligence to facilitate tax compliance.
Another challenge is the allocation of taxing rights among countries, which has become
more complex with the growth of the digital economy. The paper will examine the impact
of digitalization on the allocation of taxing rights and the potential for international
cooperation to address this issue.
The study will also assess the regulatory responses of developing countries to the
challenges of taxation in the digital economy. This includes evaluating the effectiveness of
existing regulations and identifying best practices for developing countries to follow.
Overall, this term paper aims to provide a comprehensive analysis of the challenges and
opportunities of taxation in the digital economy for developing countries and to offer
insights into how policymakers can effectively regulate this new and rapidly evolving
sector.

Methodology:
The paper employed a systematic review based on a review of relevant scholarly articles,
proceedings, journals, and reports comprising both academic and professional literature on the
taxation of digital businesses in drawing inferences. The systematic review was employed
because it is most suitable to identify, appraise and synthesize evidenced-based findings
from academic and professional literature on taxation of digital economic activities as well
as the gazette Finance Act 2020 in order to make valuable inferences there
from. Furthermore, this approach is also in line with prior studies. This term paper will
employ a mixed-methods research approach that combines both qualitative and quantitative
data analysis. The study will also use statistical analysis to evaluate the impact of
digitalization on the allocation of taxing rights among countries .
Data Collection:
The term paper will use both primary and secondary sources of data. Primary data will be
collected through interviews with experts in taxation, digital economy, and business in
developing countries. Secondary data will be collected from government publications,
academic articles, and other relevant sources.
Analysis:
The data collected will be analyzed using a mixed-methods approach. The qualitative data
will be analyzed through thematic analysis, and the quantitative data will be analyzed using
statistical software such as STATA. The analysis will identify the different tax policies and
regulations that affect the digital economy in developing countries and examine the
effectiveness of current tax systems in regulating the digital economy. The study will also
analyze the regulatory responses of developing countries to the challenges of taxation in
the digital economy.
Findings:
The systematic review suggests that Non-Resident Companies (NRCs) are liable to pay tax
when they derive N25 million annual gross turnover or its equivalent in other currencies as
a result of their engagement in digital economic activities in Nigeria. This also includes
NRCs that use the Nigerian domain name or registers a website address in Nigeria or by
customizing their digital platform to target persons in Nigeria and providing billing options
for payment in Naira currency. The study argues that although Nigeria can adopt a profit
base tax instead of a revenue base tax in taxing digital business models in the country,
there is the risk of NRCs engaging in profit shifting or understatement of profits when
profits are used as a basis. Hence, the study advocates for adopting revenue base tax in
order to mitigate excesses of NRCs. The government could equip the administrative
machinery with ultra-modern technologies in collaboration with other foreign tax
jurisdictions around the world by sharing intelligence information relating to digitalized
business models in their respective countries. Consequently, as the Federal Government
targets a 15% tax-to-GDP ratio with the implementation of the Finance Act 2020, there is a
need to sustain and encourage the use of digital platforms through the creation of an
enabling environment among the industry players. Although, there are still some areas of
concern which need clarification, especially the issue of double taxation which the country
was a signatory to in the international tax treaties for example the commonwealth nations .
Conclusion:
In conclusion, the study provides insights into the Nigeria Finance Act 2020 and clarifies
the concept of Significant Economic Presence (SEP) in relation to Non-Resident
Companies (NRCs) on the taxation of digital business models. Furthermore, as Nigeria
aspires to create more jobs, investing heavily in digital infrastructure by creating an
enabling environment for digital economic activities to flourish can improve the ease of
doing business in the nation and serve as a catalyst in reinvigorating the economy towards
addressing fiscal deficits experienced in the country by increasing inflows of foreign
exchange. More so, the study developed a framework for the taxation of the digital
economy in Nigeria and further advocates for a revenue base tax which is more beneficial
for improved tax revenue in Nigeria than the profit base tax especially looking at the
antecedent and peculiarities surrounding the phenomena.
In simpler terms, this study explains how Nigeria can tax digital businesses that operate
within its borders. It also suggests that investing in digital infrastructure can help create
jobs and improve the economy. The study recommends that Nigeria should focus on taxing
revenue instead of profits to increase tax revenue.