Understanding Nigeria's Digital Services Tax (DST)

 

Digital services have made life easier for everyone, but they’ve also created new challenges for tax systems around the world. In Nigeria, the Digital Services Tax (DST) was brought into its tax landscape by the insertion of paragraph (c) into section 13 (2) of the CompanyIncome Tax (CITA) by section 4 of the Finance Act 2019 to ensure that companies making money from Nigerians through the internet contribute their fair share to the country’s revenue. Whether you’re a local or foreign business, understanding DST is crucial. Let’s take you through it in quick session.

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1. What is DST?

DST is a tax on income made from providing digital services to Nigerians. If a company is operating online and earning from Nigerian customers without a physical office in the country, they must pay DST. For example, Netflix, which streams movies to Nigerians, and Google, which runs ads for Nigerian businesses, fall under this category. 

 

2. What Was It Like Before DST?

Before the Finance Act 2019, Nigeria could only tax companies that had a physical presence in the country. This meant global companies like Facebook and Amazon, which made huge profits from Nigerian users, weren’t paying taxes here. The introduction of DST fixed this gap, ensuring that digital businesses now contribute to Nigeria’s economy, even if they don’t have offices here. 

 

3. What Does “Significant Economic Presence” Mean?

Significant Economic Presence (SEP) is a way to determine whether a foreign company is active enough in Nigeria to be taxed. If a company earns more than ₦25 million a year from Nigerian users, uses Nigerian customer data for business, or provides services like ads or streaming to Nigerians, it qualifies as having SEP. For example, Spotify earns from Nigerian subscribers, so it meets the criteria for SEP. 

 

4. Who Pays DST?

DST is specifically for foreign companies without offices in Nigeria that make money from Nigerian users. Local companies are already taxed under the tax laws, so DST doesn’t apply to them. Examples of companies that pay DST include Netflix for streaming services, Google Ads for online advertising, and Amazon for e-commerce sales to Nigerians. 

 

5. What Services Are Taxed Under DST?

A wide range of digital services falls under DST. This includes streaming platforms like YouTube Premium, where Nigerians pay for ad-free content, and e-commerce sites like Alibaba, where Nigerians shop. Even businesses using Facebook Ads to promote products to Nigerian customers are covered. Essentially, if it’s a digital service involving Nigerian users, it’s likely taxable. 

 

6. How Much is the DST?

DST is taxed at the same rate as Nigeria’s Companies Income Tax, which is 30% for digital services that raked in over ₦100 million, and 20% for revenue between ₦25 million and ₦100 million in a tax year. However, the tax only applies to the profits these companies make from Nigerian users, not their global income. 

 

7. How Does DST Relate to VAT?

While DST taxes the company’s income, Value Added Tax (VAT) is charged on the services consumed by Nigerians. For instance, when you pay for a Netflix subscription, the company adds VAT to your bill, while also paying DST on the income earned from you. 

 

8. What is Withholding Tax and Why Does It Matter?

Withholding Tax (WHT) is a tax deducted at the source. When a Nigerian company pays a foreign company for digital services, like advertising on Google Ads, they withhold a percentage of the payment as tax and remit it to the government. This ensures the government collects some tax even if the foreign company doesn’t directly file taxes. 

 

9. Does DST Apply to Nigerian Businesses?

No, Nigerian businesses don’t pay DST. They’re already subject to taxes like Companies Income Tax and VAT. DST is specifically for foreign companies earning money from Nigeria without a physical presence in the country. 

 

10. Can Foreign Companies Be Taxed Twice?

Foreign companies don’t have to worry about paying the same tax twice. Nigeria has Double Taxation Agreements with many countries. This means if a company pays DST in Nigeria and income tax in its home country, it may get relief or deductions to avoid being taxed twice on the same income. 

 

11. What Happens If a Company Doesn’t Pay DST?

Companies that fail to comply with DST laws risk facing penalties, fines, or additional interest charges from the Federal Inland Revenue Service (FIRS). It’s not just about the money—non-compliance could also damage the company’s reputation in Nigeria. 

 

12. How Are Big Companies Handling DST?

Global companies like Netflix, Facebook, and Google have adjusted to the DST. For example, Google now includes DST as an additional charge for Nigerian customers using Google Ads. Similarly, Netflix has built DST and VAT into its subscription pricing for Nigerian users. 

 

13. What Does DST Mean for Businesses?

DST requires businesses to take Nigerian tax laws seriously. Beyond the financial cost, failing to comply can harm a company’s reputation and disrupt partnerships with Nigerian businesses. Imagine trying to build trust with local clients while avoiding taxes—it’s a risky game. 

 

14. Are There Any Exemptions?

Not all companies have to pay DST. For instance, organizations involved in education or free research services might be exempt. An online library offering free resources wouldn’t pay DST, but a paid e-learning platform like Coursera or Udemy likely would. 

 

15. How Can Companies Stay Compliant?

Staying compliant with DST is straightforward. First, foreign companies need to assess if they have Significant Economic Presence in Nigeria. If they do, they must register with FIRS, consult tax professionals for guidance, and adjust their pricing to factor in the DST. This ensures they meet their obligations without taking a hit to their bottom line. 

 

Final Words

The Digital Services Tax is part of Nigeria’s effort to modernize its tax system and capture revenue from the booming digital economy. Whether you’re streaming, shopping, or running ads, DST ensures fairness in the way taxes are collected. For businesses, staying compliant isn’t just about following the law—it’s about building trust with Nigerian customers and partners. 

If you’re a business earning income from Nigerians online, now is the time to understand DST and act accordingly. Got any thoughts or questions? Let’s chat!