Significant Economic Presence (SEP) is a concept in taxation that allows a country to tax foreign companies that earn income from its market even if they do not have a physical office or permanent establishment in the country.
In Nigeria, SEP was introduced through the Finance Act 2019 and implemented by the Federal Inland Revenue Service (FIRS). Under the rules, a Non-Resident company is considered to have SEP in Nigeria if it:
1. Derives income from digital services provided to Nigerian users (e.g., online platforms, streaming, digital advertising).
2. Provides technical, professional, consultancy, or management services to Nigerian customers.
3. Earns revenue above the threshold determined by the tax authority from Nigerian sources.
How should a Nigerian telecom operator determine whether cross-border roaming, bandwidth, and technical service payments to foreign affiliates trigger Significant Economic Presence (SEP) under Nigerian tax laws?
A Nigerian telecom operator should determine whether payments to foreign affiliates for roaming, bandwidth, or technical services trigger Significant Economic Presence (SEP) by evaluating the nature of the service, revenue attributable to Nigeria, and applicable statutory thresholds under the Companies Income Tax Act (CITA) and the Significant Economic Presence Order 2020.
First, the telecom operator must identify whether the foreign affiliate is providing digital services or technical/management services to Nigerian users or entities. Under Nigerian tax law, a non-resident company may be deemed taxable in Nigeria where it transmits data, signals, or digital services into Nigeria and profits are attributable to such activity.
Second, the operator should assess whether the foreign affiliate derives revenue from Nigerian sources exceeding ₦25 million annually or maintains sustained digital interaction with Nigerian users. Under the SEP Order 2020, a foreign company is considered to have SEP if it earns ₦25 million or more from Nigerian digital transactions or services, or engages in targeted digital interaction with Nigerian customers.
Third, the telecom operator should consider whether the services involve technical, management, consultancy, or professional services provided from outside Nigeria, as such payments may also trigger SEP or Nigerian tax obligations where income is derived from Nigerian residents.
Finally, the telecom operator must also evaluate withholding tax (WHT) obligations and double taxation treaty provisions, since Nigerian payers may be required to deduct 10% WHT on payments to non-resident companies, which may represent the final tax where the non-resident does not have SEP or a permanent establishment in Nigeria.
Therefore, determining SEP requires reviewing the nature of services, revenue threshold, digital interaction with Nigerian users, and applicable treaty or withholding tax rules.
Audit Procedures to Ensure Completeness and Accuracy of VAT on Telecom Services
To ensure completeness and accuracy of Value Added Tax (VAT) remittances on prepaid airtime, data bundles, USSD charges, and dealer commissions, auditors should perform several substantive and control-based procedures.
First, auditors should reconcile telecom billing and recharge platform records with the general ledger and VAT returns to confirm that all taxable transactions have been captured. Telecom operators generate high volumes of transactions, so comparing recharge system data, mediation systems, and revenue reports helps ensure completeness.
Second, auditors should verify that VAT is correctly applied at the statutory rate of 7.5% on all taxable telecom services, including airtime, data bundles, and USSD charges, since Nigerian VAT law requires VAT to be charged on the supply of goods and services consumed in Nigeria.
Third, auditors should perform cut-off testing and transaction sampling on prepaid recharge sales and data bundle purchases to confirm that VAT is recorded in the correct accounting period and that system-generated VAT calculations are accurate.
Fourth, auditors should review dealer and distributor commission arrangements to ensure that VAT treatment is appropriate. This includes confirming whether commissions represent agency services subject to VAT and verifying that VAT is correctly accounted for either by the telecom operator or the dealer depending on contractual arrangements.
Fifth, auditors should reconcile VAT output tax reported in returns with collections from recharge platforms, USSD billing systems, and electronic payment gateways to identify any under-reported revenue streams.
Finally, auditors should assess internal controls over telecom billing systems and automated VAT calculations, including system configuration testing, access controls, and exception reports, to ensure ongoing compliance with VAT regulations.
In conclusion, determining whether cross-border roaming, bandwidth, and technical service payments trigger Significant Economic Presence (SEP) requires careful evaluation of the nature of services provided, the revenue derived from Nigerian sources, and the applicable thresholds under Nigerian tax laws. Telecom operators must therefore adopt a proactive approach to tax compliance by reviewing contractual arrangements with foreign affiliates, monitoring revenue thresholds, and ensuring appropriate withholding tax treatment where applicable. At the same time, robust audit procedures are essential to guarantee the completeness and accuracy of VAT remittances on telecom services.