Nigeria digital economy bill risks killing the golden goose

By David Whitehouse
Posted on Tuesday, 28 September 2021 14:35

A staff member works at the reception of the paystack online payment company in the government reserved area in Ikeja, in Lagos
Analysts fear companies like Paystack will be less attractive to investors if Nigeria follows through with its digital economy bill. REUTERS/Akintunde Akinleye

A Nigerian bill proposing to tax and regulate the digital economy risks stunting the development of one of the country’s only engines of growth.

The bill, leaked in August, would allow the National Information Technology Development Agency (NITDA) to issue licenses to digital economy businesses, collect taxes and punish those who don’t comply. NITDA already exists as part of the ministry of information and digital economy, but as yet has little power.

The proposed legislation lists the promotion of  local and foreign investment in information technology and the digital economy among its aims. Analysts fear the opposite will be the case if the bill becomes law. There are “uncomfortable” elements in the bill, says Ikemesit Effiong, head of research at SBM Intelligence in Lagos.

Companies like Paystack and Piggyvest, he argues, are unlikely to be as attractive to investors if the bill becomes reality. “The sector is already highly regulated” and piling on more regulation “certainly” risks damaging the future of Nigerian fintech, he says.

  •  The proposals do little to offer intellectual property protection and simply “adds another level of compliance” for businesses.
  • Some companies don’t even know whether the bill will cover them or not, Effiong adds. There is a “lack of clarity in regulatory thinking.”
  • The agency will be able to extend the tax net to any company with a vague link to the digital economy, he says. The danger is that implementation will be “punitive, onerous and adversarial.”
  • The bill has yet to be presented to the legislature, but if that happens, it would be likely to pass, Effiong says.  “For the most part, the presidency has been able to have its way.”

Ambiguity

Sections of the bill concerning licenses “seem not to have taken into account the duplicity of these efforts among other public stakeholders” such as the Securities Exchange Commission, the central bank and the Nigeria Communications Commission, says Abiodun Odunuga of the Nigeria-France Tech Initiative (NFTI) in Paris.

Having to make duplicate efforts on licenses could deter foreign investors and give an incentive for Nigerian start-ups to start thinking about relocating their companies offshore, Odunuga says. “To say we really want to encourage local content and more active participation without removing bottlenecks that impede and deter these startups from growing is a paradox. “

The bill is “vague in some areas” and “creates much room for ambiguity”, says Ayobami Omole, telecoms analyst at Tellimer in Lagos. It is “likely to add to the long list of regulatory concerns that investors have” with Nigeria, she says.

The bill says it applies to “the provision, deployment and use of information technology systems, practices, and digital services within Nigeria, or on a ship or aircraft registered in Nigeria.” In effect, Omole says, that creates “additional cost and challenges for businesses that use technology, which is going to be virtually every business in the future.”

Effiong sees the proposals as a symptom of a wider ambiguity in Nigeria’s approach to taxation and regulation. In general, the only way many companies in Nigeria find out that they are included in a particular tax is when they get a bill, he says.

  • Fintechs already find it hard to process dollar transactions and must not facilitate the purchase of foreign securities. “The hoops and rings don’t make sense.”

Effiong cites an example of his company SBM doing some work for a French client this year. The French company had to transfer payment four times before SBM received it – and even then the money had to be held in escrow until SBM could prove to the central bank that it was a legitimate transaction. The result was that the company was only paid in August for work that was completed in March.

Bottom line

Nigeria may have seen its last unicorn if the proposals come to fruition.

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