Artificial Intelligence And Taxation In Nigeria

INTRODUCTION

Artificial Intelligence (AI) is no longer a futuristic concept—it is actively reshaping how business is done across multiple sectors, from fintech and healthcare to logistics and legal services. In Nigeria, both local startups and international companies are adopting AI technologies to improve operations, cut costs, and create new markets. These AI-enabled businesses are generating substantial revenue, but the legal and tax environment in which they operate has not fully caught up.

Most of Nigeria's tax framework was built around traditional businesses, where services are rendered by human workers, and taxable income flows from identifiable activities or physical establishments. This poses several challenges. Can AI, which independently performs functions once reserved for people, be treated as a taxable entity under Nigerian law? Should digital platforms that use AI to automate financial services be taxed the same way as banks or fintechs that rely on human agents? And what happens when a foreign AI company earns revenue from Nigerian users but has no physical footprint in the country?

This article highlights how AI fits within the broader digital economy, examines whether current tax laws in Nigeria can accommodate AI-based enterprises, identifies practical compliance concerns, and proposes legal strategies for staying ahead.

UNDERSTANDING AI-BASED BUSINESSES AND THEIR TAX IMPLICATIONS AI

AI is reshaping Nigeria's business landscape, with applications ranging from legal-tech and fintech tools to health diagnostics and cloud-based analytics. These services are often delivered remotely, with no physical footprint in Nigeria—posing distinct tax challenges under the current legal framework.

1. Companies Income Tax (CIT) for Local and Foreign AI Firms

Under Section 40 of the Companies Income Tax Act (CITA), Nigerian-incorporated AI businesses are taxed based on their annual turnover:

• 30% for large companies (over ₦100 million),
• 20% for medium-sized firms (₦25 million to ₦100 million).¹
• 0% for small companies (below ₦25 million).

Foreign AI firms without a physical presence may still be taxed under the Significant Economic Presence (SEP) rule, introduced by the Finance Act 2021. Under Section 13(2)(c) of CITA, a foreign AI company is subject to CIT if it:

• Uses a Nigerian agent or representative to market or support its AI products (e.g., Software as a Service platforms)²,
• Provides digital services or tools accessed by Nigerian users;
• Earns at least ₦25 million annually from Nigerian sources through digital channels.³

In such cases, tax is payable on the portion of income attributable to Nigerian users.⁴ Importantly, many AI services are billed in foreign currency. Federal Inland Revenue Service (FIRS) determines tax liability by converting revenue using the Central Bank of Nigeria's open market exchange rate. For instance, $100,000 earned in 2024 at ₦1,500/$1 translates to ₦150 million in Nigerian income—placing the company in the 30% CIT bracket.

2. Withholding Tax on Remote AI Services

Foreign AI firms offering technical, management, or professional services to Nigerian clients are subject to Withholding Tax (WHT) at a flat rate of 10%, regardless of whether the Nigerian recipient is an individual or a company.⁵ Under Section 13(2)(e) of CITA, this withholding serves as a final tax for non-resident providers, meaning no further tax filings are required for that income in Nigeria. The obligation to deduct and remit the WHT rests with the Nigerian client, who must do so before making payment to the foreign service provider.

3. Value Added Tax (VAT) on Digital Services

AI services delivered digitally—including Software as a Service (SaaS), AI-powered platforms, and data analytics tools—are now classified as import services and subject to 7.5% VAT under the VAT Act.⁶ Foreign AI businesses with a Significant Economic Presence in Nigeria must register for VAT with FIRS.⁷

4. Personal Income Tax

AI businesses operating as sole proprietorships or partnerships are taxed under the Personal Income Tax Act (PITA) on net profits at progressive rates ranging from 7% to 24%, depending on income. These rates may change with pending tax reforms at the National Assembly.

Such businesses must register with the relevant State Internal Revenue Service, obtain a Tax Identification Number (TIN), and file annual tax returns. Given Nigeria's layered tax structure, AI firms—particularly those offering cross-border services—must plan carefully, reflect VAT and WHT in contracts, and remit taxes promptly to avoid penalties.

Case Study: Vodacom Business Nigeria Limited (VBNL) vs. Federal Inland Revenue Service (FIRS)

The dispute between Vodacom Business Nigeria Limited (VBNL) and the FIRS provides a precedent on the application of VAT to cross-border digital transactions in Nigeria.

Vodacom Nigeria had procured bandwidth services from New Skies Satellites (NSS), a company based in the Netherlands with no physical presence in Nigeria. NSS did not charge VAT on its invoices, and Vodacom did not self-assess or remit VAT on the transaction. Upon review, FIRS insisted that Vodacom was liable to remit VAT, relying on Section 10(2) of the VAT Act, which imposes VAT on imported services consumed in Nigeria. Vodacom challenged the demand, arguing that the services were rendered offshore, NSS did not conduct business in Nigeria, and therefore no VAT obligation could arise under Nigerian law.

The Federal High Court agreed with FIRS, holding that the place of consumption, not the place of supply, determines VAT liability. On appeal, the Court of Appeal upheld the decision, affirming that Nigerian recipients of foreign services must self-charge and remit VAT even if the foreign supplier is unregistered and VAT is not invoiced.

Implications of the Decision

The Vodacom v. FIRS judgment provides clarity on the VAT obligations of Nigerian businesses that receive services from foreign providers. The key takeaways are:

• VAT Liability Rests with the Nigerian Recipient: Where a Nigerian business receives taxable services from a foreign provider, it must self-assess and remit VAT, regardless of whether the supplier is VAT-registered in Nigeria or includes VAT on the invoice.
• Reverse Charge Mechanism Applies in Practice: Although the VAT Act does not use the term "reverse charge," Section 10(2) effectively creates such an obligation.⁸ In international tax systems, the reverse charge mechanism shifts the responsibility to collect and pay VAT from the foreign supplier to the domestic customer, particularly in cross-border service transactions. What matters is the substance of the law: if the service is consumed in Nigeria, VAT must be accounted for locally.

TAX COMPLIANCE CHALLENGES FOR AI-BASED BUSINESSES

AI-driven businesses in Nigeria face a unique set of tax compliance challenges due to the digital and borderless nature of their operations. These challenges cut across both legal interpretation and practical implementation of Nigeria's tax laws.

1. Ambiguity Around "Significant Economic Presence" (SEP)

While Section 13(2)(c) of the Companies Income Tax Act (CITA) allows Nigeria to tax foreign digital companies with a Significant Economic Presence (SEP), the criteria remain broad and open to interpretation. The FIRS considers factors such as Nigerian-sourced revenue exceeding ₦25 million, use of local domain names, and sustained engagement with Nigerian users.⁹ However, it remains unclear whether platforms offering free AI services—such as search engines or generative chatbots—fall within this scope if they derive indirect value from data monetization or targeted advertising.

2. Complexities in Determining Taxable Profits

AI companies often rely on data-driven, algorithmic business models that do not fit neatly into traditional tax categories. For example, AI-powered advertising platforms generate revenue from global user interactions, making it difficult to attribute income to Nigeria. Subscription based models further complicate matters, especially where pricing is determined regionally or globally. These complexities raise concerns around double taxation and create room for profit shifting or tax avoidance if income attribution is not clearly defined.

3. Compliance by Foreign AI Firms

While the Finance Act 2020 extended VAT obligations to foreign digital service providers, compliance remains limited. Many AI firms have not registered for VAT in Nigeria, and the current regime depends largely on voluntary compliance. This has resulted in significant VAT leakage.

4. Cross-Border Taxation and OECD BEPS 2.0 Considerations

Nigeria has not fully implemented the OECD Base Erosion and Profit Shifting (BEPS) 2.0 framework, which aims to allocate taxing rights based on where economic value is created— not merely where the provider is located. This gap affects AI businesses that operate across multiple jurisdictions, as they may face double taxation risks in the absence of clear tax treaties or dispute resolution mechanisms.

5. High Compliance Costs for AI Startups

For Nigerian AI startups, tax compliance can be resource intensive. Navigating multiple tax obligations—such as CIT, VAT, and PIT—requires time, expertise, and ongoing legal support. Frequent changes to tax rules and filing requirements, especially through Finance Acts and FIRS circulars, add to the complexity. Without proper guidance, startups risk late filings, penalties, and audit exposure, all of which can divert attention from growth and innovation.

TAX PLANNING STRATEGIES FOR AI BUSINESSES

AI businesses in Nigeria must adopt proactive tax planning strategies to ensure compliance while optimizing their tax position. Key areas to consider include:

• Business Structuring: Registering under the Pioneer Status Incentive Scheme or operating within Free Trade Zones (FTZs) can provide tax holidays and exemptions.
• Incentives and Deductions: AI firms may qualify for pioneer industry incentives and R&D deductions under Section 26 of CITA, lowering taxable income.
• Withholding Tax (WHT): Cross-border service payments may attract reduced WHT rates under Double Taxation Agreements (DTAs), where available.
• VAT Compliance: Following Vodacom v. FIRS, imported digital services are subject to self-assessed VAT, unless exempt under the VAT Act.
• Transfer Pricing: Multinational AI firms must comply with Transfer Pricing Regulations, ensuring related-party transactions reflect market value.
• Digital Tax Obligations: Providers of AI-driven digital services should register for VAT, maintain proper tax records, and monitor global tax reforms.

Proactive planning reduces compliance risks, enhances efficiency, and supports sustainable growth in Nigeria's digital economy.

CONCLUSION

As AI-driven businesses grow within Nigeria's digital economy, the tax landscape around them is rapidly evolving. From corporate income tax under CITA to VAT obligations and case laws like Vodacom v. FIRS, it is clear that both local and foreign AI companies must navigate a complex and increasingly scrutinized regulatory environment.

The challenges ranging from uncertainty around Significant Economic Presence to compliance with VAT and transfer pricing rules—demand a proactive, structured approach. At the same time, opportunities exist through incentives such as pioneer status and R&D deductions that can improve tax efficiency when properly leveraged.

For AI businesses, staying compliant is no longer optional—it is essential to avoid legal risk, ensure operational continuity, and remain competitive. For more information or guidance on tax compliance, please reach out to us at www.scp-law.com.

Footnotes

1 Sections 13(2)(a) & 40, Companies Income Tax Act

2 SaaS refers to a cloud-based software distribution model where applications are hosted by a provider and accessed by users over the internet, typically on a subscription basis. Examples include AI-powered analytics tools, cloud accounting platforms, and customer relationship management (CRM) software

3 Section 13(2)(c), CITA, inserted by Section 4, Finance Act 2019

4 Section 13(2)(a) & (b), CITA

5 Deduction at Source (Withholding) Regulations 2024

6 Section 10, VAT Act, as amended by Section 43, Finance Act 2020.

7 Guidelines on Simplified Compliance Regime for Value Added Tax (VAT) for Non-Resident Suppliers 2021. Accessed on 18th March 2025 from https://old.firs.gov.ng/wp-content/uploads/2021/11/Guidelines-on-VAT Simplified-Compliance-Regime-11.09.2021.pdf

8 Now Section 10(3), VAT Act (as amended by Finance Act 2020)

9 Section 1, Companies Income Tax (Significant Economic Presence) Order, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.