FG: Why Nigeria Has Not Endorsed OECD’s Proposal on Digital Economy

Ndubuisi Francis and James Emejo in Abuja

The federal government yesterday gave reasons why it withheld its endorsement to the Organisation for Economic Cooperation and Development’s (OECD) proposed solution to issues affecting the digital economy.

It hinged its position on concerns around the possibility that the terms of the proposed agreement may result in undesirable outcomes for the revenue accruable to taxing jurisdictions.
Speaking at the 17th General Assembly and 10th anniversary of the West African Tax Administrations Forum (WATAF) with the theme: “The Taxation of the Digital Economy: Exploring Untapped Revenue Sources in Africa,” the Minister of Finance, Budget and National Planning, Mrs. Zainab

Ahmed said Nigeria was yet to endorse the OECD proposal because the country seeks to prioritise the importance of securing a fair deal that provides for equitable global re-allocation of profits to all market jurisdictions.

Ahmed who disclosed government’s stance, said many developing countries, including Nigeria, may experience negative or reduced revenue collection from the implementation of the outcome of the digital economy project as propounded by the OECD.

She said: “I am aware that some countries have endorsed the agreement. While I believe that the decision to do so lies within the policy choice of each jurisdiction, I crave your indulgence to highlight one or two implications of the proposed solution, for us.

“First of all, the scope threshold of Pillar 1 covers only Multinational Enterprises (MNEs) with €20 billion global revenue and above 10 per cent profitability, which means just about 100 companies across the world, are within the scope of the rules.

“This threshold has left many of the well-known MNEs exploiting the digital space out of the scope of Pillar 1, and will significantly reduce any benefit that may accrue to market jurisdictions from taxing right.

“Even where the non-resident company (NRC) meets the revenue and profitability threshold, there is still the requirement of operating in and meeting a local sales threshold of €1 million in the market jurisdiction, except for jurisdictions with a Gross Domestic Product of $40 million and below that have the in-scope revenue threshold fixed at €250,000.”

According to her, the proposed scope reduction after seven years of implementation provides for some conditions, which include effective implementation of mandatory binding dispute resolution mechanism.

She observed that there was no certainty of the reduction in the scope threshold, adding that the rule may continue to apply to only the few companies that fall under the scope revenue and profitability threshold.

The finance minister noted that in addition, the building blocks on Unilateral Measures required that all jurisdictions withdraw their existing legal framework for taxing all NRC deriving income through digital means without a physical presence, and refrain from introducing any other ones subsequently.

She pointed out: “The implication of this is that it restricts the number of non-resident companies engaged in digitalised businesses that may pay tax in our jurisdictions to only the 100 that are in-scope of the threshold, to the exclusion of all others, regardless of the actual number.

“It should further be noted that the unilateral measures to be withdrawn is not restricted to Digital Service Taxes but also includes other relevant measures that have not been defined, that taxes non-resident companies without physical presence in the market jurisdiction,” she added.
Ahmed noted that this was a challenge because Withholding Taxes on Royalties and fees for Technical Services, which represents a significant source of revenue generation to countries where payments are made, may be included in subsequent definitions of those measures.

Such taxes, she explained, may no longer be collectible under the proposed rule.

She also observed that the project introduces a mandatory binding dispute resolution mechanism for Amount A and issues connected to it including all Transfer Pricing and business profits disputes, which implies that most tax disputes involving MNEs cannot be determined under the domestic legal framework, but under international arbitration.

She noted that Nigeria has contributed its quota at different fora, especially at the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, otherwise known as the Inclusive Framework (IF).

The minister stated that the basis of Nigeria’s involvement in the process was the understanding that a coordinated, universal solution to the tax challenges of the digitalised economy was necessary and that the solution would be fair and acceptable for all members.

“We had hoped that all jurisdictions would be participating in the project on equal footing and that the agreed solution would benefit all while preserving jurisdictions’ existing taxing rights which are not aimed at digital businesses, and that the project would provide universally acceptable rules, by consensus.

“The question therefore arises: why has Nigeria not endorsed the OECD proposed solution to the issues affecting the digital economy?

“Simply put, Nigeria seeks to prioritise the importance of securing a fair deal that provides for equitable global re-allocation of profits to all market jurisdictions, and it is our view that the agreement has not met this objective,” she said.

Ahmed observed that, “the special General Assembly of Tax administrations in the West African sub-region provided a unique opportunity for frank and forthright discussions on how best we can protect our interests and maximise our benefits, not just as individual countries but as a regional bloc.”

As the competent authority in tax matters for Nigeria, she expressed pleasure that her ministry had actively participated in the global discourse around the issue of taxation of the digital economy, particularly as it affects the allocation of taxing rights.