The advent of disruptive digital economy has birthed prime opportunities for globalisation and increased tax revenue. In this report, CHIMA NWOKOJI explores the opportunity cost to Nigeria of outright rejection of OECD/G20 global agreement on tax modernisation.
Technology, globalisation, and global warming have changed the world. Taxation, which is the lifeblood of any economy, must keep pace as well.
Going by the data from the National Bureau of Statistics (NBS), as at first quarter of 2022, over 68 million businesses were active in Nigeria, while less than 20 million of these were active taxpayers.
Analysts therefore wonder why this gap still exists in Nigeria with all the automation, tax amnesty offered and other improvements brought into tax administration in the country.
This explains why tax authorities have no other option than to explore other innovative ways to ramp up enforcement of tax laws and expand the tax dragnet.
One of such ways is embedded in the digital economic space, where, with a mouse click, individuals can move money across borders and corporations can transact with their affiliates across global supply chains.
The digital economy refers to all economic transactions that occur on the internet. The Organisation for Economic Co-operation and Development (OECD) describes it as “an economy that incorporates all economic activity reliant on, or significantly enhanced by the use of digital inputs, including digital technologies, digital infrastructure, digital services and data. It refers to all producers and consumers, including the government, that are utilising these digital inputs in their economic activities.”
All of these remain elusive and hard to grasp for tax purposes, but experts believe that with the renewed vigour brought into the enforcement of Value Added Tax (VAT) and withholding tax, Nigeria has already started the journey of grasping transactions in the digital space.
For instance, the Executive Chairman of the FIRS, Muhammad Nami, highlighted that by virtue of the amendment to Section 25 of the FIRS (Establishment) Act in the 2021 Finance Act, any person who fails to grant the Service access to its information technology systems to connect to its automated tax administration solution is liable to penalties under the law.
The country only needs a little more push in these aspects.
A recent report by the World Bank estimates that by 2025, the resulting impact of the internet economy could contribute nearly $180 billion (approx. N75.6 trillion) to Africa’s economy. Smart nations have taken the position to draw from this pool of wealth.
The world has moved into the knowledge revolution and the phase of interconnectedness where production depends on intangible know-how assets that can be located anywhere but not easily taxable.
For instance, multinational enterprises such as Amazon, Alibaba, Twitter, Spotify, Uber, Facebook, Google, Netflix, YouTube, among others are operating in the digital space without necessarily having a physical presence in all the countries where they generate their revenues. They did not necessarily set up offices or have their employees work in those countries. So, any country waiting for their significant physical presence before taxing them will be missing out on huge tax revenues.
By moving profit from certain jurisdictions where the economic activities took place, tax authorities are faced with the potential risk of eroding the value created in such jurisdictions by multinational enterprises.
This brought the idea of the gathering of tax authorities from many parts of the world to work out how these changes were affecting their tax collections; because taxation is serious business.
It is expected that Nigeria should move a step further, by joining in this shift; leveraging the Finance Act of 2021 which amended Section 10 of the VAT Act to revolutionise tax administration in the new normal.
The 136 countries’ agreement
Widespread dissatisfaction with low tax payments by the world’s major multinationals (despite annual profits of nine percent of global gross domestic product) spurred this groundbreaking agreement to modernise the existing and century-old international system.
At the Organisation for Economic Co-operation and Development (OECD)/G20 meeting held on Friday, October 8, 2021, 136 countries and jurisdictions representing more than 90 per cent of global Gross Domestic Product (GDP), agreed to the two-pillar solutions to taxing the digital economy. They set 2022 to be a crucial year for implementing the agreement.
Writing on the International Monetary Fund (IMF) blog in April 2022, the trio of Vitor Gaspar, Shajik Hebous and Paolo Mauro agreed that countries face tax challenges that have no national borders and require cross border collaboration.
These challenges create room for tax evasion and avoidance, leading to loss of revenue that could have financed social spending or infrastructure investments.
“Our new Fiscal Monitor shows how better international coordination in three areas: taxing large corporations, sharing information on offshore holdings, and enacting fair carbon pricing can benefit everyone,” they said.
Pillar one of the agreement says that a portion of multinationals’ profits must be taxed where the firms’ goods or services are used or consumed. This means that tech companies can be taxed where their customers are located, even if their employees are far from their customer base.
According to the IMF, this new taxation principle set the stage for a more efficient tax than unilateral digital services taxes.
Pillar two establishes a global minimum corporate tax of 15 per cent. By doing so, it puts a floor on competition, reducing incentives for countries to compete using their tax rates and for firms to shift profits across borders.
With this, some nations will top up their tax on “undertaxed” profit to the minimum level, increasing corporate tax revenues by up to six per cent globally.
The writers in the IMF blog are of the view that reversing the downward trend of corporate income tax rates, reduced tax competition in the digital space could raise revenue by another eight per cent, bringing the total effect to 14 per cent.
However, the peculiarities of emerging market economies like Nigeria is not overlooked. There is a consensus opinion that process should continue, however, to better adapt to low-income countries’ circumstances, for example, to simplify some aspects of corporate taxation, strengthen withholding taxes on cross-border payments, and share more country-by-country information on multinationals.
For low-income economies like Nigeria, to reap the benefits of these changes, they need to adopt complementary reforms, such as removing wasteful tax incentives.
Coordinating on personal taxation
Much like corporations, the taxation of individuals (especially the wealthiest) also requires coordination across borders. Recent leaks of documents such as the Panama Papers and Paradise Papers revealed a massive stock of offshore wealth and widespread tax loopholes.
And with the rise of digital assets that allow for even greater anonymity, the sharing of information is becoming more and more vital. Beyond the revenue loss, opaque offshore accounts designed to hide wealth facilitate the transnational transfer of corrupt proceeds.
It should be remembered that one of the discoveries of Pandora Papers was that, though not seen on the Forbes’ wealthiest list, about 21 ex-Nigerian governors and ministers are worth a treasure.
According to filings of their businesses with their offshore financial managers, Trident Trust Company (BVI) Limited, as of October 2016, they had a combined treasure worth about $100 million and £77.3 million in assets, cash, bonds, equities, mutual funds and property holdings; controlled by the Standard Chartered Bank in Guernsey, Jersey and the U.K.
Another two owned assets worth $511,860 and 50,000 pounds in Standard Bank, Jersey.
At the conservative official exchange rates of N415 trading for a dollar and N449 to a British pound obtained from the CBN site early July, this is equivalent to about N76.420 billion. Application of the OECD)/G20 tax agreement will checkmate this corrupt wealth acquisition and transfer.
According to the IMF, coordination can deliver tangible results, as it complements the 163 countries (Nigeria inclusive) agreement on exchange of information under the Global Forum on Transparency and Exchange of Information for Tax Purposes.
“Yet, more can be done to improve the reliability of the information, our report notes. Countries should do more to promote beneficial ownership registries’ information about who really owns or controls a company,” the trio from IMF posited.
Nigeria’s dilemma on global tax modernisation
The existing international tax rules assume that you need a certain level of physical presence (an office, a factory, a workshop, etc.) in a foreign country for you to make any significant or stable revenues.
The dilemma that Nigeria faces has been clearly explained by the FIRS Chairman, Nami and Mr Mathew Gbonjubola, the Group Lead Special Tax Operations Group, and Nigeria’s representative at the OECD Inclusive Framework.
According to Nami, “There are severe concerns for how the rules would compound the issues in our tax system. For instance, to be able to tax any digital sale or any multinational enterprise, that company must have an annual global turnover of 20 billion euros and global profitability of 10 per cent.
“That is a concern. This is because most multinationals operating in Nigeria do not meet such criteria, and we would not be able to tax them.
“Secondly, the 20 billion Euro turnover in question is not just for one accounting year, but it is that the enterprise must make EUR 20 billion revenue and 10 per cent profitability for four consecutive years. Otherwise that enterprise will never pay tax in our country, but in the country where the enterprise comes from, or it’s country of residence.”
He added that this is an unfair position, especially to domestic companies, which with a minimum of above N24 million (5,700 Euros) are subject to companies income tax in Nigeria,
“This rule will take off so many multinationals from the scope of those that are currently paying taxes to Nigeria. In other words, even the multinationals that are currently paying taxes in Nigeria would cease to pay taxes to us because of this rule,” he said.
In Nigeria, prior to the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order), it was believed that there must be a certain level of physical presence for companies to be subjected to tax. With this rule, it became practically challenging to tax companies operating in the digital economy because they could earn income without any physical presence in Nigeria.
With the introduction of the SEP Order, companies are not only taxed on the basis of physical presence but also on economic presence. A Non-resident Company (NRC) providing digital service is deemed to have a SEP in Nigeria in any accounting year where it derives from Nigeria, a gross turnover or income exceeding N25 million ($64,000) or its equivalent in other currencies from any or a combination of digital services provided; uses Nigerian domain name (.ng) or registers a website address in Nigeria; or even has purposeful and sustained interactions with persons in Nigeria by customising its digital platform to target the Nigerian market. It includes reflecting its product or service price in Nigerian currency or providing options for billing or payment in Nigerian currency.
An NRC involved in the provision of the above services will be deemed to have an SEP in Nigeria where it earns any income from: a person resident in Nigeria or a fixed base or agent of an NRC.
But, as at the time details of this agreement was released, 136 of the 140 Inclusive Framework countries have agreed to this release. Four countries – Kenya, Nigeria, Pakistan, and Sri Lanka have not yet joined the agreement.
Should Nigeria join the agreement, the SEP order introduced would most likely be repealed while the Two-Pillar approach of the OECD would be adopted.
Specifically, multinational enterprises with global sales above EUR 20 billion and profitability margin above 10 per cent will be covered by the new rules and 25 per cent of the profit above the 10 per cent threshold to be reallocated to market jurisdictions.
Pillar Two introduces a global minimum corporate tax rate set at 15 per cent to be effective 2023. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around $150 billion in additional global tax revenues annually.
The aim of the Two-Pillar Solution is to make sure that MNEs do not take advantage of the old rules of international tax to avoid paying their fair share and the new rules are designed to capture and address this problem.
Explaining in detail, Mr Gbonjubola highlighted that despite the expected outcome that both Pillars will increase Global Corporate Income Tax by as much as $150 billion per annum, with an attendant favourable environment for investment and economic growth, there were serious concerns that the pillars did not address negative revenue outcome for Nigeria and other developing countries.
His words, “The general issue that developing countries have with the outcome that was published on October 8 is the high cost of implementation. And that speaks to the complexities of the proposal in the inclusive framework statement. In every complex situation or rule, implementation and compliance will always be difficult. When implementation or compliance is difficult, there would be a high cost of implementation.
Gbonjubola said that looking at the bulk of the money that would accrue from the project, if any, 70-80 percent will go to the developed countries. Almost nothing comes to the developing countries.
On the specific concerns raised by Nigeria, Mr Gbonjubola, who led Nigeria’s team on the Inclusive Framework negotiations, explained that while the whole project started out to find solutions to the challenges of a digitalised economy, the outcome was completely different.
Nigeria does not have a problem with withdrawal of unilateral measures by countries as required by the statement because the country does not have any unilateral measure targeted at digital services companies.
Increasing the dilemma, the Minister of Finance, Zainab Ahmed, was quoted to have said that Nigeria would continue to participate in the inclusive framework activities particularly the design of all the technical notes and the model rules, and then, if and only if, the concerns expressed are addressed, then Nigeria still has the chance to join up and to sign up.
But if not, it will be left for policymakers to decide going forward.
Opportunity cost of rejecting OECD/G20 Inclusive Framework
Although the concerns being raised by Nigeria through the FIRS are valid, there is a consensus that innovative ways can be worked out. Rejecting it outright is like throwing the baby with the birth water, because of what the future holds. The complex situation or rule on implementation and compliance to the global agreement which the FIRS officials highlighted are still prevalent in Nigeria’s existing tax laws, yet the country’s tax revenues has remained in the upward trajectory and so, these may not be sufficient excuse to outrightly reject the framework which has been described as the future of taxation in the digital economy.
The digital economy is equivalent to 15.5 per cent of global GDP, growing two and a half times faster than global GDP over the past 15 years to 2019 and has grown even faster till today according to the World Bank document.
“It has become imperative to examine incidental issues on taxing the digital economy as it presents the Nigerian government with huge potential and, at the same time, tax policy may be disincentives for the growth of digital business,” the Managing Partner of Punuka Attorneys & Solicitors, Mrs Elizabeth Idigbe, said.
The FIRS earlier this year set out to achieve 100 per cent automation of all its tax administration processes with the aim of blocking revenue leakages and revolutionising revenue generation in Nigeria.
While it is important to deploy technological tools in assessing entities that fall within the Significant Economic Presence (SEP) threshold and relevant turnover generated from Nigeria, it is also important for the country to look beyond SEP and think of what it would loose in the emerging tax potentials from the digital space especially by continued opt out of OECD/G20 Inclusive Framework.
To the Minister of State for Budget and National Planning, Prince Clem Agba, the digital economy is high on the list of untapped sources of funds for the Nigerian tax authorities and remains the future of the nation.
Agba, whose views aligned with other stakeholders, said a delicate balance must be achieved such that taxation of the digital economy does not stifle its growth.
The current tax rate in Nigeria for big companies with over N100 million turnover yearly is 30 per cent. Also, MNEs have been compelled to file tax returns under the Significant Economic Presence (SEP) Order 2020.
So, the application of the two-pillar initiative will result in Nigeria conceding to the adoption of global minimum tax, with the MNEs operating in Nigeria being subjected to the 15 percent global corporate tax rate.
Way forward
The Chartered Institute of Taxation of Nigeria (CITN) believes that there is a need for greater inclusiveness of developing nations in making international tax policies so that they do not get the short end of the stick when these policies are passed and implemented.
But the Institute considers the Two-Pillars as beneficial initiatives for the Nigerian government and urges the government to collaborate with other developing countries in the OECD member countries to push for an increase in the global minimum tax rate for the benefit of the African Union while considering signing the statement.
An increase in the global minimum tax rate to the OECD recommended average rate of 21.5 percent that should be more beneficial to developing countries like Nigeria.
The Institute, in a position paper, suggested subjecting digital businesses to a withholding tax (WHT) the same way you would apply WHT to dividends and interest earned by a foreign company. Slightly related to this was the third idea of applying an equalisation levy on digital transactions.
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The PDP spokesman recalled how the opposition party had on various occasions alerted that the APC government had ceded sovereignty over a large portion of our country to terrorists, “many of whom were imported into our country by the APC.”
He further stated: “From the video, in a brazen manner, terrorists as non-state actors boldly showed their faces, boasting, admitting and confirming their participation in the Kuje Prison break, some of whom were former prison inmates who were either jailed or awaiting trial for their previous terrorism act against our country.
“Nigerians can equally recall the confession by the Governor of Kaduna State, Mallam Nasir el-Rufai that the APC government knows the plans and whereabouts of the terrorists but failed to act.
According to Ologunagba, about 18,000 Nigerians have been killed by terrorists between 2020 and 2022 “as the criminals continue to be emboldened by the failures and obvious complicity of the APC and to which the PDP had always drawn attention.”
“This is not politics; this is about humanity and leadership, which leadership sadly and unfortunately is missing in our country at this time,” he said.
The PDP added that it is appalled by “the lame response by the apparently helpless, clueless and deflated Buhari Presidency, wherein it told an agonizing nation that President Buhari “has done all and even more than what was expected of him as Commander in Chief by way of morale, material and equipment support to the military…”
“This is a direct admission of incapacity and failure by the Buhari Presidency and the APC. At such a time, in other climes, the President directly leads the charge and takes drastic measures to rescue and protect his citizens.
“In time of adversity, the President transmutes into Consoler-in-Chief to give hope and succour to the citizens. Painfully, Nigeria does not have a President who cares and can stand as Consoler-in-Chief to the citizens.
“It has now become very imperative for Nigerians to take note and realize that the only solution to this unfortunate situation is to hold the APC government accountable. We must come together as a people, irrespective of our political, ethnic and religious affiliations to resist the fascist-leaning tendencies of the APC administration.
Ologunagba called for an urgent meeting of the National Council of State to advise on the way to go over the nation’s worsening insecurity.
“Our nation must not fall. The resilient Nigerian spirit and ‘can-do- attitude’ must be rekindled by all to prevail on the President to immediately and without further delay, accede to the demand by the PDP and other well-meaning Nigerians to convene a special session of the National Council of State to find a lasting solution since the President has, in his own admission, come to his wit’s end,” the PDP spokesman declared.
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