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Sunday, October 24, 2021

FG Highlights Reason For Not Endorsing OECD Solution To Issues Affecting Digital Economy

The federal government of Nigeria has highlighted the reason that Nigeria has not endorsed the Organisation for Economic Co-operation and Development (OECD) proposed solution to the issues affecting the digital economy, particularly as it affects the allocation of taxing rights.

Nigeria has not endorsed the OECD proposed solution 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, according to Mrs. Zainab Ahmed, Honourable Minister of Finance, Budget and National Planning.

The Honourable Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed (right) with Boss Mustapha, Secretary to the Government of the Federation at the 17th General Assembly and 10th Anniversary of the West African Tax Administrations Forum (WATAF) recently held in Abuja.

In her special address at the 17th General Assembly and 10th Anniversary of the West African Tax Administrations Forum (WATAF) recently held in Abuja and virtually, Mrs. Zainab Ahmed, Honourable Minister of Finance, Budget and National Planning, noted: “As the competent authority in tax matters for Nigeria, …we have actively participated in the global discourse around the issue of taxation of the digital economy, particularly as it affects the allocation of taxing rights.

Speaking at the two-day event on the theme: ‘The Taxation of the Digital Economy: Exploring Untapped Revenue Sources in Africa’, which she said is perhaps the most topical one at the moment in tax circles and for good reason, Mrs. Ahmed noted: “As the so called ‘e-economy’ continues to grow and develop internationally, it is only natural to expect that there will be issues associated with taxation of the income that accrues from it and how this income can be properly tracked, assessed and taxed.” 

In this regard, the country has continued to contribute its quota in different fora, most importantly at the OECD/G20 inclusive framework on base erosion and profit shifting, otherwise known as the inclusive framework (IF).

The Honourable Minister stated that the basis of Nigeria’sinvolvement in that 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. “And it is our view that the agreement has not met this objective.

In her words: “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.

Some countries, according to Mrs. Ahmed, 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 €20billion global revenue and above 10 percent 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 Amount A 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 1million euros in the market jurisdiction, except for jurisdictions with a gross domestic product (GDP) of $40 million and below that have the in-scope revenue threshold fixed at €250,000.

Furthermore, the proposed scope reduction after seven years of implementation provides for some conditions, which, as she stated, include effective implementation of mandatory binding dispute resolution mechanism. “Thus, there is no certainty of the reduction in the scope threshold, and the rule may continue to apply to only the few companies that fall under the scope revenue and profitability threshold. 

In addition, Mrs. Ahmed stated: “The building blocks on unilateral measures require 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. 

“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.

Speaking further, she also said: “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. 

“This is a challenge because withholding taxes on royalties and fees for technical services, which represent a significant source of revenue generation to countries where payments are made, may be included in subsequent definitions of those measures. Thus, such taxes may no longer be collectible under the proposed rule.

One other critical issue is that the project, as she said further, 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 multinational enterprises cannot be determined under the domestic legal framework, but under international arbitration. This will most likely lead to conflict with the requirements of domestic law for many jurisdictions. 

“Under the constitution of Nigeria, for instance, tax revenue disputes are within the exclusive jurisdiction of the relevant court.  In addition to this, the cost associated with international arbitration, the unreasonableness of arbitral awards which Nigeria has experienced, and low capacity in the arbitral process are germane concerns for developing countries.

Nigeria’s concerns are “centred around the strong possibility that the terms of the proposed agreement may result in undesirable outcomes for the revenue accruable to taxing jurisdictions. Many developing jurisdictions may experience negative or reduced revenue collection from the implementation of the outcome of the digital economy project.

The “destiny of our economies lies in our hands. We may,therefore, need to put on our thinking caps and explore possibilities of developing local solutions that works, either within our domestic tax rules or along the regional blocs.

In view of the foregoing, she urged all delegates to remain focused on the fact that the ultimate goal is the equitable re-allocation of profits, to maximise revenue for themember states.

Yunusa Tanko Abdullahi
S.A Media and Communications to the Honourable Minister of Finance, Budget and National Planning

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