Nigeria’s government yesterday gave reasons why it withheld its endorsement to the OECD – Organization for Economic Cooperation and Development’s – 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 prioritize the importance of securing a fair deal that provides for equitable 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.
“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 digitalized 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 are 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.
“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.