By Bassey Udo
Nigeria is cautious in endorsing the Organization for Economic Cooperation and Development (OECD)/ G20 Inclusive Framework on taxation of the digital economy in the country’s overriding best interest, the Federal Inland Revenue Service (FIRS) has said.
The Chairman of FIRS, Muhammad Nami, who gave the clarification on Monday said the country’s cautious disposition was to ensure it did not lose out on potential revenue flows from the digital economy.
Nami, who described the agreement as unfair to Nigeria and the developing countries in general, said after reviewing the conditions of the agreement, there were concerns over the impact signing it would have on the country’s tax system and tax revenue generation capacity .
“There are serious concerns on how the rules would compound the issues in our (Nigerian) tax system. For instance, to be able to tax any digital sale or any multinational enterprise (MNEs), that company or enterprise must have an annual global turnover of €20 billion and a global profitability of 10 percent. That is a concern. This is because most MNEs that operate in Nigeria do not meet such criteria, and we would not be able to tax them.
“Secondly, the €20 billion global annual turnover in question is not just for one accounting year, but it is that the enterprise must make €20 billion revenue and 10 percent profitability on average for four consecutive years, otherwise that enterprise will never pay tax in our country, but in the country where the enterprise comes from, or its country of residence,” the FIRS Chairman said.
“Thirdly, he said for Nigeria to subject a Multinational Enterprise to tax under the rule, the entity must have generated at least €1 million turnover from Nigeria within a year,” he added.
Nami stated that this was an unfair position, especially to domestic companies which, with a minimum of above N25 million (about €57,000) turnover, are subject to companies income tax in Nigeria.
Again, he said the rule would take-off so many Multinational Enterprises from the scope of those currently paying taxes to Nigeria, adding that even the MNEs currently paying taxes in Nigeria would cease to pay taxes, because of the rule.
In addition, the FIRS boss said on the issue of dispute resolutions under the Two-Pillar Solution, the rules were such that in the event of a dispute between Nigeria and a Multinational Enterprise, Nigeria would be subject to an international arbitration panel as against Nigeria’s own justice system.
“It would be subject to international arbitration and not Nigeria’s judicial system and laws—even where the income is directly related to a Nigerian member of an MNE group, which is ordinarily subject to tax in Nigeria on its worldwide income and subject to the laws of Nigeria.
“We are concerned about getting a fair deal from such a process. More so, such a dispute resolution process with a Multinational Enterprise, in an international arbitration panel outside the country, would lead to heavy expenses on legal services, traveling and other incidental costs.
“Nigeria would spend more, even beyond the tax yield from such cases,” Nami read.
On the issue of Nigeria losing significant revenue if it failed to sign into the OECD Inclusive Framework rules for the taxation of the digital economy, the FIRS Chairman said this was not a problem, as the country had already put forward four ongoing solutions to the challenge of taxation of the digital economy.
Apart from making it a point of practice to annually amend the country’s tax laws to reflect the current global realities, he said through these reviews the country developed the Significant Economic Presence (SEP) rule, via the Finance Act of 2019 and 2020.
The SEP rules, he said, set the threshold for Multinational Enterprises, without physical presence in Nigeria, for registration and payment of taxes to the country.
Also, he said the country deployed the technology to bring digital transactions to the tax net, adding that coupled with the SEP rule, Nigeria has started seeing the impact; with companies like Twitter, Facebook, Netflix, LinkedIn, among others.
Although these companies, which had no physical presence in Nigeria and were not paying taxes, the new law has made it possible to now register them for tax purposes and make them pay taxes accordingly.
He said a positive to the arrangement was that Nigeria surpassed its target for tax collection in 2021, despite the challenges posed to the global economy, including Nigeria’s economy, by the COVID-19 pandemic.
Besides, the other initiative, he noted, was the Data-4-Tax Initiative, a blockchain technology which FIRS is jointly developing with the Internal Revenue Services of the 36 states and the FCT, under the auspices of the Joint Tax Board.
With the initiative, he said the FIRS was confident there would be a seamless view and access to all economic activities of individuals and corporate bodies in Nigeria going forward, including money spent on digital commerce.
“The fourth is that we have set up a specialised office, the Non-Resident Persons Tax Office, to manage the taxation of non-resident persons and cross-border transactions, including all tax treaty operational issues and income derived from Nigeria by non-resident individuals and companies,” he said.
While appreciating the Nigerian public who raised concerns at various occasions over Nigeria’s decision not to endorse the Two-Pillar solution, Nami said their concerns came from a place of genuine passion and patriotism, anchored on seeking a better Nigeria.
“The concerns over Nigeria’s decision not to endorse the agreement are well-understood by us. We know that these questions come from a place of genuine concern and passion for a better Nigeria,” Nami said.