The Federal Inland Revenue Service (FIRS) has explained why Nigeria did not sign the Organisation for Economic Cooperation and Development (OECD) G20 Inclusive Framework two-pillar solution to tax challenges of the digitalized economy.
The OECD G20 Inclusive Framework two-pillar solution proposes a framework of rules aimed at tackling base erosion and profit shifting, and providing for the taxation of Multinational Enterprises (MNEs).
Nigeria, and three others out of the 140 OECD member-countries have not agreed on the framework
Nigeria’s reasons for not agreeing to the Two-Pillar solution were explained in a.
The Executive Chairman of the FIRS, Muhammad Nami, during a webinar session hosted by the revenue agency last week, noted that taxation of the digital economy had become a topical issue that many economies and development blocs are working to solve, including the OECD and the United Nations Tax Committee, which have commissioned projects to produce a common front for countries to adopt.
Represented at the forum by the FIRS Group Lead, Executive Chairman’s Group, Mr. M. Abubakar, the FIRS boss clarified: “Nigeria has been involved in various work-streams under the OECD project and had articulated its position on the technical work towards the goal of producing a common front for countries.
“However, our concerns on potential negative revenue returns that the rule designs would have for developing countries were unaddressed, Nigeria abstained from committing to the rules at this time”, Nami added.
He explained that the webinar was organized to educate the public on the modalities and impact of the statement released by the OECD Inclusive Framework on the 8th of October 2021 and to provide a broad picture on why Nigeria abstained from signing.
In his technical paper presentation during the session, the Group Lead Special Tax Operations Group, and Nigeria’s representative at the OECD Inclusive Framework, Mr. Mathew Gbonjubola, pointed out that despite the expected outcome that both Pillars will increase Global Corporate Income Tax by as much as $150 Billion per annum, with 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.
He expatiated: “The general issues that developing countries have with the outcome that was published in October 8th 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 high cost of implementation.
“Another issue was that the economic impact assessment that was carried out on Pillar 1 and 2 were founded on an unreliable premise. The country-specific impact assessment that was done was top-down.
“Somebody just looked at the GDP of Nigeria, and says Nigeria’s GDP is this much and then they should be able to buy this number of shoes and things like that. And you and I know, in that kind of postulation, the margin of error is usually very wide. That exactly was what happened with this. Particularly for Nigeria, when we ran the numbers it was way off the figures that the OECD gave us.
“And the final issue most developing countries had was that the developed world, within the inclusive framework, was very indifferent to the concerns expressed by most developing countries. This you can see from the outcome, with respect to the complexity, issues of high cost of implementation and on the issue of revenue accruable to developing countries.
“When you look at the bulk of the money that would accrue from the project, if any, 70% – 80% will go to the developed countries. Almost nothing comes to the developing countries”, Gbonjubola stressed.
On the specific concerns raised by Nigeria, the seasoned tax administrator, 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.
He further noted that the statement by the OECD Inclusive Framework required all parties to remove all Digital Service Taxes and other relevant similar measures with respect to companies taxation and to commit not to introduce such measures in the future.
The FIRS Group Lead Special Tax Operations Group further said: “The statement required the withdrawal of unilateral measures by countries. Which Nigeria does not have a problem with (Nigeria does not have any unilateral measure targeted at digital services companies).
“However, the paper that was released on unilateral measures was so expansive in its definition that we are concerned that the taxing rights that Nigeria has always enjoyed may be withdrawn”, he added.
According to him, Nigeria is unable to implement the mandatory binding resolution on arbitration because of constitutional limitations as to tax dispute resolution.
Gbojunbola explained: “Pillar 2 is not a deal breaker because Nigeria could work with Pillar 2. “We have a few issues with Pillar 2 but we could live with them but because Pillar 1 and 2 are a single package, since we are rejecting Pillar 1, we can’t take on Pillar 2”
“Under the inclusive framework rule you either accept both Pillars or you reject both Pillars. You cannot pick one to the exclusion of the other. And since Nigeria is not able to join one of the pillars, it means we are out of both Pillars”, he stressed.
The tax expert pointed out that Nigeria did not see any additional revenue coming to her by way of Pillar 2, noting that the Pillar could act as a behaviour modifier for policy makers to take another look at the various tax incentives and tax waivers we have in our tax laws and begin to restructure them in other to ensure that we are not deliberately throwing away revenue.
He further noted:“Nigeria could not sign up to the statement of the inclusive framework because it did not address the concerns that we had expressed as a country and it also did not take cognisance of issues around developing countries, which will make those outcomes not to provide additional revenue, and if any, very little, and at very significant cost.
“And finally, just like the Honourable Minister of Finance said a couple of months ago, 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 we have expressed are addressed, then Nigeria still has the chance to join up and to sign up. But if not, we will leave that to our policy makers to decide going forward”, Gbonjubola maintained.
The webinar, which was a special edition of the FIRS Taxpayer Engagement Series, was hosted by the Technical Assistant (Tax Policy) to the Executive Chairman FIRS, Mr. Olufemi Olarinde, while technical papers where delivered by Messrs Mathew Gbonjubola, Temitayo Orebajo, Kehinde Kajesomo, Emmanuel Eze and Ms. Aisha Isa all staff of the revenue agency.