The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed has explained why the Federal Government had yet to endorse the solution proposed by the Organisation for Economic Cooperation and Development on tax issues in a digital economy.
Zainab gave the explanation on Tuesday in Abuja at the opening session of the 17th General Assembly and 10th Anniversary of the West African Tax Administrations Forum.
He spoke on the theme “The Taxation of the Digital Economy: Exploring Untapped Revenue Sources in Africa.”
As the competent Authority in tax matters for Nigeria, Ahmed said that the finance ministry has actively participated in the global discourse around the issue of taxation of the digital economy, particularly as it affects the allocation of taxing rights.
In this regard, she said that the Ministry will continue 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.
She said that the basis of the Ministry’s involvement 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.
Ahmed explained further that the Federal Government 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.
However, she expressed concern that while Nigeria seeks to prioritise the importance of securing a fair deal that provides for equitable global re-allocation of profits to all market jurisdictions under the proposed OECD solution on digital economy taxation, the agreement has not met this objective.
She added, “I am aware that some countries 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 Multi National Enterprises (MNEs) with €20bn 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 Amount A taxing right.
‘Even where the non-resident company meets the revenue and profitability threshold, there is still the requirement of operating in and meeting a local sales threshold of 1m euros in the market jurisdiction, except for jurisdictions with a GDP of $40m and below that have the in-scope revenue threshold fixed at 250,000 Euros.
“Furthermore, the proposed scope reduction after seven years of implementation provides for some conditions, which 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, 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.”
These conditions, according to the Minister, restrict the number of non-resident companies engaged in digitalised businesses that may pay tax in Nigeria 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 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,” she added.
She urged all delegates at the conference to remain focused on the fact that the ultimate goal is the equitable re-allocation of profits, to maximize revenue for member states.
“The issues I have pinpointed and others which I have not, should agitate our minds in the course of our discussion sessions and it is my hope that this conference will produce an actionable communique that will contribute to policy formulation particularly for member States,” she added.
The Chairman of the Federal Inland Revenue Service, Mr Mohammed Nami said that the agency recently deployed its integrated tax administration system known as the TaxPro Max, to ease tax administration and compliance.
He said following the deployment of the TaxPro Max in June 2021, the Service generated over N664bn representing the highest revenue generated by the FIRS in a single month since the outbreak of COVID-19.
We believe that with the simplification of tax remittances through the deployment of TaxPro Max and the resultant efficiency, the Service is geared towards recording increased collection rates, which will further enhance government revenue and improve transparency in tax administration.