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By Chinwendu Obienyi
In July 2021, the Organisation for Economic Co-Operation and Development (OECD) had announced there would be changes to the international tax rules applicable to multinational companies across the world.
This new arrangement would entail a final detailed implementation plan released in October 2021 with its effective date set for 2022. The approach is borne from Pillars 1 and 2 of OECD’s Base Erosion and Profit Shifting (BEPS), which advocates a global tax rate and allocation of more revenue to market-facing jurisdictions.
Furthermore, multinational entities (especially digital services outfits) will pay less tax to the headquarters and more to where they service customers. In addition, they will now be subject to a global companies’ income tax rate of 15 per cent.
In a bid to optimise this development, there are feeling it might usher in the need for corporate restructuring by digital services outfits, that currently adopt various tax planning schemes such as the Uber’s Double Dutch or Google’s Irish Sandwich systems.
As of October 2021, 136 countries have signed this agreement but countries such as Kenya, Nigeria, Pakistan, and Sri Lanka are yet to agree on the details of this arrangement.
According to the Finance Minister, Zainab Ahmed, the agreement is skewed to the interests of rich nations and could actually hurt the country’s tax revenues.
Speaking to a panel session during the World Economic Forum in Davos earlier in January, Ahmed said, “The negotiations were not conducted on an equal footing, favored wealthy economies and created rules that are too complex for Nigeria to effectively implement”.
Giving more insights, the Federal Inland Revenue Service (FIRS), in a statement said that despite the expected outcome that both Pillars will increase Global Corporate Income Tax by as much as $150 billion per annum, with an attendant favourable environment for investment and economic growth, there were serious concerns that the pillars didn’t address negative revenue outcome for Nigeria and other developing countries.
“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 said 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 is exactly what happened with this. Particularly for Nigeria, when we ran the numbers, it was way off the figures that the OECD gave us. 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”, it had said.
Recent moves by the OECD
Recently, delegates from the OECD met with Nigerian tax officials urging Nigeria to tap into the two-pillar tax solution at a workshop it jointly organized with the FIRS to discuss the maximisation of the benefits of the two-Pillar solution for Nigeria.
After a critical review of the rules and Nigeria’s participation in their development, stakeholders at the meeting resolved that “there is the need for Nigeria’s continued participation in the rule development, as a member of the Inclusive Framework, to ensure that the interest of the country and Africa is factored into the design and development of the rules.
“In light of this, there is a need to commence immediate implementation of fiscal policy measures around the Global Minimum Tax Rules, in view of the fact that other jurisdictions around the world have commenced implementation of measures that will enable them reap top-up taxes allowed under the rules, which will be to the detriment of Nigeria from 2024, if no step is taken.
“There is also an urgent need to review and streamline Nigeria’s tax incentives, as the rules will have the impact of allowing other jurisdictions to mop up taxes not collected in Nigeria due to tax incentives,” the statement from the meeting read.
The stakeholders also observed that Nigeria could implement and reap the benefits of Pillar 2, even where it does not wish to implement Pillar 1, noting that “Effective implementation of Pillar 2 rules holds significant potential for increased tax revenue to fund government programme, boost the economy and keep Nigeria as an attractive investment location.”
As part of its recommendations, the OECD-Nigeria Meeting urged stakeholders within the country to commence internal engagements and draw up a national strategy for immediate streamlining of its tax incentives, to avoid ceding its tax base to other jurisdictions, owing to the implementation of Pillar 2 rules.
Experts react
However, experts who spoke on the development during a programme monitored by Daily Sun, are somewhat divided on it. Economist and Tax Manager at PwC Nigeria, Abiodun Kayode-Alli, commended the FG for properly looking at the agreement.
Kayode-Alli noted that some modifications ought to be made because a lot of developing nations are of the view that developed countries will be enjoying the lion share of this particular arrangement.
He however urged the FG to set fiscal measures in place in order to ensure the country does not lose out on the incentives given to multinational entities
“Based on the threshold that has been set by OECD inclusive framework are what Nigeria currently have in its domestic legislation and so it does not seem as if Nigeria is losing if you are looking at it in terms of the first solution but for the second solution, Nigeria will lose out if it does not begin to put in place necessary fiscal measures in order to be able to enjoy some of the benefits and incentives given to multinational entities.
So for one, Nigeria needs to make some modifications in order to ensure it does not lose any revenue but for the other aspect which Nigeria is yet to sign to, Nigeria is not losing from what we know. Given that it is just a new thing that is yet to be implemented, we cannot really tell the impact for now but I think Nigeria is on the right track”, Kayode-Alli said.
For his part, Yomi Olugbenro, Partner and West Africa Tax leader at Deloitte Nigeria, said, “Theoretically, this is a good deal that we should take because other incentives around the clear rules of taxation that multinationals are looking up to for the purpose of their investments in their economy, we cannot look at it from the rate of tax alone and so when we collaborate, there is a lot more to gain but negotiating better rules is not out of place”.
