Last year’s international tax deal that involved 136 countries and jurisdictions under the umbrella of the Organisation for Economic Co-operation and Development, OECD is fast becoming an eye-opener on the need for collaboration in taxing digital giants.
With the value of digital tech giants like Meta, and Google surpassing the Gross Domestic Product, GDP of many countries globally, nations are waking up to the opportunities of subjecting these digital giants to tax.
It is on the heels of this reality that Nigeria is leading a conversation for African countries to join hands together with a view of taxing digital giants more effectively.
Nigeria through its apex revenue agency; The Federal Inland Revenue Service, FIRS proposed that African countries must seek a viable alternative to the OEDCD agreement that was reached last year in Europe and is gradually taking off with full implementation.
The West African giant wants an alternative a different agreement from what was reached in Europe to enable market jurisdictions.
This call is coming after some African nations already yielded to the agreement reached in Europe under the aegis of OECD.
In the words of the FIRS Chairman, Muhammad Nami who led the Nigeria contingent to a recently held Technical Assistance Programme organized by the African Tax Administrators’ Forum, ATAF and hosted by Togo, Africa must continue to choose what is more favourable to the continent before any other consideration.
About OECD’s 2021 Agreement
The OECD’s agreement has a 2 pillar clause with the aim of reforming the administration of the international tax regime and seeing to a fairer distribution of resources with top economies playing a big brother role to less viable economies.
The first pillar summarises that a company with a global turnover of more than 20 billion euros and a profit margin of more than 10 percent will allocate 20-30 percent of the profit above 10 percent of revenue to market jurisdictions using a revenue-based allocation key.
With Pillar 1, it is expected that taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
The goal of Pillar 1 as stated by the OECD is to ensure a fairer distribution of profits and taxing rights among countries.
The second pillar sets a global minimum tax rate of (at least) 15% that will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.
Nigeria’s Argument Against OECD’s Arrangement Continues
Further backing its argument for an African approach to such an agreement, Nigeria submits that the deal by OECD will produce very minimal revenue comfort for African countries as it favours the European counterpart the more.
Going the Europe way will cost the African continent more in carrying out its administrative implementation that the actual revenue it is expected to generate from the OECD agreement. This is according to an analysis submitted by the Nigeria-led Nami contingent.
Further Suggestions
Beyond the suggestion to embrace an African approach, Nigeria also wants African leaders through the African Tax Administrators Forum to table the matter at the UN Tax Committee of Experts, South Centre.
It is also expected that African leaders collaborate with all others that share the same pan African interest to explore alternative rules that will enable African countries to effectively tax digital businesses.
Nigeria also emphasizes the need to place a premium on capacity building where the African tax administrator is equipped with modern-day skills to ensure tax compliance.
A clear way to do this as suggested is to organise peer-to-peer knowledge sharing sessions between beneficiaries of the Technical Assistance programmes, while also intensifying its technical assistance on international tax rules, particularly in the areas of tax treaties, transfer pricing, and exchange of information.
Some of the submission of Nami includes,
“Nigeria continues to hold the view that the outcome will produce very minimal revenue comfort for African counties. This is instructive considering the implementation challenges that developing jurisdictions will face due to the complexity of the Pilar 1 and 2 rules.”
“Our analysis continues to show that the possible cost of administering and implementing the complex rules will far outweigh the expected revenue accruing from its implementation.”
“I therefore urge the African Tax Administrators Forum to join the discussion at the UN Tax Committee of Experts, South Centre, as well as collaborate with all other well-meaning stakeholders to explore alternative rules that will enable African countries to effectively subject the digital businesses and base eroding payments to tax in our jurisdictions.”
“These collaborations should extend to other rules developed and implemented at the international level for the taxation of Multinational Enterprises, such as the tax treaty, exchange of information and transfer pricing rules,”
“It is crucial for the ATAF Technical Assistance to look towards improving the capacity of member country’s tax administration, through the digitisation of operations. Also, critically needed by tax authorities in the West African region is the development of Data Analytics intelligence expertise and the use of research tools that are required for taxation in a modern economy,”
Recent Happenings Concerning Digital Tax
Many countries have begun a detailed review of their tax policies to capture digital services. Taxmobile.Online summarizes some of these major highlights across the world:
- The United Kingdom has imposed a digital service tax (DST) which is about 2% on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces.
- Mexico imposed a 16% VAT on foreign business-supplied digital services and as a result, foreign businesses operating in Mexico must register for VAT in Mexico and remit taxes monthly.
- Chile also imposed 19% VAT on digital services from foreign suppliers.
- There is a 16% VAT in Kenya on non-resident businesses via digital marketplaces and websites.
- In September 2022, Ecuador enacted its 12% VAT on all electronic and digital services.
