The Flourishing Digital Economy: The Challenge of Taxation
Our sources reveal that the digital economy, previously a relatively uncharted territory, has significantly transformed into a potent powerhouse with a staggering estimated global worth of $11.5 trillion as of 2016. Experts now predict that Africa is set to experience a massive influx in its digital economy, potentially reaching a value of approximately $300 billion by 2025. The growth of this digital economy has been primarily driven by multinational enterprises (MNEs), reigning champions who often operate beyond jurisdictions without any physical presence. Their cross-border activities are putting a strain on traditional taxation systems, causing significant tax revenue deficits worldwide.
Designing New Tax Frameworks: The OECD’s Two Pillars
According to information from our sources, the OECD proposed a solution to this mounting issue by initiating the Base Erosion & Profit Shifting (BEPS) project. The core of this project is a Two Pillars Approach, tailored for taxing the income generated by the digital economy. Pillar One focuses on giving tax rights to market jurisdictions, effectively eliminating the requirement for a physical presence. Simultaneously, Pillar Two proposes a global minimum tax rate of 15% for large MNEs to prevent profit shifting to jurisdictions with low tax rates.
Nigeria Strays Away from the OECD’s Path
While the OECD has been proactive in its approach, Nigeria has taken a slightly different path, crafting its own rules for the digital economy’s taxation maze. As per the Finance Act 2019, Nigeria implemented the concept of ‘Significant Economic Presence’ (SEP). The SEP Order outlines the guidelines for non-residential entities, which if fulfilled, would imply that they have an SEP in Nigeria and hence, be liable for Nigerian tax obligations.
Nigeria’s tax authorities however, have not endorsed the OECD’s Two Pillars Approach. The Federal Inland Revenue Service (FIRS) has shown concerns that the approach might not coincide with Nigeria’s national interests and could lead to potential revenue losses.
Tension over the OECD Framework
Nigeria’s stance of pushing back against the OECD framework is mirrored in a few other countries, prompting calls for reconsidering the Framework to better serve developing economies. Areas of contention include the Framework’s dispute resolution mechanism that some fear could spark constitutional conflicts and infringe upon national sovereignty.
Nevertheless, not supporting the Framework could give rise to uncertainties for MNEs and could negatively influence foreign investment. As negotiations between the OECD and Nigerian authorities persist, there seems to be an air of open-endedness, leaving room for further discussions regarding how Nigeria can reap rewards from the provisions of the Framework.
