By : Maha Abu Wedn and Ade Adesomoju
The booming digital economy in many African countries like Nigeria and Egypt raises the hopes for more revenues for the countries in their COVID-19 fatigued economies.
More tax revenues derived from the digital economy could help governments of African countries save their crumbling education and healthcare systems.
But much of these funds from the digital economy are being sucked out of the continent by non-resident multinational enterprises (MNEs). These companies escape taxes on the profit they make in various countries because of the age-old international tax rules which require companies to be physically present in a country to be taxed by the country.
While the problem is global, there has yet to be a universally accepted consensus on how to tackle it. This collaborative report examines the different approaches of Egypt, which has joined a global plan to tax such companies, and Nigeria, which has decided to act unilaterally.
Countries lose between $100 billion and $240 billion annually to Base Erosion and Profit Shifting (BEPS), says the Organisation for Economic Cooperation and Cooperation (OECD), a group of 37 democracies with market-based economies.
BEPS activities refer to tax planning strategies adopted by companies to artificially shift profits to locations with no or low tax rates and no or little economic activity in order to pay less or altogether avoid paying income tax.
OECD says the estimated annual loss to BEPS is the equivalent of four to 10 per cent of the global corporate tax revenue.
Global solution
Since BEPS thrives on gaps and disparities in tax laws in various jurisdictions, the OECD in collaboration with G20, a forum of the world’s 20 most developed and emerging economies, established the OECD/G20 Inclusive Framework on BEPS in June 2016.
On October 8, 2021, the 137 member countries and jurisdictions (the list has since grown to 141) of the OECD/G20 Inclusive Framework on BEPS unveiled a Two-Pillar solution deal to tackle the tax challenges arising from the digitalisation of the economy and introduce a global minimum tax.
Pillar 1 seeks to remove the requirement of physical presence of firms in a country for the country to have a right to tax them. It sets thresholds of profit for big multinational enterprises (MNEs) to be allocated to market jurisdictions from which they derive significant sales.
Pillar 2 seeks to curb the incentives for MNEs to shift profits from high tax jurisdictions to tax friendly jurisdictions through the introduction of a global minimum tax regime of 15 per cent.
It is expected that the agreement will generate approximately US$150 billion in additional global tax revenues, annually.
Nigeria’s unilateral approach
Despite the mouth-watering promises of the Two-Pillar solution, four out of the 141 members of the OECD/Inclusive Framework on BEPS – Nigeria, Kenya, Pakistan and Sri Lanka – have refused to sign the Two-Pillar solution plan.
One of Nigeria’s major issues with it is the high profit thresholds it sets for multinational enterprises (MNEs) to be taxed by various countries where they have significant economic presence.
Under the multilateral arrangement, a company or an enterprise must have an annual global turnover of €20 billion (euro) and a global profitability of 10 per cent.
The chairman of Nigeria’s Federal Inland Revenue Service (FIRS), Muhammad Nami, said in a press statement in May that “most MNEs that operate in our country do not meet such criteria and we would not be able to tax them.”
Instead of the Two-Pillar solution plan, Nigeria has introduced the Digital Service Tax (DST) in its newly amended Financial Act.
The unilateral approach, which took effect from January, targets non-resident firms with significant economic presence at 6 per cent turnover. Targeted services being sold to local customers include apps, high frequency trading, electronic data storage and online advertising.
The new tax regime allows Nigeria to tax non-resident MNEs with gross turnover or income exceeding N25 million (naira) or its equivalent (about US$65,000).
Some non-resident tech giants such as Twitter, Facebook, Netflix and Linked-In, have since registered with Nigerian authorities for tax purposes and now include value added tax as part of subscribers’ fees in Nigeria.
Egypt relies on multilateral approach
Nigeria and Egypt, like many countries of the world just recovering from the devastating impact of COVID-19, are in desperate need of money.
But, unlike Nigeria, Egypt rests its hope of raising its tax revenues from the digital economy on the Inclusive Framework Two-Pillar solution deal.
Ramy Youssef, Assistant Minister of Finance for Tax Policies and Development, said in an interview that his ministry “is fully prepared to implement the two-pillar agreement”.
The Minister of Finance, Mohamed Maait, said in an interview that the Egyptian government aims to bring its budget deficit, which currently hovers around 6.8 per cent, to about 6.2 per cent by the end of the 2021/2022 fiscal year.
“There are expectations that Egypt’s revenue from tax revenues resulting from the global multilateral agreement for taxes will reach between 3 and 4 billion (Egyptian) pounds annually, according to estimates of the current business volume,” Mr Youssef, the Egyptian Assistant Minister, said.
He also said it “is likely that the outcome will exceed these expectations” in subsequent years.
How does that compare to Nigeria’s approach? Taiwo Oyedele, the Fiscal Policy Partner and Africa Tax Leader at PwC, an international accounting firm, said it was difficult to estimate Nigeria’s likely earnings from its unilateral measure.
“They have to consider the withholding tax, the company income tax, and then, some of those companies that have an entity in Nigeria have to separate the payments by their entity in Nigeria from the payments abroad,” Mr Oyedele said in an interview from Lagos, Nigeria.
Alexander Ezenagu, a Nigerian lawyer and Assistant Professor of Taxation and Commercial Law at Hamad Bin Khalifa University, Qatar, said Nigeria’s digital service taxation law is in conflict with the OECD/G20 global deal. “Nigeria is taking a unilateral measure as against the multilateral measures most countries would adopt.” He said “Nigeria has strong justifications,” but warned that the unilateral measure would exclude the country from other beneficial provisions of the multilateral deal.
Josh Bamfo, Partner and Head, Transfer Pricing, at Andersen Nigeria, an independent tax and business advisory firm, also said that, with all its merits, Nigeria’s digital service taxation could earn the country trade isolation from trading partners embracing the Two-Pillar solution.
But Mr Oyedele of PwC argued that the advantages of Nigeria’s unilateral measure outweigh any disadvantages.
The tax expert said although about 100 multinational companies are expected to be captured under the OECD Inclusive Framework Two-Pillar solution globally, Nigeria would be able to tax only about six of them if it signs the multilateral deal.
“The conclusion is that the money Nigeria would make from those few multinationals would be a lot less than what it is making on its own,” he said.
Similarly, Tommaso Faccio, Head of Secretariat of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), in an interview from Nottingham, the United Kingdom, said Nigeria “will likely experience negative net revenue outcome” if it adopts the multilateral deal. “Why give up a revenue stream today for an unclear (or worse) one tomorrow?”
Mr Faccio also pointed out the mandatory arbitration clause enshrined under Pillar 1 “to ensure certainty to MNEs” as disadvantageous to many countries. He said the clause offends the Nigerian constitution which makes tax disputes non-arbitrable. The law grants certain Nigerian courts and Tax Appeal Tribunal the jurisdiction to adjudicate over tax disputes.
“Besides, the cost associated with international arbitration and unreasonableness of past arbitral awards will put government revenues at risk,” Mr Faccio said, reinforcing the Nigerian tax chief’s earlier press comment that Nigeria is “concerned about getting a fair deal from such process.”
Mr Oyedele also noted that the commencement of the agreement could take longer than anticipated. “If they start in the next two years, then they’re lucky; 2025 would be my expectation,” he said.
“The journey ahead is complicated and difficult,” he said, explaining further that many signatories to the multilateral agreement still need to surmount legislative obstacles for it to be enforceable in their countries.
Former vice Minister of Finance, Egypt , Amr El Monayer, said he was confident Egypt could benefit from the multinational deal, but it must adopt “a concrete policy and take immediate actions for the taxation of the digital economy.”
Karim Emam, an international tax expert and chair of tax & customs committee at the French Chamber in Egypt, advised African countries to go beyond the multinational agreement and start “the future journey” “by developing their tax policies, focus on capacity buildings and developing a new tax administration that is capable to operate in the new global tax system”.
Mr Oyedele, the PwC official, said many African countries only joined the multilateral agreement for diplomatic reasons. He called on all African nations “to come together as a people, speak in one voice and fight for the interest of the developing countries”.
Similarly, Mr Faccio of the ICRICT advised that given “the uncertainty surrounding the passing of Pillars One and Two into national legislation both in the EU and the US”, countries should “consider alternative measures such as the one already implemented by Nigeria and Kenya, either unilaterally or along the regional bloc.”
